Western Climate Initiative releases program design document

Posted on January 25, 2011 by

Similar to the EU-ETS operational in Europe, the US also seems to be moving slowly towards establishing a regional cap and trade system to begin with. The Western Climate Initiative (WCI – A partnership of seven U.S. states and four Canadian provinces) recently released its program design document (the Program Design), setting out how the WCI will implement its plans to establish a regional cap-and-trade system by January 1, 2012. WCI seeks to reduce regional greenhouse gas (GHG) emissions to 15% below 2005 levels by 2020.The system will cap emissions from major industrial emitters in 2012, and be expanded to cover providers of transportation, residential and commercial fuels in 2015.



In general, each partner will issue a number of allowances – called an“allowance budget” – equal to its share of the regional cap. The Program Design recommends that in 2012, the first year of the program, each partner issues allowances equivalent to the actual emissions of its covered firms. When the fuel providers are covered in 2015, the Program Design similarly recommends that in that year they be issued allowances equal to their actual emissions. After these phase-in years, the WCI recommends a linear decline in the size of each partner’s allowance budget until 2020.

The Program Design will allow covered firms to trade allowances to meet their compliance obligations. And the following flexibility mechanisms will be in place:

  • WCI partners may award covered firms Early Reduction Allowances for voluntary emission reductions that occurred on or after January 1, 2008 and before January 1, 2012, and that were in addition to any business-as-usual emission reductions.
  • Covered firms may bank allowances for use in future compliance periods. However, the WCI will generally not allow these firms to borrow allowances from future compliance periods to meet present compliance obligations unless the partners create specific exceptions to this rule.
  • Firms covered by the WCI, collectively, may use certain offsets and emissions credits from outside the covered sectors to meet their caps, but for no more than 49% of the aggregate required emissions reductions(as opposed to the total allowable emissions) across all WCI jurisdictions. In practice, this may mean that a firm could only cover approximately5% of its total allowable emissions by the purchase of offsets or non-WCI credits. It is therefore expected that demand will initially be low for offsets inside the WCI.

In the Program Design, each WCI partner can choose how it will allocate allowances to covered firms within its jurisdiction. One allocation method will be quarterly auctions, such as those that take place under the Regional Greenhouse Gas Initiative (RGGI), a cap-and-trade system of north-eastern U.S. states.

Key features of Proposed System

  • Allowances sold through WCI auctions will have a floor price to ensure that low-cost allowances do not flood the market. Any person with an account in the WCI’s allowance tracking system, including covered firms and other market participants, may participate in the auctions; however, to prevent market manipulation, the WCI will limit the number of allowances a single person can purchase.
  • Other than auctions, WCI partners may also distribute allowances for free, especially to energy-intensive, trade-exposed industries, which otherwise may face significant incentives to relocate to jurisdictions outside the WCI that do not regulate GHG emissions.
  • According to the Program Design, the WCI partners may consider using “benchmarking” to allocate the free allowances – essentially, issuing more allowances to covered firms whose efficiency exceeds the industry standard. To contain the cost of allowances, the WCI will consider allowing partner jurisdictions to establish an allowance reserve from which additional allowances could be released into the system if allowance prices exceed a certain level.
  • This method of increasing allowance supply has been a cost-containment feature of recent U.S. Congressional cap-and-trade proposals. Furthermore, the WCI may eventually be linked to other North American cap-and-trade systems – such as the RGGI or the proposed Midwestern Greenhouse Gas Reduction Accord – by recognizing emission reduction credits generated under those systems. Such linkage can add liquidity to the WCI market and reduce the marginal cost of abatement for firms covered by the WCI.


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