Climate Initiatives Dialogue Conference Call

1. Climate Initiatives Dialogue Conference Call April 16, 2008 1

2. Overview • WCI Stakeholder Process • Reporting Recommendations • Allocation Recommendations • Offset Recommendations • Next Steps www.westernclimateinitiative.org

3. WCI Stakeholder Process • 3/11/08 - Stakeholder calls re: scope and electricity recommendations • 3/26/08 - Offsets workshop • 3/28/08 - Stakeholder webinar on economic analysis • 4/8/08 - Stakeholder call re: reporting recommendations • 4/9/08 - Stakeholder call re: allocations recommendations • 4/14/08 - Stakeholder call re: economic analysis assumptions book www.westernclimateinitiative.org

4. Upcoming WCI Stakeholder Opportunities • 5/14/08 - Draft design and economic analysis released • 5/12/08 - Stakeholder call re: initial economic modeling results • 5/21/08 - Stakeholder meeting in Salt Lake City re: draft design recommendations • July 2008 - Final draft recommendations released • 7/21/08 - Stakeholder call re: phase II model results • 7/29/08 - Stakeholder meeting in San Diego re: final draft recommendations • August 2008 - WCI announcement of program design and next steps www.westernclimateinitiative.org

5. Reporting Recommendations 5

6. Practical Impacts for Reporting Compatible with CARB Reporting Rule As needed to support the cap-and-trade program and inform state inventories Harmonize with The Climate Registry (TCR) and international reporting programs TCR quantification protocols provide consistency across WCI partners 6 www.westernclimateinitiative.org 6 www.westernclimateinitiative.org

7. 1. Breadth/Scope of Coverage Options: • (a) Require reporting only for sectors included within the cap • (b) Require reporting for certain other sectors too, e.g., ones that are likely to be phased in over time WCI Recommendation: Include capped sectors in reporting and certain non-capped sectors that may be phased in later (will have to determine which ones, and lower thresholds may apply). 7 www.westernclimateinitiative.org 7 www.westernclimateinitiative.org

8. 2. Initiation of Reporting Options: • (a) Begin mandatory reporting before cap-and-trade commences • (b) Begin only with the start of the cap’s first compliance period WCI Recommendation: Begin reporting before cap-and-trade commences. Strive to avoid reporting-related delays to the start of the cap-and-trade program. 8 www.westernclimateinitiative.org 8 www.westernclimateinitiative.org

9. 3. Coordination Among Partner Jurisdictions Options • (a) A single WCI model reporting rule that stipulates reporting specifications • (b) WCI jurisdictions develop individual rules with common core elements WCI Recommendation: Develop essential requirements for a model WCI reporting rule by the end of 2008. Incorporate consideration for jurisdictions that already have reporting rules adopted or in process. 9 www.westernclimateinitiative.org 9 www.westernclimateinitiative.org

10. 4. Data Management & TCR Interaction Options • (a) Require that all capped sources report directly to the TCR • (b) Require sources to report toindividual jurisdictions (then upload data to TCR) WCI Recommendation: Sources will report either (a) directly to jurisdictions, or (b) through the TCR’s program framework. 10 www.westernclimateinitiative.org 10 www.westernclimateinitiative.org

11. 5. Verification Options • (a) Require third party verification • (b) Allow multiple approaches to ensuring data quality (i.e., other than third party verification) WCI Recommendation: The WCI will establish essential quality assurance elements for reported data that will be consistent across jurisdictions. Each jurisdiction will have an oversight mechanism to ensure compliance with the reporting requirement. As part of this mechanism, each jurisdiction will establish procedures to ensure that the quality assurance elements are met, which could include requiring 3rd party verification, rigorous compliance audits or other appropriate approaches. 11 www.westernclimateinitiative.org 11 www.westernclimateinitiative.org

12. 6. Mandatory Federal GHG Reporting • How should WCI states and provinces and TCR incorporate and interface with recent federal GHG reporting developments in the U.S. and Canada in designing and implementing the WCI GHG reporting program? WCI Recommendation: Get involved in federal GHG reporting program development in the U.S. and Canada to ensure that federal reporting programs are harmonized with the jurisdictions’ interests to the greatest extent possible. 12 www.westernclimateinitiative.org 12 www.westernclimateinitiative.org

