Greenhouse Gases, State Greenhouse Gas Emission Limits, and Annual Reporting. The United States Environmental Protection Agency (EPA) and the Department of Ecology (Ecology) identify carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, sulfur hexafluoride, as greenhouse gases (GHGs) because of their capacity to trap heat in the Earth's atmosphere. The global warming potential of each GHG is a function of how much of the gas is concentrated in the atmosphere, how long the gas stays in the atmosphere, and how strongly the particular gas affects global atmospheric temperatures. Under state law, the global warming potential of a gas is measured in terms of the equivalence to the emission of an identical volume of carbon dioxide over a 100-year timeframe (CO2e).
Since 2008, state law has established limits on the emissions of GHGs in Washington. Ecology is responsible for monitoring and tracking the state's progress in achieving the emissions limits. 2020 legislation updated the statewide emissions limits as follows:
Certain entities with annual GHG emissions equaling or exceeding 10,000 MT CO2e must report their emissions to EPA and Ecology. Reporting entities must report by June 1st of the year following the year for which they are reporting; however, electric power entities must report by June 1st. Certain entities reporting annual emissions equaling or exceeding 25,000 MT CO2e must have their reports verified by a third party and are covered entities under the Climate Commitment Act (CCA).
Cap-and-Invest Program. Generally. In 2021, as part of the CCA, the Legislature directed Ecology to implement a Cap-and-Invest Program (Program), which is a market-based system designed to achieve the GHG emission limits set in state law. At a high level, the Program requires Ecology to set a limit, or cap, on statewide GHG emissions, which declines over time consistent with the state GHG emission limits. Covered entities must either reduce their emissions or obtain allowances or offset credits (compliance instruments) equal to their covered emissions during each Program compliance period. Other entities may opt-in to comply with the Program. Allowances are obtained through state auctions, provided for free to certain entities, and transacted between entities, including through secondary allowance markets. Offset credits are transacted between entities and are subject to several other requirements. One compliance instrument represents one metric ton of CO2e emissions.
Compliance Period. The Program currently operates within four-year compliance periods, with the first compliance period occurring between January 1, 2023, and December 31, 2026, the second compliance period occurring between January 1, 2027, and December 31, 2030, and so on, until December 31, 2049. Compliance periods may change if Washington enters into a linkage agreement with other jurisdictions.
Compliance Obligations and Deadlines. An entity's annual compliance obligation is equal to 30 percent of its covered emissions from the previous year. Compliance deadlines are on November 1 of an applicable year. For example, during the first compliance period, between 2023 and 2026, an entity was required to submit compliance instruments on November 1, 2024, equal to 30 percent of its 2023 covered emissions. The next compliance deadline is November 1, 2025, where an entity must submit compliance instruments equal to 30 percent of its 2024 covered emissions. The same November 1st deadline and percentage requirements apply in 2026 and then, by November 1, 2027, an entity must submit compliance instruments equal to the remaining 70 percent of covered emissions from each of the four years.
Annual Allowance Budget. Ecology determines the annual allowance budget—the total number of allowances offered in a particular calendar year—based on a calculation adopted in rule and which is dependent on other factors. For the first compliance period, the annual allowance budgets are as follows:
Allowance Auctions and Cost Containment Mechanisms. There are four regular allowance auctions (regular auction) held each year, where a portion of the allowances from the annual allowance budget are offered for sale to registered entities. In some regular auctions, there are additional allowances offered for sale, including allowances from future allowance budgets and allowances consigned by certain utilities. A covered entity, an opt-in entity, and a general market participant may register and participate in a regular auction, but different purchase and holding limits apply to these entities. The auction settlement price is the lowest accepted bid price and is the price all successful bidders pay.
Since February 2023, there have been nine regular auctions with settlement prices for current year allowances ranging from $25.76 to $63.03. Auction nine, held in March 2025, had a settlement price for current year allowances of $50.00.
To help minimize allowance price volatility and provide cost protection for covered entities, the Program requires Ecology to set an auction floor price and a price ceiling. The auction floor price must increase by a predetermined amount each year, which Ecology rules specify is by 5 percent and adjusted for inflation. The price ceiling must increase annually in proportion to the auction floor price. The 2025 auction floor price is $25.85 and the price ceiling is $94.85.
Ecology must also set a reserve auction floor price, which determines when an allowance price containment reserve (APCR) auction must occur. Ecology sets a Tier 1 and Tier 2 auction reserve floor price, which is adjusted annually by 5 percent and for inflation. The 2025 auction reserve floor prices are: Tier 1—$60.43; and Tier 2—$77.63.
During the first compliance period, between 2023 and 2026, Ecology must place no less than 2 percent of the total number of allowances from the annual allowance budgets in those years in an APCR Account. After the first compliance period, Ecology must adopt rules establishing the number of allowances to be placed in the APCR Account. Ecology is currently placing 5 percent of the allowances in the annual allowance budgets for each year of the first and second compliance periods in the APCR Account. Allowances in the APCR Account are offered for sale through APCR auctions, which are separate from regular auctions and operate with different requirements. An APCR auction is held:
Under certain circumstances, when no allowances remain in the APCR Account after the last APCR auction before a compliance period deadline, Ecology must issue the number of price ceiling units sufficient to provide cost protection for covered entities to comply with the Program. These units must be sold at the applicable ceiling price.
