Washington will attempt to merge its fledgling carbon-pricing market with another one operated by California and Quebec in hopes of further slashing greenhouse gas emissions and settling the high prices of pollution allowances spurring political backlash, state officials said.
Laura Watson, director of Washington’s Department of Ecology, announced her decision to pursue market linkage Thursday morning. She said state officials must now negotiate with California and Quebec to join their international market.
“This decision is just the beginning of an extensive process,” Watson said during a news conference. “We anticipate that these discussions could require a year or more to complete.”
The merger was always a stated goal with Washington’s carbon-pricing market, created through the 2021 Climate Commitment Act, which requires most of the state’s largest emitters of greenhouse gases to pay for their pollution that causes climate change.
Expanding the markets would give the three governments greater leverage in cutting emissions from their largest polluters, according to an October analysis from Ecology. A broader market would provide stability to businesses that must buy the allowances, further encouraging their transition toward renewable energy, Watson said.
The end result should be lower carbon allowance prices for polluters, Watson said.
In Washington, allowance prices jumped higher than expected almost immediately. Already the auctions in which the allowances are sold have raised nearly $1.5 billion for state-funded projects and rebates meant to thrust the state toward a carbon-free future.
But polluters have also passed at least a portion of those high allowance prices on to consumers, resulting in higher gas prices. While gas prices in Washington have come down from a peak of more than $5 in September, they’re still more than a dollar above the national average. State officials have estimated the carbon market has added between 25 to 35 cents to Washington’s gas prices.
Those high gas prices have lathered political opposition to the carbon markets and fueled an effort to repeal the Climate Commitment Act, aimed for the 2024 ballot.
In the months ahead, Watson said state officials in Washington will negotiate with California and Quebec to see how the markets might fit together.
One large consideration must be timing, said James Bushnell, an economics professor at the University of California, Davis. Washington’s carbon market doesn’t expire and California and Quebec’s will in 2030, if it is not renewed.
Watson said California and Quebec might already be looking into eliminating or changing their market’s expiration.
The state and Canadian province would likely have to consider other changes as well, Bushnell said, like how to pair their allowance pricing limits with Washington’s and how to ensure investors interact proportionately across each of the three governments.
“I think they’re perfectly happy to have [Washington] join,” Bushnell said. “I don’t know if they’re willing to bend over backwards to change their own market to make it look more like Washington but there’s reasonable middle ground there.”
The process has already played out before, Bushnell noted. Ontario joined California and Quebec’s market in 2018, though it left the market later that same year under orders from a new provincial administration.
Watson’s decision on Thursday garnered praise from Caroline Jones, a senior analyst with the nonprofit Environmental Defense Fund. Jones said a larger market would be able to accelerate cuts in climate pollution. The move would also cut compliance costs for polluters buying allowance and make the overall market more efficient.
Officials with Puget Sound Energy expressed concerns this summer about high costs from Washington’s stand-alone market and noted that linkage would alleviate the problem.
But relief would take time. Assuming Washington, California and Quebec agree to merge their markets, the earliest the process could be finished is 2025, Watson said.
