Several states have also implemented market-based policies aimed at limiting GHG emissions from major sectors. Such policies are implemented at the state level and through regional agreements. For the purposes of this section, we highlight those carbon pricing policies implemented through regulation.
Two primary carbon pricing regional agreements focus on limiting GHG emissions from major sectors. The first, the Regional Greenhouse Gas Initiative (RGGI), is focused on reducing GHG emissions from the power sector. The second, the Transportation Climate Initiative (TCI), is aimed at reducing emissions from the transportation sector.
At least one state, Massachusetts, is a participant in RGGI and TCI and also implements a state program, parallel to RGGI, limiting GHG emissions from certain power plants that rely on fossil fuels. California and Washington are the only states currently implementing an in-state multi-sector cap-and-trade program. Additionally, Washington’s Clean Air Rule, adopted in 2016, established a market-based program limiting emissions from major in-state stationary sources and petroleum and natural gas distributors, has been suspended following a decision from the Washington state Supreme Court striking down portions of the rule.
In implementing the Global Warming Solutions Act of 2006 (AB 32), the California Air Resources Board (CARB) adopted by regulation a multi-sector cap-and-trade program rule in 2011. The initial rule established an annual emissions allowance budget from 2013 to 2020 and phased-in requirements for regulated entities during three compliance periods. Electricity generators and industrial facilities emitting 25,000 metric tons of carbon dioxide equivalent (CO2e) or more were required to comply with the cap during the first compliance period starting in 2013. The cap took effect for natural gas and fuel suppliers meeting or exceeding the 25,000 CO2e metric ton threshold during the second compliance period starting in 2015. The program was designed to regulate the sources responsible for 85% of the state’s GHG emissions.
California’s cap-and-trade regulation has been updated several times over the course of the program. Of note, in 2012 CARB adopted regulations authorizing “linkage” with other GHG emissions trading programs, which provided for the use of allowances and offsets earned in external cap-and-trade programs for compliance with California’s program. California’s program linked with Québec’s cap-and-trade program in 2014. In 2017, California enacted AB 398, which extended the program’s cap to 2031.
California’s current regulations provide for an annual emissions allowance budget (in millions) of 346.3 in 2019, decreasing annually down to 193.8 in 2031.
In 2021, Washington state passed the Climate Commitment Act (SB 5126), which caps and reduces GHG emissions from their largest emitting sources and industries. The program was set to begin early 2023 and requires businesses that emit over 25,000 metric tons of carbon a year to purchase allowances for the additional emissions. The program creates a limited number of state-issued carbon allowances to be auctioned four times a year to companies that exceed the 25,000 metric-ton threshold. The number of allowances available at auctions will decrease each year, lowering the cap for overall emissions in the state.
Companies that choose not to comply will be fined $5,000 per violation per day. Companies that meet the criteria have until Nov. 1, 2024, to have 30% of their total 2023 emissions covered as the state makes the transition. A few companies will be classified as “emissions-intensive, trade-exposed” businesses to spare them from purchasing allowances right away to ensure big businesses don’t leave the state.
Regional Greenhouse Gas Initiative
The Regional Greenhouse Gas Initiative (RGGI), formed in 2009, is the nation’s first binding cap-and-trade program aimed at reducing GHG emissions from the power sector. Twelve states—Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont, and Virginia—currently participate in the program, with Pennsylvania being the latest state to rejoin RGGI. Other states are looking to participate in the program in the coming years.
The program is enforced through independent regulations adopted by participating states and is designed around a regional emissions allowance cap—one allowance provides for regulated entities to emit one short ton of CO2. In 2014, RGGI states adjusted down the regional cap to account for banked allowances. The adjusted allowance cap is 93.3 million in 2023. In 2017, the RGGI states extended the emissions cap out to 2030. Additional revisions to the cap are expected to be made in 2021 through 2025.
Transportation and Climate Initiative
The Transportation and Climate Initiative (TCI) was formed in 2010 by a coalition of Northeast and Middle Atlantic states and Washington, D.C., with the intent of reducing carbon emissions from the transportation sector. Fourteen jurisdictions, including 13 states—Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, Vermont and Virginia—and Washington, D.C., participate in the TCI.
In 2018, TCI members committed to designing a regional cap-and-invest policy to reduce carbon emissions from the transportation sector. The policy would provide for each TCI jurisdiction to invest program proceeds “into low-carbon and more resilient transportation infrastructure.”
On Oct. 1, 2019, the TCI released a framework for its draft regional policy proposal, addressing which entities would be regulated under the program, emissions reporting and monitoring requirements and equity concerns. This framework was followed by a draft Memorandum of Understanding (MOU) released in mid-December 2019 that would, in addition to committing participating jurisdictions to implementing the cap-and-invest program, require participants to jointly develop a model rule. A draft model rule for potential adoption by TCI jurisdictions was released in March 2021. The model rule includes provisions related to covered emissions, emissions reporting, and allowance budgets, among other requirements. The model rule also includes specific provisions aimed at addressing concerns related to equity and environmental justice.
Additionally, in December 2020, Connecticut, Rhode Island, Massachusetts and the District of Columbia entered into an MOU to implement the TCI Program, with the first reporting period starting as early as January 2022. They will be the first jurisdictions to launch the program. Other Northeast, Southeast and Middle Atlantic states committed to working with Connecticut, Rhode Island, Massachusetts and the District of Columbia in developing the program while advancing emissions reduction policies in the transportation sector at both the state and regional level. While a number of TCI jurisdictions signed this statement of support, Maine did not. You can find additional information regarding the TCI-Program’s policy design process here.