Cap and Trade and the Western Climate Initiative

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• Cap and Trade and the Western Climate Initiative
• Washington Port Association
• September 25, 2008

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Western Climate Initiative (WCI)

• Develop regional strategies to address climate
  change
• Washington, Oregon, California, Arizona, and New
  Mexico signed in February, 2007
• Montana, Utah, British Columbia, Manitoba, Quebec
  and Ontario have signed on
• 6 US states, 6 Mexican states and 1 Province are
  official observers

Partner
Observer
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Regional Strategies

• Joint work to
• Promote clean and renewable energy in the region
• Increase energy efficiency
• Advocate for regional and national climate
  policies that are in the interest of western
  states
• Identify measures to adapt to climate change
  impact
• Three specific directives
• Set a regional emissions reduction goal
• Join a multi-state registry to track, manage and
  credit reductions
• Design a regional multi-sector market-based
  mechanism

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Current Situation

• No limits on greenhouse gas emissions
• Full cost of fossil fuels not reflected in price
  of goods and services
• In economic terms, called an externality
• Impacts from unlimited emissions felt throughout
  the economy
• Thus, some economists call climate change the
  greatest market failure in history.
• 4

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Where we are headed

• Low carbon economy
• Reduce emissions
• Avoid the worst climate change impacts
• Adopt policies that encourage
• development of clean and renewable energy
• investment in jobs and infrastructure to support
  the economic transition
• assistance to those hit hardest by climate change
  damages

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How well get there

• Policies that encourage more efficient use of
  energy
• California tailpipe standards for passenger autos
• Renewable Portfolio Standard
• Renewable Fuel Standard
• Climate Action Team (CAT) proposals
• Putting a price greenhouse gas emissions
• Internalizing the cost

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Pricing GHG Emissions

• Two main options
• Tax
• Cap and Trade
• Tax price is certain, emission reductions are
  not
• Cap and Trade reductions are certain market
  sets the price
• How Does Cap and Trade Work?

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Cap-and-Trade Basics

• A government authority
• Limits the total amount of emissions (cap)
• Distributes allowances - permits to emit - for
  free or by auction
• Establishes the compliance period allowances
  emissions
• Number of allowances decline each year, creating
  demand
• They can be bought and sold --- traded
• Emitters reduce emissions, purchase allowances
  from others, or fund projects outside capped
  sectors that reduce emissions - offsets

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Musical Chairs to Explain Cap and Trade
An Illustration of Managed Scarcity
Each chair represents one permit or
allowance If you have a permit, you get a
chair

• Based on work by Holmes Hummel, PhD
• Fellow for Congressman Jay Inslee
• November 21, 2007

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Musical chairs
2012

• At the start of the game, everyone has a seat
  because there are no limits on carbon emissions.

All stick figures by Tormod Lund, GraffleTopia.com
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The Cap
2013

• In the second year, the cap starts to decline
• The number of permits available also declines
• In our analogy, one player is left without a
  chair

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The Trade
Would anyone be willing to sell their chair for
10?
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The Innovation
Sure! For that price, I can finance an
efficiency upgrade, eliminating my need for a
pollution permit.
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The Market
2015

• As cap tightens in each new round, fewer
  allowances are available,
• Prices expected to increase to reflect real cost
  of greenhouse gas emissions on the economy
• Low carbon reduction strategies become economical

SELL PRICE
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Achieving Reduction Targets
2050
2040
2030
2020
2020

• Cap-and-trade lets players choose at what price
  they will reduce their emissions
• and how they want to reduce them

Rail Transport
Hybrid vehicle
Energy Upgrades
Wind power
Solar power
Green buildings
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Using Market Incentives
2015

• For some, more profitable to reduce emissions
  and sell allowances
• Profit is a main driver for innovation and
  investment need both

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Achieving Reduction Targets
2020

• Purpose is to reduce greenhouse gas emissions
• Number of permits available is reduced each year
• until the ultimate target has been achieved

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The End Game Achieving Climate Stabilization
2050

• The last players
• can afford to pay
• have the least flexibility to reduce
• These are the most valuable/needed uses of fossil
  fuels

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WCI Design

• Most expansive cap and trade program designed to
  date
• Regional Greenhouse Gas Initiative (RGGI)
  carbon dioxide from electricity only
• EU ETS carbon dioxide from electricity,
  industrial combustion and process emissions
• Will cover nearly 90 of the regions emissions
  by 2015
• RGGI 33 of emissions
• EU ETS 40 of emissions

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Economic Modeling Results

• Possible to meet regional goal with overall
  modest savings
• Complementary policies get us about ½ way to
  target
• CA tailpipe standards
• 1 reduction in demand for electricity and gas
• 2 reduction in VMT
• Offsets and banking reduce allowance prices
• Covering more sources also reduces prices

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What the design is and isnt

• It is
• the policy framework
• what must be the same between jurisdictions to
  have a regional program
• It isnt
• the specific details they will come through
  legislative and rule processes

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What the design covers

• Sources and gases covered threshold
• Points of regulation
• Methodology for setting regional cap
• Methodology for establishing partner budgets
• Allowance cost containment features
• Recognition of reductions before start
• Reporting threshold and essential elements

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What has to be the same

• Basic reporting requirements
• Sectors, gases and thresholds (generally)
• Points of regulation
• Quantification methods
• Setting regional caps
• Establishing partner budgets
• Compliance periods banking borrowing

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What has to be the same

• Early reductions allowances
• Offset criteria and protocols, including
  verification and maximum offset credits allowed
• Auction process, including participation and
  reserve price
• Linking to other systems
• Participation in regional administrative
  organization

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What can be different

• Allocation of allowances within states/provinces
• Maximum percent of allowances auctioned
• Minimum offset credits allowed
• Allowances set-aside for specific uses
• Recognition of reductions from within a partner
  budget

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Next Steps

• Meeting with stakeholders
• How to craft state-specifics
• Deliver legislation 12/1/08
• Continued work with partners on
• Early Reduction Allowance criteria
• Developing offset protocols and project types
• Setting regional cap and partner budgets
• Model reporting rule
• Design of auction process
• Essential elements for cap and trade rules
• Designing regional organization

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• www.ecy.wa.gov/climatechange/index.html