Cap and Trade and the Western Climate Initiative December 10, 2008 .

Cap and Trade and the Western Climate Initiative

December 10, 2008 www.ecy.wa.gov

Cap-and-Trade BasicsCap-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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Cap and Trade as Musical Chairs Cap and Trade as Musical Chairs

Based on work by Holmes Hummel, PhD

Fellow for Congressman Jay Inslee

November 21, 2007

An Illustration of Managed Scarcity

Each chair represents one permit or “allowance”If you have a permit, you get a chair

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Musical chairsMusical chairs

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

2012

All stick figures by Tormod Lund, GraffleTopia.com 4

The Cap The Cap

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…

2013

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Would anyone be willing to sell their chair for $10?

The TradeThe Trade

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Sure! For that price, I can finance an efficiency upgrade, eliminating my need for a pollution permit.

The InnovationThe Innovation

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The MarketThe Market

• 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

$20 $20$20SELLPRICE:

2015

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Achieving Reduction TargetsAchieving Reduction Targets

Cap-and-trade lets players choose at what price they will reduce their emissions

–and how they want to reduce them

$65$20

$10$30

$50

2050204020302020

Wind power

Rail TransportHybrid vehicleSolar power

Green buildings Energy Upgrades

2020

$30 9

Using Market IncentivesUsing Market Incentives

• For some, it is more profitable to reduce emissions and sell allowances • Profit is a main driver for innovation and investment• We need both to make the level of reductions science says is required

2015

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Purpose is to reduce greenhouse gas emissions

Number of permits available is reduced each year until the ultimate target has been achieved

Achieving Reduction TargetsAchieving Reduction Targets2020

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The End Game: Achieving The End Game: Achieving Climate StabilizationClimate Stabilization

The last players• can afford to pay

• have the least flexibility to reduce

These are the most valuable/needed uses of fossil fuels

2050

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WCI DesignWCI 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 region’s emissions by 2015– RGGI =~33% of emissions– EU ETS = ~40% of emissions

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Economic Modeling ResultsEconomic 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• Including more sources in the program also reduces

prices

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What the design is and isn’tWhat the design is and isn’t

• It is – the policy framework– what must be the same between jurisdictions to have a regional

program

• It isn’t– the specific details; they will come through legislative and rule

processes

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What has to be the sameWhat 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 and borrowing

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What has to be the sameWhat 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• Functions assigned to regional administrative

organization

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What Can be DifferentWhat Can be Different

• Allocation of allowances within states/provinces• Maximum percent of allowances auctioned• More stringent limit on use of offsets• Allowances set-aside for specific uses• Recognition of early reductions

– from within a partner allowance budget

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Design RecommendationsDesign Recommendations

• Comprehensive– All 6 primary greenhouse gases – All major sources

• Large industrial combustion and process emissions (2012)• Electricity (2012)• Transportation, Residential, Commercial and Industrial Fuels

below threshold (2015)

• CO2 from biomass and biofuels exempt except for reporting

• Program starts in 2012; reporting in 2011

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More Design RecommendationsMore Design Recommendations

• Threshold– 25,000 metric tons annually for inclusion in the

program– 10,000 metric tons annually for reporting

• Compliance flexibility– Offsets – Banking (no borrowing)– Early Reduction Allowances (ERA)– Three year compliance periods– Allowances from other cap and trade systems

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OffsetsOffsets

• Focus on quality– Real, surplus/additional, verifiable, permanent

• Limited to 49% of reduction– Majority of reductions from capped sectors

• Each jurisdiction may have more stringent limits• No limit on location• Protocols will be jointly developed or modified• Priority projects: forestry, agriculture and waste

management

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OffsetsOffsetsAn illustrationAn illustration

Years 20202012

2012 Program Cap

Declining Annual Program Caps

2020 Program Cap

49%: Maximum use ofoffsets and other allowances

51%: Minimum reductionfrom covered sources

Million Metric Tons of CO2e

Years 20202012

2012 Program Cap

Declining Annual Program Caps

2020 Program Cap

49%: Maximum use ofoffsets and other allowances

51%: Minimum reductionfrom covered sources

Million Metric Tons of CO2e

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• Regional Cap– Annual caps set before program begins– Steadily decline each year– 2012 cap = Based on best estimate of expected emissions

• Reported emissions• Population and economic growth

– 2015 cap = Add best estimate from transportation and residential, commercial and industrial fuels below threshold

– 2020 cap = Regional goal


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• Partner allowance budgets – based on– Each partner’s reduction goal– Estimate of actual emissions from covered sources using

• Population• economic growth• expected emission changes

– Reporting data (less in 2012; more in 2015 and 2018)


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• One time 2012 adjustment to allowance budgets• Each jurisdiction contributes 1% of 2012 budget

redistributed to partners based on their individual– Production and consumption of electricity– Population and economic growth– Share of the total emissions between 2001 and 2005


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• 10% minimum auction in 2012; increases over time– Half with reserve price to manage any over-allocation

• Value should be used for WCI-wide benefits:– Energy efficiency and renewable energy incentives and

achievement– Research, development, demonstration and deployment– Promoting emission reductions and sequestration in

agriculture, forestry, other uncapped sources

• Distribution of remainder up to individual partners• May be standardized to address competition


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• Early Reduction Allowances (ERA)– For certain reductions between 1/1/08 and 1/1/12– On top of individual partner allowance budgets– Issued in 2012 only

• Recognition for other reductions or set aside allowances for specific uses– Come out of the individual partner allowance budgets

• Enforcement– True up by July 1 after end of each compliance period– Three tons for every one ton short – Other enforcement authorities of partners


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• Regional administrative organization– Reduce costs– Improve program transparency and consistency in

• Administrative functions• Market monitoring• Conducting auctions• Reviewing and adopting offset and reporting protocols• Coordinating review and issuance of offset credits

– States and provinces retain authority


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www.westernclimateinitiative.org

Cap and Trade and the Western Climate Initiative December 10, 2008 .

Documents

carbon emissions

emissions offsets2cap

regions emissions

emissionsnumber of allowances

fewer allowances

allowances profit

purchase allowances

carbon dioxide