Legislative Framework for a Washington Cap and Trade Bill

Sections
1) Legislative Intent and findings
a. Overall description of climate change concerns voiced by the
legislature
b. Intent to create a market-based program to achieve the statewide
emissions goals as defined in RCW 70.235.020
c. Intent to use the most cost-effective market-based program to reduce
greenhouse gas emissions measured by $ per unit of GHG reduction
d. Intent to minimize impacts on Washington households, consumers and
businesses
2) Definitions
a. "Allowance" means a tradable authorization to emit up to one metric
ton of carbon dioxide equivalent.
b. "Allowance price containment reserve" means an account maintained
by the department with allowances available for sale through separate
reserve auctions at predefined prices to assist in containing
compliance costs for covered and opt-in entities in the event of
unanticipated high costs for compliance instruments.
c. "Annual allowance budget" means the total number of greenhouse gas
allowances allocated for auction or distribution for one calendar year
by the department.
d. "Auction" means the process of selling greenhouse gas allowances,
along with allowances from external greenhouse gas emissions trading
programs with which Washington has linked its carbon pollution market
program, by offering them up for bid, taking bids, and then distributing
the allowances to winning bidders.
e. “Auction ceiling price” means the maximum price for allowances that
would be accepted for bids at auctions.
f. "Auction floor price" means a price for allowances below which bids at
auction would not be accepted.
g. "Auction purchase limit" means the limit on the number of allowances
one registered entity or a group of affiliated registered entities may
purchase from the share of allowances sold at an auction.
h. “Aviation fuel” has the same meaning as provided in RCW 34
82.42.010.
i. “Biofuels” means a fuels derived from non-fossilized and biodegradable
organic material originating from biogenic plants, and animals, or
microorganisms, material, especially including: products, by-products,
residues and waste from agricultural, or forestry, waste products, and
related industries; the non-fossilized and biodegradable organic
fractions of industrial and municipal wastes; and gases and liquids
recovered from the decomposition of non-fossilized and biodegradable
organic material.

Confidential

 j.

k.

l.

m.

n.

o.
p.
q.

r.

s.

t.

u.

"Carbon dioxide equivalent" (CO2e) means a measure used to compare
the emissions from various greenhouse gases based on their global
warming potential.
"Compliance instrument" means an allowance or offset credit, issued
by the department or by an external greenhouse gas emissions trading
program to which Washington has linked its carbon pollution market
program. A covered or opt-in entity may use one compliance
instrument to fulfill each compliance obligation equivalent to one
metric ton of carbon dioxide equivalent.
"Compliance obligation" means the requirement to turn in to the
department the number of compliance instruments equal to a covered
or opt-in entity's covered emissions during the compliance period.
"Compliance period" means the three-year period for which the
compliance obligation is calculated for covered entities except for the
first compliance period. The first compliance period is from XXXX,
through XXXXX
"Covered entity" means a person with a compliance obligation, and
who has emitted or is otherwise responsible, as specified in this
chapter, for emissions that are more than the applicable emission
threshold.
"Department" means the department of ecology.
"Emission threshold" means the greenhouse gas emission level at or
above which a person has a compliance obligation.
“Energy Intensive – Trade Exposed” or “EITE” means a manufacturing
business that meets the numerical criteria established
in section
xx of this act,
or has a proper primary North American industry
classification system code as provided in section xx of this act
"External greenhouse gas emission trading program" means a
government program, other than Washington's carbon pollution market
program created in this chapter, that controls greenhouse gas
emissions from sources outside of Washington through an emissions
trading program.
"Facility," means any physical property, plant, building, structure,
source, or stationary equipment located on one or more contiguous or
adjacent properties in actual physical contact or separated solely by a
public roadway or other public right-of-way and under common
ownership or common control, that emits or may emit any greenhouse
gas.
"First jurisdictional deliverer" means the first person over which the
state of Washington has jurisdiction that generates or procures
electricity for use within the state and delivers that electricity to the
first point of delivery.
"General market participant" means a registered entity that is not
identified as a covered entity or an opt-in entity who is registered in
the program registry and intends to purchase, hold, sell, or voluntarily
retire compliance instruments.