Linkage with Other Jurisdictions. In 2021, the CCA directed Ecology to explore linkage with other jurisdictions with external GHG emissions trading programs with the goals of reducing the cost of compliance and Program administration, enhancing market security, and providing consistent requirements for entities operating in numerous jurisdictions. Several specified provisions of linkage were included, relating to, in part, holding limits, reporting, and public notice. Ecology was also directed to provide agency-request legislation if it found any CCA provision prevented linking the Program with another jurisdiction. California and Quebec have operated a joint carbon market since 2014, which is approximately six times larger than Washington's.
Ecology's proposed agency-request legislation facilitating linkage was enacted in 2024. The legislation, among several other things, authorized Ecology to synchronize the Program with another jurisdiction's by modifying the length of compliance periods, auction purchase limits, and allowance holding limits. It also contained several provisions related to electricity importing and offset projects.
In 2024, Washington, California, and Quebec issued joint statements expressing mutual interest in linking carbon markets. According to Ecology, linkage is a multi-step process that includes opportunities for public input, and it expects to enter into a linkage agreement in 2026, which would link the markets in 2026 or 2027. Each jurisdiction is currently amending its Program.
Compliance Instrument Market Analysis and Forecasting. Ecology must provide analysis and forecasts of the Program's compliance instrument markets, including:
Ecology must consider the analysis in adopting rules and implementing requirements under the CCA.
Economic Modeling. Ecology must periodically perform economic modeling to analyze design features of the Program. The analysis must include a baseline model assuming implementation of complementary emission reduction measures and additional modeling scenarios Ecology staff deem necessary. The additional modeling scenarios must include current available technology and known adoption rates to better understand how to administer the Program.
By December 31, 2026, Ecology must include a modeling scenario reflecting linkage with other jurisdictions. Ecology must post the economic modeling results on its website by December 31, 2026, and post updated results by December 31, 2027, and by December 31st every two years thereafter.
Economic modeling results posted by Ecology must contain:
Annual Reporting of Greenhouse Gas Emissions and Compliance Obligations. To ensure the Program remains implementable and capable of fulfilling a linkage agreement, Ecology may, by rule, including emergency rule:
Annual Allowance Budgets. For the purposes of Ecology: setting annual allowance budgets to achieve the applicable emission reduction limits in state law; adopting allowance budgets on a calendar year basis providing progressively equivalent reductions year-over-year; and adjusting allowance budgets based on its review of the Program after the third compliance period, the emission reduction limits apply as of December 31, 2030, 2040, and 2050.
Price Ceiling Modification. The price ceiling for calendar years 2026 and 2027 must be $80. If Ecology enters into a linkage agreement, and the linked jurisdictions do not amend their rules to synchronize with the $80 price ceiling, Ecology may amend its rules to synchronize Washington's price ceiling with those of the linked jurisdictions. The price ceiling may not be set below $80 unless Ecology determines it is necessary to enter into a linkage agreement.
Allowance Price Containment Reserve Allowances and Prices. Ecology must place no less than 2 percent and no more than 5 percent of the total number of allowances from the 2027-2040 allowance budgets in the APCR, which must be placed in the APCR and made available in the second compliance period, beginning in 2027.
Ecology must adjust the APCR Tier 2 price to reflect the 2026 and 2027 price ceiling of $80.
Other. The legislation contains a state severability clause.
The committee recommended a different version of the bill than what was heard. PRO: The goal of this bill is to ensure liquidity and price stability during the early years of the program, and inject liquidity into the market during a critical time period. The bill clarifies the compliance date is as of December 31st and not January 1st, as Ecology has interpreted. This is consistent with California. The market analysis is good information for policymakers and the public. The most substantive piece of the bill is pulling forward allowances from future years into the second compliance period. This is a thoughtful piece of legislation at a critical time while we wait for linkage to occur. The bill allows us to use current tools to introduce more liquidity. We do not see this bill as having an immediate impact on market prices today but to provide a more reliable program for entities as linkage approaches. This is a modest adjustment to the CCA, and we appreciate the economic modeling piece. This is a helpful tweak to manage costs of CCA compliance.
OTHER: This bill makes it easier for covered entities to comply with the CCA by reducing near-term prices, but it may also introduce difficulties for the state to allocate allowances to emissions-intensive trade-exposed industries in the future. The shift may also slow the transition to cleaner technologies, which may affect frontline communities impacted by climate change.
PRO: Representative Joe Fitzgibbon, Prime Sponsor; Isaac Kastama, Clean & Prosperous Washington; Jessica Spiegel, WSPA; Peter Godlewski, Association of Washington Business.
PRO: The market analysis is a critically important function for our state. The analysis will help us better understand how carbon units are traded, especially in secondary markets. As the program shifts beyond public auctions, deeper insight into private transactions is critical for accurate price forecasting and evaluating the program’s effectiveness. The value of state-conducted forecasting would provide lawmakers with better insight into how the program affects different economic sectors.
This bill does change the allowance distribution in the future. The near-term increase in sales would likely balance out over time. Capping the upper end of allowance prices could help ease energy costs. The bill contains modest but meaningful reforms essential for the long-term viability of both the program and the market. Establishing that linkage agreement is critically important for helping businesses manage compliance costs and for enabling the state to use its resources efficiently. The bill is a win-win for the state and government.