Updated WCA HB1975 Demand, Supply and Price Outlook for Compliance Period 1

On April 29, Washington Department of Ecology shared detailed market guidance outlining how HB1975 will be implemented, with key structural changes taking effect from 2027. The notice provides clarity on allowance supply, auction design, and cost containment mechanisms, addressing Washington Cap and Trade market uncertainty around how revised caps and retroactive adjustments will be operationalized.

A central element of the update is the treatment of retroactive vintages arising from the revised 2023–2026 program budgets. Ecology confirmed that these additional allowances will not be back-issued into past auctions but instead introduced into the market starting 2027 through current vintage auctions. This approach concentrates incremental supply closer to the end of Compliance Period 1, effectively increasing liquidity during a period when compliance demand is expected to peak. In line with statutory requirements, these allowances will be allocated across the Allowance Price Containment Reserve, Emissions Containment Reserve, and Voluntary Renewable Energy accounts, ensuring consistency with the program’s design while moderating potential price volatility from sudden supply shocks.

Significant refinements have also been introduced in the design and functioning of the Allowance Price Containment Reserve auctions. From 2027 onward, APCR allowances will be sold across two price tiers, with Tier 2 explicitly defined as the midpoint between the price ceiling and Tier 1 trigger price. Based on current assumptions of 3% annual inflation, this places the Tier 2 price at approximately 75.24 dollars in 2027, with Tier 1 around 70.48 dollars and the ceiling near 80 dollars. This clearer pricing structure enhances predictability for market participants, particularly compliance entities managing cost exposure.

However, the distribution of allowances between Tier 1 and Tier 2 within each APCR auction introduces an important dynamic linked directly to market conditions. If the triggering current vintage auction clears at or above the Tier 2 price, all APCR allowances in the subsequent reserve auction will be offered at Tier 2. In contrast, if the trigger occurs at or above Tier 1 but below Tier 2, the supply will be split evenly between the two tiers. This mechanism ties reserve supply pricing closely to prevailing market signals, reinforcing the role of APCR as a responsive cost containment tool rather than a static supply buffer.

Ecology has also revised how APCR volumes will be distributed over time. Instead of spreading reserve supply across multiple events with less defined structure, the updated guidance indicates that APCR allowances will be disbursed across a maximum of three auctions leading up to the compliance deadline. This creates a more concentrated release schedule, potentially amplifying the impact of each APCR event on market pricing and liquidity. In addition, Ecology confirmed that 5% of the 2031–2040 allowance budgets will be pre-allocated into the APCR before the conclusion of Compliance Period 1. This forward-shifted supply effectively increases near-term cost containment capacity, while slightly reducing availability in later periods.

Another key provision ensures that any remaining APCR allowances will be fully offered in a mandatory pre-compliance auction. This guarantees that all available cost containment supply is accessible to the market before entities finalize their compliance obligations. The pricing and tier distribution for this final auction will depend on the outcome of the June 2027 current vintage auction, further reinforcing the linkage between primary market conditions and reserve mechanisms.

From a regulatory timeline perspective, Ecology indicated that it plans to file a CR-102 rulemaking package by Spring 2026, with the expectation that the full rulemaking process will be completed by the end of the year. This provides the market with a defined window for stakeholder engagement and final adjustments before the new framework becomes operational in 2027.

Overall, the guidance introduces greater structural clarity on how additional supply from revised caps will enter the market, while strengthening the responsiveness of cost containment mechanisms. By aligning APCR pricing and distribution with auction outcomes, and concentrating retroactive supply closer to compliance deadlines, the updated framework is likely to play a critical role in shaping price behavior, liquidity conditions, and compliance strategies in the Washington carbon market through the remainder of the decade.