Confidential

 v. "Greenhouse gas" means carbon dioxide (CO2), methane (CH4),
nitrogen trifluoride (NF3), nitrous oxide (N2O), sulfur hexafluoride
(SF6), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and other
fluorinated greenhouse gases.
w. "Holding limit" means the maximum number of allowances that may
be held for use or trade by a registered entity at any one time.
x. "Imported electricity" means electricity generated outside the state of
Washington and delivered for use within the state, but which did not
originate from any jurisdiction with which Washington has a linkage
agreement.
y. "Limits" means the greenhouse gas emission reductions required for
Washington state, as specified in RCW 70.235.020(1)
z. "Linkage agreement" means a formal agreement that connects two or
more carbon market programs to reciprocally recognize each
jurisdiction's compliance instruments.
aa.“Marine fuel” means a any fuel used to power an ocean-going vessel.
bb.“Ocean-Going Vessel” means a commercial, government, or military
vessel meeting any one of the following criteria:
i. A vessel greater than or equal to 400 feet in length overall (LOA)
as defined in 50 Code of Federal Regulations (CFR) § 679.2, as
adopted June 19, 1996;
ii. A vessel greater than or equal to 10,000 gross tons (GT ITC)
pursuant to the convention measurement (international system)
as defined in 46 CFR § 69.51-.61, as adopted September 12,
1989;
iii. A vessel propelled by a marine compression ignition engine with
a per-cylinder displacement of greater than or equal to 30 liters.
cc. "Offset credit" means a tradable compliance instrument that
represents an emission reduction or emission removal of one metric
ton of carbon dioxide equivalent.
dd."Offset project" means a project that reduces or removes greenhouse
gases that derive from sources not covered by the program.
ee."Offset protocols" means a set of procedures and requirements to
quantify greenhouse gas reductions or greenhouse gas removals
achieved by an offset project.
ff. "Opt-in entity" is a person responsible for the emission of greenhouse
gases not covered by the program and that voluntarily chooses to
participate in the program as if it were a covered entity.
gg."Person" means an individual, firm, partnership, franchise holder,
association, organization, corporation, business trust, company, limited
liability company, or government entity.
hh."Point of delivery" means a point on the electricity transmission or
distribution system physically located in Washington where a power
supplier delivers electricity for use in the state. This point can be an
interconnection with another system or a substation where the
transmission provider's transmission and distribution systems are
connected to another system, or a distribution substation where

Confidential

 electricity is imported into the state over a multijurisdictional retail
provider's distribution system.
ii. "Program" means the carbon pollution market program implemented
under this chapter.
jj. "Program registry" means the data system in which covered entities,
opt-in entities, and general market participants are registered and in
which compliance instruments are recorded and tracked.
kk. "Registered entity" means a covered entity, opt-in entity, or general
market participant that has completed the process for registration in
the program registry.
ll. "Retire" means to permanently remove an allowance or offset credit
such that the allowance or offset credit may never be sold traded, or
otherwise used again.
mm.
"Surrender" means to transfer an allowance or offset credit to
the department, either to meet a compliance obligation or on a
voluntary basis.
3) Creation of Program
a. To achieve the statewide emissions goals as defined in RCW
70.235.020, this law establishes a market program to create and
distribute allowances that can be traded in state and in other national
or international programs that are linked
b. The program shall include:
i. Creation of allowances
ii. Setting of an annual allowance budget
iii. Distribution of allowances to covered parties
iv. Identification of Energy Intense Trade Exposed businesses
v. An allowance auction process
vi. Allowance proceeds distribution process
vii. Allowance price containment provisions
viii. Offset credit mechanism to meet compliance obligations
ix. Linkage agreements with other jurisdictions
x. Creation of a compliance instrument tracking system
xi. A compliance requirement process
4) Scope of Coverage
a. Stated intent that the program should cover all quantifiable GHG
emissions in all sectors of the economy on a CO2 equivalent basis
b. Coverage to include all facilities above 25,000 tons CO2e/yr
c. Coverage to include all in-state generated and imported electricity
d. Coverage to include transportation fuel emission
e. Coverage to include natural gas emissions not covered by large
stationary sources
5) Exemptions
a. Fuel brought into the state in the tank of a vehicle, vessel, plane
b. Aviation fuel
c. Marine fuel
d. Biofuels

Confidential

 e. Exported fuels, electricity and natural gas that are exported or flow
through the state
f. Emission previously covered by an out-of-state carbon policy, charge,
tax or regulation
g. Fuels consumed by EITE designated facilities
6) Setting the Cap
a. The department of revenue shall establish an annual cap
b. The cap shall be set in a manner that will achieve the statewide
emissions goals as defined in RCW 70.235.020
c. The cap decline factor will be set at the start of the program and be
calculated as a level amount for each year based on a calculation of
the 2035 emissions goal defined in RCW 70.235.20 less the most
recent level of recorded emissions in the state then divided by the
number of years between the commencement of the program and
December 31, 2035.
7) EITE discussion and protection
a. A party shall be an EITE if it is
i. List of EITE’s from Carbon Tax, or
ii. Is an EITE as calculated by the following formula
The department of commerce will apply objective numerical criteria for both
energy intensity and trade exposure for the purpose of identifying energyintensive trade-exposed manufacturing facilities. The criteria for energyintensive trade-exposed status will be determined by applying the following
methodology:

