Colorado Set to Finalize CO2 Trading Rules, Bridging Emissions Programs

Colorado CO2

Colorado is on track to finalize new rules for its industrial CO2 emissions trading markets by the end of the year, marking a significant step in the state’s efforts to curb greenhouse gas emissions. The revised regulations aim to streamline the state’s Greenhouse Gas Emissions and Energy Management (GEMM) rule, which has been under development, and integrate the two existing programs, GEMM 1 and GEMM 2, to enhance emissions reduction incentives.

Integrating GEMM 1 and GEMM 2 for Effective Emissions Control

The Colorado Air Pollution Control Division announced on September 30 that only minor adjustments were made to the initial draft of the trading rules released in July. These changes were based on public feedback collected through mid-August. The final draft seeks to address key differences between the two programs under the GEMM rule, which covers industrial facilities emitting 25,000 metric tonnes (t) or more of greenhouse gases (GHG) annually. Facilities under these programs are required to reduce their emissions by 20% from 2015 levels by 2030.

The GEMM rule includes two distinct approaches. The GEMM 1 program, launched in 2021, adopts an "intensity-based" method, setting emissions limits per unit of production, which allows for more flexibility in compliance. In contrast, GEMM 2, introduced in 2023, follows a traditional cap-and-trade system, imposing an overall emissions cap across 18 facilities. The draft rule aims to bridge these approaches by enabling GEMM 1 facilities to trade their emissions credits within the GEMM 2 market, thereby incentivizing broader compliance and emissions reduction.

The draft rule introduces a mechanism that allows GEMM 1 facilities to tag certain credits as "GEMM 2 eligible," starting in 2025. To qualify, these credits must represent a defined percentage reduction in total emissions, with the threshold becoming progressively stricter over time. Under the revised plan, GEMM 1 facilities can trade credits in the GEMM 2 market if they achieve a 10% reduction below a specific emissions level for two consecutive years (revised from three years). From 2027 onward, this threshold will increase to 20%, reflecting the state’s goal for more meaningful emissions cuts.

Additionally, both GEMM 1 and GEMM 2 credits come with a three-year use limit, ensuring that facilities act promptly to meet their emissions targets. Colorado will also hold annual auctions, providing an open market for buying and selling credits, thus enhancing the flexibility and accessibility of emissions trading across the state.