Cap-and-trade, climate change return to the 2024 WA Legislature

All these efforts will occur against a backdrop of attempts to eliminate the entire cap-and-invest program  — initiatives that could dominate the November 2024 elections.

Conservative organization Let’s Go Washington has submitted a petition to the Washington Secretary of State’s Office to eliminate the cap-and-invest system, blaming it for high gasoline prices. If the Legislature does not pass this initiative to the Legislature – something few people expect lawmakers to consider –  the petition will go automatically to the November ballot.

“It will be dead on arrival,” Sen. Joe Nguyen, D-White Center and chairman of the Senate’s Energy & Environment Committee, confirmed about potential action in the Legislature. Democrats who support the cap-and-invest program hold majorities in both the House and Senate.

“Maybe people would rather have a choice [with a November referendum]. The community at large, the people are upset about it. … [Cap-and-invest] is fundamentally transforming our energy industry with a hockey stick,” said Rep. Mary Dye, R-Pomeroy and ranking minority member on the House Environment & Energy Committee.

Also, revoking the cap-and-invest program is one of the few policy planks that leading GOP gubernatorial candidate Dave Reichert has announced so far.  “On DAY ONE as Governor, I will pause the taxes that are costing you 50 cents more a gallon for gas and are increasing your utility bill. The current policy is not affordable, and worse it fails to live up to its promise to protect our environment,” Reichert tweeted.

The governor doesn’t have the authority, however, to revoke or pause state laws that were passed by the Legislature and signed by a previous governor. They can propose changes but the Legislature would have to approve them.

Sen. Mark Mullet, D-Issaquah and a Democratic gubernatorial candidate, has introduced a bill to tweak the cap-and-invest program this session. “You have to make [the cap-and-invest program] more affordable [at the gas pump]. You need to fix it, or voters will overturn it,” he said.

The cap-and-invest system, passed by the Legislature in 2021, is aimed at decreasing carbon emissions while financing a few hundred climate change mitigation measures across the state. A Washington Department of Ecology report measured the state’s carbon dioxide emissions at 99.57 million tons in 2018. A 2008 state law calls for overall emissions to be reduced to 50 million tons by 2030, to 27 million tons by 2040 and to 5 million tons by 2050.

Under the new cap-and-invest program, carbon-emitting corporations – like oil and gas companies and utilities – bid every three months on state allowances for the pollution emitted by their facilities. The winning bidders all pay the same price on these allowances after the auction ends.

The state government is raising a huge amount of money — roughly $1.8 billion so far in its first year — which the Legislature is allocating toward clean energy development and programs that mitigate the impacts of climate change, particularly on disadvantaged communities.

The Inslee administration is predicting Washington carbon auctions will raise another $941 million in the first six months of 2024, with most of the money going toward climate change mitigation. Inslee wants to use some of that money to send a one-time $200 credit to the utility bills of roughly 750,000 low- and moderate-income households in the state.

Meanwhile, Rep. April Connors, R-Kennewick, has introduced a bill to send any cap-and-invest revenue that the Legislature has not appropriated by July 1 back to Washington’s residents as a rebate.

Washington’s cap-and-invest program was the second created in the U.S. after California’s system, which conducted its first carbon auction in 2012. In 2014, Quebec joined California in putting a price on carbon.

Inslee and Democratic legislative leaders are taking political flak for the state’s high gasoline prices — due in part to oil companies passing their auction costs onto consumers at the pump — accounting for a 21-cent- to 50-cent-per-gallon increase in gasoline prices, depending on who is doing the calculating. The gas prices in the three West Coast states — Washington, Oregon and California — usually are among the highest in the nation for economic and geographic reasons outside of the cap-and-invest program.

Also on the legislative agenda

The most ambitious proposed legislation in the upcoming session would force oil companies to open their finances to state scrutiny. Inslee and Democratic leaders believe the oil industry has not been up front about the reasons for Washington’s high gasoline prices.

“We would like to see more transparency around oil prices,” said Rep. Beth Doglio, D-Olympia and chairwoman of the House Environment & Energy Committee.