13. Allocation Recommendations 13

14. Key Allocations Questions • Centralized/Regional Apportionment vs. Apportioned to Individual WCI Partners • Standardized Distribution vs. Left to WCI Partners • Free Allocation vs. Auction vs. Hybrid www.westernclimateinitiative.org

15. Regional Cap and Allowance Budgets • Establish a declining regional cap and that each Partner have an allowance budget within the cap. • The regional cap will be equal to the sum of the Partner allowance budgets. • The regional cap and Partner allowance budgets be set through 2020. www.westernclimateinitiative.org

16. Distribution of Allowances by Partners • Once the allowance budget has been established for each Partner, allowances will be issued by each Partner rather than issued by a regional organization. www.westernclimateinitiative.org

17. Establishment of Cap and Trade Partner Budgets • Allowance budgets will be consistent with the emission reductions that the WCI must realize from the sources covered by the cap and trade program to achieve the WCI emission reduction goal. • The Partners will develop a methodology for calculating partner allowance budgets. www.westernclimateinitiative.org

18. Partner Discretion to Issue Allowances • Each Partner will have flexibility to issue, beyond the minimum percentage auction amount, its remaining allowances as it sees fit. • Each Partner will be required to advise the other WCI partners at the beginning of each of each compliance period how it intends to allocate the remaining allowance. www.westernclimateinitiative.org

19. Partner Discretion to Issue Allowances (cont.) • Each Partner initially will have discretion to issue allowances within its jurisdiction. • Partners may make different use of auction proceeds. • While the Partners will initially have flexibility in issuing allowances, the WCI will seek standardized allowance distribution over time to the extent possible. www.westernclimateinitiative.org

20. Partner Discretion to Issue Allowances (cont.) • Sector-Specific Assessment of Competition Among WCI Jurisdictions • Variations in allowance distribution could create competitive issues among WCI jurisdictions. • Sector-specific analyses will be conducted by the Partners to determine whether consistent distribution is needed to address such issues within the WCI. www.westernclimateinitiative.org

21. Partner Discretion to Issue Allowances (cont.) • Sector-Specific Assessment of Competition with Non-WCI Jurisdictions • Compliance requirements could create competitive issues within the WCI and those outside the WCI, resulting in emissions leakage outside the WCI region. • Sector-specific analyses will be conducted by the Partners to determine whether allowance distribution can address non-WCI region leakage. www.westernclimateinitiative.org

22. Auction Recommendations • Each Partner will auction a minimum percentage between 25% and 75% of its allowance budget through a coordinated regional auction by which each partner will auction allowances throughout the WCI region and receive the proceeds of the auction. www.westernclimateinitiative.org

23. Phased Increase of Auctioning • Greater emphasis could be given to free allocation in the early years of the program as a means of mitigating business and consumer cost impacts and providing transition assistance, in addition to utilizing auction proceeds for these purposes. • The minimum percentage of allowances to be auctioned should be increased over time, potentially to 100%. www.westernclimateinitiative.org

24. Credits for Early Reductions • Each Partner will have discretion to give credit for early actions, but any credit for early action must come from within the cap and will come out of the individual Partner’s allowance budget. www.westernclimateinitiative.org

25. Banking and Borrowing • Banking • Purchasers and covered entities will be allowed to bank allowances without restrictions on the amount of allowances that may be banked or for how long. • Borrowing • Borrowing of allowances from future compliance periods not be allowed. www.westernclimateinitiative.org

26. Compliance Periods • The compliance periods will be three years long. • Multi-year compliance periods will provide regulated entities with greater flexibility for compliance. • To accommodate start-up issues, the initial compliance period will include special rules to assist in the transition into a cap and trade system. www.westernclimateinitiative.org

27. Regional Organization • The Partners will create a regional entity to coordinate the regional auction of allowances, track emissions and allowances, and monitor and report on market activity. • There may also be a need to resolve other coordination issues, such as competitiveness and leakage issues resulting from potentially divergent allocation procedures among the WCI Partners. www.westernclimateinitiative.org

