Washington state is in the middle of what can only be called very complicated period in climate policy. The experts at Van Ness Feldman have a great summary of the competing policies here.
Briefly, Governor Jay Inslee recently proposed a cap-and-trade system that would be implemented through regulations under development at the state Department of Ecology. Meanwhile, two 2016 ballot initiatives are gaining momentum, but would use carbon taxes instead of a cap-and-trade market. One initiative (I-732) would use a revenue-neutral approach, returning revenues to taxpayers as is the case in British Columbia; another (Alliance for Jobs and Clean Energy) would use carbon revenues to fund mitigation, adaptation, and transition assistance, similar to how revenue is used in California's carbon market.
This week's news is that the WA Department of Ecology has withdrawn its proposed cap-and-trade rules, with a promise to iterate on the draft regulations and finalize new rules over the summer. I will be very interested to see the new regulations because Washington's initial proposal attracted controversy through its use of unilateral links to other markets and compliance instruments.
In the now-withdrawn rules, the Department proposed allowing regulated entities in Washington to meet their legal obligations under the state cap by turning in compliance instruments from Washington's market, the Regional Greenhouse Gas Initiative (RGGI), California's carbon market, Québec's carbon market, and a number of California-approved carbon offset protocols (see Section 173-442-190). These links are "unilateral" because they enable only a one-way flow of instruments—from the other systems into Washington's market—and because a unilateral link doesn't require permission from linked parties.
Reactions to the proposed unilateral links were mixed. Presumably industry stakeholders were very pleased to have access to supplemental low-cost compliance instruments (~$13/tCO2 in the CA/QC February 2016 auction and $7.50/tCO2 in the December 2015 RGGI auction). But were WA stakeholders to take advantage of the unilateral links, that could create scarcity and raise prices in the linked jurisdictions. Notably, RGGI released a terse statement, noting that the WA proposal raises "substantive issues" with respect to the use of RGGI instruments.
I was planning to write a comment letter to the Department of Ecology with respect to the link to carbon markets in California and California. At this point, it's clear that leakage from resource shuffling is a major contributor to the low prices in the CA/QC market, which remain at the regulatory price floor due to oversupply. And for the first time since the market began, the joint auction of new allowance instruments in February 2016 didn't completely sell out (h/t Andy Coghlan). This means that California entities left low-cost compliance instruments on the table, providing further evidence of market oversupply and potentially signaling a lack of confidence in the post-2020 future of the cap-and-trade market.
The details of California's carbon market should matter to Washington residents and policymakers because the initial decision to let Washington parties buy California instruments means that California's problems with leakage would directly affect Washington's policies. Simply put, Washington could end up sending good money after bad credits. That would certainly make compliance cheaper, but would do so at the cost of actually reducing greenhouse gas emissions. Although at a smaller scale, the issue would look a lot like the EU Emission Trading System's interaction with the Clean Development Mechanism offsets program, which flooded the EU market with cheap, low-quality offset credits that weakened the environmental integrity of the EU system. Given the problems in California's market, not to mention the experience with policy dilution in other trading systems, my view is that Washington state policymakers should study the issue carefully and transparently before entering into unilateral link with other jurisdictions.
Meanwhile, I'll be keeping a close eye on the Department of Ecology's future proposals in this area and will be looking for local experts to help us all make sense of the competing policy proposals and their relationship to state politics. It's great to see so much interest in developing new policies from Washington civil society and policymakers—but it's important to get the details right.