Oregon DEQ

BY TED SICKINGER

Oregon lawmakers this week dove into the most complicated and controversial debate of the upcoming 35-day legislative session: legislation that sets up a market-based, carrot-and-stick approach to reducing greenhouse gas pollution.

The two bills will pit environmental advocates determined to see the state do more to combat climate change against business interests who believe the policy is either not ready for primetime or, worse, a job-killing energy sales tax that will deliver little benefit for the planet.

If this sounds familiar, it’s because this polemic has been playing out worldwide for years, most recently with the Trump administration’s abandonment of the Paris climate accords. That prompted politicians across the country, including Oregon Gov. Kate Brown, to double down on local and regional commitments to combatting climate change. In the absence of consensus, however, it’s not clear how high the legislation will rank among Brown’s or legislative leaders’ priorities.

Oregon has been trying to thread this political needle for a decade. It first developed the framework for a carbon pricing program in 2007 with other western states. Since then, the Legislature considered various iterations of a “cap and trade” program, and backers have been refining the most recent plan in a series of workgroups since July.

Oregon isn’t inventing the wheel; a similar system is up and running in California and Canada with reportedly little ill effect on the economy. Oregon has the option of linking up with that market. And economists generally consider carbon pricing the most efficient way of reducing greenhouse emissions.

That’s not to say this policy is simple, cheap or devoid of potentially unintended consequences. Ballpark estimates put annual revenues from the proposed Oregon program in the neighborhood of $700 million initially. Advocates counter that early costs would be far less due to concessions designed to soften the blow on various industries.

Moreover, much of the money would go toward reducing emissions – and thus compliance costs – as well as to cushion the economic hit on consumers and help communities and workers adapt to climate change, which could impose staggering costs across the landscape.

How would it work? The state would replace its current greenhouse gas reduction goals – which it’s projected to miss – with an economy-wide emissions limit that declines each year. Ultimately the target would ratchet down to meet the new emission caps: 45 percent below 1990 levels by 2035 and 80 percent below 1990 levels by 2050.

The policy applies to companies and facilities emitting more than 25,000 metric tons of carbon dioxide equivalents a year. They would be required to acquire “allowances” every year to cover each ton of their emissions, either in a state auction or from other participants trading on a secondary market. The Department of Environmental Quality says about 100 entities would be regulated, comprising more than 80 percent of state emissions.

The state would systematically reduce the supply of allowances auctioned each year in line with the statewide emissions limits. Tighter supply would mean higher auction prices. Businesses that could comply more cheaply by reducing emissions would do so, while other would continue buying allowances to cover their pollution.

In theory, that’s it. In practice, there’s some head-spinning complexity involved, with concessions designed to lessen the impact on specific industries, the ability to comply by investing in offset projects, and a detailed prescription for the use of the auction proceeds.

The cap and invest program would apply differently to various sectors, which fall into three separate buckets: transportation, electric and gas utilities, and industry. What follows is a primer on how Legislative Concepts 44 (Senate version) and 176 (House version) would work; cost estimates based on current emission levels and a projected $16 floor price for allowances in 2021; and how the legislation envisions using the revenue.

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Transportation fuels are responsible for the largest portion of Oregon's greenhouse gas emissions.

File photo/The Oregonian

TRANSPORTATION

2016 emissions: 24 million metric tons

2021 allowance revenues: $384 million

Where the money would go: Transportation infrastructure projects "in the roadways" that reduce emissions or increase resiliency.

Governance: This money would go through the Legislature's regular budgeting process in Ways and Means, with input from a new, 21-person advisory committee established by the legislation.

Transportation fuels are the largest source of greenhouse gases, accounting for 38 percent of the state’s 62 million metric tons in 2016. In terms of emissions reductions, advocates say they are also the toughest nut to crack as the pollution comes from so many sources, and are still increasing.

The state is already trying to reduce the carbon intensity of transportation fuels though its Clean Fuels program, but pricing carbon emissions could accelerate that process and throw off lots of cash to fund emission-reduction projects. Constitutionally, any money raised by an assessment on motor fuels needs to be used exclusively for projects in the state’s roadways, or next to them.

The legislation would establish a separate sub-account of the state highway trust fund: the “transportation decarbonization investment fund.” Advocates say the money could be used for various transportation infrastructure projects, including light rail infrastructure in the roadway, dedicated lanes, electric charging along highways, bike paths, sidewalks -- anything that will help people get around using less fossil fuels. Sixty percent of the money would be reserved for communities most impacted by global warming.

Opponents estimate, based on the floor price for allowances in 2021, the legislation would immediately raise the price of fuel by at least 16 cents per gallon, and more over time. They claim that will cost the average Oregon family $50 to $125 more per month, depending where in the state they live.

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Greenhouse gas emissions from power plants such as Portland General Electric's Port Westward Generating Plant in Clatskanie would be regulated under Oregon's cap and invest bills.

Steven Nehl/The Oregonian

ELECTRIC AND GAS UTILITIES:

2016 emissions: 22 million metric tons

2021 allowance revenue: $180 million to $350 million

Where the money would go: Rate credits, especially for low-income customers, weatherization and energy efficiency projects within the utilities' service territories.

Governance: The legislation directs the general use of the revenues, but the utilities would come up with specific spending plans in consultation with state utility regulators.

The state’s big investor-owned utilities -- Portland General Electric, PacifiCorp and Northwest Natural -- are the primary targets here. The program is a bit convoluted in this sector, but here’s how it works in general.

