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Carbon Fee or Cap-and-Trade: After 2018 Legislative Failures, Washington and Oregon Greenhouse Gas Bills Have Second Chance at Life, But Distinct Approaches

Newsletter Articles

October 30, 2018

Since the November 2016 election, it has been a commonplace expectation that “blue” states would push forward with climate legislation and attempt to fill the policy gap left by the Trump Administration. Oregon and Washington – states with Democratic governors and legislatures controlled by Democrats – seemed prime candidates to participate in the effort. In early 2018, the Washington and Oregon legislatures considered major climate legislation. In Washington, the bill proposed a carbon fee; Oregon’s legislation would have instituted a cap-and-trade system. What the Oregon and Washington approaches had in common was that they were not “revenue neutral”: both measures would use the revenue collected for a range of environmental and social justice purposes. Both measures failed to pass.

The bills, however, are getting a second chance at life. Washington’s carbon fee legislation is re-appearing, with some changes, on the November 6, 2018 ballot as a citizen initiative; Oregon’s bill will reappear in some form in the 2019 legislative session. The fate of both, as well as the two approaches to greenhouse case regulation they embody, are of obvious interest to emitters of greenhouse gases. The potential impact of both, however, goes far beyond carbon fees and carbon allowances. By following California’s approach of using the revenue generated to fund a wide range of environmental purposes – including energy conservation, clean energy, carbon sequestration, transportation de-carbonization, and response to the impacts of climate change – the bills also present opportunities for a wide range of businesses, local governments, and non-governmental organizations seeking funding for initiatives ranging from renewable energy and environmental restoration to education and affordable housing.

The Oregon Legislation: “Cap and Invest”

Oregon has had statutory goals for greenhouse gas reductions since 2007, when the legislature codified as Oregon’s policy:

to reduce greenhouse gas emissions in Oregon pursuant to the following greenhouse gas emissions reduction goals:

(a) By 2010, arrest the growth of Oregon′s greenhouse gas emissions and begin to reduce greenhouse gas emissions.

(b) By 2020, achieve greenhouse gas levels that are 10 percent below 1990 levels.

(c) By 2050, achieve greenhouse gas levels that are at least 75 percent below 1990 levels.[1]

Those goals, however, remain aspirational; they have no regulatory force. The Oregon Global Warming Commission, created by the same 2007 legislation, is not a regulatory body. The Commission’s role is to study, educate, report biennially to the Legislature, and make recommendations.[2]

Although the statewide greenhouse gas reductions called for by statute are only goals, Oregon isn’t without climate legislation generally or, more specifically, greenhouse gas regulation:

  • In 1997, the Oregon Legislature enacted a pioneering standard for emissions of carbon dioxide from base load electric generating plants fueled by natural gas.[3] The legislation also authorized the Oregon Energy Facility Siting Council to adopt carbon dioxide emissions standards for other fossil-fueled power plants. The carbon dioxide emissions standards,[4] however, apply only to facilities obtaining a “site certificate” from the Council.
  • Since 2008, rules adopted by the Oregon Environmental Quality Commission have required a range of sources of greenhouse gas emissions to register and report their emissions.
  • In 2009, the Legislature authorized the Oregon Environmental Quality Commission to “adopt by rule low carbon fuel standards for gasoline, diesel and fuels used as substitutes for gasoline and diesel.” In the 2015 legislative session, the Legislature eliminated the “sunset” that would have taken effect that year, while extending the deadline for achieving a 10 percent reduction in “carbon intensity” from 2020 to 2025 “or by a later date if the commission determines that an extension is appropriate to implement the standards.” Further changes to the program were made in the 2017 legislative session.[5]
  • In 2016, Oregon enacted the “Clean Energy and Coal Transition Plan” (SB 1547). The legislation combined an array of climate initiatives, including a phase-out of “coal-by-wire” by January 1, 2030 and an increase in Oregon’s renewable portfolio standard applicable to the state’s major investor-owned utilities. The bill also included measures addressing energy efficiency, transportation electrification and community solar development.[6]

Despite these statutory and regulatory initiatives, the Oregon Global Warming Commission’s most recent biennial report, issued in 2017, concluded that Oregon is not on track to meet its statutory greenhouse gas reduction goals: “Despite the anticipated reductions due to implementation of Oregon’s [Renewable Portfolio Standard] and other policies, the state’s forecast is not expected to come within striking distance of either the statutorily mandated 2020 and 2050 emission reduction goals ….”[7]

