Cap & Invest Bill Summary – Clean & Prosperous Institute

Senate Bill 5981: “Implementing a greenhouse gas emissions cap and trade program”

Senate Bill Report
Sponsors: Senators Carlyle, Palumbo, and Lovelett.

Executive Summary

Overview

Establishes an emissions trading program for greenhouse gases (GHG) to be implemented by the Department of Ecology.
Requires the program to limit GHG emissions to 40% below 1990 levels by 2035, and 80% below 1990 levels by 2050.
Specifies distribution of auction revenues to certain energy efficiency projects, assistance to low-income households and highly impacted communities, and climate change impacts and natural resource resiliency.

Emissions Coverage and Allowances

About 75% of statewide emissions (73 MtCO2e) would be subject to compliance through allowances after exemptions (mariner, air, federal facilities, biogenic emissions, etc).
Free allowances plus allowances withheld in reserve during initial auctions would total around 27 MtCO2e.
Allowances sold in auction would therefore be around 46 MtCO2e initially (~50% of statewide emissions) – increasing over time as a percent of statewide emissions.

Revenues

Based on California‘s current price of ~$15 per metric ton, the sale of 46 MtCO2e would result in annual revenue of $690 million. Funds would be allocated to three accounts:

40% to the Energy Transformation Account
35% to the Energy Transition Assistance Account
25% to the Climate Impacts Resilience Account.

Background

The state Department of Ecology is responsible for monitoring and tracking the state’s progress towards the emission limits. SB 5981 would apply a threshold of 25,000 metric tons of CO2e.

At the state level, facilities, sources, and sites whose yearly emissions exceed 10,000 metric tons of CO2e are required to report their annual emissions to Ecology or to local air authorities that implement the state Clean Air Act.

Liquid motor vehicle and aircraft fuel suppliers that supply fuel whose combustion would exceed the 10,000 ton threshold must also report their annual emissions. Under the Federal Clean Air Act, EPA reporting requirements are in place for facilities and fuel suppliers whose associated annual emissions exceed 25,000 metric tons of CO2e.

Other notable emissions trading systems include California, Quebec (linked to California), and the European Union. For a more complete description, please refer to CaPI’s Cap & Invest Program Comparison Matrix.

In particular, the California Cap program has helped meet statewide 2020 emissions goals as early as 2016, and is a popular program overall and was recently extended as a more stringently shrinking cap from 2020 to 2030.

Bill Summary

As submitted during the 2019 session, SB5981 would have established Ecology’s authority to enforce Program requirements. While the proposed legislation left many of the program requirements to Ecology’s discretion, the bill did provide some detailed program requirements.

Coverage and Exemptions:

SB5981 directs Ecology to implement a GHG emissions cap and trade program (GHG Program) to achieve the state’s GHG emission reduction limits and updated limits to 40% below 1990 levels by 2035 (previously 25%), and 80% below 1990 levels by 2050 (previously 50%).

The program would be required to:

Include tradable allowances and be capable of linking with other programs and voluntary, registered program participants;
Cover entities exceeding a 25,000 metric ton threshold in a single year between 2016 and 2018, with 2013-2017 emissions establishing the base for allowance determination for each covered entity;
Includes as covered entities those delivering electricity, natural gas to non-covered entities, fuel suppliers other than natural gas, and facilities that are direct federal power market electricity purchasers.,

Coverage

In total, according to an April 2019 revised fiscal note, 73 MtCO2e in allowances are anticipated for coverage in 2021, including:

15 MtCO2e in free allowances for power and residential natural gas (for NG, in proportion to fuel supplied to low-income residential customers),
As much as 11 MtCO2e for EITEs (though this is likely an overestimate, as all reporting facilities to the Ecology GHG Reporting Program are less than 9 MtCO2e of fossil fuel emissions).

Revenue-generating allowances via auction would therefore be around 46 MtCO2e (assuming EITE free allowances of 9 MtCO2e). This does not include opt-in participants who may choose to register and participate.

Exemptions

Exemptions were written into the bill for biomass and biofuels, aviation fuels, watercraft fuels, coal-fired generation facilities that are exempt from GHG limitations and requirements (namely the Centralia coal plant), national security facilities, and emissions that cannot reasonably pass through a stack or vent.

Emissions-Intensive, Trade-Exposed entities (EITEs),

The bill directs Ecology to establish rules by January 1, 2020 for a declining number of free allowances to be provided to EITEs from 2021 through 2035.

By January 1, 2021 and updated every two years starting in 2025, objective criteria would be required to identify additional manufacturing businesses as EITEs. Covered EITEs with lower emissions intensities must receive a larger allocation of allowances than those with higher emissions intensity in the same industry.

Allowance Budget, and Auctions

By October 1, 2020, a program budget must be in place for all covered entities for 2021 through 2035, in proportion to their share of reductions necessary to meet 2035 limits. The program budget must include calendar year allowances that provide equivalent GHG emissions year to year, and establish criteria for up to four allowance auctions per year, as well as provisions for offset credits and trading with linked jurisdictions.

In addition, an annually increasing auction floor price through 2030 must be established along with a ceiling price that will determine when to offer allowances through reserve auctions and the reserve auction floor price. The reserves include a Price Containment reserve (at least 4% of total 2021-2023 allowance budget), and an Emissions Containment reserve from withheld allowances when annual emissions caps and GHG emissions limits may not be met.

After a performance evaluation, program adjustments must be made by the end of 2026.

The next phase of the program is 2036-2050, with the program budget adopted by October 1, 2034 and including an interim evaluation and adjustments by the end of 2042.

Allowance auctions are to be run by a qualified, independent contractor. Bid guarantees are to be held and evaluated by a qualified financial services administrator. Rules on participation and implementation are to be determined by Ecology, including rules to prevent bidder collusion and market manipulation.

