Responding to the Governor’s intense pressure to rush a carbon cap rule into place before this year’s election, the Department of Ecology continues to push an unreasonable timeline. Their rushed rule is unraveling by the day.
One major problem with the rule is the requirement that companies purchase carbon credits from established carbon trading markets in California and the northeastern states’ Regional Greenhouse Gas Initiative (RGGI). As we’ll discuss below, neither carbon market seems to have been substantively consulted on this, and Ecology’s projected carbon prices ignore obvious pricing policies and market dynamics in an effort to keep the rule’s compliance costs low.
RGGI is the first mandatory market-based regulatory program in the U.S. to reduce greenhouse gases, and it only applies to power plants. The program’s first auction was in August 2008 and participating states include Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont. Proceeds from auctions go to energy efficiency, the development of renewable energy, and assistance to low-income ratepayers. We’ve noted before that Ecology proposes to simply export the price increases associated with Washington’s higher energy rates. So, the additional money paid by Washington families will go to other states rather than be re-invested in utility bill assistance for families asked to pay more under the rule.
There are several problems with turning Washington companies loose on the RGGI market.
First, RGGI has a fixed supply of allowances available for auction. If Washington companies increase that demand in a market where supply will not increase, then look for prices to rise dramatically. Northeastern utilities understand this and are beginning to push back on RGGI administrators. It’s why RGGI took the unusual step of putting out a statement on January 26th where it said Ecology’s rule “raises substantive issues relating to the potential use of RGGI allowances.” That’s a shot-across-the-bow in agency speak.
Another problem is speculators – hedge funds, Wall Street investors, etc. The RGGI market is currently over-supplied with allowances, but more than 80% of them are in the hands of speculators. Like Enron manipulating prices during the West Coast energy crisis, these speculators are withholding allowances to create an artificial scarcity that has lifted prices significantly. This is the choppy water into which Ecology is steering Washington companies and families.
Finally, the carbon cap in the RGGI states stops decreasing in 2020 and remains fixed in perpetuity. This happens to correspond with the 2022 enforcement of EPA’s new Clean Power Plan for utilities. So, every RGGI state will have to analyze whether RGGI participation ensures compliance with the new EPA rules. In cases where it doesn’t – Massachusetts and Maryland’s caps under RGGI are insufficient to comply with 2030 EPA caps – they’ll likely opt out of RGGI in favor of an alternate plan that guarantees EPA compliance.
With respect to RGGI, both the supply / demand dynamics of Washington’s participation and the legitimate question of RGGI’s post-2020 composition will factor heavily into the carbon price on that market. Ecology seems to have conducted a cursory review of historic allowance prices on RGGI to arrive at its “low-cost” allowance scenario of $10 per metric ton. By the time Ecology’s Rule is proposed to take effect, however, RGGI is going to be a much different market.
California’s current floor price for a ton of carbon is $12.10, meaning it’s 20 percent more today than Ecology’s “low-cost” allowance assumption of $10 in 2020. And the California floor price – like the other carbon markets in Quebec (current price $22.80 / ton USD) – escalates annually. By contrast, Ecology estimates that the $10 carbon price will be available through 2035 on these other markets. By the time Ecology’s rule goes into effect, however, the California floor price will be $16 per ton, or 60 percent above Ecology’s “low-cost” scenario.
It’s clear California was not consulted extensively during the drafting of the Ecology rule. Anecdotally, we’ve heard that the regulatory body overseeing the California carbon market is not entirely clear what the Ecology rule’s impact will be. More on that in the future. But, we should expect some pushback from them also when it comes to a large volume of companies entering their market to purchase allowances. Yes, they’ll take our money if we’re going to give it to them. But, since California’s cap and trade system covers the entire economy, it means everybody – from the largest company to the smallest household buying gas and electricity– will be paying more to comply with the law. That’s a political problem we just dropped in their lap.
In an effort to comply with the Governor’s unreasonable timeline on his carbon cap rule, Ecology is cutting corners they don’t normally cut. The more we look into this rule the more we find more reasons for concern.
NEXT UP ON THE BLOG
Ecology estimates that roughly 75 percent of emissions subject to the rule are from regular citizens. In other words, when you hear them say “polluter” what they really mean is “you.” We’ll explore why companies distributing energy to Washington citizens will simply have to buy allowances on the aforementioned carbon markets and pass along those costs, and how that result will have no impact on carbon reduction.