GHG Accounting – Aligning markets with state greenhouse gas reduction policies
As Western states pursue their own approaches to the clean-energy transition, the California Independent System Operator (ISO) is committed to supporting different state policies in our markets.
States are currently using two general methods to track and reduce greenhouse gas (GHG) emissions. These include placing a price on carbon emissions, in an emissions trading system like California’s Cap-and-Trade Program and Washington’s Cap-and-Invest Program, or requiring utilities to lower total GHGs over time without placing a price on the emissions. The ISO is working to support states that adopt both pricing and non-pricing programs without affecting reliability or costs for utilities in states that don’t have similar emission reduction policies.
Collaboration is key to innovation, and it is also a cornerstone of the ISO’s GHG Coordination working group, which has focused on the current design for carbon pricing regions, discussed metrics that would be helpful to learn about GHG market performance, and explored new approaches for states and utilities that have climate polices not based on a carbon price.
The ISO has more than a decade of experience reflecting state carbon-pricing policies in its markets and has evolved rules to reflect the price of carbon in close collaboration with states and market participants.
California and Washington both have emissions trading systems. These programs put a cap on economy-wide carbon emissions that get stricter over time and establish a price on carbon emissions by requiring emitters to acquire compliance instruments in a market and then surrender a number of these instruments equal to their emissions. Covered companies, with GHG emissions, must retire a number of allowances equal to their emissions to comply with the program. The compliance costs from these programs apply to electricity used to serve customers in Washington and California with GHG-emitting resources. The ISO’s market design allows resources to reflect those compliance costs with state regulations, enabling the market to account for them when dispatching the lowest-cost resources.
The initial design incorporated into the ISO’s markets, as a result of the California Air Resources Board (CARB) Cap-and-Trade program, allowed emitting resources to reflect the cost of carbon in their bids. The ISO then expanded this to address optimized transfers of energy in the Western Energy Imbalance Market (WEIM) serving California electric customers. With Washington State’s launch last year of its Cap-and-Invest program, and with development of the Extended Day Ahead Market (EDAM) scheduled to launch in 2026, GHG market design is again evolving to accommodate two distinct pricing regions. The ISO worked closely with the Washington Department of Ecology, CARB, and other stakeholders to evolve the market design and account for multiple pricing regions.
Current market design reflects price-based carbon policy, allowing resources to reflect their compliance costs with the carbon-pricing policies of the relevant region. This design allows resources in Washington or California to reflect the cost of carbon in their bids, while also allowing resources outside of those states to determine whether they want to opt in to serve a state with a carbon-pricing program. Thus, the market includes the cost of compliance when optimizing to serve load in a GHG pricing region but removes that bid component when a resource located in a non-carbon-pricing region serves load outside of Washington or California.
This design benefits all market participants. External resources that bid and are awarded to serve load in California or Washington receive a marginal GHG price, which is paid by the load subject to that state’s carbon-pricing policies. This also benefits GHG pricing states by consistently imparting a carbon price on all emitting resources used to serve the state’s load.
A new challenge is how to take into account climate policies that do not price carbon emissions, such as renewable portfolio standards implemented in Washington and Oregon. Rather than setting a price on carbon, other states and some utilities in the West simply require that customer load is served with generation that meets lower emission targets over time. However, utilities do not currently have a way to reflect this limitation in the ISO’s market. Stakeholders took on this challenge, suggesting in the working group both an in-market constraint-based approach and an out-of-market accounting and reporting method. The ISO policy development staff will explore both ideas on different timelines and plans to publish an Issue Paper on the out-of-market tracking and reporting approach later this fall.
The ISO views stakeholder input, especially in the early stages of policy development, as vital to the success of market design.
The GHG Coordination working group is just one example of how the ISO’s collaborative working group approach has been proving effective in making sure that all stakeholder concerns, ideas, and perspectives are heard early in the process so they are more readily incorporated in the policy phase of our stakeholder initiatives. The different approaches taken across the West, and the evolving nature of state policies in this space, will continue to make this partnership and coordination with stakeholders essential.
