On Nov. 2, 2023, Laura Watson, Director of the Washington State Department of Ecology (ECY), made the preliminary decision to pursue linking Washington’s cap-and-invest program with the programs in California and the province of Québec based on a preliminary analysis report issued in October.
California and Québec have successfully operated a linked carbon market, the Western Climate Initiative (WCI), since January of 2014. The WCI, regulated by California Air Resources Board (CARB), conducts joint allowance auctions each quarter and enables the allowances to be exchanged between the two jurisdictions in a combined market. Washington’s preliminary analysis found that a linkage agreement would need to reduce compliance costs, ensure seamless sale and tracking of allowances, and maintain market security for the state’s program to be successful.
ECY believes a decision to pursue linkage between the Washington market and WCI would address these criteria and create a larger market with more liquidity– providing price stability and assurances to participating businesses that would incentivize wise long-term strategies to reduce emissions that Washington’s standalone market has been lacking, shown by the price volatility and lack of trust recently seen in the state’s program over the past quarter.
Dec-23 CCAs in the WCI market traded up to an all-time high of $38.75 following ECY’s linkage announcement, up $0.80 from $37.95 the previous day. The contract traded 128 times, totaling over 2.4 M tons in volume. The WCI market had a similar bullish reaction in response to CARB’s November joint workshop announcement to present different cap reduction modeling scenarios that would affect allowance prices in the WCI, resulting in the previous record high settlement increasing by $0.12 to $38.00 in the last week of October.
In contrast, Dec-23 V23 WCAs traded down to $53.00 in wake of ECY’s decision, dropping $0.30 from the previous session. Traders in the WCA market are likely not expecting any changes to affect the Washington program in the near term ahead of the upcoming APCR and quarterly auctions scheduled for November and December. In addition, further linkage developments (largely dependent on California’s response) will likely take place in mid-2024, leaving the Washington market waiting until further progress is made.
Director Laura Watson notes that regulatory and statutory tweaks, likely based on results from future independent market analyses from the WCI jurisdictions, will be needed for Washington’s cap-and-invest program to facilitate a linkage agreement moving forward.
While both WCI jurisdictions will conduct analyses leading to a decision to admit Washinton into the WCI market, linkage at this point largely depends on California’s assessment over Washington’s market. CARB has cited Washington’s standalone market operations, the stability of its policies, and market behavior as key metrics that would influence California’s decision to seek linkage. Rajinder Sahota, CARB’s Deputy Executive Officer, has emphasized WCI’s stance on observing Washington for one year before coming to a decision, likely pointing to an update on the matter to come in Q3 of 2024.
In the meantime, ECY will be conducting an Environmental Justice Assessment to determine the potential impact on Washington communities, provide further analyses, and publish a final report taking into account any changes in California’s, Québec’s, and Washington’s programs. ECY further states that the next steps could take over a year to complete and would need to occur before Washington could begin participating in a linked market. If no major setbacks occur, the soonest Washington could likely begin operating as part of a linked market would be 2025 or later, per Director Laura Watson.
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