Western Climate Initiative Unveils Carbon Trading Plan

By Published On: July 30, 2010

The Western Climate Initiative released its “comprehensive” plan to create a multi-jurisdictional carbon cap-and-trade program July 27 covering California, New Mexico, British Columbia, Ontario, and Quebec. By 2020, the plan seeks to cut greenhouse gas emissions in those jurisdictions--which are greater than in all of Canada--by 15 percent below their 2005 level. Governor Arnold Schwarzenegger, who reached out to other governors to form the initiative, called it “an important step forward” in the move to “a green economy.” Two years in the making, the plan targets the power industry in 2012. By 2015 it would expand to cover transportation fuels and fuels for homes and commercial enterprises. “There’s a strong need to take action now,” said Michael Gibbs, California Environmental Protection Agency assistant secretary for climate change. California, which is writing rules to carry out its own climate change law, AB 32, is banking on the initiative to make its planned carbon cap-and-trade program successful. State regulators have expressed hesitance about their ability to create a successful and adequately liquid single state carbon cap-and-trade system. “What really matters in a cap-and-trade program is liquidity,” said Robert Noel de Tilly, Quebec Ministry for Sustainable. Development, Environment, and Parks climate change advisor. Despite that only five of the 11 states and provinces that are members of the Western Climate Initiative are developing carbon cap-and-trade rules, British Columbia climate policy executive director Tim Lesiuk maintained the plan had attained “a critical mass.” Emissions from the five jurisdictions moving forward with the program represent more than two-thirds of the total greenhouse gases from the 11 participating jurisdictions. However, Gibbs acknowledged that the other states and one province--namely, Arizona, Montana, Oregon, Utah, Washington, and Manitoba--are still studying whether to pursue cap-and-trade programs and will not be ready to go in 2012, the initiative’s target date for launching a carbon trading market. The blueprint contained few surprises. It mostly pulls together in one document bits and pieces of a carbon trading plan released piecemeal over the past couple years, observed Chris Busch, Center for Resource Solutions policy director. Also, the plan does not go into effect until each of the five jurisdictions act in the face of brisk political headwinds to adopt actual rules to implement a carbon market. Gibbs noted the plan closely mirrors what California is eyeing for its own AB 32 cap-trade program. Key features of the Western Climate Initiative plan include: -It covers the electricity sector, with the point of regulation being the first jurisdictional deliverer of power into the states and provinces that are part of initiative. Emissions from power imported into these jurisdictions will be counted toward the cap based on actual emissions when the source of power generation is known. When the source is unknown, emissions will be based on a standard formula. Renewable energy credits, which represent the renewable energy attributes of power and are sold separate from the actual electricity, are not eligible for emissions reduction credit under the plan. -Stationary sources, like power plants and utilities, are to be covered when the plan takes effect in 2012. Transportation fuels and other fuels are to be rolled in beginning in 2015. The emissions baseline, from which progress toward the declining cap is measured, is 2012 for stationary sources and 2015 for the fuels. Yearly emissions reduction requirements are to be linear, that is, the same amount each year. -As a cost-containment mechanism, offsets could be used to meet 49 percent of emission reduction requirements. In addition, jurisdictions would administer an emissions rights reserve fund to sell rights into the market when the price of carbon climbs. Regulated businesses would be able to borrow emissions rights from future years to comply in any current year if need be. Compliance is to be measured in three-year cycles to smooth out bumps in emissions based on factors like changes in the economy and weather. This will make it easier, for example, to deal with droughts that reduce hydropower output and force utilities to rely more on fossil fuel. Unlimited emissions banking would be allowed too, giving businesses the right to retain emissions rights not used for future use or sale. -Emissions rights are to be sold in a Western Climate Initiative-wide auction conducted quarterly. A sealed bid, single round, uniform price (lowest winning bid) auction format would be used, initiative officials said, to minimize the potential for market manipulation. Any party--including those not regulated, such as financial institutions--could participate in the auctions, though there is to be a purchase limit for each participant. In addition, auctions are to include a price floor for emissions rights to maintain a consistent price signal in the carbon market. The initiative plan includes a variety of other reporting, tracking, enforcement, and administrative requirements aimed at preventing fraud and market manipulation, keeping the market transparent, and enforcing carbon emissions reductions. Officials also said they hope to build linkages with other carbon markets as cap-and-trade programs expand.

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