B&D’s Carbon Markets Roundup covers domestic and international developments related to carbon pricing and related regulatory programs aimed at regulating or reducing greenhouse gas emissions. This edition of Carbon Markets Roundup covers developments during the first half of 2019, which saw significant action in numerous U.S. states and regional programs. Notably, the Transportation Climate Initiative has gained momentum and appears poised to launch a new carbon pricing scheme for transportation fuels in the mid-Atlantic and Northeast. Washington state passed a suite of new climate measures, while Oregon failed to do the same thanks to some literal last-minute maneuvering by the legislation’s opponents. And as 2020 inexorably approaches, the Parties to the Paris Agreement are still working to develop offset and trading mechanisms under Article 6. These and many other notable developments are discussed further below.
Transportation Climate Initiative Begins Process of Developing New Carbon Market in the Northeast
Development of the regional Transportation Climate Initiative (TCI) has ramped up during the first half of 2019. TCI—a nascent program that would establish a carbon market covering the transportation sector in the Northeast and Mid-Atlantic—is holding numerous workshops and other forums to develop policy and related regulatory components. Ultimately, it is likely that the TCI working group will adopt a model rule, which then would be adopted by member states with state-specific modifications. While initially conceived as a cap-and-trade program (or a cap-and-dividend), recent discussions indicate that TCI may ultimately emerge as a carbon tax imposed on transportation fuels based on their GHG emissions.
A public workshop held on April 30, 2019, at the Boston Public Library, focused on TCI design elements, with the framing of that program as either a regional “cap and invest” program (much like RGGI works in the power sector), or a “tax and invest” program. Following the April 30 workshop, TCI has held several other workshops focused on equity and environmental justice. These issues have risen to the fore as community groups and other stakeholders express concerns over the potential impact of TCI and the need to reduce emissions in communities experiencing higher emissions impacts.
While TCI has largely flown under the radar, it has the potential to have significant and wide-ranging impacts across member states (currently Connecticut, Delaware, Maryland, Massachusetts, New Jersey, Pennsylvania, Rhode Island, Vermont, Virginia and the District of Columbia). With an aggressive timeline to develop program components, stakeholder engagement is key to ensure a well-designed program. In addition to equity concerns, conversations related to carbon accounting, the role of offsets, trading mechanisms, and investment of proceeds are presently underway. These and other design elements will ultimately prove vital to both the success and feasibility of implementing a regional market-based program to reduce GHG emissions from the transportation sector.
After several years of fruitless effort, Washington adopted the Washington Clean Energy Transformation Act (CETA), which requires Washington’s electric utilities to phase out greenhouse-gas emitting electricity generation. CETA is one of a package of bills aimed at reducing Washington’s greenhouse gas emissions that includes limiting emissions of hydrofluorocarbons (gases used in refrigeration and other industrial processes), imposing new energy efficiency requirements on commercial buildings, and encouraging the use of electricity and alternative fuels in Washington’s transportation system.
CETA imposes three major mandates on Washington utilities, including both investor-owned and consumer-owned utilities, such as PUDs and municipal utilities. First, the legislation mandates that all coal-fired resources must be eliminated from the portfolio of generation resources used to serve Washington consumers by December 31, 2025. Second, all electricity sold at retail in Washington must be greenhouse gas neutral by January 1, 2030. Third, all electricity sold in Washington after January 1, 2045, must be produced by either renewable resources or non-emitting generators.
The carbon-neutrality goal is one of the first in the nation. Utilities can achieve this goal using a combination of non-emitting resources, renewable resources, and “alternative compliance options” that produce GHG reductions equivalent to the other options. Utilities may use alternative compliance options to satisfy up to 20% of the GHG neutrality requirement.
The legislation allows for a variety of alternative compliance options. The simplest is to make an “alternative compliance payment” ($84 per MWh for gas peaking plants, $60 per MWh for combined-cycle plants) or to use unbundled Renewable Energy Credits (RECs), a compliance option that has long been used to meet Washington’s Renewable Portfolio Standard (Initiative 937). Utilities may also invest in “energy transformation projects,” which include energy conservation programs, GHG reductions in the transportation sector, distributed energy resources (such as small rooftop solar systems), renewable natural gas systems, and emissions reductions in the agricultural sector. The ability to satisfy a portion of utility obligations through alternative compliance options ends, however, on January 1, 20145.
The law requires both the Washington Utilities and Transportation Commission and the Washington Department of Commerce, which has primary responsibility for overseeing the consumer-owned utilities’ compliance with CETA, to develop a variety of rules to implement the statute. We anticipate rulemaking processes will play out over the next several months.