The gap between aspiration and accomplishment helped give rise to what advocates have characterized as “cap and invest” legislation. The 2018 bills (HB 4001 in the Oregon House and SB 1507 in the Oregon Senate) would have instituted a market-based “cap and trade” system, while dedicating most of the proceeds of the auctions of allowances to a new “Oregon Climate Investments Fund” and a new “Transportation Decarbonization Investments Account.” The stated purpose of the legislation was “to reduce greenhouse gas emissions … and to promote carbon sequestration and adaptation and resilience by this state’s natural and working lands, fish and wildlife resources, communities and economy in the face of climate change and ocean acidification.”[8]

Key provisions similar to other cap-and-trade programs included:

must result in greenhouse gas emissions reductions or removals that:
(A) Are real, permanent, quantifiable, verifiable and enforceable; and
(B) Are in addition to greenhouse gas emissions reductions or removals otherwise required by law and any other greenhouse gas emissions reductions or removals that would otherwise occur.[18]

  • Eliminate the state’s greenhouse gas emission goals. In their place, the state’s Environmental Quality Commission[9] would establish a greenhouse gas emissions goal for 2025 that is at least 20 percent below 1990 levels, and statewide greenhouse gas emissions limits for 2035 and 2050 that are at least 45 percent and 80 percent, respectively, below 1990 levels.[10]
  • The cap on “statewide greenhouse gas emissions” would apply to total annual emissions of greenhouse gases in Oregon, and to “all emissions of greenhouse gases from outside this state that are attributable to the generation of electricity that is delivered to and consumed in this state, accounting for transmission and distribution line losses.”[11]
  • The Environmental Quality Commission would adopt a cap on total anthropogenic greenhouse gas emissions by all “covered entities” by setting an annual allowance budget for calendar year 2021, with a schedule of allowance budgets that decline at a predetermined rate until 2050.[12]
  • Covered entities would include persons in control of air contaminant sources cumulatively emitting at least 25,000 metric tons annually of carbon dioxide equivalent; electric companies and consumer-owned utilities if regulated emissions attributable to load meet or exceed the 25,000 metric ton threshold; natural gas marketers, natural gas utilities; and other persons “as necessary to address regulated emissions that are attributable to the combustion of fuel that is imported, sold or distributed for use in this state.” Regulated emissions would not include greenhouse gas emissions from the combustion of fuel for watercraft of aviation.[13]
  • Each covered entity would meet its compliance obligation by surrendering “compliance instruments” – allowances, or a combination of allowances and offsets – equal to that obligation.[14]
  • The Department of Environmental Quality would hold an auction of allowances at least annually.[15] The Environmental Quality Commission would set an auction floor price for 2021 and establish a schedule for the floor price to increase by a predetermined amount in each subsequent year.[16]
  • Offset projects would have to be “located in the United States or in a jurisdiction with which the Environmental Quality Commission has entered into a linkage agreement.”[17] As with other cap-and-trade programs, the projects:
  • A covered entity could not use offset credits to meet more than eight percent of its compliance obligation, and not more than four percent could be met with offset credits “that are sourced from offset projects that do not provide direct environmental benefits to this state.”[19]

The legislation included a range of measures aimed at limiting the potential economic disruption of cap-and-trade. These included allocating allowances at no cost to “emissions-intensive, trade-exposed” industries,[20] allocating allowances at no cost to consumer-owned utilities,[21] and allowing an electric company or natural gas utility to consign allowances to the state for auction, with proceeds used to reduce greenhouse gas emissions or “stabilize or reduce energy bills for customers.”[22]

The 2018 legislation was characterized by supporters as “cap-and-invest” because the proceeds received by the state from the auction of allowances would be invested in one of three funds or accounts: the Transportation Decarbonization Investments Account; the Climate Investments Fund; and the Just Transition Fund.[23] The Oregon Constitution requires that revenue from the taxation of motor vehicle use and fuel “shall be used exclusively for the construction, reconstruction, improvement, repair, maintenance, operation and use of public highways, roads, streets and roadside rest areas in this state;”[24] therefore, the legislation required that any auction proceeds constituting such revenue be placed in the Transportation Decarbonization Investments Account. Of the remaining auction proceeds payable to the state, 85 percent would be transferred to the Climate Investment Fund and 15 percent would be transferred to the Just Transition Fund.[25] The Just Transition Fund would be administered by the state’s Higher Education Coordinating Commission and would focus on workforce issues for workers and communities adversely affected by climate change or climate change policies.[26]

