The Western Climate Initiative to Reduce Greenhouse Gas Emissions

Summary:  The previous post discussed California’s greenhouse gas (GHG) reduction program mandated under its Global Warming Solutions Act of 2006.  In this post we present a description of the Western Climate Initiative (WCI).  WCI is an agreement to reduce greenhouse gas emissions encompassing seven states and four Canadian provinces extending from British Columbia to Quebec.  Its principal goal is to produce economy-wide reductions in emissions by 15% from the levels of 2005 by 2020, using a market-based cap-and-trade mechanism.  Implementation of the program is to begin in 2012, and proceed in two phases. So far, however, only two of the seven states in the U. S. have progressed toward placing the program in effect.  Prospects for the Canadian provinces may be stronger.

Introduction.  The Western Climate Initiative is a transnational collaboration of California Arizona, New Mexico, Utah, Oregon, Washington, and Montana in the U. S., and British Columbia, Manitoba, Ontario and Quebec in Canada (called “entities” in this report).  Initially the governors of California, Oregon, Washington, Arizona and New Mexico established the Western Climate Action Initiative, in February 2007.  Their agreement recognized the detrimental effects of greenhouse gas-induced warming arising from human activities, such as prolonged droughts, excessive heat waves, reduced snow packs, altered precipitation patterns and more severe wild fires.  The initiative agreed that interstate collaboration was needed, and supported market-based policies to reduce GHG emissions as a cost-effective mechanism to so.

Goals of the WCI include reducing emissions of greenhouse gases that lead to global warming, developing alternative industries that provide new economic activities while also combating global warming, and minimizing the risks associated with adverse effects of global warming such as mentioned above. Importantly, it was undertaken in recognition of the failure of substantive action on climate change at the federal level. 

Greenhouse gases covered in WCI are carbon dioxide, CO2, as well as other gases.  The heat-trapping ability of CO2 on a molecule-for-molecule basis is relatively weak; its overwhelming importance is due to the massive amounts emitted by burning the large amounts of fossil fuels used in the world economy.  Methane or natural gas, when not burned as a fuel, escapes into the atmosphere from many sources; molecule-for-molecule methane is about 25 more potent in heat-trapping effectiveness than CO2.  Another gas arising from human activity, nitrous oxide (N2O), is even stronger, about 300 times more potent than CO2; other industrial gases, including sulfur hexafluoride (SF6) and a set of hydrofluorocarbons and perfluorocarbons, range as high as 23,000 times more potent than carbon dioxide molecule-for-molecule.  Thus small amounts of these gases in the atmosphere have effects that are many multiples of those of CO2.  Numerical conversions are made when reporting data for those gases into a unit called a CO2-equivalent.

The WCI Cap-and-Trade Program.  The WCI establishes a cap-and-trade program to reduce GHG emissions, with the goal of achieving reduction of 15% of the regional emission level evaluated for 2005 by 2020 (see schematic projection to 2020 in the following graphic). 



WCI GHG reduction goal for 2020 not including Manitoba, Ontario and Quebec, as of August 2007.  Source:  http://www.westernclimateinitiative.org/component/remository/func-startdown/91/



It is designed to reduce emissions produced by 90% of the economic activities of the member entities.  Since each entity is legally independent, each has to set its system up by its own laws and rules. 

Briefly, the program relies on emissions reporting, granting of “emission allowances” by each entity whose number establishes the cap, or upper limit of emissions.  Each allowance permits the owner to emit 1000 metric tons of CO2-equivalent GHGs in a year.   The allowances can be bought by or sold to (traded) to other entities in a WCI regional allowance market.  They are issued to each industrial and commercial source of GHG emissions.  The result of this market system is that it establishes a price for emitting GHG, which in essence creates a penalty for emitting.  This provides an incentive for each source to innovate in order to reduce emissions, thus reducing its costs each year.  Additionally, offsets of 5% of total emissions are allowed with external, qualified operations that draw GHGs from the atmosphere, anywhere in North America. Offsets include activities such as reforestation.

The complete formulation of the cap-and-trade system to be implemented by WCI  was released in August 2008.  It includes detailed economic modeling and reports earlier experience gained with GHG cap-and-trade regimes in California and the European Union. An updated summary of the Design Program was issued in August 2010.

Need for High-Quality Emissions Data From Rigorous Reporting.  The WCI Program relies on a rigorous, authoritative quantitative survey of GHG emissions from each entity for 2005 in order to establish its numerical emissions goal for 2020.   Ongoing surveys, and reports to the WCI administration, are to be submitted every year to ensure compliance and track progress.  In addition, these monitoring activities have to be created with an eye toward future regulatory regimes that U. S. federal and Canadian national governments, through the Environmental Protection Agency and Environment Canada, are likely to impose in the near future.

Setting Program Emissions Limits. The program proceeds in two phases.  The first, covering 2012-2014, envisions estimating emissions for 2012 that omit transportation fuels and low-volume emissions from residential and commercial fuels.  This interim limit is subjected to reductions in allowances until the second phase begins in 2015, when estimates for the omitted fuels are added in.  This total is then further reduced year-by-year to 2020.  This is shown in the following graphic.



