What the Heck Just Happened in Virginia?!

Well that was unexpected.

Contrary to widespread expectations, Virginia Governor Northam yesterday allowed Virginia’s signature climate and clean energy initiative to fall prey to a budget rider maneuver that, as explained below, delays the effective date of Virginia’s carbon regulation for the power sector from 2020 until 2021.

Before Yesterday, What Would Have Happened?

14 days ago, the Virginia Department of Environmental Quality (DEQ) completed a multi-year process to finalize an air pollution regulation to address carbon pollution from power plants, via the tried-and-true method of cap and invest.  That is, set a declining cap and allow polluting sources to buy and sell one-ton carbon allowances to ensure least-cost, market-based compliance. The proceeds from the sale of allowances may be used to invest in energy efficiency to further lower electric bills.

That all-but-final rule is now sitting on the Governor’s desk for his “final” action (more on that below).

The rule is explicitly designed to “link” Virginia’s carbon allowances to the carbon allowance market of the Regional Greenhouse Gas Initiative (RGGI). That is, the rule provided f or Virginia power plant carbon allowances to be wholly fungible and therefore tradeable along with RGGI-based allowances. The rule would grow the RGGI carbon allowance market considerably (by more than a third) and in doing so afford all market participants with more opportunities for lower-cost compliance options (therefore lowering overall compliance costs). 

Lastly and importantly, Virginia’s carbon cap (with a 2020 baseline year cap of 28.0 million tons, to decrease 3% annually starting with the first reduction in 2021) would have kicked in in 2020 as the first year of compliance under the cap.

All in all, the DEQ wrote a strong carbon rule, which is particularly smart in its ability to link to the larger and already successfully established RGGI carbon market.

What the Now-Binding Budget Prohibition Says and Does

The budget prohibition Northam signed into law yesterday that impedes the DEQ’s carbon regulation can be found here.

That now-binding budget rider is pretty straightforward: no state dollars (which therefore includes civil servant time) may be spent to “support participation” in RGGI. That sweeping language by implication includes DEQ personnel talking to RGGI Inc. to: integrate Virginia into its trading platform, convey Virginia-based allowances onto RGGI’s auction platform, create an operable RGGI-linked allowance tracking system, and other indispensable administration. In other words, the important staff work to ensure Virginia’s plug-and-play entry into the larger RGGI market.

That “grunt work” is now off the table, as of yesterday, and as long as the Northam-approved budget is in effect. To borrow the DEQ’s description, it’s “pens down” on the carbon rule, until that budget restriction disappears in a future annual state budget, the next of which will likely kick in sometime early next year when a new budget is presumably signed into law again.

So, what then is the bottom line of this budget rider? Because Virginia’s carbon regulation as currently written is tied directly to utilizing the RGGI auction platform, the rule cannot viably function, so long as DEQ is unable to “talk” to RGGI.

Therefore, Virginia’s expected “Year One” participation in RGGI in 2020 probably just went poof.

What Will Likely Happen Next?

Absent fast and immediate action by Governor Northam (more on that below), the carbon rule’s “effective date” in terms of limiting carbon pollution from Virginia power plants by linking to RGGI will likely kick in in 2021, instead of the expected 2020.

Why Is It a One-year Delay, Exactly?

The rule as passed last month by the DEQ’s Air Board contains a provision (9VAC5-140-6045) that punts the initial compliance date of the regulation by exactly one year, assuming next year’s budget does not contain the same bad budget restriction on RGGI participation as this year’s budget does.

While anything can happen between now and 2020, most folks wager that the highly-politicized RGGI budget rider won’t make it through the budget conference process next year.

The upshot?

Most money is on Virginia participation in RGGI starting in 2021 rather than 2020.

What About Governor Northam’s Statement That He Will Direct the DEQ to “Implement the Regulation” and “Achieve Pollution Reduction Goals,” Despite the Budget Rider?

As he alluded to in his budget signing statement, Gov. Northam does have an opportunity to change the rule to become functional in 2020.

Specifically, he has until Monday 5/6 under Virginia’s Administrative Process Act (Section 2.2-4013) to suggest changes to the DEQ’s final carbon rule, as approved by the Air Board last month.  Those changes could, probably after another comment period, allow for the rule to become effective starting in 2020. However, due to the budget restriction, there could be no participation with RGGI.  That is, a rule based on the changes the Governor might send down, could only function as a Virginia-only cap-and-invest program. 

That workaround would require several changes, for example, by revising the rule's definition of “carbon trading program” from a multi-state program to a Virginia-only program.

As of today, it is unclear whether Northam will deliver on his commitment to “implement the regulation” and “achieve pollution reduction goals” by changing the rule by Monday 5/6 to keep it on track for a 2020 (rather than 2021) compliance timeline.

Again, if he does, those changes must be made by Monday.

Beyond that potential “workaround,” the regulation as signed off by the Air Board last month does not have wiggle room to commence compliance via an initial cap in 2020. 

Therefore, 2021 compliance appears to be the only viable path forward.

Is There Any Good News Here?

YES.

While Northam’s unexpected crumple yesterday was a grave disappointment, don’t forget: Virginia still has a carbon rule on the books that puts it on track to be the first southern state to cap its power plant carbon pollution, starting in 2021. 

Sure, 2020 woulda been nice.

But the Commonwealth’s 2021 participation in RGGI is a pretty darn good look for Virginia, too.

About the Authors

Walton Shepherd

Virginia Policy Director, Climate & Clean Energy Program

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