Compliance carbon market status in the US

Unlike the EU ETS, the US has not been successful in creating a national carbon market. Former President Barack Obama attempted to create a 

 but was unable to foster enough support among US states to do so. The opposition towards a national carbon market stems from states whose economies largely depend on the fossil fuel industry. It is, therefore, up to individual states to take the initiative to implement state-wide or regional cap-and-invest programs. Currently, WCI and RGGI are the largest compliance carbon markets in the US – covering fourteen states in total. In addition to the regional markets, Massachusetts, Washington, and Oregon have their own state-wide programs. Although fostering sufficient political cohesion among US states to implement a national ETS is highly unlikely, the increasing prioritization of decarbonization initiatives among states, as well as financial incentives to do so via the Inflation Reduction Act (IRA), serve as an opportunity for carbon markets to play a larger role in US climate strategies.

Other established cap-and-invest programs

Washington began its state-wide cap-and-invest program

 under WCI. Although its market is not linked with the California-Quebec joint program, its structure and sectoral coverage align with those of California and Quebec. All businesses emitting ≥25 ktCO2e/year in the state must purchase allowances for every ton of CO2 they emit – notably natural gas and electricity utilities, large industrial facilities, and fuel suppliers. The program is intended to be a major regulatory tool in helping the state achieve its GHG reduction goals for 2030 and beyond. This summer, Washington, California, and Quebec regulators will discuss the feasibility of a potential linkage with the California-Quebec program, with a possible 2025 start date. The state held its first quarterly auction on 28 February, at which it offered 6,185,222 V23 allowances at a settlement price of USD 48.50/t, which is USD 20.65 above the California-Quebec Q1 auction settlement price of USD 27.85/t.

 in 2019. The program includes the transport, buildings, industry, and power sector with a compliance threshold of ≥ 200 ktCO2e/year from supplied fuels. Unlike the WCI and RGGI programs, the state’s program freely allocates 100% of its carbon allowances to covered entities.

Massachusetts Limits on Emission from Electricity Generators

 is used to further decarbonize the state’s power sector. The program began in 2018 and covers all electricity generations that are covered in RGGI (whose capacity is ≥ 25 MW). From 2021, all allowances have been auctioned off at quarterly auctions. The program was implemented to provide a more robust carbon market in the state in order to achieve an 85% GHG reduction below 1990 levels by 2050.

Cap-and-invest programs under consideration

New York adopted its updated Scoping Plan

 that outlines a series of initiatives for reaching its GHG reduction targets of 40% below 1990 levels by 2030 and 85% by 2050. A cornerstone of the state’s decarbonization strategies is an economy-wide cap-and-invest program. The state-wide program will be a major advancement from its existing program that solely covers New York’s power sector under RGGI. Although its power sector is likely to remain in RGGI, state regulators have yet to decide on whether the power sectors will opt into the new state market. The program is expected to begin operation in 2025.

 geared towards reducing the state’s GHG emissions – including a goal to reduce electric power sector emissions 70% below 2005 levels by 2030 and net zero emissions by mid-century. Since his start in office in January 2017, Governor Roy Cooper (D) has taken steps to give greater priority to carbon reduction strategies in the state and has been supportive of efforts by regulators wanting the state to join RGGI. State regulators have highlighted the benefits a RGGI membership would have towards achieving North Carolina’s carbon reduction targets while also fostering revenue to create an equitable sustainability transition in the state. Despite growing support to join the carbon market, Republican control of the State Senate and House will make passing such legislation highly unlikely in the near future.

Arizona, Montana, New Mexico, and Utah were all former members of WCI with the intent to reduce CO2 emissions through cap-and-invest systems, but the 2008 recession and the election of Republican leaders in the states ultimately led to their 2011 exit from the market. Through an Interagency Climate Change Task Force, New Mexico has since attempted to implement a cap-and-invest program to help achieve its updated climate policies set forth in 2019. The state, however, has yet to gain sufficient political backing to do so.

The implementation of the state-wide cap-and-invest program in New York has great potential to act as a catalyst for the expansion of programs across RGGI member states. There have been attempts in the past to expand carbon markets among RGGI states – notably the 

Transportation and Climate initiative Program

 (TCI-P) that was attempted by Massachusetts, Rhode Island, Connecticut, and the District of Columbia. As several RGGI member states have updated their climate policies that include more ambitious carbon reduction targets, as well as stronger financial incentives to decarbonize 

as a result of the Inflation Reduction Act

, New York’s move may renew efforts in the region to strengthen RGGI and expand sectoral coverage within states’ carbon markets.

Washington’s potential linkage with California and Quebec is a promising indication of the strength of the WCI program. Much of the current skepticism towards carbon markets in the US stems from a perceived negative impact on ratepayers. The EU ETS, for example, has a tenure and backlog of environmental and economic achievements that Europeans can look upon when valuing the role of emission trading schemes as a tool for decarbonization. A successful linkage with Washington and strong market output, therefore, may ease states’ skepticism and put greater value towards cap-and-invest programs when considering their decarbonization strategies.

The legal battles pertaining to the future membership of Pennsylvania and Virginia in RGGI, however, pose a threat to US sentiment towards compliance carbon markets. Pennsylvania joined RGGI in April 2022 and was sued shortly thereafter on the grounds in which it joined the market. It has since been unable to partake in any of the subsequent auctions. Upon the election of Virginia Governor Glenn Youngkin (R), state officials have been posed to leave RGGI by the end of 2023. Resolutions and clarity regarding the legal proceedings of the states’ exit will likely come later in the year. If these states do leave RGGI, it will spark doubt and uncertainty in the legitimacy and efficacy of RGGI and compliance markets as a whole.

The biggest barriers to many US states’ unwillingness to adopt a carbon market are the potential down streaming of costs and the negative impacts it may have on states whose economies are rooted in the fossil fuel industry. The WCI and RGGI markets will face notable regulatory updates in the coming years, the success of which will shape the future role of compliance markets in the country. Although a national ETS is not on the table any time soon, increased regulatory ambition around the US for stronger decarbonization targets and significant funding from the IRA offer an opportunity for carbon markets to play a larger role in states’ climate strategies.

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As there is no national emissions trading scheme in the US, it is up to individual states to implement state-wide and regional compliance carbon markets. Upcoming regulatory updates to the WCI and RGGI markets, in conjunction with increased financial incentives from the IRA, serve as an opportunity for cap-and-invest systems to play a larger role in US decarbonization strategies. 

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