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.
Submitted by Mike Massa, Board Co-Chair of Carbon Washington
January 16, 2018
Thank you, Chair Carlyle and the members of the committee, for this opportunity to provide testimony in support of SB 6203.
I am writing on behalf of Carbon Washington, a statewide, nonpartisan, grassroots organization focused on accelerating the transition to a vibrant clean-energy economy. We advocate for policies to reduce carbon pollution in ways that are effective, fair, economically sound, and politically feasible.
We believe that pricing carbon pollution is a necessary step for reaching our state’s emission reduction goals. SB 6203 is a constructive proposal that gets many of the big policy pieces right.
This bill proposes a steadily rising carbon tax covering most of the state economy, creating a strong market incentive for all of us to use energy more efficiently and transition to cleaner sources. That price signal will also motivate both entrepreneurs and established companies to develop innovative clean energy solutions that drive economic growth. Importantly, the proposed tax rate is predictable, enabling businesses and households to plan their budgets. In addition, the scope of exemptions is relatively narrow; and the requirement for EITE’s to demonstrate a substantial impact on their competitiveness before receiving one is responsible.
If there is a Legislative consensus to spend some of the revenue from pricing carbon pollution, then we would prefer to see the funds directed mainly towards two areas: 1) offsetting the economic impact of the tax on low-income households, and 2) projects that further reduce emissions and help our communities adapt to the unavoidable impacts of climate change. We also believe it is important to include strong planning and oversight processes to ensure that taxpayer money is spent effectively and efficiently.
SB 6203 appears to meet those criteria, though we would like to see an analysis of the projected financial impact of this bill on households in the bottom 40% by income. We encourage you to strengthen the relief for vulnerable citizens if modeling shows their net tax burden would increase under this proposal.
Finally, we encourage you to discuss ways to provide some tax relief for middle-income households, who are struggling to get by in both economically depressed areas of Washington and increasingly unaffordable urban centers.
In conclusion, we believe that SB 6203 is a good starting point for acting on the state’s responsibility to protect its people and natural resources from the threat of climate change. Thank you for considering our remarks. Carbon Washington looks forward to working with you on bipartisan clean-energy policies that enable our state to prosper.
Watch the video on TVW.
The Carbon Washington team was excited to see Governor Inslee kick off the legislative session this week by introducing a carbon pricing plan. The Governor has gone “all-in” on this proposal, using the bulk of his State of the State address on Tuesday, January 9, to speak to it and issue a passionate challenge to legislators to take serious action on climate this session:
“...we must recognize an existential threat to the health of our state, a threat to the health of our children, and a threat to the health of our businesses that demands action. That threat is climate change.”
On balance, we find that Governor Inslee’s proposed bill gets many of the big pieces right. We are still reviewing the details but we hope and expect to see it gain momentum this session. The policy has four major components:
The Governor’s proposal would tax carbon pollution from from all coal, oil, and gas sources in the state, as well as electricity from those sources including imported electricity. (Montana’s coal plants that power Puget Sound Energy would be taxed, for example.) Public transit and marine fuels are covered by the carbon tax, with agricultural diesel exempt. The price would start at $20 per ton beginning in June of 2019. Starting in 2020, it would increase by 3.5% plus inflation each year, without a price cap. The tax has broad coverage and is imposed upstream. That may sound familiar, as it closely replicates Initiative 732.
The tax is estimated to generate “$1.5 billion in new revenue over the first two years and an estimated $3.3 billion over the next four years,” which will be allocated into three main areas — clean energy investments, water and natural resources resilience, and transition assistance. Of the revenue, 50% would go to investments in clean energy transition — a priority would be given to projects that benefit low-income communities, communities of color and indigenous communities — but there is not a specific overlay or percentage that is required to be spent on low-income communities. An additional 35% of the revenue is designated for water and natural resource resilience, including projects to reduce stormwater pollution, build fish culverts, improve forest health and fire management, and prevent flooding. The final 15% of the revenue would go to worker transition and low-income support through existing programs, including income assistance, affordable housing and transportation development, rural economic development, and training and education subsidies. The plan also features strong accountability measures in the form of clear agency authority, metrics and cost abatement data around the spending programs, and citizen oversight. The table below breaks it down:
|50%||Clean Energy Transformation||Funds investments in clean energy, particularly in low-income communities, indigenous communities, and communities of color. Nonprofits, businesses, and local governments will be eligible to apply for funding for verified carbon-reduction projects.|
|35%||Water and Resource Resilience||Funds for stormwater and flood risk management, fish culverts, forest fire prevention and management. Also a focus on water resource reliability and conservation.|
|15%||Transition Assistance||Funds rural economic development, low-income assistance, affordable housing and transportation development, worker re-training (via subsidies through existing organizations), and identification of disproportionately impacted communities. Training programs will focus on renewables, SmartGrids, next generation hydropower, renewable forest products, and health and fire risk management.|
What’s in this for the business community?
