Washington voters save the state’s Cap-and-Invest Program: What comes next?

Washington State’s ambitious Cap-and-Invest Program was on the ballot this November. The program is designed to reduce planet-warming greenhouse gases (GHG) in the state by requiring large-emitting businesses to purchase emission allowances. The businesses can then buy and sell these allowances in the state-run marketplace, with proceeds from the allowance auctions going to fund conservation initiatives in the state.

Now that Washingtonians have voted overwhelmingly to keep the program, various contingent rules will come into effect, and the Washington Department of Ecology (Ecology) is losing no time adopting regulations to fully implement the program. Major emitters, utilities, and other stakeholders are encouraged to take note.

What is the Cap-and-Invest Program?

Washington laws passed in 2008 and 2020 require the state to cut GHG emissions roughly in half by 2030 and by 95 percent by 2050. The 2021 Climate Commitment Act (CAA) represented the most significant step toward meeting those obligations, with the Cap-and-Invest Program as its centerpiece.

As in mandatory carbon markets elsewhere, the idea is to leverage the power of supply and demand to create incentives for the private sector to find the best ways to limit its GHG emissions within its compliance obligations.

Under the current law, businesses whose covered emissions (including electricity imported by in-state power providers) are at least 25,000 metric tons of carbon-dioxide equivalent (MT CO2E) per year are required to acquire and surrender one allowance for each metric ton of emissions. Eligible natural gas utilities, electric utilities, and “emissions intensive trade exposed” industries (EITEs), which are local manufacturers that face substantial global competition, receive an allocation of free allowances from the state every year, with the number of no-cost allowances allocated to decrease over time. Failure to comply with the program may subject a covered business to fines of up to $50,000 for each day of violation.

The CAA made Washington one of the growing number of jurisdictions around the world using markets to meet their climate change commitments.

Initiative 2117

Many Republican legislators in Washington were opposed to the program, which they dubbed Governor Jay Inslee’s “hidden gas tax.”

This opposition came to a head when Representative Jim Walsh (R-19) and a conservative donor sponsored an initiative to the Legislature to repeal the Cap-and-Invest Program and prohibit future efforts to impose a similar program on GHG emissions. When the legislature failed to pass the measure, it went on the ballot as Initiative 2117.

After a heated campaign, nearly 62 percent of Washington voters rejected the initiative. This rejection led to a sizeable surge in carbon auction prices. Consequently, the Cap-and-Invest Program remained intact, triggering a wave of substantial regulatory activity.

Complying with the CAA

The first compliance deadline for the Cap-and-Invest Program was on November 1, 2024 – only four days before the election that would decide the program’s fate. To maintain compliance, covered and opt-in entities must be registered with the online Compliance Instrument Tracking System Service to obtain allowances covering emissions for the current four-year period by purchasing allowances at auction or from other entities, obtaining no-cost allocations, earning offset credits, reducing emissions, or a combination of the above.

The law also limits how many allowances that covered or opt-in entities and “general market participants” (ie, parties that trade in allowances but are not subject to any emissions caps) can buy as a percentage of credits sold at a single auction or can own as a percentage of all allowances issued in a single year.

No-cost allowance allocations for qualifying electric utilities and natural gas utilities are intended to mitigate the cost burden of the Cap-and-Invest Program on Washington consumers of electricity. Ecology must allocate these allowances based on forecasts of each utility’s retail electric load and resource supply mix and may adjust as needed. The number of no-cost allowances available decreases over time to the meet the emissions reductions targets set out in the CAA: a 45-percent reduction from 1990 levels by 2030, and a 95-percent reduction form 1990 levels and removal of the residual 5 percent to achieve “net-zero” GHG emissions by 2050.

Market participants are required to annually submit compliance instruments on November 1 of each year to cover 30 percent of their emissions from the prior year emissions. The final surrender deadline for the current four-year compliance period (2023 to 2026) will be November 1, 2027.

Senate Bill 6058

Uncertainty regarding CAA compliance was compounded by other legislation intended to augment the CAA. In anticipation of the Cap-and-Invest Program going into effect, Governor Inslee signed SB 6058 to strengthen the market and eventually allow it to link with the markets in California and Quebec. Many SB 6058 provisions will take effect on January1, 2025 – but Initiative 2117 threw those plans into limbo. The Cap-and-Invest Program’s success at the ballot box means these efforts can proceed once more. Notable mandates coming in 2025 under SB 6058 include:

• Raising the bar by changing the definition of “biofuels” to require at least a 30 percent reduction in greenhouse gas emissions compared with fossil fuels
  
  
• Increasing the percentage of allowances that any one covered or opt-in entity can purchase during a single auction from 10 to 25 percent, while retaining more conservative purchase and ownership limits for general market participants
  
  
• Revising the reduction schedule for no-cost allowances for EITEs based on four-year periods prescribed by statute, instead of compliance periods
  
  
• Providing quarterly status updates on any potential agreements to link the Washington market to markets in other jurisdictions
  
  
• Eliminating the current 25,000 MT CO2E threshold of emissions associated with electricity imported from certain sources for inclusion in the program
  
  
• Allowing federal providers of hydroelectricity to register as opt-in entities and voluntarily participate in the Cap-and-Invest Program
  
  
• Additional rulemaking to bring elements such as compliance periods, electricity definitions and reporting, reporting methodologies, and offsets in line with linked markets

Further rulemaking under the CAA

Meanwhile, Ecology has had a very active rulemaking calendar to adopt regulations to implement the CAA, including the Cap-and-Invest Program. These include new rulemaking on:

• Overburdened communities: Ecology is developing a new rule to reduce air pollutants in 16 overburdened communities that are “highly impacted by air pollution” and require targeted strategies to improve air quality. The rule will outline processes and strategies for reducing emissions to meet air quality targets and may involve additional rulemaking for implementation. Ecology plans to hold stakeholder meetings in winter 2024 to 2025.
  
  
• Electricity markets: Ecology has adopted a new rule for electricity markets to determine which entities are responsible for emissions associated with electricity imported from centralized electricity markets, such as the Western Energy Imbalance Market, the Extended Day Ahead Market, and Markets+. The rule is intended to ensure the accounting of emissions from electricity purchased through centralized electricity markets, which is important for the proper functioning of the Cap-and-Invest Program. The rule also provides market operators with clarity to identify out-of-state resources supplying electricity to Washington and ensures that the market’s operation reflects the state’s GHG policies. The rule was adopted on December 3, 2024 and will take effect on January 3, 2025.

These measures represent significant steps in Washington’s efforts to manage GHG emissions and transition to a low-carbon economy. Ecology provides multiple opportunities for the regulated community to participate in the rulemaking process to ensure that business perspectives are accurately reflected. These perspectives help ensure that Ecology has reasonable compliance expectations while still striving to achieve the state’s ambitious climate goals. Stakeholders are encouraged to stay informed as market regulations continue to roll out, and to participate in the ongoing rulemaking process to help shape the future of Washington's energy and climate policies.

For more information or assistance on these emerging issues, please contact the authors.