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WCI Draft Cap and Trade Design Prioritizes Forestry, Agriculture and Waste Management Offsets

Submitted by Grant Boyle

WCI’s July 2008 draft design recommendations suggest capped emitters will be able to use offset credits to meet 10% of compliance obligations.

Project types under “priority” consideration include: Agriculture (soil sequestration and manure management); Forestry (afforestation/reforestation, forest management, forest preservation/conservation, forest products); and Waste management (landfill gas and wastewater management).

According to the proposal, project types that reduce emissions covered by the cap-and-trade system ( such as electricity projects) would not be eligible to create offsets.

Starting in 2009 WCI Partners will coordinate to develop and approve standard protocols for the project types.

WCI Partners may approve and certify offset projects located throughout Canada, the United States, and Mexico, where projects are subject to comparably rigorous oversight, validation, verification and enforcement as those located within the WCI jurisdictions.

In the case of offset credits under the Kyoto Protocol's Clean Development Mechanism (CDM) and Joint Implementation (JI), the WCI Partners may establish “added criteria to ensure similar rigor to WCI approved/certified offset projects or other requirements”. The WCI Partners are also considering a method that restricts the use of offsets from projects located outside WCI jurisdictions for compliance purposes in the WCI.

WCI releases Draft Design for regional cap-and-trade system

The Western Climate Initiative (“WCI”) released its Draft Design of the Regional Cap-and-Trade Program (the “Draft Design”) on July 23, 2008. The WCI is a partnership of 11 US states and Canadian provinces, including BC, Manitoba, Quebec and Ontario (collectively, the “Partners”) that is developing a regional cap-and-trade system for greenhouse gas emissions. The Draft Design, summarized below, outlines the WCI’s current recommendations for the system and will be subject to public comment in the coming months. The WCI plans to release its final recommendations this fall.

The scope of the Draft Design is more ambitious in many respects than other climate change mitigation plans. The Draft Design contemplates capping the emissions of six greenhouse gases (carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride), whereas the EU ETS cap applies only to carbon dioxide at this time. Under the WCI scheme, facilities emitting more than 25,000 tCO2e would be regulated. This threshold is 75% lower than the 100,000 tCO2e thresholds in the Alberta Specified Gas Emitter Regulations and the federal “Turning the Corner” plan. Like other mitigation plans, the WCI will regulate emissions from electricity generation and industrial facilities (including both combustion and process emissions). However the Draft Design recommends also regulating emissions from residential, commercial, and industrial fuel combustion at facilities below the 25,000 tCO2e thresholds and from transportation fuel combustion. However these sources will not be regulated until the second compliance period. Interestingly, emissions from biofuels and biomass will not count towards the cap, creating an opportunity for such fuels to displace fossil fuels.

Emissions from generating stations and industrial facilities in the WCI region will be regulated at the point of emission. Emissions from electricity imported from non-WCI jurisdictions will be regulated at the first point of distribution in the WCI. Emissions from sources below the 25,000 tCO2e threshold and from transportation fuels will be regulated “up-stream” from the point of emission, for example at the first point at which the fuel is distributed in the WCI region.

An aggregate cap for the entire WCI region will be established for 2012 based on the estimated emissions for that year. The cap will be adjusted in 2015 to account for the additional smaller fixed combustion sources and transportation sources discussed above. The cap will decline steadily from 2012 to 2020 and will be enforced in 3-year compliance periods. The WCI has yet to give any indication what the initial cap or rate of decline will be.

The aggregate cap will be apportioned to each of the WCI Partners. The Draft Design does not describe the specific apportionment methodology, but does state that the methodology “will address factors such as production and consumption of electricity, projected population growth and economic activity, and other factors.” WCI Partners will then be responsible for distributing emissions allowances to regulated entities “as they see fit” and for administering compliance in their respective jurisdictions.

Even though Partners will have significant autonomy in administering their allocation, they will be expected to harmonize their efforts in certain significant respects. The Draft Design suggests that Partners shall “consider standardizing the distribution of allowances over time” to address potential competitiveness issues. Additionally, Partners will be expected to set aside a portion of their allowances for “public purposes”, such as subsidizing renewable energy, R&D, or CCS. Finally, individual Partners agree to auction a portion of their allowances, such allowances must be sold through a “coordinated regional auction process.”

Regulated entities will be allowed to bank allowances, but will not be able to “borrow” from future allocations. Allowances will be tradable not just within a particular Partner’s jurisdiction, but across the entire WCI region. The Draft Design also contemplates the creation and trading of offsets. The treatment of offsets will be discussed in a separate posting.

Of particular relevance to British Columbia, the Draft Design states that “WCI Partners agree that individual jurisdictions may use fiscal measures that contribute to achieving overall comparable GHG emission reductions and internalize the price of carbon as expected through the regional cap-and-trade program for transportation and residential/commercial fuels.” Specifically, the WCI will determine a mechanism for integrating BC’s provincial carbon tax in the regional cap-and-trade program.

Ontario to Jump Onboard the WCI

On July 18, 2008 Ontario’s Premier Dalton McGuinty announced that Ontario is moving from ‘observer’ status to a member of the Western Climate Initiative (WCI), which includes BC, Manitoba, Quebec, Arizona, California, New Mexico, Oregon, Washington, and Utah. The WCI is a group of Canadian provinces and U.S. states banding together in a regional initiative to address climate change. Alaska, Colorado, Idaho, Kansas, Nevada, Wyoming, Saskatchewan and the Mexican states of Sonora Baja California, Chihuahua, Coahuila, Nuevo Leon and Tamaulipas have observer status. The WCI expects to complete design recommendations of a regional, multi-sectoral cap and trade program by August 2008 and roll out the program by 2010.

More details on the WCI can be found in our new Climate Change Law Bulletin - Issue No. 1 (July 1, 2008): Emerging GHG Compliance Emissions Trading Systems in North America.

50% reduction by 2050 Climate Change Goal - 'Emerging Nations' Not on Board

At a working session in Toyako, Japan on July 8, 2008, the G-8 leaders met with the leaders from 8 fast-growing, pollution-emitting nations to talk on the topic of global warming. Even though the "Statement on Climate Change" released July 8, and the “Declaration of Leaders Meeting of Major Economies on Energy Security and Climate Change”, released July 9, are full of ambitious and ‘cooperation is key” language, no consensus was reached on the G-8’s climate change goal of reducing emissions 50% by 2050.

China, India, Brazil, Mexico and South Africa, representing 42% of the world’s population, rejected the notion that all should share in the 50% reduction in GHG emissions by 2050 target, on the basis that it is the wealthier countries that have created most of the environmental problem up until now. In a statement, these ‘emerging nations’ commented, "it is essential that developed countries take the lead in achieving ambitious and absolute greenhouse gas emissions reductions.” President Hu Jintao of China is quoted as adding that “developed countries should make explicit commitments to continue to take the lead in emissions reduction.”

This stance on climate change is problematic, in that some developed countries, including Canada, have been taking the opposite approach, saying that major action cannot be taken without these emerging nations on board. This ultimately creates a cycle of “we won’t act unless you are on board, yet you won’t get on board unless we act”. Meanwhile, critics of this cycle point out that this inaction is likely to lead to increased warming of the planet, increased costs in climate change mitigation, and an increase in environmental consequences.

Hopefully the spirit of cooperation will prevail, and, as the Declaration suggests, "launch a comprehensive process to enable the full, effective, and sustained implementation of the Convention through long-term cooperative action, now, up to, and beyond 2012, in order to reach an agreed outcome in December 2009 (Copenhagen Climate Change Conference)."