Washington State Voters to Decide Fate of Cap-and-Invest Program on Tuesday
Washington voters on Tuesday will decide the fate of the state’s cap-and-Invest program ahead of what would be the program’s second anniversary in January.
The program has been marked by allowance price volatility and rulemaking updates as the state’s Department of Ecology continues to make tweaks to balance its potential impact on retail fuel prices and its role in helping the state achieve its goals under the Climate Commitment Act.
Kate Haerizadeh, an OPIS policy analyst, said the program, should it survive the referendum to end it, will depend on effective market adjustments and linkage discussions.
“The Washington program’s future could hinge not only on the ballot initiative outcome but also on the state’s ongoing rule adjustments to ensure market stability. As the program matures and moves forward, balancing price containment measures with demand driven auction outcomes will be key,” she said.
Allowance Prices
After the start of the program’s first compliance period in January 2023, OPIS assessed prices for the program’s primary compliance instrument, Washington Carbon Allowances, at about $45/metric ton based on secondary market activity.
OPIS assessed the WCA V23 December 2023 price at $43/mt through the first few weeks of the program’s life based on limited trade information for the contract on the Nodal exchange. The first WCA auction occurred on Feb. 28 and signaled robust demand.
The first quarterly auction held in Q1 2023 settled at $48.50/mt and sold out of 6.2 million WCAs, according to Ecology. During a conference shortly after, the department’s climate commitment act implementation manager Luke Martland told attendees the auction generated “dramatically more” revenue than the state Legislature had projected.
Prices continued to rise and auction settlement prices jumped to $56.01/mt in Q2 and $63.03/mt in Q3. Both settlement prices breached the auctions’ Allowance Price Containment Reserve Tier 1 price, triggering supplemental allowance auctions that are built into the program to temper rapid increases in compliance costs.
Amid the surge in demand, OPIS WCA price assessments, which reflect daily trades on the secondary market, hit an all-time high of $70.50/mt for the OPIS WCA current vintage forward contract on April 14, 2023.
Each of the APCR allowance auctions sold out, and Ecology implemented several emergency rulemaking to inflate supply and relieve upward pressure on WCA prices.
The first APCR sold out of 1.05 million allowances, and regulators in September 2023 enacted emergency rulemaking to allocate 5 million APCR allowances at the second reserve auction scheduled for November 2023.
The initial APCR pool in 2023 was 3.16 million WCAs, or 5% of the total annual budget of 63.3 million. Ahead of the APCR auctions in 2023, Ecology enacted emergency rulemaking that clarified allowance holding limits, increased APCR auction volumes and specified that allowances acquired through APCR auctions must be deposited into an entity’s compliance account.
The second APCR auction offered nearly five times the amount of WCAs available in the first APCR auction, and only offered allowances priced at the Tier 1 price as opposed to two batches of allowances priced at both the Tier 1 and 2″Based on the auction results thus far, we determined that frontloading the supply of allowances for the November APCR auction would increase market stability by putting downward pressure on businesses’ compliance costs,” Ecology said in its September emergency rulemaking update.
The agency in December said it would allocate another 1 million reserve allowances for 2024 under a new APCR schedule. Ecology said it adjusted the APCR schedule to offer a potential 7 million APCR allowances in 2024. It said all allowances offered at APCR auctions during the first compliance period, which runs through 2026, would be at the $51.90/mt Tier 1 price, as opposed to
being split between the Tier 1 and $66.68/mt Tier 2 prices. The Tier 1 price increases annually by 5% plus inflation.
These steps appeared to stem further jumps in allowance prices, as the Q4 2023 cap-and-invest auction in December sold out, but the price settled just one cent below the APCR trigger threshold.
Initiative 2117
The rapid increase in allowance prices earlier in 2023 led to a ballot initiative to repeal the state’s Climate Commitment Act, which would effectively end the Cap-and-Invest program.
Signatures for Initiative 2117 were collected late last year and the state in January said the measure would appear on voters’ ballots in November. Washington voters will decide the emissions trading program’s future in Tuesday’s general election.
WCA secondary market prices fell in the first quarter after the state said the future of the program would be decided by voters.
In addition, the program had recently been saturated with uniformly priced reserve allowances that could not be traded on the secondary market.
The uncertain future of the program led to bearish prices this year. OPIS assessed the WCA V24 December 2024 price at an all-time low $29.50/mt on March 15. Throughout the year, a strong supply of credits and weaker auction demand
pushed quarterly auction settlements to close to the 2024 floor price of $24.02/mt.
OPIS on Tuesday assessed the WCA V24 December 2024 price at $47/mt.
Voter support for the ballot question has fallen in the second half of the year, according to polling data released in July, September and October.
Voter surveys in mid-October showed declining support for program repeal among likely voters. According to SurveyUSA poll results published on Oct. 20 by the Seattle Times, 48% of respondents said they would vote against the initiative and 30% said they would vote to repeal the program. Twenty-two percent of those responding said they were undecided.
The poll of 703 likely voters was conducted Oct. 9-14 and sponsored by the newspaper, Seattle television station KING 5 and the University of Washington’s Center for an Informed Public.
A similar SurveyUSA poll conducted in July showed 34% of likely voters said they would vote against repeal and 48% said they would vote to end the program. The remaining 18% described themselves as uncertain.
A separate poll of 403 registered state voters, conducted from Sept. 3-6, showed support for repeal had weakened to 30% from 41% in May, according to nonpartisan media group Cascade PBS/Elway.
