Washington State Carbon Tax
Gov. Jay Inslee Tuesday released an ambitious plan to tax fossil-fuel emissions in Washington state. But will the Washington Legislature approve it?
OLYMPIA — Gov. Jay Inslee Tuesday urged Washington lawmakers to embrace his ambitious plan to tax fossil-fuel emissions in Washington state.
In his State of the State address, the governor implored legislators to cast aside their reservations and adopt a plan to tackle climate change in this year’s short, 60-day legislative session.
Republicans remain adamantly opposed to a carbon tax, and Democrats have been divided over what such a plan should look like.
Inslee’s proposal would levy a $20-a-ton price on carbon emissions, said Reed Schuler, an Inslee policy adviser. That price would rise over time.
The billions of dollars raised would support clean-energy projects, work to improve floodwater management and reduce risks of wildfires, and assistance to offset the tax’s impact on low-income communities.
The governor first mentioned a carbon tax in the proposed supplemental budget he rolled out last month. In that plan, he said $950 million would go toward replenishing budget reserves he proposed spending on K-12 education, to satisfy the Washington Supreme Court order called the McCleary decision.
With the tax, residential natural-gas prices could increase about 10 percent in 2020, and gasoline prices could rise between 6 and 9 percent, said Lauren McCloy, a policy adviser for Inslee.
Electricity costs could increase 4 to 5 percent, although it would likely be less for Seattle consumers who are served largely by hydropower.
If approved, Washington would join California and British Columbia in pricing carbon on the West Coast.
California has adapted a program that sets an ever-lowering cap on emissions, then runs quarterly auctions where the price polluters pay for carbon allowances is set.
This cap-and-trade approach was initially favored by Inslee in a 2014 proposal that he tried unsuccessfully to get through Legislature.
A carbon tax has not found support with GOP lawmakers. Republican Senate Minority Deputy Leader Sharon Brown, of Kennewick, described Inslee’s proposal as “economy-crippling new energy taxes …” “The energy tax that the governor proposes would drive up the cost of motor fuel and electricity, imposing a huge burden on struggling families,” Brown said.
Democrats have been more supportive of the idea of a carbon tax, but disagreement remains over how to implement such a plan and where the money would go.
“It’s a diversity of opinions in our caucus,” said House Majority Leader Rep. Pat Sullivan, D-Covington.
Asked whether lawmakers could find agreement, Sullivan said, “It’s a challenge, there’s no question about it … but, it is possible.”
He said tax revenues “should go to mitigate effects” on communities and industries that are affected.
Meanwhile, Senate Democratic Majority Leader Sharon Nelson, of Maury Island, has called any carbon legislation “a big lift” this year.
Sen. Reuven Carlyle, D-Seattle, and sponsor of Inslee’s proposal in the Senate, will have to find a way to bring lawmakers on board.
“I’m in Sen. Warren Magnuson mode,” said Carlyle, referring to the late U.S. senator from Seattle known for his environmental accomplishments. “This is about getting the votes.”
Inslee’s plan “is a solid, functioning first draft,” Carlyle said, “and we’re going to take it from here and kick it into high gear.”
The tax is intended to create a price signal that steers consumers — including businesses — away from fossil fuels. It would rise by 3.5 percent each year above the rate of the inflation.
The tax would be levied on businesses that use fossil fuels, including petroleum distributors and others.
Aircraft and agricultural fuels are among the products shielded from the tax. Some trade-exposed, energy-intensive industries also would be exempted.
Utilities also would have an option to invest in projects to reduce carbon emissions that could qualify for tax credits. That has helped the bill gain support from Puget Sound Energy, the state’s largest private utility.
In a statement, Puget Sound Energy President and CEO Kimberly Harris called Inslee’s proposal “an important step forward …”
“We look forward to working with the governor, legislators and other interests to make the 2018 session the turning point for Washington state’s energy future,” Harris said.
But the oil industry is wary.
A spokeswoman for the Western States Petroleum Association — which represents Phillips 66, Shell, Andeavor and U.S. Oil — said the organization is concerned about the tax burden that would be passed along to consumers.
While combating climate change has been Inslee’s signature priority, the Legislature and the courts have stifled his ambitions.
In the Legislature’s 2015 session, the governor’s plan to create a carbon cap-and-trade system stalled. Likewise, lawmakers in 2017 took a pass on his proposal for a carbon tax.
A judge last month invalidated parts of the clean-air rule that Inslee created through executive action, which was intended to cut greenhouse-gas emissions.
Nonetheless, with talk of new ballot measure on carbon that could go to voters, lawmakers are talking about carbon pollution more than in recent years.
More than a dozen Democratic House members have signed on to another proposal, HB 2338, that would reduce the carbon content of transportation fuel.
Sen. Kevin Ranker, D-Orcas Island, has sponsored another version of a carbon tax, SB 6096.
Three carbon tax bills have been introduced in the 2018 legislative session, as of January 18th. SB 6203 proposed by Governor Inslee is sponsored by Senate Energy, Environment and Technology Chair Reuven Carlyle (D-36th LD) and a large group of Democrats. Senator Ranker (D-40th LD) introduced SB 6096 and Senator Hobbs (D-44th LD) introduced SB 6335.
Our Carbon Tax Matrix (below) is designed to provide an overview of the most important differences between these bills. A short discussion of some of the key policy areas follows the table. Of course, there is no substitute for reading through the actual bills if you want to fully understand the different programs and elements of each proposal.
All of these policies focus on taxing the carbon content of fossil fuels and electricity consumed within Washington State. They all exempt fuel brought into the state in vehicle fuel tanks as well as fuels and electricity exported from the state; provide a credit against carbon tax previously paid on the same fuel or electricity in other jurisdictions; and have other technical details in common.