Limits on allowance purchases include 25% of any auction by a single entity with a quantitative maximum of 4% of bid guarantee for market participants and a TBD holding limit. Allowances will be tracked by an electronic tracking system, including both a compliance and holding account for all entities.

Revenue Allocation

Under a newly established Carbon Pollution Reduction Account, to which auction revenues would be appropriated, three funds would be created to receive a share of the revenue:

Energy Transformation Account: 40% plus any penalties and monies directed by the legislature into the Carbon Pollution Reduction Account.

Commerce controls the funds, informed by an implementation plan from Ecology, and must use them for projects and programs with verifiable reductions in carbon pollution that are additional to current practices, and are physically located in Washington.

This includes 10% of funds for projects and programs located in highly impacted communities (as designated through a process outlined in the bill), meeting high labor standards for wages and benefits, maximize access to local workers and diverse businesses.

Ecology may suspend or terminate funding when a project does not meet projected GHG emissions reductions as specified in the funding agreement, and in cases of gross misuse of funds, the proponent may be required to return funds.

Funded projects will be held in a publicly available electronic database created by Ecology .

Energy Transition Assistance Account: 35%.

The funds are controlled by Commerce and are designated to provide funding to low-income households disproportionately impacted by increased energy prices, and to provide highly impacted communities with access to clean energy and low-carbon housing, transportation options, and technologies.

Other priorities include displaced fossil fuel-related industry workers, mitigation of energy and transportation costs borne by low-income persons as a result of Program policies, and assistance for highly impacted communities to reduce carbon pollution and environmental burdens.

An implementation plan, in consultation with and affording significant weight to an Environmental and Economic Justice Panel, is required by December 31, 2020.

Commerce must also develop a worker support program and bargaining unit for nonsupervisory fossil fuel industry workers affected by the transition away from fossil fuels. In consultation with the Environmental and Economic Justice Panel (EEJP), this program may allocate additional funding to support an unforeseen number of eligible workers.

Climate Impacts Resilience Account: 25%

Controlled by Ecology and DNR, at least half of the funds in the account must be used to address climate change impacts and preparedness. These include community wildfire preparedness; fire suppression, prevention and recovery on tribal lands; relocating communities on tribal land affected by flooding and sea level rise; and climate change awareness and preparation education.

The other half of the funds must be used for natural resources resilience and related purposes, such as improving forest and natural lands health and resilience; reducing stormwater impacts from existing infrastructure; restoring natural floodplain ecological functions to reduce risk of floods; improving the availability and reliability of in-stream and out-of-stream water uses; constructing fish barrier correction projects on state highways and local roads; preparing for sea level rise projects; and increasing the ability to adapt and remediate the impacts of ocean acidification.

An implementation plan would be developed, in consultation and with substantial accord given to recommendations from the Environmental and Economic Justice Panel. All funding must prioritize highly impacted communities.

Compliance Periods

Compliance begins January 1, 2021 for all covered parties except EITEs whose compliance will begin on January 1, 2024. Each compliance window is three years. At least 30% of compliance instruments for the compliance window must be submitted in each of the first two years of the compliance window. There is no borrowing from future allowance years to meet current or past compliance obligations but allowances may be banked to meet future obligations.

A third-party verified emission report for each entity is due by September 1 of the following year. A $200 per allowance penalty, rising with inflation starting in 2025, is to be levied for each missing allowance short of the compliance obligation.

Offsets, Banking, and Linking:

Offsets

Offset credits are permissible for a portion of compliance obligations. All offset projects must be located in the United States or in a linked jurisdiction and must be certified by a recognized registry within two years prior to the effective date of the section of the act creating offset credits.

From 2021 to 2023, offsets may be used to cover 8% compliance obligations. At least 75% of those offsets must be from projects with direct environmental benefits in Washington State.

From 2024-2034, offsets may be used to cover up to 6% of compliance obligations. At least 50% of those offsets must be from projects with direct environmental benefits in Washington State.

Banking and Linking

All entities may bank allowances to meet future compliance obligations and Ecology must implement the Program so that it may be linked with other jurisdictions having similar programs, enabling joint allowance markets, better market security, increased cost-effectiveness, and consistent requirements across jurisdictions.

A linkage agreement must include a rule adopted by Ecology that supports the economic impacts by an economic analysis. However, the state shall not cede legal and policymaking authority over Program design and enforcement.

Governance

Climate Oversight Board

A Climate Oversight Board would be responsible for ongoing review of Program implementation, review of plans to implement funded programs, and more.

The board must include:

The Governor or their designee;
The Commissioner of Public Lands or their designee;
Two members of the Senate, one from each party, appointed by the Senate President;
Two members of the House, one from each party, appointed by the Speaker;
Two members representing federally recognized Indian Tribes (must be invited); and
One member of the Environmental and Economic Justice Panel.

Chief responsibilities of the Climate Oversight Board include ongoing review of implementation plans from the funds established by the bill. The mission for the use of revenues through these implementation plans is to “ensure the fairest, most efficient, and timely achievement of the objectives in this chapter regarding greenhouse gas emissions reductions, transition assistance, job development, and climate resilience.”

Environmental and Economic Justice Panel

An Environmental and Economic Justice Panel would also be established. The Panel would be appointed by the Governor and include:

One tribal leader and one representative of highly impacted communities as co-chairs;
Five members representing the interests of vulnerable populations residing in highly impacted communities in different geographic areas of the state;
At least one additional tribal government representative; and
Two union labor representatives.

Consultation with tribes by any state agency that receives funding is required.

Highly impacted communities, on a census tract basis, are to be designated by DOH following a statewide environmental disparities analysis.

Ecology may issue an order or a penalty of up to $10,000 per day for each violation of the provisions of the Program.