A Glimpse of How Regional Carbon Trading Might Work

The Valero refinery in Benicia, CA (Photo: Craig Miller)

After three years of deliberations, participants in the regional carbon trading pact known as the Western Climate Initiative have released a “comprehensive strategy” for how the coalition will achieve its goals of reducing emissions 15% below 2005 levels by 2020.  The plan, “Design for the WCI Regional Program” lays out details for a regional cap-and-trade system, offsets and incentives, and energy efficiency programs.

Central to the plan is the cap-and-trade auction, but to date, just five of the 11 WCI partners have begun drafting regulations in anticipation of joining the program when it launches in January 2012.  Those five members: California, New Mexico, Ontario, Quebec, and British Columbia, account for 70% of the total emissions of WCI partners. That’s enough to get the auction up and running, according to Micheal Gibbs, deputy secretary for climate change at the California EPA and co-chair of the WCI.  California alone accounts for 40% of the WCI partner emissions.  And even California’s participation could be called into question depending on how the voting goes on November’s ballot.

The WCI cap-and-trade plan is designed to gradually wind down emissions, starting with power plants in 2012 and then adding transportation and other industry in 2015.

Despite the details outlined in the report–which Gibbs describes as a road map to help jurisdictions writing their regulations–a lot remains unresolved.  Gibbs said partners are still grappling with three main areas: 1) how to manage offsets, 2) design of the permit auction itself, and 3) ensuring effective oversight of the carbon market including limits on allowances that any one entity can hold.

Questions also remain about emission allowances and how they’ll be distributed.  Each state or province will determine how many allowances it will issue to meet its own specific emissions goal (the newly-released plan recommends that members develop allowance budgets using the same methods.) The total of these will determine the regional emissions “cap.”  Each jurisdiction also determines how those allowances will be allocated, whether, for example, they will be given away or auctioned off.   How to allocate allowances is an issue of debate across the entire cap-and-trade discussion, but within the WCI this raises particular concerns if different members select dramatically different methods.

Gibbs said that the partners are aware that, particularly in certain industries (dubbed “EITE” for energy-intensive, trade-exposed) such as oil refining and glass manufacturing, the consortium is considering using a benchmark system in which polluters would get free allowances up to certain benchmark, and need to shell out for them beyond that.  He said that the members of WCI are largely in agreement on this concept and that the details will be worked out before the carbon auction launches in 2012.

“We all have to be cognizant of not disrupting the economy overall and ensuring that we can phase this in in a way that is affordable and effective for all concerned,” said Gibbs. “We recognize that carbon policy is not uniform with our major trading partners and so we don’t want to put our industries at a competitive disadvantage as we transition this in.”

Another question, of course, is just how effective a regional cap-and-trade system can be, particularly when fewer than half the consortium members have plans to participate at the outset.

“We would prefer to see national [climate] action in the United States,” said Gibbs, who suggested that WCI could provide a springboard for that.

Gibbs pointed out that even in this limited capacity, the WCI carbon auction will be three times of the size of the Regional Greenhouse Gas Initiative (RGGI), which is a consortium of East Coast states that has already launched a cap-and-trade system that is about to hold its ninth auction of pollution permits.

But John Geesman, former CEC Commissioner and co-chair of the American Renewable Energy Council said that he thinks the WCI plans may be in for a rougher road once its head cheerleader–California Governor Arnold Schwarzenegger–is out of office next year.

“With Arnold in the last few months of his administration and progress stalled at the federal level, I think it’s going to be pretty hard going from here,” he said. “It would take a lot of political capital on the part of California to pull those other states along.  I think the cap-and-trade portion of that agenda is going to be hard to accomplish until the federal government decides it wants to play, too.”