Sometimes the term “cap-and-trade” evokes images of traders run amok and Enron-style meltdowns. “Why can’t we just use the good part (the cap that makes polluters stop polluting) without the questionable part (trading that enables Wall Street antics)?” concerned citizens sometimes wonder. Why not just a cap?
Washington state, using the authority of the state Clean Air Act, is about to try just a cap. “Cap-and-reduce,” some are calling it. I might call it “cap-and-cap.”
This summer, Governor Jay Inslee ordered the State Department of Ecology to conduct a public process and write a rule capping climate pollution. Ecology has released the initial outlines of its plan. The agency expects to release a full draft in December, take public comment, and finalize and adopt the rule in summer 2016. Many details of the plan remain to be fleshed out, but here are some questions and answers about the direction the rule is heading.
Q. How will the cap work?
Ecology will set an overall state pollution goal, declining over time. The agency will determine how much pollution individual carbon-emitting power plants, refineries, and other facilities are allowed to release into the atmosphere in order for the state to stay under the cap. Ecology will assign each facility an individual pollution cap. Facilities will measure their pollution and report to Ecology, which will determine if they have met their individual pollution goals.
Q. How much pollution will be capped?
The cap will cover 59 percent of the total pollution in the state. It will cover the pollution content of fuels sold by large petroleum fuels producers and large natural gas distributors, as well as the emissions from the smokestacks of stationary sources, such as power plants and factories. The cap will cover all greenhouse gases: carbon dioxide, methane, nitrous oxide, and the fluorinated gases (hydrofluorocarbons, perfluorocarbons, sulfur hexafluoride, and nitrogen trifluoride).
Q. What businesses or facilities will be regulated by the cap?
Only the 35 biggest facilities in Washington—the refineries, power plants, and factories emitting more than 100,000 tons of carbon dioxide equivalent (CO2e) per year—will be capped. These large facilities include:
- Petroleum fuel producers, such as BP’s Cherry Point refinery and Shell’s Puget Sound refinery;
- Stationary sources, such as power plants and metal, waste, chemical, or pulp and paper processors; and
- Natural gas distributors, including facilities owned by Avista, Cascade Natural Gas, and Puget Sound Energy.
Because some companies own more than one facility, the rule will only apply to 30 different companies.
A threshold of 100,000 tons is high. Most carbon caps set the threshold at 25,000 tons CO2e. However, Ecology found that lowering the threshold to 25,000 tons would dramatically increase the administrative complexity of a Washington cap because it would more than double the number of capped entities—from 35 to 80—but would only extend the cap to another 1 percent of the state’s greenhouse pollution. Setting and enforcing individual caps for each of 80 different facilities would be administratively difficult, so Ecology is planning to maximize emission reductions per dollar of administrative overhead.
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The rule also will not cover:
- TransAlta’s Centralia coal power plant (its two boilers are scheduled to be shut down in 2020 and 2025)
- Imported electricity
- Imported petroleum fuels
- Fuels made for aviation and maritime use
- Agricultural practices
- Industrial combustion of woody biomass
Q. Will regulated businesses be able to trade emission credits?
Washington State will not issue pollution allowances or conduct auctions. However, it will allow regulated businesses to trade amongst themselves. If a business proves to Ecology that it has emitted less pollution than its individual cap allows, it could generate credits and sell them to another Washington business that has not been able to cut its emissions enough to meet its cap. Ecology has not yet decided how it would certify or track these company-generated credits, but it plans to leave it up to the regulated businesses to develop any trading marketplace.
Q. If they can trade, isn’t this really cap-and-trade?
The possibility of trading makes Ecology’s plan look suspiciously like a cap-and-trade program with free allocation of allowances. In “cap-and-giveaway,” as that scenario can be called, the government decides how many allowances to give to each facility, allowing them to pollute up to that level for free. If a facility cuts emissions, it can sell excess allowances to another facility that has not cut emissions down to its government-allocated amount.
At best, giving away allowances for free blunts the price signal. At worst, it results in a windfall profit for companies at the expense of people, as the European Union learned the hard way. Washington would not create nor give away allowances. Instead it would give each facility a cap and let the facilities create and trade their own credits if they wish. By not creating tradable credits, Washington constructs extra transaction costs for facilities wishing to trade, but if they manage to create their own credits, the program could function much like cap-and-giveaway.
Q. Will regulated business be able to buy offsets?
Ecology wants to give regulated businesses the option to buy offsets: emission reductions credits from projects in Washington or possibly anywhere in North America. Ecology is requesting public comment on the proper range of offsets. This approach would allow businesses to comply with the cap even if they are unable to reduce their own pollution, and it could generate investment in projects such as dairy digesters, transportation projects, or efficiency implementations.
Q. What about other pollution-reducing policies?
Ecology has interpreted Governor Inslee’s order to give it the authority to conduct a rulemaking just for a cap. It intends to require that all emission reductions from the cap be additional to (above and beyond) any reductions that would be required by other Washington policies, such as the existing Energy Independence Act.
Q. So… is this a good idea?
Cap-and-cap is Washington’s third- or fourth-best option. Climate change is a problem that calls for a legislative solution. The legislature or the people could craft a bill that curbs pollution by using the best tools at our disposal, namely, a carbon price and cost-effective complementary policies. Administratively setting individual caps for large emitters creates bureaucratic costs without the benefit of a price signal. Omitting complementary policies leaves a lot of emissions—and possibly a lot of dollars—on the table.
Governor Inslee is doing what he can with his executive authority. Good on him for doing something! Let’s hope a more comprehensive approach can win approval of the legislature or the voters soon, so the Evergreen State can cut more pollution at lower cost.