What is Cap & Invest?
Cap & Invest is an effective, market-based emissions trading policy approach currently employed globally by local, state, and national governments to reduce greenhouse gas (GHG) emissions.
Cap & Invest policies have three key elements:
The Cap: Regulators set hard, enforceable limits on carbon dioxide and other GHG emissions to ensure climate goals are met.
- The total amount of allowed emissions is divided among regulated entities – either through auctioning, freely awarded allowances, or a combination.
- Each entity’s allowance is determined by historic emissions
- The cap declines over time and each entity is responsible for its retiring an amount of allowances equal to their emissions.
Trading: Allowances can be traded, sold, or purchased between covered entities, allowing the most cost-effective emissions reductions to occur first so that the system costs trend towards optimized, lowest-costs.
- Regulated entities are incentivized to reduce emissions in the most economically efficient way possible and sell surplus allowances. Entities facing greater carbon reduction challenges purchase allowances while working towards cost-effective, long term solutions. Market mechanisms drive innovation and investment in carbon reduction technologies.
- If linked to other programs, trading can occur across jurisdictions which can limit market volatility in the price of allowances through a larger, more economically diverse linked system. California and Quebec have linked their programs, for example.
Investment: A market is established to enable unused carbon allowances to be sold at auction to other regulated entities.
- Auction revenues are returned to the economy as investments that support carbon reduction projects, highly impacted communities, or other areas of need.
How well has this worked in other jurisdictions?
Launched in 2013, California’s emissions trading program regulates around 450 businesses (over 80% of the state’s total GHG emissions). Within four years, by 2016, the state achieved its 2020 goal of reducing emissions by 16% and emissions fell another 5 million metric tons of carbon dioxide equivalents in 2017. Under the program, the state has continued to reduce GHG emissions while driving strong economic growth including 1.4% greater than average economic growth in 2017.
Investments from program revenues in the first have of 2019 grew to $914 million, after $1.4 billion total in 2018, with over 60 percent of investments toward projects benefitting low-income and environmentally disadvantaged communities.
Northeast and Mid-Atlantic States:
Launched in 2008, the Regional Greenhouse Gas Initiative (RGGI) is a 10-state emissions trading policy for the electric power sector. Since implementation, power sector emissions have fallen by 40% and the region’s electricity prices have decreased by 6.4% (while in in all other states, prices increased by an average of 6.2%). During this period, the economies in RGGI states grew by 4.3% relative to non-RGGI states.
Emissions trading programs are in place in The European Union, Quebec, and the Republic of Korea, eight sub-national Chinese regions, Switzerland, New Zealand, and Kazakhstan.
What’s the summary of the existing bill?
(For a more in-depth review of the bill, see our Cap & Invest SB5981 Summary.)
Senate Bill 5981, titled “An act relating to implementing a greenhouse gas emissions cap and trade program”:
- Establishes a statewide GHG cap and invest program to be implemented by the Department of Ecology
- Sets a limit on GHG emissions to 40% below 1990 levels by 2035, and to 80% below by 2050
- Distributes auction revenues to certain energy efficiency projects, assistance to low-income households and highly impacted communities, and to climate change impacts and natural resource resiliency projects.
Emissions coverage and allowances
About 75% of statewide emissions (73 MtCO2e) would be subject to compliance exemptions.
Free allowances plus allowances withheld for reserve during initial auctions would total around 25 MtCO2e.
Allowances sold in auction would be approximately 50 MtCO2e initially (over 50% of statewide emissions), and would increase over time as a percent of statewide emissions.
Based on the current price in California of about $15 per metric ton, sales of 46 MtCO2e would result in an annual revenue of $690 million. Auctions would occur at least annually and as often as quarterly.
Auction revenues would be allocated to three accounts:
- 40%: Energy Transformation Account (Department of Commerce)
- 35%: Energy Transition Assistance Account (Department of Commerce)
- 25%: Climate Impacts Resilience Account (Department of Ecology and Department of Natural Resources)
Which entities would get free allowances?
SB 5981 would provide free allowances for:
- Electricity suppliers covered by the 100% Clean Energy bill.
- Natural gas suppliers in proportion to their low-income residential customers.
- Facilities that are exempt from GHG limitations and requirements including biomass and biofuels, aviation fuels, watercraft fuels, and coal-fired generation.
- National security facilities.
- Entities with emissions that cannot reasonably pass through a stack or vent.
- “Emissions-Intensive Trade-Exposed” facilities (EITEs), with free allowances provided at a declining rate from 2021 to 2035.