28. New Partners • Allowances for new Partners will be in addition to the existing allowance budgets for current Partners. The regional cap will be expanded to accommodate emissions from the new Partner. • Once the cap and trade program has been instituted, new Partners should come into the cap and trade program at a regionally-coordinated and designated time, such as the beginning of the relevant compliance period. www.westernclimateinitiative.org

29. Timelines for Partner Activities • The Partners will develop a schedule for various WCI efforts, including launching the cap and trade program, establishing emissions baselines and Partner allowance budgets and undertaking case-by-case discussion on competition or leakage issues. www.westernclimateinitiative.org

30. Offset Recommendations 30

31. Offset Criteria • Administratively simple and cost effective • Operationally straightforward for participants • Ensures integrity of emission reductions • Adds to economic efficiency of the cap and trade system • Stimulates innovation and provides co-benefits • Enhances transparency and minimizes uncertainty • Facilitates linkage with other programs www.westernclimateinitiative.org

32. Role of the Offset Program • A GHG offset program should be an element of the WCI cap and trade design • A primary role of the offset program could be to reduce the overall compliance costs. • By lowering overall costs, an offset program could support a more aggressive reduction cap than might otherwise be feasible. • Encourage innovation, co-benefits, GHG emission reductions from sources not covered by the cap. www.westernclimateinitiative.org

33. Offset Project Types and Protocols • The WCI should: • aim to develop an initial set of eligible project types and protocols prior to cap and trade program launch; • provide a process to review and approve other project types and related protocols proposed by project developers; • use protocols that are standardizedto the extent possible; and, • make use of, and adapt if needed, existing protocols as appropriate. www.westernclimateinitiative.org

34. Offset Projects Approved Through the WCI • The WCI should consider approving offset projects located throughout Canada, the United States, and Mexico, where such projects would be subject to comparably rigorous oversight, validation, verification and enforcement as those located within the WCI jurisdictions and would not undermine the ability for the WCI to link to other trading systems. • The WCI should consider a method that gives priority to offset projects located within WCI jurisdictions. The method should also consider other roles of the offset system. www.westernclimateinitiative.org

35. Tradable Units From Government Regulated GHG Emission Trading Systems • The WCI should consider allowing for compliance purposes by individual regulated entities the use of tradable units (offsets and allowances) from other government regulated GHG emission trading systems that are recognized by the WCI as meeting similarly rigorous criteria for environmental integrity. • The WCI should ensure accounting systems are in place to prevent using tradable units more than once for compliance. www.westernclimateinitiative.org

36. Limits • To ensure that meaningful emission reductions take place within the sources covered by the cap-and-trade system, the WCI should limit the use of offsets and non-WCI tradable units for compliance by individual regulated entities. The Offsets Subcommittee will consider making a specific draft recommendation to the WCI based on further analysis and considering the level of the cap set for the cap and trade system and undertaking case-by-case discussion on competition or leakage issues. www.westernclimateinitiative.org

37. Offset Program Administrative Structure and Function • The WCI should use an administrative structure for the offset program that combines optimal aspects of jurisdiction-by-jurisdiction, public-private partnership, and centralized regional approaches and may draw from existing programs. • A regional organization should coordinate review and adoption of protocols; coordinate review and issuing of offsets; provide the criteria and means to accredit service providers to deliver validation and verification services. • The WCI should select or develop a centralized offset registry and ensure integration with the emissions reporting and allowance tracking system of the cap and trade system. www.westernclimateinitiative.org

38. Other Ongoing Discussions 38

39. Scope • Transportation fuels. • Residential/Commercial fuels. • Threshold. • Phasing. www.westernclimateinitiative.org

40. Electricity • First Jurisdictional Deliverer. • Allowance apportionment. www.westernclimateinitiative.org

41. Next Steps • Go to www.westernclimateinitiative for copies of materials. • Next meeting of Dialogue in May www.westernclimateinitiative.org

42. For More Information • www.westernclimateinitiative.org • Michael Gibbs, Cal/EPA • mgibbs@calepa.ca.gov www.westernclimateinitiative.org