The referendum “would prohibit state agencies from imposing any type of carbon tax credit trading, and repeal legislation establishing a cap-and-invest program to reduce greenhouse gas emissions. This measure would decrease funding for investments in transportation, clean air, renewable energy, conservation, and emissions-reduction.”
A “yes” vote would repeal the law that established the program and would prohibit the state from enacting similar emissions cap-and-trade markets.
The September poll showed 46% of respondents would vote against repeal, up from 31% in May, and 24% of respondents were “undecided,” down from 28% in May. Washington’s secretary of state in October released arguments for and against the referendum.
Supporters of a repeal argue the program is an “expensive, unfair and wasteful CO2 tax.” Program opponents said the “CO2 tax added nearly 40cts per gallon at the pump, making Washington’s fuel some of the most expensive in the nation.”Supporters of the program argued that the referendum was “purposely misleading” and “a threat to [Washington’s] air, land and water.” They also
said the initiative would “cut one-third of funding for [Washington’s] already stretched transportation plan.”
Washington’s retail unleaded fuel prices have fluctuated in recent years. The average price for regular gasoline in the state was $3.573/gal in 2021, or 54.6cts above the U.S. average, according to OPIS retail fuel price data. That premium climbed to 74cts in 2022, when gasoline prices in the state averaged $4.722/gal.
In 2023, the year the cap-and-invest program took effect, the average retail price for gasoline in the state was $4.593/gal, $1.052 above the national average.
From January through October, the state’s average premium to the national price was 87.53cts/gal.
Linkage Discussions
Despite the possibility of repeal, Ecology has been focused on the program’s future that could include a linkage with California and Quebec’s cap-and-trade program under the Western Climate Initiative.
California, Québec and Washington in March said they were exploring a linkage of their carbon markets. This was the acknowledgement that the three jurisdictions were working to link after Washington said it intended to pursue such an arrangement in November 2023. California and Québec linked their markets in 2014.
Ecology regulators said linkage could add price stability and support program longevity.
“Our analysis shows that if a linkage were to occur by 2027, Washington (and WCI) allowance price would trade at the APCR tier 1 level. However, without a linkage Washington allowance would be trading at the price ceiling level by 2027,” Ecology said when it announced plans to pursue combining its program with the others.
A linked program would hold joint auctions of allowances that could be used for compliance in California, Washington and Québec and would be tradable across jurisdictions. The linked market would have a uniform allowance price.
In April, Washington Gov. Jay Inslee signed a bill (S.B. 6058) that would facilitate linking the state’s carbon emissions market with the California and Québec program.
Legislative changes to the program include adjusted compliance periods, increased allowance purchase limits and new rules on offset use, among other language submitted by Ecology in the fall of 2023.
The three jurisdictions in late September said they were making progress toward an agreement, adding that a deal to join the programs could be finalized as early as next spring.
“We believe linkage will strengthen our respective efforts to fight climate change and reduce air pollution, while also encouraging more governments to adopt scalable, market-based climate policies in the future,” the three jurisdictions said.
An OPIS analysis found that a move to link Washington’s program with California and Québec’s could bring regional price stability and enable allowance trading across borders, therefore establishing a broader and multi-jurisdictional carbon market.
“This integration does, however, require a consistent regulatory framework to prevent destabilizing market shocks going forward.”
Amid the linkage discussions, WCA and CCA secondary market prices alternated between a discount and a premium to one another during the past year.
OPIS WCA assessment prices fell below CCA prices in January before briefly surpassing OPIS CCA prices in July and again in early September.
CCA and WCA prices in late September averaged near the same level, before WCAs strengthened in secondary market trade this past month. Thus far in October 2024, the OPIS WCA V24 December 2024 price has averaged $45.862/mt while the matching CCA price averaged $37.330/mt.
“The fluctuating relationship between WCA and CCA prices underscores the market’s sensitivity to local regulatory changes, trading volumes, and also the unique compliance dynamics in Washington state,” Haerizadeh said.
OPIS assessed the WCA V24 December 2024 price at $47/mt on Tuesday, and the CCA V24 December 2024 price at $37.015/mt.
What’s Next
Ecology has said it will continue to operate the program until it receives direction based on the results of Tuesday’s vote. If a repeal vote succeeds, the initiative would take effect on Dec. 5 and would effectively cancel the results of the fourth-quarter allowance auction scheduled for Dec. 4.
“Unless I-2117 passes and takes effect, Ecology will continue implementing the Climate Commitment Act and the Cap-and-Invest Program as it currently stands, including holding all scheduled auctions and enforcing all compliance deadlines,” the agency said in July.
If the program is ended by voters, Ecology said it would no longer have authority provided under the repealed provisions. The referendum would not affect statutes governing Ecology’s Greenhouse Gas Reporting Program, and the department would continue implementing that program.
The agency last week provided an update on entities’ access to the Compliance Instrument Tracking System Service platform should the initiative pass.
Ecology said it would take at least three months to withdraw from the CITSS if the program is repealed and expects that the platform would remain accessible over that period.
Ultimately, the program’s first two years were highlighted by stronger-than-expected initial allowance demand, frequent regulatory responses to adjust supply level and a public response to a perceived increase in fuel prices.
“Washington’s Cap-and-Invest program is at a pivotal moment as it is balancing climate goals with the challenges of market stability and affordability,” Haerizadeh said. “The outcome of the upcoming vote will both determine the program’s future and could even influence whether or not other states consider integrating carbon markets as a viable tool for emissions reduction.”
Reporting by Slade Rand, srand@opisnet.com
Editing by Kylee West, kwest@opisnet.com and Jeff Barber jbarber@opisnet.com
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