Information Regarding Potential Agency Request Legislation on Carbon Market Linkage
The Director of Ecology intends to announce a preliminary decision as to whether Washington will pursue linkage with California and Québec in early November. If the Director decides to pursue linkage, Ecology may need to advance agency request legislation to amend the Climate Commitment Act (CCA) to facilitate linkage. That legislation may also contain other administrative changes that would improve the program but are not required for linkage.
Because the Director has not yet made her preliminary decision, we cannot say with certainty whether we will be advancing agency request legislation, or which changes it would include. However, we are distributing this information to inform market participants of the topics that may be under consideration. We are sharing this document broadly so that all market participants, covered entities, general market participants, and other interested parties are provided with the same information at the same time.
The list below includes topics that may be included in agency request legislation if such legislation is advanced by Ecology. This list reflects our best current thinking of the topics to include in legislation, but it is not exhaustive. Similarly, an item’s inclusion on this list is not a guarantee that it will be included in any potential future legislation, merely that we are considering such an amendment if the Director reaches a preliminary decision to pursue linkage. Finally, it is important to note that California and Québec are currently reassessing their cap-and-trade programs and may make changes that could impact linkage.
Potential statutory amendments relevant to linkage
Allowance purchase limits for covered entities (RCW 70A.65.100(6)(a))
Under current law, a covered entity or an opt-in entity may not buy more than 10% of the allowances offered during a single auction. In California and Québec, these entities may not buy more than 25% of the allowances offered during a single auction. For linkage to occur, this purchase limit needs to be consistent across linked jurisdictions and, as a result, Ecology may propose amending the CCA to increase Washington’s purchase limit to 25%.
Allowance holding limits for General Market Participants (GMPs)(RCW 70A.65.100(6)(b))
As authorized by RCW 70A.65.090(7)(b), Ecology has set limits in rule on the number of allowances an entity may hold at any given time (WAC 173-446-150). These holding limits are consistent with California and Québec’s holding limits. In addition to these holding limits, the CCA provides that a General Market Participant (GMP) may not own more than 10% of the total allowances issued in any calendar year (RCW 70A.65.100(6)(b)). California and Québec do not have such a holding limit.
Currently, Washington’s statutory 10% holding limit is less stringent than the holding limits outlined in the program rules in all three jurisdictions, and therefore does not impose any actual limits on GMPs or present any barrier to linkage. However, once the number of allowances issued each year declines sufficiently, Washington’s 10% holding limit may have an impact and will impose a requirement on GMPs that is inconsistent with California and Québec requirements. Ecology may propose amending the CCA to remove this inconsistency.
Offsets
There are two potential offset-related amendments that Ecology may pursue. First, under our current statute, offset credits used for compliance in Washington’s program must come from offset projects that provide direct environmental benefits (DEBs) to Washington or from offset projects “located in” a jurisdiction with which Washington has entered into a linkage agreement (RCW 70A.65.170(2)). California does not require that all offset projects be located in that state. Ecology may seek to amend the CCA to allow offset credits from California or Québec to be used as compliance instruments in Washington, as long as they are from offset projects that are located in or provide DEBs to California or Québec.
Second, the CCA states that a covered entity may fulfill up to 5% of its compliance obligation using offset credits from non-Tribal lands, and an additional 3% using credits from projects located on federally recognized Tribal lands (RCW 70A.65.170(3)). Ecology may propose adding flexibility to allow a covered entity to fulfill up to 5% of its compliance obligation using offset credits from any eligible offset project, whether on Tribal lands or not, with an additional 3% that must come from projects on Tribal lands. We would make similar changes to the requirements for offset credits during the second compliance period. The program rule (Chapter 173-446-600 WAC) already builds this flexibility into the offset limits for the third and subsequent compliance periods (7(c)).
Finally, depending on whether California and Québec adjust their treatment of offsets, Ecology may need to seek changes to the CCA, and/or authority to address offset-related issues via rulemaking.
Electricity
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Reporting of electricity (RCW 70A.15.2200(5)(a)): Under current statute, greenhouse gas (GHG) emissions associated with electricity must be reported if they reach 10,000 metric tons of carbon dioxide-equivalent (MT CO2e) per year. California has no threshold for reporting unspecified electricity. For greater consistency with California’s program, Ecology may propose removing the existing 10,000 MT CO2e per year threshold for reporting GHG emissions for electricity in Washington. This change would require a change to the state Clean Air Act (not the CCA).
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Electricity imports (RCW 70A.65.080(1)(c)): Under current law, electricity importers importing electricity with GHG emissions greater than 25,000 MT CO2e per year are covered entities in the cap-and-invest program. For consistency with California, Ecology may seek authorization to require by rule that all importers of unspecified electricity shall be covered entities, regardless of the amount of unspecified electricity they import.