 The potential uses of the Climate Investment Fund would be particularly broad, including:

  • Energy efficiency and conservation in buildings;
  • Support for transit-oriented affordable housing;
  • Renewable energy projects, energy storage, demand response, and community solar projects;
  • Transportation electrification;
  • Local government planning “for reducing greenhouse gas emissions or promoting carbon sequestration, adaptation or resilience”;
  • Investments in natural and working lands; and
  • Strengthening “the resilience of fish, wildlife and ecosystems in the face of climate change.” [27]

Although the legislation would create a substantial pool of funds available for projects of interest to local governments, businesses and non-governmental organizations, there are some notable constraints. First, money in both the Transportation Decarbonization Investments Account and the Climate Investment Fund will be allocated by the Legislature, not by administrative agencies. Second, a maximum of only 20 percent of the funds in the Climate Investment Fund would be unrestricted. Fifty percent of that Fund would have to be allocated to benefit “impacted communities,” defined as “communities most at risk of being disproportionately impacted by climate change,”[28] and one-third of that amount would have to benefit rural areas. Ten percent of the Climate Investment Fund would be allocated to projects benefiting Indian tribes and 20 percent would be allocated to investments in natural and working lands.[29]

The pitfall encountered by the Oregon bills was prosaic: they ran out of time in the 2018 legislative session. The Oregon Constitution generally limits the legislative session in even-numbered years to just 35 days.[30] Other legislation had priority in the abbreviated session. Governor Kate Brown and Democratic leaders in the Legislature quickly expressed support for passage in the 2019 legislative session.

One or more cap-and-invest bills will be submitted in the 2019 session, but the precise provisions – and changes from the bills considered in the 2018 session -- may not be known until as late as December 21, the deadline to drop bills with the Chief Clerk of the Legislature for pre-session filing. The fate of the legislation, however, may be decided sooner: Oregon’s climate legislation will not be on the November 6, 2018 ballot, but Oregon’s governor is.

Although Oregon has not had a Republican governor in over 30 years, the 2018 gubernatorial contest is proving to be a close one. Democratic incumbent Kate Brown holds a slim lead over Republican challenger Knute Buehler, with 17 percent of the electorate undecided.[31]

Although Buehler, a physician and member of the Oregon House of Representatives, has indicated he believes in anthropogenic climate change, he is also on record as opposing cap-and-trade legislation that is not revenue neutral. In an editorial published in the state’s largest daily newspaper in October 2017, he characterized the “cap-and-invest” legislation as “a $1.4 billion tax and slush fund scheme.”[32] In Oregon, a governor’s veto can only be overridden by a two-thirds majority vote in both houses of the Legislature – a majority Oregon Democrats do not currently enjoy in either the House or the Senate.

The Washington Legislation: Carbon Fee

In contrast to Oregon, Washington law expresses reductions in emissions of greenhouse gases as a requirement rather than a goal:

(1)(a) The state shall limit emissions of greenhouse gases to achieve the following emission reductions for Washington state:

(i) By 2020, reduce overall emissions of greenhouse gases in the state to 1990 levels;

(ii) By 2035, reduce overall emissions of greenhouse gases in the state to twenty-five percent below 1990 levels;

(iii) By 2050, the state will do its part to reach global climate stabilization levels by reducing overall emissions to fifty percent below 1990 levels, or seventy percent below the state's expected emissions that year.[33]

Like Oregon, Washington has greenhouse gas emissions standards for power plants. For plants with generating capacity up to 350 MW, the standards are implemented by the Washington Department of Ecology[34] and local clean air agencies; for larger plants, the standards are implemented by the Washington Energy Facility Site Evaluation Council.[35] Washington has not followed California and Oregon in adopting a low carbon fuel standard for transportation fuels; an effort to pass such a standard in the 2018 legislative session failed.[36]

Washington has also pursued its own path with a carbon tax or fee – an approach not adopted by any other state. A carbon tax initiative on the November 2016 ballot failed, receiving under 42 percent of the vote.[37] That measure would have been revenue neutral: new revenue from the carbon tax was balanced by a reduction in the state’s retail sales tax and certain business and occupation taxes.[38]

In the 2018 legislative session, a carbon tax bill supported by Washington Governor Jay Inslee failed to garner enough support to pass the State Senate. Senate Bill 6203 would have imposed a tax of $12 per metric ton of carbon.

