Last week when the Western Climate Initiative’s latest draft appeared it mystified most folks who aren’t insiders to the process. That’s a shame because WCI is hugely important. So over the next few days I’m going to embark on a series of posts that I hope will clear up some of the misunderstandings. Along the way, I’m also going to explain what Sightline wants to see improved.

Maybe the single most important question in cap and trade is the question of “scope,” the question of what we should include under the cap. How do we decide which carbon pollution counted? And who must obtain the tradeable carbon permits that are equal to the cap?

WCI gets a couple of things right. First, they will regulate all six of the major greenhouse gases. And they’ve opted for an “upstream” approach: regulating carbon at the handful of points where it enters the economy (pipelines, refineries and so on) rather than further downstream where hundreds or thousands of fuel users would be implicated. It’s the coal plant, not the residential electricity meter, that gets treated.

But other questions have been stickier. Some sectors are getting a pass, at least for now, because they are technically infeasible to cover. For example, emissions from agriculture and forestry are difficult to count and there are multitudes of small-scale emitters who have little capacity to participate in a cap and trade program. Fortunately, however, the vast majority of the West’s carbon pollution is relatively easy to count, and the polluters are large and sophisticated companies that are accustomed to regulatory requirements. (Think utilities, oil refiners, and smelter operators.) The right thing—for the climate, for the program’s cost-effectiveness, and for equity among businesses — would be to include as many sources of carbon pollution as is technically feasible.

But that hasn’t happened.

The single biggest problem with scope is that WCI is excluding oil companies — even though transportation fuels are the single largest source of emissions—until the second “compliance period,” which doesn’t start until 2015. (A “compliance period” is a unit of time over which the regulated firms must match their climate emissions to the number of carbon permits that they have obtained.) Seven years is a long time to wait to address the central climate threat of the West. And it gets worse: because each compliance period is three years long — meaning that polluters have three years to match their emissions to their carbon permits –we might not see meaningful reductions until eight or nine years from now.

That’s hardly the only problem.

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  • We see the very same problem with WCI excluding natural gas used in homes and businesses until the second compliance period. In this case, however, the delay is even more frustrating. Natural gas is already a highly regulated industry—much like the electricity sector — and so it’s extremely difficult to see why it couldn’t be included in the first round.

    What’s left in the program? In the first compliance period, WCI will cover the electricity sector, large industrial plants, and a few others. But even for these sectors, WCI is dragging its heels: the first compliance period won’t start until 2012. So not until sometime between 2012 and 2014 will even this small share of polluters make WCI’s first reductions. (In a follow-up post about “offsets” I’ll explain why these sectors may not actually make any reductions even at that late date.)

    It’s getting hard to believe that WCI’s latest proposal takes seriously the urgency of reducing emissions post haste. In fairness, WCI is taking a go-slow approach in part because policymakers want two years of emissions reporting data before starting the market program. There’s maybe some sense to this, but it has at least one signficant problem: if any carbon permits are given away for free on the basis of emissions (an approach sometimes called “grandfathering”) then it may encourage polluters to increase emissions in the near-term. If they report high emissions during the reporting period they’ll get awarded more cash-value permits when the program start. We’d be effectively paying companies to pollute more.

    What else is wrong? WCI proposes to entirely exclude all biomass combustion from the program. It’s hard to make sense of what this might mean because “biomass” can refer to everything from corn ethanol to algae to Indonesian palm oil to local canola. Biomass shouldn’t be treated any differently from other sources of carbon. What’s more it’s an invitation to “fuel-switch”: to run electricity plants off wood waste rather than natural gas; to heat your home with wood rather than gas; and so on. Both release climate pollution, of course, but we’d only be counting the emissions from one. In some cases, fuel-switching might be a good thing, while in other cases it’s clearly not. But a serious cap on carbon would treat all fuels the same way: based on their carbon emissions.

    There’s one additional problem that I’ll deal with more fully in a subsequent post. The “thresholds” are too high for regulation under the program. Rather than 10,000 tons of carbon-dioxide-equivalent recommended by most public interest groups, WCI has opted to set a threshold of 25,000 tons, which will effectively exclude a large share of emissions, particularly in Canada’s oil and gas industry. It’s yet another free pass to the oil companies. But more on this issue later.

    Okay, that’s about enough on scope for now.

    Last week when the draft came out, I said it was “basically pretty good.” That’s true in the sense that the West is moving toward a cap and trade program—an important ingredient in responsible climate policy — but I’ve been getting grouchy. The more carefully I study the proposal (as well as the politics), the less happy I am with it. But more on that in the rest of my “Inside WCI” series. Stay tuned.