What's in a [carbon market] name?

Why governments should adopt the 'Cap-and-Invest' nomenclature

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Two years ago, at the start of 2023, Washington State launched the second state-wide emissions trading scheme in the United States.

California was the first state-wide carbon trading scheme, and a pioneer in covering multiple sectors of the economy under one carbon price. Launched in 2013, the program covers power generation, heavy industry, transportation as well as other sectors accounting for ~85% of the states emissions. Four years earlier the Regional Greenhouse Gas Initiative (RGGI) was introduced. It was the first emissions trading scheme in the US, and while it only covers the power sector, its reach extends across ten states in the Northeast and Mid-Atlantic.

First mover advantage can be vital in many enterprises, but it’s arguably less important when it comes to establishing a carbon price. The good thing about going later is that you can learn from the experience of those that went before you, and hopefully avoid making the same mistakes (see The great sulphur dioxide allowance bull market: What lessons can we learn from the first cap-and-trade system?).

Back in 2016 Washington State voted 59.3/40.7 against carbon pricing in a referendum. The state’s proposal (I-732) called for the introduction of a revenue neutral carbon “tax” in 2017. It was to start at $15 per tonne, rise to $25 per tonne in 2018, and then increase every year thereafter at 3.5% plus inflation, topping out at $100 per tonne (in 2016 dollars).

A subsequent vote in 2018 was also rejected, 56.6/43.4. This time the state proposed a $15 “fee” (no one likes taxes!) on every tonne of CO2 emitted in the state, but with much of the revenue invested in emission reduction projects. The plan outlined on the ballot (I-1631) was for the fee to escalate by $2 per tonne each year until the 2035 emission reduction target was met.

Fast forward to 2021 and Washington State adopted a package of proposals to “combat climate change and prepare the state for the future low-carbon economy”. One of the bills, the Climate Commitment Act (CCA), sought to establish a market-based program to meet the emission reduction targets set out in state law (see Everything you need to know about Washington State's "Cap-and-Invest" carbon market).

One crucial factor that Washington State learned from earlier carbon markets is the importance of the name. Rather than adopt the term used to describe California’s program - ‘Cap-and-Trade’ - policymakers in Washington State chose to name it ‘Cap-and-Invest’. Instead of emphasising the ‘trade’ in allowances by regulated entities and investors (speculation always gets a bad rap), ‘invest’ pivots the narrative towards actual projects that enable households and businesses to cut emissions (see Know your onions: Concern over the role of speculators in Europe's energy markets is overplayed).