Initiative Measure No. 1631 (I-1631), on the November 2018 ballot, continues the effort to adopt a carbon tax, but makes several notable changes from Senate Bill 6203, including by affording a substantial formal role for tribal interests. Referred to as the “Clean Air, Clean Energy Initiative,” but formally known as the “Protect Washington Act,”[39] it differs from a cap-and-trade approach in that there is no express cap on emissions, no market auction of allowances, and no provision for offset projects. Rather, it would impose a “pollution fee.” The use of the term “fee” rather than “tax” is intended to ensure that revenue can be devoted to the purposes outlined in the initiative, rather than being susceptible to appropriation for use by other state programs. The pollution fee:

must be collected from large emitters based on the carbon content of:

  1. Fossil fuels sold or used within this state; and
  2. Electricity generated within or imported for consumption in the state.[40]

The pollution fee would begin on January 1, 2020 at $15 per metric ton of carbon content; it would increase by $2 per metric ton, plus an inflation adjustment, on January 1 of each subsequent year.[41] The annual increases cease only “when the state’s 2035 greenhouse gas reduction goal is met and the state’s emissions are on a trajectory that indicates that compliance with the state’s 2050 goal is likely ….”[42]

I-1631 includes a range of exemptions from the pollution fee. Similar to Oregon, the exemptions include fossil fuels and electricity used by facilities in an “energy-intensive, trade-exposed” sector,[43] and aircraft and maritime fuels.[44] Fuels used “solely for agricultural operations” are also exempt.[45]I-1631 also exempts Washington’s only coal-fired power plant, the Centralia Power Plant, which is already required to close one boiler by the end of 2020 and the other boiler by the end of 2025.[46]

Although “offsets” are not part of the pollution fee program, I-1631 does allow a light and power business or a gas distribution business to “claim credits for up to one hundred percent of the pollution fees for which it is liable” by making “investments in programs, activities and projects consistent with a clean energy investment plan.” For investor-owned utilities and gas distribution businesses, the clean energy investment plan must be approved by the Utilities and Transportation Commission; for consumer-owned utilities, the plan must be approved by the Washington Department of Commerce.[47]

All receipts collected from the pollution fee would be deposited in the “Clean Up Pollution Fund.” Expenditures from the Clean Up Pollution Fund would be divided into three accounts as follows:

must prescribe a competitive project selection process that results in a balanced portfolio of investments containing a wide range of technology, sequestration, and emission reductions solutions that efficiently and effectively reduce the state’s carbon emissions from 2018 levels by a minimum of twenty million metric tons by 2035 and a minimum of fifty million metric tons by 2050 while creating economic, environmental, and health benefits.[50]

  • 70 percent must be used for clean air and clean energy investments.[48]The account must be used for “programs, activities or projects that yield or facilitate verifiable reductions in pollution or assist affected workers or people with lower incomes during the transition to a clean energy economy.”[49] The Department of Commerce would be charged with responsibility to develop an investment plan and proposed rules to be updated every four years. The investment plans:
  • 25 percent must be used for clean water and healthy forests investments.[51] The account is “intended to increase the resiliency of the state’s waters and forests to the impacts of climate change.”[52]
  • 5 percent must be used for healthy communities investments.[53] The account “must be used for programs, activities, or projects to prepare communities for challenges caused by climate change and to ensure that the impacts of climate change are not disproportionately borne by certain populations.”[54]

As with Oregon’s 2018 legislation, the scope of projects potentially eligible for funding under I-1631 is broad. Unlike Oregon, authority for final approval of funding for projects and programs would be vested not in the Legislature but in a new Public Oversight Board established within the office of the governor.[55] For each of the three accounts a corresponding “investment advisory panel” would provide detailed recommendations to the Public Oversight Board and state agencies.[56]

In addition, annual investments across all three accounts are further constrained to meet the following requirements:

