Background: Cap and Trade. In general terms, a cap-and-trade program is a market-based mechanism to reduce air pollution. First, a cap is set on an air pollutant. Entities are then given or sold "allowances" to emit the pollutant. Entities with unused allowances are allowed to sell their surpluses to entities that have overspent their allowances. Sometimes, a cap-and-trade program allows the use of "offsets," which are emission cuts outside the cap but are nonetheless treated like an allowance.

A U.S. cap-and-trade program was established for sulfur dioxide in 1990. In 2005, the European Union enacted a cap-and-trade program for CO2 emissions called the European Union Emission Trading System. In the U.S., the first mandatory cap-and-trade program for CO2 emissions is the Regional Greenhouse Gas Initiative (RGGI), an effort of ten northeastern states that auctioned its first allowances last fall.

Western Climate Initiative (WCI). In 2007 the governors of Arizona, California, New Mexico, Oregon, and Washington formed the WCI. They were later joined by Montana and Utah, and the Canadian provinces of British Columbia, Manitoba, Ontario, and Quebec. Other U.S. and Mexican states have joined as observers.

The WCI has recommended the implementation of a cap-and-trade program as part of a comprehensive regional effort to reduce greenhouse gas (GHG) emissions by 15 percent below 2005 levels by 2020.

Washington's GHG Emission Reduction Targets. In 2008 the Legislature set the following GHG reduction targets for the state:

by 2020 reduce overall GHG emissions in the state to 1990 levels;
by 2035 reduce overall GHG emissions in the state to 25 percent below 1990 levels; and
by 2050 reduce overall GHG emissions in the state to 50 percent below 1990 levels, or 70 percent below the state's expected GHG emissions that year.

The Legislature also required the Department of Ecology (DOE), in coordination with the WCI, to develop a design for a regional multisector market-based system to limit and reduce GHG emissions. The design was presented to the Legislature in December 2008, and its concepts are addressed in this bill.

Summary of Engrossed Second Substitute Bill: Specifying Legislative Findings and Intent. The Legislature reaffirms the state's greenhouse gas (GHG) emission targets established in 2008. In addition, the Legislature finds, among other things, that despite the current economic downturn, it remains essential that the state fashion a long-term strategy for reducing GHG emissions.

The Legislature intends to provide recommendations to the 2011 Legislature regarding the merits of implementing a multisector emissions reduction program, as well as recommendations for complementary measures to achieve the state's emission reduction requirements.

Declaring an Emissions Reduction Policy. Polices are specified for the state's position on any regional or national multisector, market-based approach to regulating GHG emissions; for example, assuring equitable economic benefits and opportunities for electric utilities operating in Washington that use hydroelectric generation.

Requiring Recommendations for an Emission Reduction Program and Emission Caps. By December 1, 2010, the Department of Ecology (DOE) must recommend a GHG emissions reduction program that sets statewide and sector emission caps for persons that annually emit at or above 25,000 metric tons of CO2 equivalents. Except for reporting purposes, emissions from industrial biomass and biofuel combustion are not covered by the program.

Starting 2012, the following sectors should be covered by the program: (1) electricity generated in the state or generated out of the state and delivered to the state by long-term financial commitments under the state emissions performance law; (2) industrial and commercial fuel combustion; and (3) industrial process emissions.

Starting 2015, the following sectors should be covered by the program: (1) transportation fuel combustion; (2) residential fuel combustion; and (3) fuel delivered or sold for industrial and commercial combustion where the fuel is used by persons not otherwise covered in 2012. The 2015 phase of the program may include complementary measures, except that measures for transportation fuels must focus on emissions reductions, not raising revenues, and consideration must be given to differing rural and urban circumstances.

No more than 49 percent of a sector's total emissions reductions from 2012 to 2020 may be satisfied with offsets.

Requiring Alternative Strategies for Achieving Emissions Reductions. By December 1, 2010, DOE must report to the Legislature alternative strategies the state may implement to meet the GHG emissions targets established in 2008. The report must include a comprehensive examination of all measures, not market-based, that the state could employ to reduce the emissions of greenhouse gases, such as regulatory emissions caps and other performance oriented regulations. The report must also incorporate an analysis of the economic impact of an emissions reduction program on the state's consumers, businesses, and citizens. The economic analysis must be conducted by the Forecasting Office of the Office of Financial Management, in consultation with the Governor's Council of Economic Advisors.

Requiring Recommendations on Offset Credits. By December 1, 2010, DOE must recommend criteria for recognizing, tracking, and retiring offset credits. In developing the criteria for offset projects, priority must be given to offset projects within the forestry, agriculture, and waste management sectors. With regard to forestry offsets, DOE must give first priority for issuing offset credits for forestry offset projects located in Washington.

When developing the criteria for forestry offsets within any regional or national emissions reduction program, DOE must advance the policies developed from consultations with the Forest Practices Board, the Department of Natural Resources (DNR), and the Forest Carbon Working Group.

Requiring the Development of Forestry Offset Policy. DOE, in consultation with the Forest Practices Board, the DNR, and the Forest Carbon Working Group, must develop the state's policy for forestry offset projects in Washington. The final policy must be completed by December 31, 2009, unless DOE notifies the agencies and working group that the policy is needed sooner. The policy must include a number of elements, including guidelines for carbon accounting in managed forests.

Requiring Recommendations on Financial Incentives for Forestry. DOE must consult with the Forest Practices Board, DNR, and the Forest Carbon Working Group to develop and deliver to the Legislature by December 1, 2010, legislation to implement a financial incentives program for forestry and forest products.