Source: http://www.westernclimateinitiative.org/component/remository/func-startdown/281/



Maintaining Competitiveness and Preventing Emissions Leakage.  In order to promote compliance with the program, WCI envisions promoting a high degree of competition to achieve cost-effective improvements in efficiency in a given economic activity or industry.  On the other hand, the program seeks to minimize “emissions leakage”.   Leakage is the avoidance of required reductions by shifting of apparent reductions in emissions to entities outside of the program that are not monitored by the program.  Those emissions would in fact increase, thus defeating the intent of the program.   One possible approach to preventing leakage is dispensing allowances without charge to those industries that are most subject to competition and that use large amounts of energy in their operations.   These operations are most likely to succumb to gaming the program.  WCI recognizes that this approach is also under consideration in the European Union, and has appeared in some U. S. congressional proposals.

Electricity Sector.  Electricity generation is uniquely distinguished by the interconnection of power plants with others outside the WCI by means of the electricity grid.  A provider of electricity in the program commonly purchases power from out-of-region generators.  The WCI program includes the emissions from such out-of-region generation in its survey of GHG emissions subject to its regulation.  In addition, voluntary development of renewable energy supplies is to be taken into account in surveys leading to granting of emission allowances.

Designing a Fair and Transparent Auction.  The WCI program envisions that an important way to distribute or reallocate emission allowances is by an auction.  Auctions will occur every three months using a single round of sealed bids in order to minimize counterproductive market manipulation of allowances.  A minimum auction price will be established which recognizes market factors at the time the auction takes place.  Auction trades will be posted for transparency and efficiency.  The market will be subject to upcoming rules that are being formulated both in the U. S. and Canada for the trading of commodities.  Kyle S. Smith, executive director for the Washington Wildlife Federation, has criticized the WCI allowance program because it has not made clear whether allowances will be free or must be purchased at the outset.  It is true that, at least for highly competitive industries, free allowances are indeed envisioned. (see above).  Security of allowances in the accounts is an important factor; news of the electronic theft of permits in the European Union in January 2011 has alerted the WCI and others to the need for protection against hacking.

Participation by Canadian Provinces.  The four provinces that have subscribed represent about 75% of Canada’s population.  As Ontario signed on to the WCI, Alberta and Saskatchewan decried the program at a meeting of provincial premiers in July 2008, calling the program a cash grab by Canada’s other provinces, which are less well off.  It has to be recognized that Alberta is the site of the massive crude oil production industry based on extraction from tar sands.  This mode of production requires far more fossil fuel input for extraction than does conventional oil production from wells drawing on deep geological reservoirs.  Alberta is responsible for the most GHG emissions of all the Canadian provinces.

Implementation in the U. S.  At the time of writing, only California and New Mexico, of the seven states participating in WCI, are on track to implement the accord.  In the November 2010 elections, California’s voters rejected a referendum initiative that would have ended implementation of California’s Global Warming Solutions Act (see the earlier post).  

New Mexico has issued rules to implement the program.  However, the new governor elected in November 2010, Republican Susana Martinez, is opposed to the program.  Earlier, in 2009, a committee of the state’s legislature failed to approve legislation to authorize carbon trading.  Furthermore, the state’s implementing rules may be challenged in court, and the new regulatory board to be appointed by Gov. Martinez may revoke the rules.  Oregon and Washington, even though generally pro-environment in outlook, have not developed rules for implementation, at least partly because of the difficult economic environment the U. S. is currently experiencing.

In February 2010 the Republican governor of Arizona, Jan Brewer, withdrew the state from the WCI.  This action is part of a statewide review of policies directed toward combating climate change.  Officials are concerned about the effect of the WCI on Arizona’s economic recovery.  The state legislature is strongly opposed to the cap-and-trade mechanism of the WCI, which requires legislation to place it in force.

Commentary on the program from Canadian bloggers appears more supportive of participation by Canada’s provinces than is the atmosphere in the U. S.   Some note the need for preserving, indeed strengthening, the limitations on GHG emissions in the WCI program.

Conclusion.  The California Global Warming Solutions Act of 2006 provides policies for reducing GHG emissions that fall within the WCI program.  As noted above, however, the political climate is an extremely difficult one for full implementation of the program elsewhere; so far in the U. S. only California and New Mexico have advanced toward its goals, while Arizona has dissociated itself from the initiative.  At the federal level in the U. S., strong opposition from the energy industry has influenced lawmakers, and the Congress has not passed legislation that limits GHG emissions.  As a result, an inefficient, variegated pattern of state and regional programs is coming into being. 

Passage of a single national energy policy directed to minimizing greenhouse gas emissions, leading hopefully to a stabilization of atmospheric greenhouse gas levels, would be far more preferable for economic and environmental policy on the national level, as well as on the international stage.  At the national level, a unified approach would help establish new industries and job opportunities, and relieve the U. S. from its critical dependence on foreign sources of fossil fuels. Ultimately, since this is a global problem, it requires a global approach.  Sound, concerted national policy by the U. S. and Canada would benefit all concerned interests.

© 2011 Henry Auer