Political Maneuvering in Oregon Kills Cap and Trade Bill
Oregon very nearly enacted the second economy-wide cap-and-trade program in the U.S., only to have it flounder when republican lawmakers left the state in late June to deny a quorum required to pass the measure. On June 17, 2019, Oregon’s House of Representatives passed HB2020B, which would have resulted in the creation of an economy-wide cap-and-trade program to meet emission reduction goals of 45% below 1990 levels by 2035 and 80% below 1990 levels by 2050. It remained unclear whether Oregon would have linked its program the Western Climate Initiative operated by California and Quebec, although HB2020B envisioned such linkage as a possibility and many political leaders in Oregon see that as a major goal. Several practical and legal questions also persisted after the house’s passage of the bill with respect to implementation and the constitutionality of the measure. These questions were ultimately rendered moot when republican lawmakers denied a vote on the bill. Will Oregon raise cap-and-trade yet again during the next legislative session? Time will tell, but the appetite for a market-based climate program may be growing in the state.
RGGI: One Step Forward, One Step Back
On June 17, 2019, New Jersey finalized regulations that re-establish a market-based GHG reduction program from the power sector that is designed to enable New Jersey to re-join the Regional Greenhouse Gas Initiative (RGGI), which it left in 2011 under then-Governor Christie. Current RGGI member states found that “New Jersey’s final rule is consistent with the RGGI Model Rule and with existing state regulations, and that New Jersey’s starting CO2 allowance budget and emissions reduction trajectory demonstrates comparable stringency with the existing RGGI program.” Based on that approval, New Jersey is on-track to re-join RGGI beginning on January 1, 2020. According to some observers, New Jersey missed out on between $62 and $154 million in RGGI auction revenues while it was out of the program during 2015-2017.
Meanwhile, Virginia’s membership in RGGI is on hold. In April 2019, the Virginia Air Pollution Control Board approved a regulation that would have paved the way for Virginia’s RGGI membership. But on May 6, Virginia finalized a budget which contains provisions (introduced by the state legislature) that prohibit Virginia from joining RGGI for now. Governor Northam would have vetoed the budget, allowing Virginia’s RGGI membership to move forward, but Northam’s office believed he lacked the legal authority to do so, so he did not do so.
The move marks the latest round in an ongoing fight between Virginia’s republican-controlled legislature and its democratic Governor, Ralph Northam – with a victory for the legislature. But a future legislature may approve different budget provisions, allowing Virginia to join the coalition. As RGGI’s Board of Directors put it: “The RGGI states applaud Virginia’s efforts over the last two years to establish a market-based GHG emissions reduction program, and remain open and ready to work with Virginia towards participation in RGGI in the future.” At the moment, it is not clear whether Virginia will proceed with implementing its own cap-and-trade program based on the regulations adopted in April. However, the budget provision blocking RGGI membership expires next year, meaning that elections this fall in Virginia will likely determine whether Virginia ultimately backs out of the RGGI process or proceeds to join the program.
During its second auction of 2019 (auction #44), RGGI CO2 Allowances sold for $5.62. A total of 13,221,453 CO2 allowances were sold, netting $74.3 million in revenue. The past three RGGI auctions have cleared $5 or higher (a relatively high price based on historical patterns), a potential indication that recent RGGI “reforms” and market demand may be tightening supply somewhat and creating an upward price trajectory.
California: Record Auction Prices and Uncertainty for Forest Offsets
California has had a relatively slow second quarter in regards to regulatory developments and proposals in regards to its two premier climate change programs: the Cap-and-Trade Program and the Low Carbon Fuel Standard (LCFS). Amendments adopted by the Board in December 2018 (which we reported on here) became effective on April 1, 2019. CARB has also started stakeholder discussions (via workshops) on further modifications to the cost-containment features of the LCFS, including potential proposals to limit the price of credits across the market, curtailing the effects of certain credit invalidations, and borrowing credits from future years to make up for compliance deficits. On May 15, CARB also reported net over-compliance of roughly 8.7 million metric tons of credits for 2018 for the LCFS. This little amount of activity itself is news, as CARB has been tweaking these programs at a breakneck pace since their inception.
This does not mean, however, that there has been a glut of activity in the carbon markets space for California. CARB’s latest joint Cap-and-Trade allowance auction with Quebec (held on May 14, 2019) saw the highest prices paid in such a joint auction under the linked programs (clearing at $17.45), and again all available allowances were sold. This latest auction adds over $740 million to California’s Greenhouse Gas Reduction Fund (used to fund California Climate Investments programs), to which the auctions overall have contributed over $11 billion. A relative lack of available offsets for auction and a market coming to grips with an ever-tightening cap likely contributed to the success of this most recent auction for California and Quebec.
