Carbon Markets Roundup

The first quarter of 2018 has been a busy one for efforts to put a price on greenhouse gas (GHG) emissions, both in the United States and abroad. In February, the European Union (EU) approved reforms to the EU Emissions Trading System (EU ETS) in late February, while Ontario joined the Western Climate Initiative (WCI), holding the first joint allowance auction with California and Quebec. Oregon and Washington failed to advance new carbon pricing proposals, while RGGI is set to expand.

European Union

The EU ETS Approves Reforms to Tighten GHG Emissions Caps

On February 27, 2018, the Council of the European Union approved revisions to the EU ETS. For several years, the EU ETS has been plagued by an over-allocation of allowances, which has hurt allowance markets and GHG reduction efforts. The reform package introduces three new elements:

1. An annual 2.2% reduction on the total GHG emissions cap.
2. Doubling of the number of allowances to be placed in the market stability reserve (MSR) until the end of 2023.
3. A new mechanism that will limit the validity of MSR allowances, beginning in 2023.

The EU ETS was launched in 2005 and operates in 31 countries (the EU plus Iceland, Liechtenstein, and Norway), and covers a broad sector of the economy, reaching about 45% of GHG emissions in member countries. Over time, it became increasingly clear that the program was over-allocated and issuing or auctioning more allowances than necessary. As a result, in 2015 the EU adopted the MSR, which attempted to solve the problem of excess allowances by removing 12% of the surplus allowances from the market beginning in 2019. The EU ETS reform package doubles that effort through 2023 and will limit the use of allowances in the MSR beginning in 2023. The EU plans to rely heavily on the EU ETS to meet its commitments under the Paris Climate Agreement. The recent EU ETS reforms are aimed at allowing the EU to achieve its internal, binding goal to reduce overall GHG emissions by at least 40% below 1990 levels by 2030, as well as corresponding commitments under the Paris Agreement. 

Western Climate Initiative

The WCI Expands and Holds its First Auction with Ontario

In January 2018, Ontario formally joined the cap-and-trade system established by California and previously joined by Quebec. Adding Ontario expands the market by nearly one-third, and creates new challenges and opportunities for regulated entities in Ontario who now participate in a broader carbon market. On February 21, 2018, Ontario, Quebec, and California held their first joint auction of GHG emissions allowances. 

The auction included 2016 and 2018 vintage allowances, as well as an Advance Auction of 2021 vintage allowances. All available current (2016 and 2018 vintage) allowances—a total of 98,215,920 allowances—were sold at a settlement price of 14.61 USD ($18.44 CAD), indicating strong demand in the wake of California’s 2017 legislative extension of the program. A total of 8,576,000 future (2021 vintage) allowances were sold (compared to12,427,950 available at auction) at a settlement price of $14.53USD ($18.34 CAD). Roughly 25% of the auction proceeds were allocated to Ontario, representing $471 million CAD, which by law will be invested in GHG reduction programs in the province through the Climate Change Action Plan.

California

California Continues to Prepare Climate Change Programs for 2030 GHG Targets

In December of 2017, the California Air Resources Board (CARB) formally adopted its third iteration of the “scoping plan” – a planning document required by legislation to chart out California’s path to achieving its 2030 emissions targets. The Cap-and-Trade Program and the Low Carbon Fuel Standard (LCFS), both prominent programs highlighted in the scoping plan, are currently slated for regulatory amendments to be finalized by the end of 2018. For the Cap-and-Trade Program, this set of amendments is not yet officially proposed, but CARB’s current thinking is that the amendments will help achieve conformance with AB 398, including new pricing mechanisms and evaluation of offset projects. 

The LCFS amendments envision an increasing role for LCFS in achieving California’s 2030 emissions targets. Also within the rulemaking package is an updated environmental review document, which CARB hopes will obtain compliance with a writ issued by the Fresno County Superior Court in POET, LLC, et al. v. CARB et al. (Case No. 09 CECG 04659 JYH). Until after the writ is discharged, LCFS standards for conventional diesel fuels and their substitutes will be “frozen” at 2017 levels, according to guidance recently published by CARB. The public comment period for the amendments to the LCFS is open until April 23, 2018. Interested stakeholders should be prepared to participate in the comment process for both of these initiatives.

