Ecology to Consider Expanding Carbon Offsets Available Under Washington State’s “Cap-and-Invest” Program

On September 12, 2023, the Washington Department of Ecology (Ecology) launched a new rulemaking addressing the use of carbon offsets to comply with greenhouse gas (GHG) emissions limits under Washington’s Climate Commitment Act (CCA). Ecology is considering rule amendments “to increase the potential variety of offset projects that can be developed within the cap-and-invest program.” The rulemaking seeks to enhance the use of carbon offsets for compliance with CCA obligations, providing additional options and cost-management approaches for entities subject to the CCA.

Key Takeaways

• Ecology’s existing CCA regulations include extensive provisions intended to ensure that carbon offsets satisfy the CCA’s requirements that offsets:
  • Provide direct benefit to Washington State;
  • Are real, permanent, quantifiable, verifiable, and enforceable;
  • Are certified by a recognized climate registry; and
  • That the carbon reductions are additional (i.e., would not occur in the absence of an offset transaction).

• The existing regulations limit the kinds of carbon offsets that can be used as compliance instruments. For example, the current rules allow offsets only under protocols approved by the California Air Resources Board for carbon-reduction projects involving livestock, forestry, and ozone-depleting chemicals.

• Ecology’s proposal may enable the use of additional carbon offset project methodologies to generate CCA-compliant offsets.

• The proposal may benefit a broad cross-section of stakeholders, including offset buyers (who may benefit from the increased availability of offsets), offset developers, and industry and natural resource stakeholders who may become eligible to generate carbon offsets through, for example, agriculture, aquaculture, and carbon capture projects.

• Interested stakeholders should participate in public hearings, comments, and workshops to help shape a workable rule. Ecology has not yet set specific dates for any of these processes, but interested parties can register to receive emails notifying them when events related to the rulemaking are scheduled.

Background and Analysis

In 2021, Washington adopted the CCA, which imposes an economy-wide cap on Washington’s GHG emissions and requires “covered entities” – those emitting over 25,000 metric tons of carbon dioxide-equivalents annually – to obtain sufficient allowances or offsets to cover their GHG emissions. The statewide cap declines over time, intending to achieve a 90% reduction in Washington’s 1990 GHG emissions levels by mid-century. Generally, covered entities obtain allowances in quarterly auctions, with one allowance required for each metric ton of GHGs the entity emits. Covered entities may also buy allowances on the secondary market, although supply is ultimately constrained by the auction volumes.

The CCA allows the use of offsets for a portion of the required allowances. For the first compliance period (2023-27), offsets may be used for up to five percent of a covered entity’s compliance obligation, provided at least 50% of those offsets are from projects that provide direct environmental benefits to Washington. For the second compliance period (2028-31), the limit drops to four percent, and at least 75% of offsets come from projects with direct local environmental benefits.

The CCA does not specify limits for offsets after 2031. Ecology is, however, permitted to modify offset limits for the first two compliance periods to align Washington’s program with programs to which it is linked. Given that flexibility, the rulemaking may substantially increase the limit on the use of offsets after 2031. In addition, because Ecology is now exploring the linkage of Washington’s program to other programs (such as California, Quebec, and potentially others), offset use limits could be slightly altered or reduced for the first two compliance periods as well. The California program currently caps offset use at 4% through 2025, then at 6% through 2030.

Early indications are that Ecology intends to expand the scope of available offsets, which are now limited to forestry projects, projects involving livestock such as dairy digesters to capture methane from manure, and projects for reductions of refrigerants such as HFCs and certain other high-potency GHGs. Beneficiaries of any expansion could include industries such as aquaculture, agriculture (beyond livestock operations), and many others that can produce offsets meeting the CCA’s requirements for verifiability, permanence, and quantifiability—as well as regulated entities seeking to hedge compliance options and contain costs. The CCA’s early results have been strongly criticized for producing high allowance prices with significant consumer impacts. Increasing the availability of offsets could help address these problems by improving the liquidity of the market for allowances and offsets and putting downward pressure on both auction prices and the secondary market for allowances.

Conclusion

Ecology’s proposal promises to expand the availability of carbon offsets to entities covered by the Climate Commitment Act. The rulemaking is, therefore, of great interest to both covered entities and the wide variety of industries that could profitably sell carbon offsets into Washington’s carbon allowance market. Those entities should actively participate in the rulemaking to ensure that the end result supports new investments in carbon offset programs and creates measurable benefits for reducing Washington’s GHG emissions.

Beveridge & Diamond's Air and Climate Change practice groups guide clients through the rapidly-changing landscape of climate-related law and regulation. With an office in Seattle, we closely track West Coast GHG regulatory developments and their impacts on stakeholders. We represent clients engaged in all aspects of the carbon and carbon offset markets, including entities acquiring carbon offsets for compliance or voluntary purposes, carbon offset project developers, and secondary market participants. For more information, please contact the authors.