  • At least 35 percent of investments “must provide direct and meaningful benefits to pollution and health action areas” designated by the Washington Department of Health.[57]
  • At least 10 percent of investments “must fund programs, activities, or projects that are located within the boundaries of and provide direct and meaningful benefits to pollution and health action areas.”[58]
  • At least 10 percent of investments “must be used for programs, activities, or projects formally supported by a resolution of an Indian tribe, with priority given to otherwise qualifying projects directly administered or proposed by an Indian tribe.”[59]

The November 6 election could open the door to new climate programs in Oregon and Washington, resulting in a price for greenhouse gas emissions and the creation of substantial funding for a wide array of energy, climate, and environmental restoration programs. Washington’s unique carbon fee approach differs in significant ways from Oregon’s more mainstream cap-and-trade legislation. Both states, however, appear poised to use the proceeds of those programs to pursue ambitious environmental goals, at least for projects and programs that can satisfy the multiple criteria guiding the use of funds. But first, the voters of both states will have their say.

For more information or assistance in the development of strategies concerning carbon regulation or investment in renewable energy and energy storage, please contact Richard Allan.

[1] ORS 468A.205.

[2] ORS 468A.235 to 468A.260.

[3] ORS 469.503.

[4] OAR 345-024-0500 to 345-024-0720.

[5] The low carbon fuel standard program is codified at ORS 468A.265 to 468A.277. The Environmental Quality Commission’s rules implementing the program are set forth in OAR 340, Div. 253.

[6] For a more thorough discussion of the Clean Energy and Coal Transition Plan, see “Oregon Enacts Phase-out of ‘Coal by Wire’ and Doubles Renewable Portfolio Standard” Marten Law News, Mar. 15, 2016.

[7] Oregon Global Warming Commission, Biennial Report to the Legislature 2017, at 27.

[8] Senate Bill 1507, A-Engrossed, § 11(1).

[9] The Oregon Environmental Quality Commission is a citizen commission with rulemaking authority; the Oregon Department of Environmental Quality is the regulatory agency charged with implementing the rules.

[10] Senate Bill 1507, A-Engrossed, § 4(2).

[11] Id. § 4(1).

[12] Id. § 13(1).

[13] Id. § 13(2).

[14] Id. § 13(4).

[15] Id. § 18(4).

[16] Id. § 18(5).

[17] Id. § 17(1)(a).

[18] Id. § 17(1)(c).

[19] Id. § 17(2)(a).

[20] Id. § 16(4).

[21] Id. § 16(3).

[22] Id. § 34.

[23] Auction proceeds related to revenue from oil and gas production would be deposited in the state’s Common School Fund, as required by the Oregon Constitution. See Or. Const., Art. VIII, § 2(1)(g).

[24] Or. Const., Art. IX, § 3a.

[25] Senate Bill 1507, A-Engrossed, § 26(3)(c).

[26] Id. § 25(2).

[27] Id. § 30(2).

[28] Id. § 12(15).

[29] Id. § 28(3).

[30] Or. Const., Art. IV, § 10(1)(b).

[31] Oregon Public Broadcasting, “Poll Shows Brown Holds Slight Lead In Oregon Governor's Race,” Oct. 16, 2018.

[32] “Gov. Brown's energy tax is another honey pot for special interest: Guest opinion,” The Oregonian (Portland), Oct. 22, 2017.

[33] RCW 70.235.020.

[34] WAC ch. 173-407.

[35] WAC ch. 463-80.

[36] HB 2338.

[37] Washington Secretary of State, November 8, 2016 General Election Results, Initiative732.

[38] Washington Secretary of State, Voter’s Guide, Initiative 732.

[39] Initiative Measure No. 1631, § 2.

[40] Id. § 8(1).

[41] Id. § 8(3).

[42] Id.

[43] Id. § 9(1)(e).

[44] Id. § 9(1)(f).

[45] Id. § 9(1)(h).

[46] Id. § 9(1)(i).

[47] Id. § 4(6)(a).

[48] Id. § 3(2)(a).

[49] Id. § 4(1).

[50] Id. § 4(2)(b).

[51] Id. § 3(2)(b).

[52] Id. § 5(1).

[53] Id. § 3(2).

[54] Id. § 6(1).

[55] Id. § 10.

[56] Id. § 11.

[57] Id. § 3(5)(a).

[58] Id. § 3(5)(b).

[59] Id. § 3(5)(c).

This article is not a substitute for legal advice. Please consult with your legal counsel for specific advice and/or information. Read our complete legal disclaimer.

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