Related, one of the greatest mechanisms of ensuring allowance affordability is the availability of offsets in the secondary market. For CARB’s Cap-and-Trade program, such offsets have largely been made available through the Forest Offset Protocol, which awards sustainable management of forest resources (and thus sequestering greater amounts of carbon) with compliance offsets that can be sold on the secondary market. Such projects have generated over 100 million compliance offsets. The forest offset program came under fire recently when a University of California Berkeley research fellow criticized the program, arguing that it overstates the amount of offsets that forest offset projects generate. Specifically, the paper argues that projects which generate 80% of the program’s offsets overestimate the amount of offsets generated based on “lenient leakage accounting methods.” Inside Cal/EPA has reported that California legislators have requested that CARB conduct an inquiry-based on the paper, to which CARB responded in a June 13, 2019 letter that the UC Berkeley analysis “contains errors and misunderstandings of the Forest Protocol related to how leakage is addressed and how offset crediting occurs.” This fight is likely far from over, with the future of the forest offsets hanging in the balance. For now, CARB has seemingly doubled-down on the veracity of forest offsets, with plans to adopt revisions to its Tropical Forest Standard, which allows jurisdictions to link up their tropical forest protection programs to California’s Cap-and-Trade program.
Biomass Accounting & Potential Clean Air Act Amendment
Several recent developments at the federal level have the potential to re-shape how biomass is treated under various climate and energy programs, and potentially influence state policy on biomass accounting.
The US Environmental Protection Agency (EPA) plans to propose a rule that classifies as carbon-neutral power produced from the combustion of forest biomass. Since 2010, the EPA has struggled to develop an accounting framework for biogenic CO2 emissions. However, until recently, EPA did not provide a regulatory policy governing biogenic CO2.
In April 2018, EPA issued a policy statement indicating that “EPA’s policy in forthcoming regulatory actions will be to treat biogenic CO2 emissions resulting from the combustion of biomass from managed forests at stationary sources for energy production as carbon neutral.” Following up on this announcement, in April 2019, EPA Administrator Andrew Wheeler informed Congress that EPA intends to propose a new rule that would treat biogenic CO2 emissions from power plants as carbon neutral. The prospective treatment of biomass as carbon neutral could affect how facilities evaluate and set the Best Available Control Technology for greenhouse gases and could encourage certain states to expand the role of biomass.
In May 2019, U.S. Senator Ron Wyden-Oregon proposed a bill that would expand the role of certain biomass at the federal level in bill S. 1614. The proposed bill seeks to revise the definition of “renewable biomass” “to better capture discarded and low-value wood waste for sustainable fuels.” The bill focuses on three main areas: private lands, mill residuals, and federal lands. Under this amendment, private landowners would now be able to use slash, thinnings and low-value lags for credit under the Renewable Fuel Standard (RFS). The bill also seeks to allow all mill residuals, not just those from authorized sources, to be used for biofuels and count for RFS credits. Finally, the bill would allow biomass harvested from certain federal lands to qualify for RFS credit. Specifically, limiting biomass harvested on federal lands to lands that are at risk for wildfire or disease.
National Carbon Pricing Efforts Gain Steam; Likely to Become a 2020 Election Issue
In the wake of the early Democratic primary debates, it is already clear that climate change will be a significant issue in the 2020 election. Carbon pricing bills also are proliferating in Congress, raising visibility for federal carbon pricing to a level not seen in nearly a decade.
On the campaign trail, Governor Jay Inslee has been pressing forward with a climate change plan that builds on principles of the Green New Deal advocated by some Democrats in Congress. Since May 2019, Governor Inslee has released four increasingly detailed parts to his climate plan (100% Clean Energy for America; An Evergreen Economy for America; Global Climate Mobilization; and Freedom from Fossil Fuels), all of which can be accessed on his campaign website at https://www.jayinslee.com/issues. (Inslee promises several more parts.) Although Inslee is currently flagging in the polls, Inslee’s plan deserves attention as it could serve as the blueprint for the Democratic nominee’s climate policy. Other Democratic presidential hopefuls have picked up the theme, with several promising to make it a central election issue.
In Congress, private corporations have led two recent initiatives to push forward federal carbon pricing. First, a new group called the “The CEO Climate Dialogue” launched a push for federal carbon pricing legislation in May. The group is comprised of both NGOs and major corporations. In a May 15 press release, the group announced that its goal is to “build bipartisan support for climate policies that will increase regulatory and business certainty, reduce climate risk, and spur investment and innovation needed to meet science-based emissions reduction targets.” It remains unclear whether The CEO Climate Dialogue group will have any significant impact, but the group echoes coalitions that formed about 10 years ago and were successful in getting cap and trade legislation passed by the House.
Second, on May 22, as part of an event called Lawmaker Education & Advocacy Day (LEAD) on Carbon Pricing, more than 75 businesses “met with a bipartisan group of federal lawmakers to call on Congress to pass meaningful climate legislation, including a price on carbon.” More about this event can be found here.