Two of these bills expand on a theme from last session, allowing both electric and gas utilities to retain some or all of the carbon taxes levied on energy they supply to customers and then use those funds to make certain investments related to carbon reduction, energy efficiency improvements, and low-income assistance. Utilities would have to receive regulatory approval for their investment plans before spending the retained tax money, and report back on the results. They would not be able to earn a rate of return for their stockholders on these investments, nor use the money to fund other legal obligations related to conservation and renewables.
There also continues to be an exemption for TransAlta’s Centralia coal plant in two of the bills. This exemption is intended to respect a shutdown agreement that the state, and a set of environmental groups, negotiated with TransAlta. Under that agreement, the facility is required to either cease operations or switch to a cleaner fuel source by 2025.
In recent years, the Centralia plant has been operating at only about one-third of its rated capacity, in part due to the low cost of natural gas. As we have noted before, imposing a carbon tax on power from natural gas facilities, but not the Centralia plant, could cause TransAlta to ramp up production at that plant. If that occurs, the net result be an increase in the state’s utility emissions until the plant stops burning coal.
It is important to protect Energy-Intensive and Trade-Exposed (EITE) businesses, like Aluminum and metal manufacturers, in our state that could be put at a competitive disadvantage by a carbon tax. The Governor’s proposal prescribes a technical approach to decide which businesses qualify for carbon tax exemptions, and those exemptions must be renewed periodically. The other two bills permanently exempt all businesses in specific groups of industries by using a list of North American Industry Classification System (NAIC’s) codes. Carbon Washington believes the risk of job leakage needs to be mitigated in a carbon tax bill, but we encourage the Legislature to focus on special handling only for businesses that are truly emission intensive and trade exposed.
Low Income and Disproportionately Impacted Communities
These three proposals take very different approaches for attempting to offset the impacts of the carbon tax and climate change on low-income and disproportionately impacted communities. Directly offsetting the tax regressivity impacts of the carbon price is not part of any of these proposals but would be an implementation option under both the Governor’s and Ranker’s bills. We support direct low income cash rebates and we encourage the legislature to consult directly with representatives of low-income and disproportionately impacted communities and integrate their ideas into these proposals as they continue to develop them.
Two other related bills worth noting: HB 2839 (Morris D-40th LD) and its companion SB 6424(Carlyle) These bills are not exactly carbon taxes, but they would apply a $40/ton + 1.25%/year “shadow” carbon price to gas and electric utility decision and planning processes. This approach could produce some of the same effects as a carbon tax on regulated utilities. While not as impactful, it does start at a higher price than the carbon tax’s listed above making it an interesting complement to one of these true carbon taxes.
Oregon Lawmakers unveil ‘cap and invest’ carbon pricing bills
The “cap and invest” bills, currently labeled as Legislative Concepts 44 (Senate version) and 176 (House version), would establish limits on greenhouse gas emissions in the state and require the largest emitters to purchase allowances to cover their output.
Proceeds from the allowance auctions would be used to reduce emissions, cushion the cost effect on households, and invest in communities disproportionately impacted by global warming, including rural areas. The cap and the available allowances would gradually ratchet down to meet the state’s greenhouse gas emissions goals – 45 percent below 1990 levels by 2035 and 80 percent below 1990 levels by 2050 – making non-compliance more expensive and incentivizing large emitters to make investments to reduce their emissions.
That’s the bare-bones concept. In practice, such a program would be far more complicated, involving carve-outs and free allowances for various industry sectors, possible linkage with allowance markets in California and Canada, and a complex prescription for the use of the auction proceeds. In fact, opponents contend the legislation is so complicated that it can’t possibly be adequately vetted in a 35-day session and should wait for next year’s regular legislative session.
The bills would initiate a process of planning, program design and rulemaking lasting two to three years, so advocates insist it’s important to get moving now to ensure a program is up and running by 2021.
“The longer we wait, the steeper the declines in the cap have to be,” said Sen. Michael Dembrow, D-Portland, the chief sponsor of the Senate bill. “We have to get to a certain point by 2050, and this program provides some discipline to have slow incremental declines.”
Politically, this may be advocates’ best chance, as the 2019 Legislative session could see another budget nightmare, with little appetite for complicated and potentially expensive climate bills amid increasing public pension and health care costs and efforts to raise new taxes.
“Oregon families want lower class sizes and more opportunities for their children,” Mark Johnson, president of the state’s largest business association, Oregon Business & Industry, said in a statement. “They are not asking lawmakers to adopt a California-style cap-and-trade system that will increase the cost of living for Oregonians and drive jobs and new investment away from our state.”
Environmental advocates come armed with their own studies suggesting that the much-needed policies will have little overall impact in Oregon’s economy, and that it could in fact be positive given the intended investments in green energy, efficiency, job training and other adaptation strategies. Indeed, they have dubbed the policies the “Clean Energy Jobs bill.”
The legislation, according to the Department of Environmental Quality, would only apply to the 100 or so entities that emit more than 25,000 metric tons of carbon dioxide equivalents a year. They fall into three main buckets: transportation, electric utilities, and industrial companies.
Dembrow, the chair of the Senate Environment and Natural Resources Committee, and Rep. Ken Helm, the Washington County Democrat who heads the House Energy and Environment Committee, will hold a joint meeting of their committees Wednesday to review the bills.
Dembrow says the interim workgroups enabled backers to build in additional clarity on governance, directions to the Department of Environmental Quality, legislative oversight, and how the bill would benefit rural Oregon. He says there’s enough time in the short session to reach consensus on a good bill.
“It’s good we’re not the first,” he added. “California blazed the way and Quebec and Ontario followed suit. It’s good not to be the first adopter, but it’s also good to be an early adopter.”
– Ted Sickinger email@example.com 503-221-8505; @tedsickinger