Yesterday, the Transportation and Climate Initiative (TCI), comprising 12 East-coast states and the District of Columbia, issued a draft Memorandum of Understanding (MOU) that would lay the framework for a cap-and-investment program covering transportation fuels across all participating jurisdictions. The draft MOU, as written, leaves unresolved many key points of the proposed program and seeks public comment by Friday, February 28, 2020. The participating jurisdictions plan to release a draft model rule sometime in 2020, and a final model rule by the end of 2020. Interested stakeholders should consider preparing comments on the MOU, which is the first step in the rulemaking process. 

Background

TCI was formed in 2012 to “work to reduce greenhouse gas emissions, minimize the transportation system’s reliance on high-carbon fuels, promote sustainable growth and address the challenges of vehicle-miles traveled.” The group comprises 11 states (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Rhode Island, Vermont, and Virginia) and the District of Columbia. New Hampshire was formerly a TCI participant, but following the release of the MOU, NH Governor Chris Sununu unexpectedly announced that New Hampshire would no longer participate in the program. Throughout 2019, TCI participating jurisdictions, with support and guidance from the Georgetown Climate Center, have held a series of public workshops and other meetings to gather preliminary input on the design of the TCI program. The MOU represents the culmination of those efforts.

Overview of Draft MOU

The MOU contemplates that all participating jurisdictions will pass a Model Rule to implement the regional cap-and-investment program. The program would cover all motor gasoline and on-road diesel fuel at the terminal rack and require fuel suppliers to hold emissions allowances equal to the greenhouse gas (GHG) emissions from the fuel they distribute in the covered jurisdictions. Those allowances would be sold at auction and traded, and the program would set an initial allowance cap that would decline over time. The program also calls for investments of auction revenue in a variety of transportation-related programs.

Notably, many of TCI’s program elements remain undefined. The draft MOU and its appendix contemplate that the final MOU will resolve those elements, including:

• Determination of the initial total emissions cap for the covered fuels.
• Allocation of emissions allowances among the participating jurisdictions.
• The schedule for reduction of the total emissions cap over time.
• The initial compliance period.
• Establishment of stability mechanisms such as a reserve of allowances that may be increased or decreased based on market conditions.
• Whether to allow the limited use of carbon offsets.
• Auction mechanics and a minimum reserve price for emissions allowances.
• Investment of proceeds in other climate- or climate justice-related action.
• General governance of the group.

TCI represents a major new cap-and-trade program that, if launched, would cover a significant swath of the U.S. economy. The MOU represents an important step in the regulatory design process, and interested stakeholders should consider preparing comments on the open subjects identified above, as well as other topics pertaining to the TCI program in general.

Beveridge & Diamond’s Air and Climate Change practice group helps private and municipal clients navigate all aspects of carbon markets and climate change initiatives, including state and federal regulatory programs, obligations arising under international agreements, private governance, and sustainability initiatives. For more information, contact the authors.