Cap-and-invest linkage

Among other things, we must determine that:

• Joining markets would not negatively impact Washington's ability to meet the emissions-reduction commitments set in state law.
• Linking would reduce the cost of compliance for covered businesses.
• The linking jurisdictions have provisions to ensure their programs provide benefits to vulnerable populations and overburdened communities.
• Linking would not have an overall negative effect on highly impacted communities in any jurisdiction.

In addition, we are required to conduct an environmental justice assessment before we can approve a linkage agreement.

The law requires that linkage must provide certain benefits to Washington in order for an agreement to be approved.

Among other things, linking markets must:

• Increase emissions-reduction opportunities and reduce the cost of compliance for covered businesses and consumers.
• Allow for more streamlined and cost-effective auction administration and program management.
• Increase overall market security.

The effect on vulnerable populations and overburdened communities is one of the criteria the law requires us to evaluate before deciding on whether to link markets. We are currently gathering information to better understand the potential impacts of linking.To start, we will look at the following:

• The policies California and Québec have in place to ensure that their cap-and-trade programs provide benefits to vulnerable populations and overburdened communities.
• The types of projects and programs funded with the cap-and-trade revenue in the other two jurisdictions.
• Research on the effects of existing cap-and-trade programs on highly impacted communities.
• Sections of the CCA, the HEAL act, and other environmental regulations that discuss the effects of Washington's program on highly impacted communities.

Do you have information or resources you think we should look at? Let us know!

An independent economic analysis of the cap-and-invest program projected that linking with California and Québec would lower the cost of allowances. This would lower the cost of compliance for businesses — one of the benefits required by law. In turn, this could reduce any price impacts on consumers.

Unused allowances are allowances that businesses in the joint California-Québec market currently have in their accounts because they have not used them for compliance. They may be saving them to use for future compliance obligations or to sell on the secondary market to generate revenue.

As long as Washington's program is separate, only allowances issued by our agency can be used for compliance in Washington. Even if a business has facilities in California, they have to have separate allowance accounts in each state and can’t move allowances between those accounts.

If we link markets with California and Québec, businesses in those jurisdictions could start selling their unused allowances to Washington businesses, which could use them to cover their emissions instead of purchasing allowances at our quarterly auctions.

The same could potentially be true for businesses that operate in two jurisdictions — California and Washington, for example. These business could choose to use their own unused California allowances to cover their Washington emissions instead of purchasing new allowances.

The law directs us to consider the number of unused allowances from before 2020 and how they might impact Washington's ability to meet its climate goals. But the law also directs us to periodically review the performance of the program to ensure that Washington's emissions are being reduced in line with the limits set in state law — which means we could reduce our annual allowance budgets, if needed.

If linking results in lower allowances prices, it could also reduce the amount of funding generated for climate projects throughout the state.

Likewise, if businesses in Washington use unused allowances from the California-Québec market, instead of buying them from Washington auctions, that could also reduce the amount of revenue generated by Washington’s program.

Sustainable allowance prices that enable businesses to comply effectively, without reducing the incentive to decarbonize, are critical to the success of the program, so we have to look carefully at both sides of this issue as we evaluate a potential linkage agreement.

In early 2023, we began engaging tribal governments and seeking input from the Environmental Justice Council and, then, from stakeholders and the broader public. We will use this input to inform our analysis of the linkage criteria laid out in the CCA and the decision about whether to pursue linkage with California and Québec.

After gathering and considering input, we will make a decision on whether to pursue linkage. We also plan to issue a report covering our preliminary analysis of the linkage criteria, as well as a summary of the feedback we received during our exploratory process. We expect to announce a decision in summer 2023.

Even if we decided to pursue linking, California and Québec would need to go through their own respective processes prior to moving forward. 

If all three jurisdictions determine that linking would be beneficial, we would begin discussing a linkage agreement and issue a report with our findings on the whether the linkage criteria are met. We would then hold a public hearing to get comments on the proposed agreement and complete an environmental justice assessment. Depending on the outcome of those steps, we may approve the agreement.

While much of Washington’s program is designed to align with California and Québec, each jurisdiction may need to make regulatory adjustments before entering into a linkage agreement.

We expect this part of the process would take at least a year.

At this time, we cannot predict if or when we would enter into a linkage agreement with California and Québec and start holding joint allowance auctions. However, we know that the process up to this point will likely take about two years, so Washington's program would not be linked until 2025 or later.

The Legislature established an expectation of linking with other markets when it passed the Climate Commitment Act. This law clearly directs us to pursue linkage if it's determined to be beneficial, though it does not provide a specific timeline for doing so.

In 2022, we commissioned an independent economic analysis of the cap-and-invest program that showed estimated allowance prices under different scenarios. In that report, the “linked” scenario was estimated to produce the most sustainable allowance prices, supporting businesses to participate effectively in the program without diminishing the incentive to decarbonize.

Given the significant impact linkage was projected to have on allowance prices and market stability, we have accelerated our timeline for exploring linkage, beginning that process alongside the implementation of the cap-and-invest program.

The CCA directed us to develop Washington’s program to be "linkage-ready," so many of the key aspects of our cap-and-invest program are already aligned with California and Québec's.

For example, Washington's program uses the same auction platform (administered by WCI Inc.). We also wrote our regulation to mirror those programs' floor- and ceiling-price calculations, and we adopted four offset protocols from the California program.

However, the three programs may still need to make some regulatory changes if all three jurisdictions agree linking is a good idea. In Washington, the formal rulemaking process usually takes around a year, and all three programs would need to complete their regulatory changes before our markets could actually be linked. This means Washington wouldn't officially join the shared market until 2025 or later.