Oregon

After Failing to Pass Cap-and-Trade Bill in Short Legislative Session, Oregon Lawmakers Eye 2019 

In Oregon, the legislature did not reach a bill that would have established a statewide GHG cap-and-trade system during a short 2018 legislative session. The proposed legislation sought to cap GHG emissions and auction emission allowances to covered entities. Oregon’s system would have taken effect in 2021. It was designed to establish an annually declining cap, with a goal of reducing GHG emissions to levels 80% below 1990 levels by 2050. Entities whose emissions exceeded 25,000 tons per year would be covered. The proposed legislation also included a framework for Oregon to participate in a broader regional trading market—the WCI—with California, Quebec, and Ontario. Despite the failure to pass legislation, Oregon House and Senate members have convened a Joint Committee on Carbon Reduction and Gov. Kate Brown has created a Carbon Policy Office in order to continue to work on and revisit the legislation in 2019. 

A key issue for lawmakers to address in 2019 is reconciling a proposed cap-and-trade approach with existing GHG reduction policies, including Oregon’s Clean Electricity and Coal Transition Act – or Senate Bill (SB) 1547. SB 1547 requires the state’s investor-owned electric utilities to provide their Oregon retail customers with electricity that is coal-free by 2030 and to completely phase out reliance on coal-fired power by 2035. 

Washington

Comprehensive GHG Regulations Elude Washington State Over Last Year

Recent efforts to regulate GHG emissions in Washington State have met with several challenges. 

On the regulatory front, in December 2017, a state district court judge invalidated key aspects of the Clean Air Rule, which had been promulgated by the state’s environmental agency in 2016 to cap emissions from stationary sources and from emissions ascribed to natural gas distributors and petroleum fuel importers. The court is now considering whether the provisions related to stationary sources should be left in place, after invalidating the portions of the rule that applied to “indirect emitters.” The state supports severing, but the industry challengers do not. Pending the outcome of the court process, the state has suspended compliance obligations for the rule. Regardless of the court’s ultimate decision, given the stakes, an appeal is expected. In February 2018, the state environmental agency revised GHG mitigation requirements and rate-based emission standards for certain power plants. 

On the legislative front, committees in the state legislature have entertained several bills over the last couple years that would tax carbon emissions or tighten the state’s renewable portfolio standard. Throwing his support behind SB 6203, Governor Jay Inslee unsuccessfully pressed the legislature to adopt a carbon tax in the legislative session that ended on March 8. A coalition of environmental and labor interests has vowed to place a carbon tax measure on the ballot this fall. A prior carbon tax initiative, which split environmental interests in the state, was defeated in 2016. 

RGGI Advances

After Tightening Caps in 2017, RGGI is Set to Expand

In 2017, the Regional Greenhouse Gas Initiative (RGGI) tightened its annual reduction goals and will lower emissions caps by another 30% by 2030 (with a corresponding reduction in annual caps and allowances available at auction). RGGI also adopted a mechanism similar to the EU ETS MSR, creating a process by which each state can remove excess allowances from each state auction. 

RGGI looks increasingly likely to expand. In New Jersey, Bill A1212—which requires the state to join RGGI—recently passed the state Assembly on a 48-24 vote. The bill would also create a “Global Warming Solutions Fund,” funded with 100% of proceeds from RGGI auctions. New Jersey withdrew from RGGI in 2011, but current governor Phil Murphy supports re-joining RGGI and issued an executive order in early 2018 requiring just that. One way or another, it appears the state is on track to re-join the program within the next few years. Virginia is also on track to join RGGI, through an executive order and set of related regulations currently being developed by the Virginia Department of Environmental Quality. But while Maine has recently enacted new legislation making it harder for that state to leave RGGI, New Hampshire is reportedly considering just that, highlighting yet again how all efforts to price carbon are subject to shifting political winds.

Beveridge & Diamond’s Air and Climate Change practice group helps private and municipal clients navigate all aspects of compliance with Clean Air Act regulations for criteria pollutants, hazardous air pollutants, greenhouse gases, and permitting processes. For more information, contact the authors.