The chances of federal cap and trade legislation in the US being passed any time soon appear to be receding, however, this means the spotlight will inevitably fall back onto state-level proposals.

In total, some 50 States could be included in a future capped carbon market, made up of three linked regional schemes: the existing Regional Greenhouse Gas Initiative (RGGI) in the east, the Western Climate Initiative (WCI) and the Midwestern Greenhouse Gas Reduction Accord (Midwestern Accord).

All eyes are currently on the WCI where 7 US States, (representing 20% of US GDP), and 4 Canadian provinces, (representing 76% of Canadian GDP), have come together to develop a common framework for implementing a scheme by the start of 2012. However, at the moment only two US states (California and New Mexico) and 3 Canadian provinces (Quebec, British Columbia and Ontario) have passed the necessary legislation to introduce a scheme, so other partners may only join at a later date .

And in California – the largest of the partners – there is a cloud hanging over the scheme’s future. A referendum has been called to suspend the regulations until such time as unemployment in the state decreases below 5.5%, it is currently at 12.6% (and not expected to drop below 8% any time soon). The vote will take place in November with energy companies largely funding the lobbying effort behind it. If successful it would severely reduce the likelihood of the other partners proceeding with their plans.

Despite this potential set back, WCI issued detailed design details for how the scheme would operate at the end of July.

Here’s a quick summary:

- seeks to reduce emissions by 15% compared to 2005 by 2020 ,
- intended to cover 90% of all greenhouse gases,
- could mean up to 1.3 bn tonnes capped by 2015,
- applies to installations responsible for emitting over 25,000 metric tones per annum,
- starts in 2012 capping power and heavy industry, with transport and heating fuels joining in 2015,
- mixture of benchmarked free allocation and auctioning for distribution of allowances,
- initial allocations to match projected BAU emissions in starting year and then steadily decline year on year,
- no restrictions on who can trade,
- floor price introduced into auction to stem supply if overallocated,
- no price cap but the price safety valves include three year compliance periods, limited used of offsetting, linking to other schemes, limited borrowing and potential reserves and ‘special purpose pools’ of permits being set aside and released under certain scenarios,
- a set aside of permits to be retired for voluntary renewable investments,
- importation of electricity from non-capped states to be included in the scheme,
- penalties for non-compliance require purchasing of excess plus a multiplier of 3 applied.

Comparing the scheme to the EU’s scheme there are some welcome differences but also some unfortunate similarities. The most problematic are the relatively low ambition (a reduction of only 1% per annum) and the decision about which sectors to include from the start. Beginning with heavy industry alongside power follows in the EU’s footsteps but it will inevitably hinder the development of the scheme by antagonising powerful lobbies, who can use competitiveness concerns to attack the scheme. If the scheme survives, regulators will inevitably come under pressure to agree generous free handouts of inflated allocations to these sectors. To give the scheme breadth and liquidity, it would have been better to include transport and domestic heating fuels from the start and to leave trade exposed industries to the very last.

Introducing an auction floor price to choke off supply in the event of an oversupply of permits is a good idea and one the EU would do well to copy. The absence of a price cap is also sensible, though it will be important that the various other proposed mechanisms for relieving high prices maintain the integrity of the cap.

Overall, if the scheme succeeds in getting off the ground, it will be a welcome step forward. RGGI, the pre-existing scheme on the eastern seaboard, though well designed, is currently floundering under a huge over-supply of permits. There is already talk of caps there being tightened in order to make a link with the west coast initiative possible – something which is long overdue.

A lot therefore rests on the good citizens of California and how they vote in November. Let’s hope they see beyond the industry lobbying and scare tactics and allow things to proceed.