Seven Western states, including Washington and Oregon, in partnership with four Canadian provinces, all operating under the Western Climate Initiative (“WCI”) have now released their final recommendations for designing a regional cap-and-trade market to reduce greenhouse gas emissions (“GHG”) starting January 1, 2012. The WCI would create the most comprehensive cap-and-trade program anywhere, ultimately regulating 90 percent of the region’s GHG emissions and going well beyond a northeastern U.S. program that applies only to electrical generation and a European Union program, which does not cover transportation, residential or commercial fuel uses.

The first step will be a reporting requirement starting January 1, 2010. All entities and facilities that have annual carbon dioxide equivalent emissions equal to or greater than 10,000 metric tons must report those emissions. Beginning in 2012, entities and facilities that have emissions of carbon dioxide equivalent greater than 25,000 metric tons will be required to participate in the cap-and-trade program.

Each WCI partner jurisdiction will have an annual budget for carbon dioxide equivalent emissions, and that budget will decline each year between 2012 and 2020. States such as Washington and Oregon will then issue allowances within their budget equal to one metric ton of carbon dioxide equivalent per allowance. At least 10 percent of the allowances must be sold at auction the first year, increasing to 25 percent by 2020, but with a goal of a much higher percentage over time. Exactly how that auction process will work is yet to be determined.

The allowances will be measured in three-year compliance periods. If at the end of a compliance period a covered entity or facility does not have sufficient allowances to meet its GHG emissions it then will have to surrender three allowances for every metric ton of carbon dioxide equivalent emissions. The states are not precluded from imposing other penalties allowed under their laws and enforcement authority.

The WCI recommendations include limitations on the use of offsets and allowances from other GHG emission trading systems, coupled with verification and enforcement mechanisms, and a preference for offsets located within the WCI jurisdictions. Still to be studied are the various types of offsets that would be suitable, such as soil sequestration, manure management, reforestation, forest preservation/conservation, forest products, landfill gas and wastewater management.

While the WCI recommendations are an important step towards regulating GHG emissions in Washington and Oregon, substantial further work is required to move from design to implementation, including bills to be submitted in the upcoming legislative sessions.

The full WCI report is available at:

www.westernclimateinitiative.org/ewebeditpro/items/O104F19865.PDF.