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Electricity imports (RCW 70A.65.010(27)): The current statute defines an “electricity importer” by listing eight different scenarios. However, a group of Electric Power Entities (EPEs) provided a white paper to Ecology explaining that these scenarios are not exhaustive. Ecology agrees that the current definition of “electricity importer” omits some imported electricity that should otherwise be covered by the cap-and-invest program. We may suggest that the definition be amended to add several of these omitted scenarios, as well as a catch-all provision allowing Ecology to identify specific electricity importers not defined in the current statute or by rule.
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Removing requirement that “netting” be reported (RCW 70A.65.010(42)(d)): One of the provisions in the current definition of “imported electricity” excludes “electricity imports of unspecified electricity that are netted by exports of unspecified electricity” under certain circumstances. EPEs have raised concerns about their ability to track and report such netting, and California no longer requires this. To harmonize with California, and address EPE concerns, Ecology may request to remove this requirement.
Include a mechanism for Ecology to be able to modify certain provisions via rule
California and Québec are both reassessing their cap-and-trade programs and may not finalize changes until after Washington’s 2024 legislative session has concluded. At that point, we may need to make additional changes to the cap-and-invest program. Ecology may seek authority to resolve certain issues and/or modify certain provisions of the program via rule, as necessary, to implement linkage.
Potential statutory amendments that are not relevant to linkage
Due date of the CCA Spending Report (RCW 70A.65.300)
Under current law, Ecology is required to submit a report to the Legislature outlining the uses of “all distributions of money” from CCA funds by Sept. 30 of each year. However, agencies that have received funding from CCA auction revenue have notified Ecology that they will not have their actual expenditures documented or be able to provide the necessary information to Ecology in time for its inclusion in a Sept. 30 report. To ensure these reports are appropriately comprehensive, Ecology may suggest changing the annual due date to Nov. 20.
Shorten auction application timelines for reserve auctions (RCW 70A.65.150(5))
The CCA requires Ecology to maintain two allowance reserves: The Allowance Price Containment Reserve (APCR) and the Emissions Containment Reserve (ECR). Ecology is authorized to hold auctions of allowances from both reserves under specific circumstances. Under current statute, APCR and ECR auctions must follow the same procedures as quarterly auctions (RCW 70A.65.150(5)). The law also requires Ecology to notify the Environmental Justice Council (EJC) 60 days in advance of each quarterly auction (RCW 70A.65.100(2)(a)), and to provide an application window of at least 30 days for entities to register to participate in a quarterly auction (RCW 70A.65.100(4)(a)). The current statute requires Ecology to follow these same procedures for APCR and ECR auctions. The 60-day notice requirement and the 30-day registration requirement create scheduling difficulties when APCR auctions are triggered. As a result, Ecology may suggest amending RCW 70A.65.150 to allow for a 30-day advance notification to the EJC for APCR or ECR auctions, and to authorize Ecology to determine the registration deadline for reserve auctions by rule.
Change to Washington GHG emissions reporting requirements
Washington’s GHG emissions reporting is currently required to mirror the U.S. Environmental Protection Agency (EPA) GHG emissions reporting requirements and to use the EPA reporting platform, called e-GGRT (RCW 70A.15.2200(5)(c)). The cap-and-invest program requires that emissions or carbon intensity baselines for emissions-intensive, trade-exposed industries (EITEs) be determined using emissions reports, including emission factors and global warming potentials, as reported to Ecology and the EPA between 2015 and 2019. The EPA is currently updating its GHG reporting requirements, revising reporting protocols and changing emission factors and global warming potentials – a process it undergoes periodically. The updated EPA rule would go into effect in 2025 to cover 2025 emissions reported in March 2026.
With these changes, the EPA reporting requirements will diverge from the reporting parameters used for the CCA program’s 2015-2019 baseline and comparing future emissions reports under the new EPA requirements to the 2015-2019 baseline data (as mandated by the CCA EITE requirements) will becomes less useful, as the two data sets reflect increasingly different information. To resolve this problem, California developed its own reporting platform called ‘California e-GGRT’. Ecology is considering following California’s lead and developing our own GHG reporting platform. To do this, the GHG reporting statute (RCW 70A.15.2200) would need to be amended, authorizing Ecology to deviate from EPA reporting requirements.
Other potential changes that Ecology may consider
As noted above, this list is not meant to be exhaustive and proposals may be added, or removed, as any potential legislation is refined. Among the additional proposals that Ecology may consider are:
- Providing no-cost allowances tied to emissions used to balance the bulk electric system for Balancing Authorities and market sales.
- Addressing confidentiality provisions to increase transparency in communications between certain utilities and their regulators.
- Ensuring that emissions from national security facilities and installations are exempt.
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