The Western Climate Initiative (WCI), a group of seven states and two Canadian provinces, recently released draft recommendations regarding how emissions allowances should be allocated under their regional cap-and-trade program.

The WCI members will issue allowances through a single pool to regulated industries. The Draft Allocations Design Recommendations calls for an initial minimum auction of 25% to 75% of the allowances and provides for the percentage auctioned to increase over time. For the remaining allowances, the member state or province may place them up for auction, allocate free allowances, bank them within a given (three-year) compliance period, or retire them outright.

The Draft Recommendation leaves several important issues unresolved. The WCI draft identified the potential for adopting sector-specific approaches. If such an approach were adopted, the WCI members would need to address whether allocations to a particular sector should be treated uniformly in the WCI region to ensure fair competition among entities in the region.

The Draft also fails to propose any mechanisms to address “leakage,” which arises when there are significant cost differentials among competing firms or industries within the WCI and those outside the WCI, resulting in consumers in the WCI purchasing from outside the WCI not subject to similar regulatory systems. The Draft provides only that WCI members will conduct a sector-specific analysis to determine if additional action is needed. In what seems like wishful thinking, the WCI draft notes that “[t]his approach will provide for sufficient standardization for an efficient cap and trade program while providing the Partners flexibility to address their individual priorities.”

On the issue of early action credits, the Draft notes that the member states and provinces will have discretion to give credit for early actions, but recommends that any credit for early action must come from within the cap and will come out of the individual Partner’s allowance budget.

California’s participation in the WCI alone renders this development significant, as the decisions taken as part of the WCI could have considerable persuasive power in the context of other regional programs, as well as any federal system. Comments on the draft recommendations are due April 16, 2008.

For further information about this topic, please contact Akin Gump.