Climate change has recently gained an increasing amount of attention from corporate executives and politicians, with numerous carbon pricing proposals introduced in Congress over the past year (including one by Rep. Carlos Curbelo (R-FL), the first by a Republican in almost 10 years). Meanwhile, Democratic candidates compete to present the most ambitious policies on climate and other issues. But despite these trends, major federal climate legislation, including carbon pricing, still seems very unlikely until mid-2020 or after the 2020 election, and those elections are likely to play a decisive role in whether we see a federal climate bill—in any form—signed into law within the next five years.
Canada Advances Federal Carbon Pricing
On June 14, 2018, Canada’s Senate passed a bill containing a new federal carbon pricing scheme, known as the Greenhouse Gas Pollution Pricing Act. That law became effective on January 1, 2019, establishing a national carbon price regime that will apply in provinces and territories that lack an equivalent carbon tax or cap-and-trade policy. The law set a price on GHG emissions from fossil fuels of $20 per ton beginning in 2019 and rising to $50 per ton by 2022.
In April 2019, the federal carbon tax was imposed on several provinces that failed to implement their own equivalent GHG pricing programs. Those provinces included Saskatchewan, Ontario, New Brunswick, and Manitoba. The Province of Saskatchewan challenged the federal carbon tax based on constitutional grounds. In a split 3-2 decision, Saskatchewan’s Court of Appeal ruled on May 3, 2019, that the Canadian federal government does have the constitutional authority to impose a carbon tax on provinces that fail to adopt their own equivalent program. The case is now headed to the Supreme Court of Canada, where it is likely to be decided later this year or in early 2020.
Paris Agreement Article 6 Mechanisms: The Saga Continues
After delaying final adoption of the “Paris Agreement Rulebook” during COP24 in Katowice, Poland in 2018, parties to the Paris Agreement are looking ahead to October’s pre-COP25 in Costa Rica and November’s COP25 in Chile to finalize standards for environmental credits trading. However, the delay has not deterred piloting of the Paris Agreement’s Article 6 market mechanisms which allow trading of emission credits between countries to help parties achieve their nationally determined contributions (NDCs).
The “Paris Agreement Rulebook,” the result of the three-year effort started at COP21 in Paris, is an attempt to establish procedures for implementing the Paris Agreement. Article 6 remains the only agenda item from the Katowice Climate Package not finalized in the rule book. Major outstanding issues include the role of carbon markets and international markets within the agreement’s larger context, accounting of credit transfers to avoid double-counting, and methodologies for executing projects and eligible activities. Despite the “empty page” in the rule book, real-world Article 6 pilot initiatives have begun.
A recent study on article 6 pilots lists various bi-lateral and bank-based efforts currently operating. Multinational and bank-based programs exist through, for example, the African Development Bank’s Adaptation Benefit Mechanism, the Asian Development Bank’s Article 6 Support Facility, and the World Bank’s Standardization Crediting Framework, Transformative Carbon Asset Facility, and Warehouse Facility. National programs identified in the report include the Canada-Chile program to reduce emission in the waste sector, NEFCO-Peru’s cooperative arrangement pilot in solid waste, Japan’s Joint Crediting Mechanism, the Swedish Energy Agency’s Virtual Pilot study in Nigeria, and Switzerland’s Pilot Activities of the Climate Cent Foundation and the KliK Foundation.
While the study is not exhaustive, it provides a sample of sources from which practical experience likely will be drawn in finalizing the Article 6 rules, currently in draft form, during COP25.
US Takes Steps to Implement CORSIA
A recent Federal Aviation Administration (FAA) announcement moves the United States one step closer to implementing the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). In March 2019, the FAA announced its Monitoring, Reporting, and Verification (MRV) Program for CORSIA. Applying to U.S. air carriers and commercial and general aviation operators, the FAA’s program consists of voluntary carbon emissions reporting to establish standardized practices to implement CORSIA.
As Carbon Markets Roundup reported in July 2018 and February 2019, the United States is a member of the International Civil Aviation Organization (ICAO). ICAO members established CORSIA to achieve carbon-neutral growth in international aviation flight. By design, CORSIA caps international aviation emissions at 2020 carbon emissions levels using a market-based offset program and an additional “basket of measures” which includes lower-emissions fuels. CORSIA does not apply to domestic flights.
Adopted in 2018 by 192 countries including the United States, CORSIA’s implementation consists of several steps. Beginning January 1, 2019, CORSIA requires signatories to submit MRV plans, such as the FAA’s recently announced MRV Program. These submissions will provide ICAO with data to establish reporting baselines ahead of the next step, the voluntary 2021 Pilot Program Phase. In 2024, the CORSIA program will begin its voluntary First Phase, with the mandatory Second Phase starting in 2027.
Internationally, many countries have committed to early voluntary CORSIA participation, beginning in 2021. As of May 6, 2019, 80 countries have made such a commitment, including the United States, Canada, France, Germany, and the United Kingdom.