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Washington State Concludes Successful First Year of Emission Allowance Auctions, Explores Regional Collaboration for Carbon Market Integration

by Krystal

Washington State successfully concluded its inaugural year of auctions for tradable emission allowances in December, marking a significant step in its commitment to combatting climate change. Concurrently, the state is contemplating integration into a collaborative regional greenhouse gas reduction initiative alongside California and Québec.

Enacted by the Washington state legislature in 2021, the cap-and-invest program was designed to establish tradable emission allowances, serving as a pivotal strategy to curtail and restrict greenhouse gas emissions progressively. The program’s overarching goal is to propel the state toward a low-carbon economy, with each allowance equivalent to one metric ton of carbon dioxide-equivalent emissions. Auctions under this program commenced on February 28, 2023, and were subsequently held in May, August, and December of the same year.

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Washington’s cap-and-invest initiative, the most recent addition to the array of U.S. carbon market programs, aspires to slash the state’s greenhouse gas emissions to 45% below 1990 levels by 2030, 70% below 1990 levels by 2040, and achieve net-zero emissions by 2050.

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Administered by the Washington State Department of Ecology, the program issues allowances for greenhouse gas emissions. Certain businesses receive a portion of allowances at no cost, as mandated by legislation, while the remainder is auctioned off quarterly. Businesses can utilize these allowances to fulfill annual compliance requirements, retain them for offsetting future emissions, or engage in trading within a secondary market.

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The inaugural cap-and-invest auction saw allowances sold at $48.50 per allowance. Subsequent auctions inched the price higher, reaching approximately $56.00 at the second and $63.00 at the third, driven by robust demand. To manage this demand surge, the Department of Ecology invoked its Allowance Price Containment Reserve (APCR), a separate allowance pool that can be released into the market when prices surpass a predefined threshold. Two APCR auctions were conducted in August and November 2023, exclusively open to entities obligated to secure allowances commensurate with their emissions.

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The settlement price in the program’s fourth auction settled at about $52.00 per allowance, reflecting a decrease from the third auction’s approximately $63.00 per allowance.

In a noteworthy development in November 2023, the Washington State Department of Ecology declared its intention to integrate its program with greenhouse gas reduction initiatives in California and Québec. This proposed linkage aims to synchronize efforts across jurisdictions and amalgamate carbon markets by aligning components such as compliance periods, allowance prices, and offsets. The collaborative approach seeks to enhance the efficacy of these programs in collectively addressing the challenges of climate change.

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