Washington State Launches New Cap-and-Invest Program
Washington State's new cap-and-invest program officially launched in January 2023. The program, largely modeled after California's cap-and-trade program, originates from Washington's 2021 passage of the Climate Commitment Act ("CCA"). The CCA aims to combat climate change by establishing a market-based program to help Washington achieve its goals of reducing GHG emissions by 95% of 1990 levels and reaching net-zero carbon emissions by 2050.
Most facilities generating emissions of 25,000 metric tons or more of carbon dioxide equivalent are subject to the program's requirements. Covered entities must register with the Washington Department of Ecology and provide detailed information regarding corporate structure, corporate associations, use of cap-and-invest consultants, and designated account representatives. Facilities will be subject to an emissions cap that decreases over time to align with state emission goals. Washington has committed to achieving a 45% reduction of greenhouse gas emissions from 1990 levels by 2030. Businesses will need to obtain allowances equal to their covered greenhouse gas emissions, either through the state's quarterly auction program or via a secondary market. Certain emissions will be exempted from this calculation, including emissions from fuels used for agricultural purposes, aviation fuels, marine fuels combusted outside of Washington, and fuels exported out of Washington.
Allowances and Offset Credits
Washington will use the Western Climate Initiative, Inc. auction platform. Other participating jurisdictions include California, Quebec, and Nova Scotia. The first emissions allowance auction is slated to take place on February 28, 2023. The auctions are structured as sealed-bid auctions. Program participants may also earn offset credits by investing in projects that result in real, permanent, quantifiable, verifiable, and enforceable greenhouse gas reductions. Four offset protocols have been adopted from California's cap-and-trade program: U.S. forestry projects, urban forestry projects, livestock projects, and ozone-depletion projects. In the 2023-2026 compliance period, participants may cover up to 5% of their emissions with offset credits, with an additional 3% available from projects on federally recognized Tribal lands. In subsequent compliance periods, the limits will drop to 4% and 2% respectively.
Though the Washington Department of Ecology estimates that 75% of statewide emissions will be covered under the cap-and-invest program, some critics have expressed concern that many of the state's largest emitters have been provided a separate emissions reduction pathway. Washington's legislature has designated certain core industries that are vulnerable to market fluctuation as Emissions-Intensive, Trade Exposed ("EITE") industries. EITE facilities, which are largely within the manufacturing sector, will be provided with no-cost emissions allowances until 2034. While critics argue that the carve-out for EITEs will slow Washington's overall emissions reduction process, proponents believe that such measures are critical to protecting Washington's economy against the risk of those businesses moving operations out-of-state. Natural gas and electric utilities will also be eligible for no-cost allowances.
The Washington Department of Ecology is working on enrolling covered entities in the program. Registration applications must be submitted and approved to become eligible to participate in auctions. Failure to comply with Washington's cap-and-trade program may result in fines of up to $50,000 per violation, per day.
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