Newsom Moves to Link California Carbon Market with Washington

Governor Gavin Newsom has authorized California to move forward with plans to link the state’s Cap-and-Invest program with Washington State’s carbon market, potentially creating a significantly larger regional emissions trading system encompassing California, Washington and Québec.

Newsom announced the action Wednesday during Climate Week in New York. The governor made the formal findings required under California law before the California Air Resources Board (CARB) can begin the regulatory process necessary to link the two markets. California has participated in a linked carbon market with Québec since 2014.

California and Washington are targeting 2027 for their first joint allowance auctions. Under a linked system, regulated California companies could purchase and use allowances originating in Washington to satisfy California compliance obligations, while Washington entities could similarly participate in the broader market.

The Newsom Administration argues that expanding the market will increase liquidity, stabilize allowance prices and provide regulated industries with additional options for meeting their emissions obligations. The governor’s office says Cap-and-Invest now covers approximately 80 percent of California’s greenhouse gas emissions and has generated $37 billion for climate investments since the program began.

For California’s oil and natural gas industry, however, the details of the linkage will matter considerably.

CIPA CEO Rock Zierman pointed out in the Bakersfield Californian that there will be more demand for allocations and credits which will drive up costs for covered companies, including CIPA members.  The increase could be as high as $7 a metric ton.

The Western States Petroleum Association told the Times that it supports properly designed market-based approaches to reducing emissions but cautioned that linking jurisdictions with different program designs, allowance inventories and market dynamics could have broad consequences for businesses and consumers. WSPA urged regulators to closely examine potential effects on jobs, fuel prices and the economies of both states.

That affordability question should remain central as CARB begins its rulemaking. California producers and refiners already operate under one of the nation's most extensive collections of climate, air quality and energy regulations. Expanding the carbon market could provide additional compliance flexibility, but the ultimate impact will depend on allowance availability, pricing, market rules and how the programs are harmonized.

The governor's action does not immediately link the markets. Instead, it clears the legal prerequisite for CARB to begin the public regulatory process. That proceeding will provide the next opportunity to evaluate how the proposed linkage would operate and what it would mean for California businesses and consumers.

CIPA will continue monitoring the CARB process as the agency develops the regulations necessary to implement the proposed California-Washington linkage.