What types of jobs may be lost or gained?
In general, EITEs are at a greater risk for job loss, and therefore are typically provided leeway in these types of programs. There is risk that facilities leaving creates job loss but simply transfers equivalent or greater emissions out of state, known as emissions leakage.
Jobs in energy efficiency, clean energy, natural resources, and clean fuels are likely to increase, and fossil fuel dependent jobs that compete with these jobs are likely to decrease.
Fossil fuel industry workers impacted by the policy would be eligible for transition assistance funded by auction revenues.
How would this work with CAR, 100% Clean Energy, and other emissions regulations?
Section 31(2) indicates that the Clean Air Rule (173-442) would be preempted by this market-wide cap and invest policy.
100% Clean Energy bill (SB 5116 passed in 2019 session)
Free allowances would be provided to power sector parties already covered by a transition plan to approach 100% Clean Energy by 2045. Free allowances would be in proportion to the emissions reductions required and/or projected by the 100% Clean Energy legislation passed in the 2019 session (as determined by the Department of Ecology).
How is this different from prior attempts to regulate carbon in Washington?
Like any major policy change, it takes time to find the sweet spot that gets all parties to a place of acceptance or neutrality. Washington state has gone through growing pains for eight years and 2020 could be the year it all comes together.
With growing frustration by environmental groups that want carbon pricing in Washington state and growing acceptance by business interests, it’s not a matter of IF carbon pricing will pass, but WHEN.
In 2009, the legislature tried to pass an emissions trading bill but it failed due to concerns over economic impacts. Since then, California and RGGI have proven that this approach can effectively cut emissions hand-in-hand with strong economic growth.
Furthermore, with strong Democratic majorities in the House and Senate and the support of key legislators, the 2020 legislature will be well positioned to pass the bill.
Cap & Invest is gaining support from key stakeholders.
BP has pledged its support, and other industry members in Washington state are reviewing this opportunity.
The state’s largest energy sector interests are increasingly supportive. Utilities want alignment across the Western energy market and with 100% Clean regulations. Natural gas companies face a barrage of local policies, and have expressed interest in a state-wide framework.
Would Washington use California’s policy as a starting point?
SB 5981 draws on the experiences of other emissions trading programs, particularly California’s successful Cap & Trade program, and has been adapted to Washington’s business and regulatory landscape including the 100% Clean Energy bill and the types and locations of EITEs.
A similar bill recently failed in Oregon. How is this different?
Quorum rules in Washington state do not allow a legislator walk-out like the one that helped kill the bill in Oregon. Moreover, considering the state’s strong history of passing climate and environment legislation, it is generally expected that Oregon will pass a Cap & Invest program soon.
How would this impact….?
SB 5981 allocates auction funds to projects that directly benefit rural communities, including:
- Carbon sequestration in forests and agricultural soils
- Improving forest and natural lands health and resilience to climate change impacts
- Improvement in the health of natural and working lands in this state
SB 5981 provides:
- Funding assistance for low-income households facing increased energy costs.
- Funding for access to clean energy and low-carbon housing, transportation options, and technologies to those with greater barriers and where pollution is concentrated.
- Free allowances allocated to natural gas suppliers be used exclusively to minimize the impacts on low-income residential customers through actions including weatherization, conservation and efficiency services, and bill pay assistance.
Highly Impacted Communities
A minimum of 10% of the Energy Transformation Account investments will be allocated to projects that are located within the boundaries of highly impacted areas.
Fossil fuel industry workers
SB 5981 provides:
- Funding for displaced fossil fuel-related industry workers.
- A worker support program for bargaining unit and nonsupervisory fossil fuel industry workers who are affected by the transition away from fossil fuels
- Additional funding to meet the needs of eligible workers in the event of unforeseen or extraordinary amounts of dislocation.
- Investments to assist displaced fossil fuel industry workers.
How will SB 5981 ensure that all communities are treated fairly?
Environmental and Economic Justice
An Environmental and Economic Justice Panel will be established to provide recommendations in the development and implementation of the programs on energy transformation, transition assistance, and climate impacts resilience.
The panel will be appointed by the Governor and include,
- One tribal leader and one representative of highly impacted communities as co-chairs
- Five members representing the interests of vulnerable populations residing in highly impacted communities
- At least one additional tribal government representative
- Two union labor representative
The Climate Oversight Board will include:
- Two members representing federally recognized Indian Tribes
- One member of the Environmental and Economic Justice Panel