The utilities would receive free allowances each year equal to their respective emissions targets under the program. They would then consign those allowances for sale in the state auction.

Simultaneously, the legislation would require utilities to acquire allowances in the market equal to their actual emissions levels.

The proceeds from the auction of the free allowances would then be returned to the utilities to offset the rate impact of buying the second set of allowances.

Sound confusing? It is. The legislation also dictates the use of the auction proceeds, first to benefit low-income customers, including renters, then all other customers, either in bill credits, weatherization assistance or other efficiency projects that reduce emissions.

Backers of the legislation contend it’s structured so ratepayers won’t face higher costs. That’s debatable. The bills direct the utilities to provide “volumetric” rate credits to low-income customers, based on their usage, but prohibits volumetric rate credits for other customer classes. So presumably, some customers will be subsidizing others and face higher costs, the utilities say. There’s no guarantee low-income customers would be made whole either.

PGE estimates that residential ratepayers could face a 6.6 percent rate increase in 2021 and as much as 27 percent by 2030 as the cost of allowances grows. Commercial and industrial increases would be larger. Oregon’s residential ratepayer advocate, the Citizen’s Utility Board, offers similar estimates for 2021.

Costs and rate impacts for coal-dependent PacifiCorp, which has much higher Oregon-related emissions than PGE, would be higher.

PGE and PacifiCorp both oppose the bills. They say their customers already cover investments in energy efficiency and renewable energy to meet state mandates. They also agreed in 2016 to eliminate coal-fired power from their energy mix by 2035.

“The utility business is already under a carbon policy,” said Scott Bolton, PacifiCorp’s senior vice president of external affairs. “We don’t understand why less than two years after the passage of that our customers will be faced with even higher cost pressures. We don’t want to penalize customers twice for the same decarbonization.”

Northwest Natural says it supports deep carbon reductions and has an internal goal of 30 percent savings by 2030 by reducing methane leakage by its gas suppliers and the use of “renewable natural gas” from landfills and wastewater treatment facilities. But it says the current legislation doesn’t recognize that it has a more limited menu of carbon reduction options than its electric counterparts.

“We’re not opposed to a carbon tax system,” said Tom Imeson, the company’s vice president of public affairs. “But we don’t think we’re there yet.”

Advocates of the bill applaud the utilities for planning decarbonization, but say there’s no enforceable mechanism to ensure it happens. They have, however, agreed to another provision in the Senate version of the legislation designed to soften any blow on electric ratepayers.

Because of the electric utilities’ deal to eliminate coal-fired power, the bill proposes to provide them with free allowances to cover the portion of their emissions that come from coal plants until 2030.

That’s potentially a big deal, eliminating two-thirds of the electric utilities’ initial allowance costs. But the benefits aren’t distributed evenly, or equitably. About 90 percent of PacifiCorp’s greenhouse emissions are from coal, compared with only 35 percent for PGE. So PacifiCorp would get more free allowances and see less cost impact than PGE during the next 15 years. This while PGE is eliminating most of its coal power earlier and has much lower overall carbon emissions.

“In a way, we’re being punished for the decision to close Boardman and get on with things,” said Sunny Radcliffe, PGE’s director of environmental policy, referring to the coal-fired power plant PGE has agreed to shutter by 2020.

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The Ash Grove Cement Durkee plant is along I 84 east of Baker City. Many industrial emitters would receive up to 90 percent of their emissions allowances for free under Oregon's proposed carbon regulation.

Jamie Francis/The Oregonian

INDUSTRY

2016 emissions: 4 million metric tons

Potential revenue: Unclear

Where the money would go: The 15 percent for the "Just Transition Fund" would provide financial support, mental health services and job training for workers affected by climate change. The remaining 85 percent would funnel into a Climate Investment Fund for projects in impacted communities.

Governance: The legislature would budget this money with the input of the program advisory committee, the Higher Education Coordinating Commission, the Employment Department

This is the sector for heavy industry – paper mills, food processors, cement and chemical manufacturers, etc. It’s not clear how heavily the carbon pricing would fall on them as the legislation envisions providing many of these companies with “up to 90 percent” of their allowances for free if they qualify as “Energy Intensive Trade Exposed.” In plain English, those are companies that use lots of energy but are vulnerable to competition from other states and countries.

The aim here, according to the bills’ sponsors, is to avoid “leakage,” where compliance costs force a business to close or move to another state. The DEQ will hire a third-party contractor to help study this sector and determine which sectors qualify for free allowances, though the legislation already specifies a variety of industries.

Because of the volume of free allowances, this is the smallest pot of money. But it’s also the most flexible to fund advocates’ political and social objectives. Fifteen percent of this pot would go to the “Just Transition Fund” to support workers affected by climate change or climate change policy (think of a ski resort or oyster farm). The other 85 percent would land in the Oregon Climate Investment Fund to benefit communities impacted by climate change and to support investments in natural or working lands, such as agriculture and forestry.

“Most of the heavy emitters are going to be given a lot of free allowances,” said Sen. Michael Dembrow, chair of the Senate Environment and Natural Resources Committee and chief sponsor of the Senate bill. “The whole purpose of this is to get them on a path to reduction. We obviously don’t want to put them out of business, but to stay and decarbonize, so they’re being handled with a gentle touch.”

- Ted Sickinger

tsickinger@oregonian.com

503-221-8505; @tedisckinger