The Governor’s carbon tax would exempt exported fuels and electricity, as well as Washington’s only coal plant, TransAlta, which is due to shut down completely by 2025. The bill also exempts Emission Intensive Trade Exposed (EITE) industries such as aluminum production and pulp-and-paper mills, but uses a particularly narrow definition of an EITE, compared to some past carbon tax bills that granted broader exemptions. Industries would have to provide proof of harm to be exempt from the carbon price — for example, facing something like a significant competitive disadvantage. Any exemptions granted would have to be re-evaluated every three years by the Department of Commerce.
This bill seeks to find a reasonable middle ground that protects manufacturers without exempting businesses that don’t meet the definition of Emission Intensive and Trade Exposed. The EITEs are also eligible to receive funds from the clean-energy programs (both the state-run program and the utility retained revenue program) to reduce their carbon emissions.
The proposal also has some special rules for utilities called Utility Retained Revenue. This is a top priority for utilities who lobbied for this concept last year. Under this program all utilities (including public utility districts) can retain the carbon tax they owe in a seperate account for clean energy and energy efficiency programs. For example, Avista could use up to 100% of the taxed amount by designing a plan to use that money for clean energy, weatherization, and low-income programs. Each utility would have to design, and get UTC or Department of Commerce approval of, a Clean Energy Investment Plan that would reduce greenhouse gas emissions in a manner beyond existing legal obligations (each additional dollar would have to yield an additional carbon reduction).
Furthermore, 20% of the Clean Energy Investment Plan money would have to be dedicated to low-income energy assistance such as discounted rates and weatherization, EV charger distribution, rebates, and other support. Each utility’s plan would not be allowed to earn a rate of return and would have to be updated every three years. This area in particular is one part of the bill we want to examine more closely to ensure that funds are used in a responsible way.
Finally the Governor’s bill also requires the Department of Commerce to develop a “Deep Decarbonization” plan within the first two years. This section would require establishing an advisory committee that would come up with a statewide plan to reduce our emissions by 80% (or more) of 1990 levels by the year 2050. The Office of Financial Management, Department of Ecology, UTC, and WSU extension program would assist an advisory committee made up of “local and state governments, businesses, public interest organizations, energy industry, and citizens” in developing this plan.
As the 2018 Washington State legislative session begins, Commissioner of Public Lands Hilary Franz has sent an open letter to House and Senate leaders in Agriculture, Natural Resources, and Energy, Environment and Technology, highlighting the threat climate change poses to our state lands and waters and calling for our state to adopt a carbon policy that puts a price on carbon and adheres to Four Resilience Principles.
Commissioner Franz stated in an interview on KING 5 News that we are already seeing significant impacts of climate change on our land and water. Franz said that while looking at a price on carbon, a mechanism for implementing this policy must ensure that we don’t have an undue impact on those people who produce our food, keep our forests safe and healthy, and protect our waters.
Franz emphasized that we need to implement a carbon policy in Washington State that strengthens the health and resilience of our lands, waters, and communities and invests in carbon sequestration. This policy must look at our natural resource areas, particularly our farms and forests, as critical areas that will actually help reduce carbon emissions. We must invest in making our lands and waters more resilient in the face of climate change, which is already impacting us and will only get worse.
In particular, Franz emphasized that we must address the concerns and impacts on rural communities in Washington, whose economies are heavily dependent on natural resources threatened by climate change. They are also a crucial part of the overall state economy — from the lumber we use to the food we all eat. By recognizing the needs of rural Washingtonians, Franz made a strong case for the bipartisan nature of climate action, as climate chaos will impact all of us.
Explaining why we need to put a price on carbon, Franz pointed out that we are already incurring enormous costs because we are not preparing for the future impacts of climate change. In her letter, she said, “While it is true that Washington is small in global emissions, it is also true that we provide significant national and global leadership when it comes to innovation, technology, and sustainable resource management—all of which are needed to combat climate change. We are home to rich forests, soils, and aquatic lands that offer climate change solutions that could stretch well beyond our state borders.”
Franz went on to say, “the threats to our healthy and productive lands are real. We are already late in responding, and we cannot afford to wait for others to bring leadership to this challenge.” Franz believes that Washington State’s leadership is needed and timely, and she urges rapid action.
As we move into 2018, and the legislature and our communities around the state contemplate this critical and enormous challenge, Franz and the Washington Department of Natural Resources (DNR) offered the following four principles intended to “guide and inform the statewide debate on carbon policy” — which they believe are critical to successfully addressing climate change and carbon policy.