Authorizing DOE to Continue Discussions with the Western Climate Initiative (WCI). The director of DOE is authorized to continue discussions with other jurisdictions in the WCI.

Requiring Implementation of an Infrastructure Program for Electric and Alternative Fueled Vehicles. Subject to appropriation, the Washington State Department of Transportation (DOT) must implement a program for planning and funding demonstration projects for the charging and fueling of alternative-fueled vehicles. The program includes, among other things, direction to pursue a West Coast initiative for major highways and urban areas.

Requiring Certain Regional Transportation Planning Organizations to Seek Funds. A regional transportation planning organization containing any county with a population over one million, in collaboration with representatives from DOE, DOT, the Department of Community, Trade and Economic Development, local governments, and the Office of Regulatory Affairs must seek federal or private funding for the planning for, deployment of, or regulations concerning electric vehicle infrastructure.

Creating the Emissions Reduction Assistance Account. An appropriated account is created for 25 percent of specified federal stimulus funds provided to the state for assisting with energy efficiency and renewable energy. Expenditures from the account may be used to assist persons in achieving emissions reductions under DOE's GHG emissions reduction program and to assist the transition of coal-fired facilities to cleaner-burning technologies. Additional purposes for expenditures are specified, such as reducing price impacts for low-income consumers.

Appropriations Provision. This act shall be in effect only to the extent that funds are specifically appropriated for the purposes of this act.

Staff Summary of Public Testimony (Environment, Water & Energy): PRO: The Legislature established the GHG targets last session and the challenge now is to decide how to effectively and efficiently meet those targets. The state exported $16 billion for fossil fuels; that money could have stayed in the state for the development of renewable energy. Washington's involvement with the WCI is important to influence the Congressional debate on a national cap-and-trade program. The business-as-usual reliance on voluntary action is not good enough – emitters need to be held accountable for any claimed reductions. With green building legislation, clean car legislation, and a GHG emissions performance law, the Washington Legislature has been an environmental leader the last several years. This bill needs to continue that legacy and to meet the mandated reduction targets. Cap-and-trade is not new; it has worked for SO2 and it is being applied to CO2 in Europe and in the Northeastern U.S. Cap-and-trade is the only program that can assure Washington will meet the mandated targets. The costs of not acting on cap-and-trade are high: rising firefighting costs, reduced stream flows, rising health-care costs, and agricultural loses. The current economic recession will end and something must be in place in 2012 if the state is to reach its reduction targets. The Governor may delay the program for up to one year if the recession continues past 2012. King County is already participating in the Chicago Climate Exchange. The country needs a structural change; we can no longer rely on cheap oil. The old economy is not hiring and the new economy is. The bill recognizes hydro by reallocating allowances out of a 1 percent common pool. Allowances should be auctioned and not distributed according to historic emissions.

CON: Businesses are struggling in the current economic recession and a cap-and-trade program would be very expensive, costing billions and jeopardizing thousands of jobs. A single national program is best. Many of the Washington companies operate in a world economy, and these companies would be at a competitive disadvantage if they had to incorporate allowance costs into their products. Many of these companies would either move to a nonWCI state or go out of business. A regional cap-and-trade would discourage investments in Washington. The effects of a regional cap-and-trade program are hard to model, so companies will have a difficult time making investment decisions. The bill delegates too much authority to DOE, and it does not protect Washington's unique hydro system. Market oversight provisions need to be determined before launching into a cap-and-trade program. The bill does not address the effect of low-water years on the hydro system, which could require utilities to rely on coal power and expensive allowances. When it comes to protecting Washington's hydro system, it is time that Washington dictate to the WCI and not the other way around. Why would the Legislature consider destroying Washington's economy in an attempt to impress the federal government? When mills close, the state's carbon footprint rises because the foreign products that are imported are produced with dirtier power. New Zealand has been unsuccessful in setting up a cap-and-trade program and that uncertainty has led to deforestation. The bill does not recognize previous efficiency efforts by companies. The bill is a blank canvas for DOE, and DOE has no duty to follow the recommendations of any of the work groups. The California experience with climate change efforts shows they underestimated the costs to their economy.

Persons Testifying (Environment, Water & Energy): PRO: Senator Rockefeller, prime sponsor; Genesee Adkins, City of Seattle; Paul Birkeland, William Brent, Randi Gladwell, citizens from Seattle; Jessica Finn Coven, Climate Solutions; Bob Doppett, Climate Leadership Institute; Matt Kuharic, King County; Jay Manning, DOE; Ethan Schaffer, Bainbridge Graduate Institute; Clifford Traisman, Washington Conservation Voters and Washington Environmental Council.

CON: Cali Daly, NW Food Processors Association; Kyle Davis, PacifiCorp; Mark Doumit, WFPA; Nancy Hiteshue, Washington Roundtable; Bart Kale, Nucor Steel; Kent Lopez, Washington Rural Electric Cooperatives; Llewelln Mathews, NWPPA; Dave McEntee, Simpson Investments; Mike Mosman, Port Blakely Tree Farms; Grant Nelson, AWB; Steve Smith, Cardinal Glass; Tamara Smilanich, citizen from Seattle; Collins Sprague, Avista; Bill Turlay, citizen from Vancouver; Dave Warren, Washington PUD Association.

Signed in, Unable to Testify & Submitted Written Testimony: PRO: William Brent, Webber Shandwick, citizens; Dick Ewing, Farm Bureau, Winthrop.

CON: Wes McCart, Stevens County Farm Bureau.

OTHER: Amber Gunn, Evergreen Freedom Foundation.