Washington’s proposed Clean Air Rule and California’s cap-and-trade market

Near Zero’s Danny Cullenward submitted a comment letter to the State of Washington’s Department of Ecology to share important information about the status of the California market:

The Department should be aware that California’s carbon market is significantly oversupplied at present, meaning that the total supply of compliance instruments available in the market significantly exceeds the demand for those instruments. The California program’s legal future is also highly uncertain. If the program expires at the end of its current authorization through December 2020, then the oversupply conditions will worsen and the environmental consequences of allowing covered parties in Washington to use allowances issued by an expiring program in California will be severe.

While the Department’s proposed Clean Air Rule does not by itself allow covered parties in Washington to submit California allowances for compliance, the accompanying cost-benefit analysis explicitly contemplates this outcome and the proposal itself creates a process for approving greenhouse gas allowances issued by external markets.

The presence of oversupply conditions in an approved external emission market would reduce the environmental integrity of the Department’s proposal. Purchasing allowances from an oversupplied market would not lead to greenhouse gas emission reductions because such a purchase would have no impact on the emissions in the seller’s market, and therefore the credit generated for compliance under the Clean Air Rule would not reflect a real emission reduction. In the worst-case scenario, sufficient oversupply in an approved external emission market could completely negate the anticipated benefits of the proposed rule during the first two compliance periods, during which time these external allowances could be used for 100% of compliance obligations.

To account for the risks identified here, the Department should conduct additional analysis of oversupply conditions in California’s cap-and-trade program prior to making any decision to approve allowances from this market. It should also explicitly consider the environmental integrity impacts of recognizing California allowances in its final cost-benefit assessment—including a consideration of the impacts should California’s program expire at the end of 2020, as is currently codified in California state regulations.

Disclaimer: I am writing in my personal capacity only, and not on behalf of my employer.