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 reviewing pulic input and gathering information to better understand the potential impacts of linking.
Some of what we will look at the include:
- 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.
An independent economic analysis of the cap-and-invest program projected allowance prices under different scenarios. The report showed the expectation of a linked cap-and-invest program would produce a lower initial emissions allowance price in Washington.
In a linked market, auctions would be held jointly with California and Québec, and all three jurisdictions would share a common allowance price. The report indicated that the allowance price in a linked market would most likely align more closely with prices in the California-Québec market.
If linking with California and Québec lowers the cost of allowances, that 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.