Considerations for Washington’s Linkage Negotiations with California and Québec

Washington State is exploring linking its cap-and-invest emissions trading system with the already linked market of California and Québec. To inform the discussions, Resources for the Future analyzed auction allowance revenue and emissions both with and without linkage and studied how the range of outcomes could affect Washington’s environmentally overburdened communities designated as highly impacted by air pollution.Our analysis found that linkage would lead to greater regional emissions reductions, more regional environmental benefits, and a more affordable program because of the expanded emissions reduction opportunities across the linked jurisdictions. However, assuming no new state policy interventions, Washington’s revenue would be moderately lower and the rate of emissions reductions moderately slower.As part of its due diligence in exploring linkage, Washington is exploring potential environmental justice consequences and has received a memo from the state’s Environmental Justice Council outlining concerns as well as a set of recommendations for how to mitigate against these concerns. In this report, we look at three of those recommendations:limit the use of banked allowances to mitigate the influence of the California-Québec allowance bank on Washington’s allowance revenue and emissions;align offset rules to ensure environmental benefits in linked states; andimplement a facility-specific emissions cap.Limiting the use of banked allowances would be the least feasible because of financial regulations governing such assets. Aligning the rules for the eligibility and use of offsets across a linked market would require modifying California’s rules and therefore may be difficult to achieve. A facility-specific emissions cap, however, could be implemented independently by Washington, and enforcement could be tailored to align with existing policies. This approach would provide a market-based backstop to support emissions reductions at emitting facilities in environmentally overburdened communities.We also analyzed effects of an emissions containment reserve and found that it would likely generate more state revenue without sacrificing cost efficiency for covered entities, but only if it is adopted across all linked jurisdictions. That and other programmatic and policy adjustments could help preserve revenues and ensure that the emissions reductions in environmentally overburdened communities meet or exceed the state’s average facility-level emissions reduction rate.