2022 WDOE_Washington State Climate Commitment Act: Summary of market modeling and analysis of propsoed cap and invest program - Draft
Briefing Document: Washington State Climate Commitment Act
Executive Summary
This document presents a comprehensive overview of the economic and market modeling analysis conducted by Vivid Economics for the Washington Department of Ecology regarding the proposed Cap and Invest Program under the Climate Commitment Act (CCA). The CCA aims to establish a regulatory framework to help Washington State achieve significant reductions in greenhouse gas emissions by 2030, 2040, and 2050. The analysis provides insights into potential allowance prices, compliance costs, and emissions trajectories under various scenarios and assumptions.
1. Introduction
1.1 Context of the Study
Washington State has committed to reducing greenhouse gas emissions significantly, requiring a 45% reduction by 2030 relative to 1990 levels. The CCA, passed in 2021, mandates the establishment of a Cap and Invest Program aimed at achieving these targets. The program will involve a cap on emissions and a market for trading emissions allowances.
1.2 Key Program Specifications
The proposed program will begin in 2023, covering approximately 75% of the state's greenhouse gas emissions. It will set a baseline of 68 million metric tons (MMT) of CO2 equivalent emissions, with a cap that declines annually to meet the CCA's emission reduction targets.
1.3 Guidance on Interpreting Results
Model results should be viewed as part of a broader set of evidence, with a recognition of the uncertainties inherent in assumptions about technology adoption, market behavior, and complementary policies.
2. Key Results
2.1 Linking Scenario
This scenario assumes that market participants expect a linkage with the California-Quebec market starting in 2025. Modeled allowance prices begin at $41 per metric ton (MT) CO2e. The expectation of linkage influences prices even prior to the actual linkage occurring.
2.2 Frontloading Scenario
This scenario reflects the proposed program rules, where allowances are frontloaded into the market at the beginning of 2023. Starting prices are modeled at $58 per MT CO2e, rising to $100 by 2030. The rise in prices is driven by a declining cap that reduces the supply of allowances.
2.3 No Linking or Frontloading Scenario
In this scenario, prices begin at a higher level of $68 per MT CO2e due to lower supply from the absence of frontloading. Emissions under this scenario also decline to 34 MMT CO2e by 2030.
3. Sensitivity Analysis
Sensitivity analyses were conducted to understand how variations in assumptions could impact modeled prices and emissions. Key areas of uncertainty include program specifications, complementary policies, market behavior, and technology adoption.
3.1 Program Specification Scenarios
This section evaluates the impact of different program designs. Frontloading of allowances generally reduces modeled prices in the initial years.
3.2 Complementary Policy Scenarios
The analysis considers how policies like the Clean Vehicles Program and Clean Fuel Standard could influence emissions reductions. The inclusion of these policies may lower modeled prices by $2 to $3 per MT CO2e.
3.3 Market Behavior Scenarios
Market behavior assumptions, such as banking horizons and demand from non-covered entities, significantly affect modeled prices. For example, reducing the banking horizon decreases initial prices due to limited demand recognition.
3.4 Technology Pathway Scenarios
Assumptions about technology adoption rates are crucial. Faster adoption reduces modeled prices, while slower adoption results in higher prices due to increased emissions.
4. Modeling Methodology
4.1 Model Overview
The Compliance Carbon Market Model (CCMM) was used to simulate market dynamics under the Cap and Invest Program. The model incorporates agent-based modeling to represent the behavior of different market participants.
4.2 Washington-Specific Assumptions
The model's supply-side and demand-side assumptions align with the proposed Cap and Invest Program. Key aspects include baseline emissions, compliance obligations, and the impact of complementary policies on demand.
Conclusion
The modeling analysis provides critical insights into the potential impacts of the Cap and Invest Program in Washington State. The results underscore the importance of well-designed program specifications and the role of complementary policies in achieving meaningful emissions reductions. Ultimately, the findings will inform policymakers as they finalize rules and regulations under the Climate Commitment Act.