Washington and California are two of the leading states in the United States when it comes to climate action. Both states have cap-and-invest programs, which are market-based mechanisms – putting up a price on carbon emissions. Washington’s program has taken a lot of input from California during its rulemaking process and built a program that closely mimics the California cap-and-trade program. Most of the programs’ mechanisms and functionality are the same as that of California’s program. Nevertheless, there are some subtle differences between the two programs which will be discussed in this article.
One of the distinctions between the two programs lies in the APCR (Allowance Price Containment Reserve) trigger and also the eligibility criteria to participate in the APCR Auction. In Washington, the APCR trigger is an auction with a clearing price equal to or above the Tier 1 APCR price. Therefore, the APCR reserve is triggered only if the allowance price in the auction surpasses the Tier 1 price. On the other hand, in California, the APCR reserve is set at 60% of the Tier 1 value. Consequently, the APCR reserve can be triggered even if the allowance price in the auction is much lower than the APCR Tier 1 price. In addition, California has a schedule to hold four potential APCR auctions against two for Washington.
The difference in APCR triggers between the two programs could lead to slightly elevated allowance prices in Washington. This is because the APCR reserve in Washington is only triggered when the allowance price is already high. Whereas, in California, the APCR auction can be held even if the allowance price is comparatively low.
Overall, the difference remains minute, but California does give more flexibility in triggering a reserve auction. The presence of the ability to hold the APCR auction before the end of each compliance period, irrespective of the trigger price, also lowers the impact of the trigger price on the market.
Another key difference between the two programs is the purchasing limit for compliance entities and general participants at the auction. In Washington, a single compliance entity is restricted from purchasing more than 10% of the total allowances for sale at an auction whereas in California, an emitter is limited to purchasing no more than 25% of the allowances at the auction. However, for general market participants that do not have a compliance obligation, the purchasing limit in both jurisdictions remains consistent at four percent in both jurisdictions.
While the purchasing limit in Washington may seem somewhat restrictive, it should not pose a significant obstacle for entities operating in the state. This is particularly true for the largest emitter, Puget Sound, which emits 9.1 million tons annually, as well as BP, which emits 2.1 million tons. Puget Sound, being a natural and electricity utility, receives significant no-cost allowances, which helps mitigate the impact of the 10% purchasing limit at the auction. Smaller entities should also be able to navigate within this limit without facing major hindrances.
Washington has language that restricts the number of allowances that voluntary or general market participants can hold for any single vintage. According to the rule, in addition to the previously mentioned holding limits, a general market participant cannot in aggregate hold more than 10 percent of the total number of allowances of any vintage year.
The clause is something new that’s present in Washington rules and is absent in California’s program. Washington is a smaller market and there is a high chance that financial entities may attempt to corner and artificially manipulate the prices. To prevent this, Ecology and legislature have implemented this fail-safe measure to protect market participants from manipulation.
The Washington program is stringent with a 7% decline in the Cap during the initial two compliance periods. Moreover, the absence of an allowance bank in the market adds to the challenges faced by compliance entities in meeting these stringent targets. To address this issue, Ecology has decided to give leniency to entities to plan out their compliance obligations over an extended period of four years against California’s three years.
A longer compliance period also gives businesses more time to make the investments necessary to comply with the program, potentially reducing the cost of compliance and making the program more economically viable for them. Overall, Washington’s 4-year compliance period is a positive feature of the program, given the stringency of the program.
The four aspects addressed in this article have been implemented to improve the program’s acceptability to Washington entities, minimize the risk of program failure, and decrease operational expenses. However, when considering the program’s linkage with California, these subtle distinctions are likely to be modified, as the original reasons for their existence no longer exist or are significantly diminished. Washington has endeavored to align its program as closely as possible with California’s, but certain adjustments were necessary due to the programs being at different stages and having varying levels of stringency.
Analyst Contact:
Craig Rocha (cmrocha@ckinetics.com)
Mira Dhandra (mdhandra@ckinetics.com)
Our market portals and InSights are only for logged-in users with the relevant access. This can be you too…
This content is outside of your current package. If you need this too, let’s talk…
Send this problem to our Clients team, and we will get back to you shortly with a plan of attack.
Speak and exchange notes with our specific-market expert, use your complimentary hours.
Arrange with Client TeamTell us who you are, and what you're after. We'll find you the right person with the answer - before you wake up twice.
Tell us who you are, and what you're after. We'll find you the right person with the answer - before you wake up twice.
Your name and email in exchange for staying up to date across the world's environmental markets... what a deal?!
This content is outside of your current package.
If you need this too, let's talk…
Phasellus tempor tincidunt sem, sed dictum ipsum mollis vitae. Maecenas eu diam convallis, pellentesque lacus et, mollis enim.
ID # | Custom Name | Created On | ||
---|---|---|---|---|
Phasellus tempor tincidunt sem, sed dictum ipsum mollis vitae. Maecenas eu diam convallis, pellentesque lacus et, mollis enim.
# ID | Custom Name | Created On | ||
---|---|---|---|---|