Induced Carbon Cost intensity = (Direct Carbon Costs + Indirect
Carbon Costs) / Gross Value Added
Trade exposed = (Import Value + Export Value) / (Import Value +
Production
Value)
Where:
“Direct Carbon Costs” means the estimated maximum costs faced by a sector
as a result of the implementation of the GHG Cap and Trade Program for the
direct costs associated with direct emissions; i.e., stationary facility emissions
not covered by offsets or rebates
“Indirect Carbon Costs” means the indirect costs faced by a sector associated
with the cost of indirect emissions (emissions from electricity consumption)
as the result of the potential increase in electricity prices as a result of the
inclusion of electricity production in the scope of the GHG Cap and Trade
Program.

Confidential

 “Gross Value Added (GVA)” means the aggregated value of goods and
services produced in an industrial sector in Washington state as prescribed by
the United Nations System of National Accounts (USNA); e.g., Gross Output Intermediate Consumption
“Import Value” means the total gross value of imports within an industry
sector due to production outside of Washington State
“Export Value” means the total gross value of exports within an industry
sector sent to destinations outside of Washington State
“Production Value” means the total gross value within an industry sector from
production within Washington State
“Export” means to transport a product from inside Washington State to
persons or locations outside Washington State
“Import” means to bring into, introduce into, or land on any location subject
to the jurisdiction of Washington State
A sector or subsector is deemed to be at a significant risk of carbon leakage
and qualifies for EITE status if either:
(i)

the additional costs as a result of the implementation of the GHG
Cap and Trade Program would lead to a cost increase exceeding
5% of its gross value added and

(ii)

trade intensity of the (sub-)sector concerned exceeds 10%, or

(iii)

if either of the two criteria in (i) and (ii) exceeds 30%.

A manufacturing business that can demonstrate to the department of
commerce that its facility or facilities meet the criteria must be issued a
certificate denoting energy-intensive trade-exposed status for the purpose of
compensating appropriate on-site manufacturing processes through the
issuance of free allowances.
(b)(i) Notwithstanding the criteria established in (a) of this subsection, the
department of commerce must issue a certificate denoting energy-intensive
trade-exposed status to:
(A) Any facility engaged in an activity described
82.04.260(12); or

in RCW 18

(B) Any facility primarily engaged in an activity encompassed within
any of the following North American industry classification system
codes (2017):
112310:
112320:
112330:
112340:
112390:
212230:

Chicken egg production;
Broilers and other meat type chicken production;
Turkey production;
Poultry hatcheries;
Other poultry production;
Copper, nickel, lead, and zinc mining;

Confidential

 311211: Flour milling;
311221: Wet corn milling;
311224: Soybean and other oilseed processing;
311225: Fats and oils refining and blending;
311230: Breakfast cereal manufacturing;
311411: Frozen fruit, juice, and vegetable manufacturing;
311412: Frozen specialty food manufacturing;
311421: Fruit and vegetable canning;
311422: Specialty canning;
311423: Dried and dehydrated food manufacturing;
311511: Fluid milk manufacturing;
311512: Creamery butter manufacturing;
311513: Cheese manufacturing;
311514: Dry, condensed, and evaporated dairy product
manufacturing;
311520: Ice cream and frozen dessert manufacturing;
311611: Animal (except poultry) processing;
311612: Meat processed from carcasses;
311613: Rendering and meat by-product processing;
311615: Poultry processing;
311710: Seafood product preparation and packaging;
311812: Commercial bakeries;
311821: Cookie and cracker manufacturing;
311824: Flour mixes and dough manufacturing from purchased
flour;
311830: Tortilla manufacturing;
311911: Roasted nuts and peanut butter manufacturing;
311919: Other snack food manufacturing;
311930: Flavoring syrup and concentrate manufacturing;
311941: Mayonnaise, dressing, and other prepared sauce
manufacturing;
311942: Spice and extract manufacturing;
311991: Perishable prepared food manufacturing;
311999: All other miscellaneous food manufacturing;
312112: Bottled water manufacturing;
321212: Softwood veneer and plywood manufacturing;
321213: Sawmills;
322110: Pulp mills;
322121: Paper (except newsprint) mills;
322122: Newsprint mills;
322130: Paperboard mills;
324110: Petroleum refineries;
324199: All other petroleum and coal manufacturing;
325188: All other basic inorganic chemical manufacturing;
325193: Biodiesel manufacturing;
325199: All other basic organic chemical manufacturing;
325311: Nitrogenous fertilizer manufacturing;
327211: Flat glass manufacturing;
327213: Glass container manufacturing;
327310: Cement manufacturing;

