Earth and climate change

Arizona Businesses Brace For Greenhouse Gas Regulations Under Western Climate Initiative

As the Arizona Legislature convenes, a Democratic governor heads to Washington, and a Republican governor takes the reins, state businesses find themselves deeply concerned about what will happen to Arizona’s environmental policy and the consequences associated with these unprecedented and troubled economic times.

Many legislators want Secretary of State Jan Brewer, who soon will take over the governor’s office, to rescind executive orders entered by outgoing Gov. Janet Napolitano. Rumors also abound about efforts to eliminate the Department of Environmental Quality (ADEQ). Meanwhile, the regulated community is left wondering what will be next for such large-scale regulatory efforts as the Western Climate Initiative (WCI), which was largely championed by Napolitano and ADEQ Director Steve Owens.

The WCI is a collaboration among seven U.S. governors and four Canadian premiers that Napolitano and others created to reduce greenhouse gases in the region using a market-based, cap-and-trade system. The member jurisdictions include: Arizona, California, New Mexico, Montana, Oregon, Utah, and Washington, as well as the Canadian provinces of British Columbia, Manitoba, Ontario and Quebec. Together, these seven states and four provinces represent more than 20 percent of the U.S. economy and 70 percent of Canada’s. Thirteen other U.S. and Mexican states and Canadian provinces have joined as observers.

Arizona entered the WCI in February 2007, following reports indicating that Arizona’s greenhouse gas (GHG) emissions were increasing. There were also predictions that by 2020, the state’s GHG emissions would increase by nearly 150 percent over the 1990 levels if Arizona neglected to reduce them. Arizona has played a vital role in the WCI since its beginning, with Owens serving as co-chair during the time the initial policy was developed. The first major accomplishment occurred with Owens at the helm, when the WCI released its design recommendations for the Regional Cap-and-Trade Program in late September.

Political changes and the design itself indicate that the WCI likely will affect Arizona regardless of whether the state stays in or exits the WCI. For example, as applied to electricity, the regulations will apply to the first jurisdictional deliverer (FJD). For sources within WCI jurisdictions, the FJD is the generator. For power generated outside the WCI jurisdictions (including federal and tribal lands) for consumption within a WCI partner jurisdiction, the FJD is the first entity that delivers that electricity, over which the consuming WCI partner jurisdiction has regulatory authority. Thus, if Arizona remains in the WCI, regulations will apply to generators of electricity; if Arizona leaves the WCI, any business or entity that seeks to deliver electricity to any jurisdiction that is a member will be subject to the regulations. In addition to electricity generators and suppliers, the WCI will regulate other sources of emissions such as industrial, residential and commercial sources, as well as industrial fuel combustion at facilities and transportation fuel combustion.

Details still must be developed, but the initial emission threshold triggering regulatory compliance is estimated to be 25,000 metric tons of carbon dioxide equivalents annually. The design was tailored to specifically allow the scope of the cap-and-trade program to expand over time to add new sources to the system, raise or lower the cap as necessary, and to integrate it into other programs.

This may be critical sooner rather than later, as many expect a federal program from President Barack Obama’s administration. Certainly with 20 percent of the U.S. economy regulated under WCI, in a region with critical energy supplies and high levels of emissions, the WCI is poised to become amodel. Additionally, calling this the Western Climate Initiative is a misnomer since Manitoba, Ontario and Quebec are included, extending the WCI boundaries to the Atlantic. In fact, the WCI covers the largest geographical area of any regional initiative. Moreover, with Napolitano in the Obama cabinet, Owens is predicted to land a federal regulatory role, and the WCI publicly states that it plans to promote and influence federal GHG emission reduction programs consistent with its design principles.

For now, Brewer is taking a cautious approach, noting that she currently plans to remain involved to get information and see what can be done in Arizona, but that given the economy, she is not yet ready to take a position on the planned cap-and-trade program. If Arizona remains in the WCI, mandatory reporting will begin with measurement and monitoring this time next year. The start date for cap-and-trade is Jan. 1, 2012. Regardless of whether Arizona is in or out of the WCI, a new regulatory regime now appears imminent and the only real questions moving forward seem to be how to influence outstanding issues and prepare for compliance and increased costs.