U.S. Carbon Compliance Programs: What Corporates Need to Know

In this article, we will explore key carbon compliance programs across the U.S., their impact on corporations, and how businesses can position themselves to thrive in this evolving regulatory environment.

Regional Greenhouse Gas Initiative (RGGI)

The Regional Greenhouse Gas Initiative (RGGI) is a cap-and-trade program targeting the power sector across 10 states in the U.S. Northeast and Mid-Atlantic, including New York, Massachusetts, and Maryland. RGGI was the first mandatory market-based program in the U.S. designed to reduce GHG emissions.

• How does the RGGI work? Power plants in RGGI states must purchase emissions allowances through auctions or the secondary market. Similar to the EU ETS, each allowance permits the emission of one ton of CO₂. Over time, the cap on total emissions declines, driving power producers to adopt cleaner technologies and improve efficiency.
• Corporate impact: Corporates operating in the power sector must manage carbon costs by purchasing allowances or investing in emissions reduction technologies. Revenues from RGGI auctions are often reinvested into energy efficiency and renewable energy projects, which can further benefit energy users.

California Cap-and-Trade Program

California operates one of the most comprehensive carbon markets in the world, with an impact extending beyond its borders. Its cap-and-trade program is linked with Quebec's, allowing for the mutual exchange of compliance instruments, which supports the expansion of market-based solutions. The program is 'economy-wide,' covering any entity—corporation, utility, university, or otherwise—that emits over 25,000 metric tons of carbon annually. It plays a key role in California’s ambitious goal of reducing GHG emissions by 40% below 1990 levels by 2030, with aspirations to further intensify these targets in the near future.

• How does the California Cap-and-Trade Program work? Applicable entities are required to hold allowances to cover their emissions, with the total number of allowances decreasing over time. To reduce their emissions and the corresponding need for allowances under California’s cap-and-trade program, entities can use California Carbon Offsets (CCOs). Each CCO represents one metric ton of carbon dioxide equivalent reduced or removed from the atmosphere through projects like forestry, methane capture, and ozone-depleting substances destruction. Entities may use CCOs to cover up to 4% of their emissions annually from 2021 to 2025, and up to 6% from 2026 to 2030. Additionally, at least half of the credits used must originate from projects located within California.
• Corporate impact: Companies operating in California with over 25,000 metric tons of annual emissions must integrate carbon costs into their financial planning. Like the EU ETS, companies that can’t sufficiently reduce emissions internally must buy allowances. Businesses with “free allocation” allowances that outperform their targets can sell surplus allowances, creating financial incentives for sustainability. Businesses who don’t receive “free allocation” allowances can justify the emissions reductions with an outright lower cost of compliance.

Oregon Cap-and-Trade (Climate Protection Program)

Oregon’s Climate Protection Program (CPP), introduced in 2022, is a hybrid emissions reduction program that sets annual limits on greenhouse gas emissions from fossil fuel suppliers. The program aims to reduce emissions across transportation, residential, commercial, and industrial sectors. However, in December 2023, the Oregon Court of Appeals invalidated the program due to procedural issues in its rulemaking process. The Oregon Department of Environmental Quality (DEQ) is now revising the CPP, with the goal of reintroducing a refined program by 2025.

• How does the Oregon Cap-and-Trade program work? The CPP sets annual limits on GHG emissions from fossil fuel combustion. Companies can meet their obligations by reducing emissions, purchasing compliance instruments, or acquiring carbon credits. For the first compliance period, each fuel supplier could choose to meet up to 10% of its compliance obligation with CCI credits, increasing to 15% for the second compliance period and then to 20% for the third and future compliance periods. However, these ratios could change with the new rulemaking.
• Corporate Impact: Corporates in Oregon’s fuel supply and heavy emissions sectors need to prepare for compliance costs associated with purchasing allowances or credits. Companies that invest in energy efficiency or low-carbon technologies will have a strategic advantage in reducing their exposure to these costs.

Washington State Cap-and-Invest Program

Inspired by California’s program, Washington’s Cap-and-Invest program is an industry-agnostic “economy-wide” program targeting entities emitting over 25,000 metric tons annually. The program aims to achieve net-zero carbon emissions by 2050. There is a ballot measure in November 2024 that could repeal the program if passed.

• How does the Washington State Cap-and-Invest Program work? Applicable entities must purchase allowances or use carbon offsets to comply with the program’s emissions caps, which become stricter over time. The Cap-and-Invest system creates a market for carbon allowances, with companies trading based on their emission performance. In the first four-year compliance period, January 2023 through December 2026, obligated parties can generally cover 5% of their emissions with offset credits and an additional 3% with credits from projects on federally recognized Tribal lands. These percentages are reduced to 4% and 2%, respectively, during the six remaining compliance periods from 2027 to 2049.
• Corporate Impact: Companies within Washington emitting over 25,000 metric tons of carbon annually must account for carbon costs and may need to invest in emissions reduction strategies to avoid purchasing costly allowances in the future.

Corporate Compliance and the Strategic Impact

For U.S. companies, carbon compliance programs represent both financial risks and strategic opportunities. High emitting companies must account for carbon costs in their financial strategies. The tightening of emissions caps may increase costs, pushing businesses to invest in emissions reductions or purchase carbon offsets to meet their obligations. On the other hand, when it comes to strategic opportunities, entities that invest in emissions reduction technologies or projects can benefit by selling surplus allowances or generating carbon offsets. Moreover, businesses that lead in sustainability will see increased favor from consumers and investors who prioritize environmental responsibility.

The Path Forward

As the U.S. strengthens its approach to carbon regulation through regional programs, corporates must proactively manage their emissions.

Cap-and-trade programs are intended to give the economy an increasing carbon price to incentivize decarbonization. The cost of emitting will not continue to be free. Companies that are not working toward these goals may begin to feel the consequences of inaction.

Though renewable energy development is increasing, the market is suspected to reach an inflection point, as compliance allowances fall, and companies draw closer to their 2030 net zero goals. Initiating effective sustainability programs and investing in long-term renewable energy solutions are paramount to reduce long-term financial and regulatory risks.

The availability of renewable energy technologies is increasing as the US green transition progresses. Investing in long-term renewable electricity or renewable natural gas offtakes can start to reduce emissions, reduce your risk and secure your potential as program targets lower, the cost to comply rises, and renewable energy supplies become competitive.