Confidential

 327410: Lime manufacturing;
327420: Gypsum product manufacturing;
331110: Iron and steel mills;
331312: Primary aluminum production;
331313: Aluminum refining and primary aluminum production;
331314: Secondary smelting and alloying of aluminum;
331315: Aluminum sheet, plate, and foil manufacturing;
331318: Other aluminum rolling, drawing, and extruding;
334413: Semiconductor and related device manufacturing;
336411: Aircraft manufacturing;
336412: Aircraft engine and engine parts manufacturing;
336413: Other aircraft parts and auxiliary equipment
manufacturing;
336414: Guided missile and space vehicle manufacturing;
336415: Guided missile and space vehicle propulsion unit and
propulsion unit parts manufacturing;
336419: Other guided
missile and space vehicle parts and
auxiliary equipment manufacturing; and
423930: Recyclable material merchant wholesalers.
(c) Facilities that have been designated as EITE will be protected from trade
exposure by the issuance of allowances.
The allowances will be identified on a sector-by-sector basis and the sector as
a whole shall receive free allowances at 90% of the liability imposed by the
Cap and Trade Program. A declining cap adjustment factor shall be applied to
this industry assistance
The Department of Commerce shall develop criteria that will ensure the
distribution of the equivalent free allowances shall be based on a statewide
benchmarking approach that does not disadvantage the most efficient
operators by sector.
(d) Industry assistance to individual regulated entities shall be determined by
a benchmarking approach that advantages the most efficient operators and
that rewards early action. Under no circumstances shall a regulated entity
receive less than XX% industry assistance.
(e)The industry assistance design shall remain constant for the duration of
the program.
(f) A sector or subsector that has been designated as EITE shall be exempted
from Cap and Trade program costs levied on fuels consumed by their
facilities.
8) Point of Regulation
a. Compliance obligation should reside as close as possible to the point of
emissions, providing transparency to emitters and helping them make
economic choices to reduce emissions
b. For transportation fuels, it should be applied at the rack
9) Cost Containment

Confidential

 a. Establish a price ceiling on the sale of allowances not-to-exceed $80 in
2030 (in nominal dollars).
b. Establish two price containment points below the price ceiling, with the
first point being set no lower than 1/3 of the value between the floor
and ceiling price
c. Allow for the use of carbon offset credits, as defined in section 11, for
up to 25% of a regulated entity’s compliance obligation
10)
a.

b.

c.
d.

e.
f.

11)

Auction rules:
Auctions should be held at a regular iteration throughout a calendar
year according to a published schedule, with a minimum frequency of
once per quarter,
The program administrator shall establish a process for the auctioning
of current vintage allowances as well as future vintage allowances.
i. Current and future vintage allowances shall be auctioned
separately.
ii. The auction of future vintage allowances shall not be subject to
the holding limit
Each auction will be conducted with an auction reserve price and no
allowances will be sold at bids lower than the auction reserve price
Holding limit shall be established for allowances with a vintage year
corresponding to the current or previous calendar years
i. the holding limit will not include allowances contained in annual
compliance accounts
Treatment of unsold allowances
Registration, disclosures
i. Ability to register as a consolidated corporate entity for direct
corporate associations

Offsets
a. Offset credits must result in reduction of GHG emissions that are real,
permanent, verifiable, and additional
b. The program administrator shall prepare a list of approved offset
protocols that are eligible to receive credit, but at a minimum, offset
protocols approved by the state of California shall be eligible for
crediting
c. The program administrator shall set crediting periods for the applicable
offset protocols
d. Offsets generated in any US state, Canada or Mexico shall be eligible
for crediting
e. The program administrator shall establish requirements for offset
verification procedures and offset verification services
f. The program administrator must establish rules for determining offset
credit invalidation
g. Allow for the banking of offsets

Confidential

 12)

Compliance
a. Triennial Compliance Periods
b. Establishing of Accounts
c. Instruments eligible for compliance
i. Allowances of a vintage year equivalent to the compliance year
or earlier
ii. Eligible offsets issued prior to the compliance deadline, up to
25% of the total compliance requirement

13)

Preemption
a. No state agency, city, town, county, township, or any other subdivision
or municipal corporation of the state may adopt or enforce a statewide
or local program that
sets a greenhouse gas
emissions cap,
limit, standard, regulation, reduction requirement, permit restriction
(including carbon intensity)
b. The Clean Air Rule is repealed

14)

Linkage
a. The department shall enter into linkage agreements with other
jurisdictions with established market-based carbon emissions trading
systems.

15)

Legislative Oversight and Review
a. This act is repealed as of XXXXXX unless it is expressly reauthorized by
the state legislature by that date. Legislative reauthorization may only
take place after XXXXXX.

Confidential