We appreciate the leadership and thoughtful analysis that Franz and her staff at the Department of Natural Resources are bringing to the discussion. Washington State’s leadership is needed and timely. In ongoing negotiations on climate policy, lawmakers should consider including Franz’s recommendations to strengthen the health of our land, forests, water systems and rural communities.
On January 9, Carbon Washington board member (and former UTC Commissioner) Philip Jones testified on CarbonWA’s behalf in support of HB 2338, the Low Carbon Fuel Standard (LCFS) bill introduced by Representative Joe Fitzgibbon. He joined representatives from Audubon Washington, Climate Solutions and the Washington Environmental Council, who also testified in support.
Carbon Washington is strongly supports carbon pricing, the most economically efficient policy mechanism for reducing carbon pollution, but putting a price on carbon isn’t the only strategy for reducing it. We also support legislative action, and initiatives to create other carbon reduction policies that align with our mission. The three most common policy options for reducing carbon pollution are pricing mechanisms, subsidies, and regulations. A low carbon fuel standard is a regulation designed to reduce carbon emissions from the transportation sector which accounts for the majority of Washington’s emissions.
HB 2338 would require the Department of Ecology to develop a regulatory program to reduce the carbon intensity of transportation fuels to 10% below 2017 levels by 2028. The carbon intensity of each transportation fuel type would be calculated by completing a full life-cycle analysis of the emissions associated with the production and distribution of the fuel, in addition to its use in a motor vehicle. Importantly, that analysis would take into account the carbon emissions associated with any changes in land-use, an important factor for biofuels.
Functionally, this bill grants Ecology the authority to reduce greenhouse gas emissions in the transportation sector by requiring fuel switching. The climate benefits come from increasing the use of electricity and natural gas for transportation, and from blending low carbon alternative fuels, like biodiesel, into conventional transportation fuels.
Often, when people think of LCFS, they think of ethanol, a dubious federal experiment in biofuels. But, this LCFS is more focused on electrification of transportation, requiring 25% of credit revenues to be invested in EV infrastructure, and on other verified carbon reduction fuel options. By requiring a life cycle analysis, this bill will also sort out the biofuel options that are beneficial for the climate from those that aren’t. It also creates a tradeable credit system that will allow regulated entities to monetize going “above and beyond” if they are able to reduce carbon beyond the established targets.
California, Oregon, and British Columbia, in addition to many countries, already have Low Carbon Fuel Standards in place. California has the oldest LCFS, which has successfully reduced the carbon intensity of their transportation fuels with nominal impacts on retail prices. The price impacts are expected to increase some as reduction targets increase; however, compliance flexibility, including a system for trading reductions, makes the economic efficiency of a well-designed LCFS quite high.
Hopefully, HB 2338 can pass in the Legislature this year, but if not, it may be feasible as an initiative since a majority of voters from both parties support a transition to cleaner fuels in polling.
A LCFS is also potentially a very good complement to a carbon tax in Washington. In a perfect world we would have a strong economy-wide carbon tax with a relatively high price. That price would encourage lots of households and businesses to buy dramatically more efficient vehicles, particularly electric ones, while motivating deep carbon reductions in many other sectors. But realistically, when Washington does enact its first carbon tax, it is likely to start at a relatively low price. A low carbon price still motivates a lot of carbon reductions by targeting low hanging fruit in the electric sector, industrial sector, and built environment while encouraging better vehicle purchasing decisions. However, fuel switching is typically considered a higher hanging fruit and may not be significantly motivated by a relatively low price on carbon.
Combining these two policies would allow the carbon tax to efficiently reduce carbon emissions across the economy without having to design multiple sector-specific programs. Later, as the carbon price grows, the costs of the two policies do not become additive, because normal market forces gradually achieve the regulatory requirements of the Low Carbon Fuel Standard, and it eventually just becomes redundant, adding no additional cost. To summarize, a LCFS can begin reducing carbon in the transportation sector until a robust carbon price kicks in.
We hope the Washington Legislature will adopt HB 2338 during this session. But if lawmakers don’t act, an LCFS could be a good subject for a ballot initiative. Polling consistently shows that a majority of voters from both parties support a transition to cleaner fuels. One way or the other, we will succeed in reducing the carbon emissions that drive climate change, by accelerating Washington’s transition to a prosperous clean energy future.
The election results from initiative 732 demonstrate that in Bellingham, Tacoma, Seattle and other Washington cities, support for climate action via carbon price is strong and politically viable. It prompts the question, why not start here? Launching carbon pricing as a patchwork within Washington State would both show the viability of the policy and create an incentive to level the playing field with a statewide policy. Washington cities, with Seattle in the lead, have also pledged themselves to serious carbon emission reductions by joining the Paris Agreement and other agreements, despite having made little progress towards the goals thus far. (more…)