Modeled after a new California office, this bill would create a division of petroleum market oversight under the umbrella of the Washington Utilities and Transportation Commission.

The new office would require fuel suppliers, refineries and others in the fuel supply chain to share details about fuel pricing, profit margins and transaction data. The new office would analyze that information. The proposed new law would likely explore setting up fines for collusion, shutting down fuel chain equipment and other forms of market manipulation, officials said during a press briefing.

“This is to simply unpack the black box of how oil companies set their prices.  … Who’s selling to whom at what volume?” said Becky Kelly, Inslee’s climate change policy adviser.

Nguyen expects the proposed office would collect “thousands of data points” from the oil industry.

Meanwhile, Mullet has introduced Senate Bill 5783 to tackle a major criticism of the program – connecting high auction settlement prices with Washington’s high prices per gallon.

The quarterly settlement prices in 2023 — $48.50 to $63.03 per metric ton of emissions — were much higher than state experts predicted in 2021. By comparison, California’s settlement auction prices began in 2012 at $10 per allowance, reaching slightly above $36 in 2023.

Inslee said state economic experts predicted lower gasoline price increases in 2021 — the often-quoted “pennies a gallon” that critics are using against the governor — because they were expecting allowance auction prices to mirror California’s when its program began in 2012. “They did their best job trying to predict what was going to happen,” Inslee said.

One reason the two experiences were different was Washington sought to trim its carbon emissions roughly twice as fast as the Golden State. That translates to Washington having fewer allowances to auction off compared to California, pushing up prices in the Evergreen State.

Mullet’s bill would address this issue by flattening out the 2021 law’s steep decline in carbon emissions over the next several years to mimic the smaller California emission goals. The bill would also shift some future allowance allocations to nearer years. Mullet contends this would lead to lower auction prices because more allowances would become available.

The bill would adjust Washington’s emission targets in the near term but would still meet the 2050 goal of trimming emissions to 5 million tons, Mullet said.

“We get to the same end goal, but do it more gradually.”

Mullet’s bill also would use some cap-and-invest revenue to trim Washington’s vehicle license tab prices.

Increasing the number of allowances to decrease auction prices is the focus of another proposed piece of legislation championed by Inslee.

Washington wants to join California and Quebec’s cap-and-trade alliance with the idea that a bigger market will keep allowance auction prices (and gasoline prices) down. The idea would take some additional coordination, since they would need to have parallel systems and Washington would need to make the adjustments. A recent Washington Ecology Department preliminary analysis concluded the proposed linkage would likely improve the cap-and-invest program’s economic durability, longevity and efficacy. “In a larger, more liquid market with a greater number of participants, allowance prices would likely be lower and change more predictably. Predictable prices can foster greater investments in decarbonization,” the report said.

However, the Republicans’ Dye argues that it is premature for Washington to merge its system with California and Quebec, saying the Evergreen State needs to fix the bugs in its program first. And she is leery about the state’s predictions of lower auction and gas prices as an expected result of the merger. “These guys don’t have a good track record on being Nostradamus on the effects of their policies,” Dye said.

Meanwhile, lurking about are worries about farmers paying cap-and-invest costs even though they are legally exempt from them. Dye said the Republicans are planning to introduce a bill to address those concerns.

Fuel suppliers fall under Washington’s laws to trim carbon emissions, and some are bidding on cap-and-invest allowances. They are not supposed to pass these costs on to farmers, but have done so in some cases. The tangled web of middlemen between fuel processors and farmers makes the system less than transparent.

“We know fuel moves through a complex path from refinery to pump,” said Joel Creswell, climate policy section manager for the Washington Department of Ecology.

“Small operations just aren’t aware of how to navigate (the system) to get exempt prices,” said Ben Buchholz, a lobbyist for the Northwest Agricultural Cooperative Council, at a Nov. 30 briefing to the Washington Senate Agricultural & Natural Resources Committee.

Another problem is fuzziness about the definition of agricultural products.

“If you dry a product, you qualify [for the cap-and-invest exemption]. If you dehydrate a product, you don’t,”  Bre Delsey, a lobbyist for the Washington Farm Bureau, told the committee. Buchholz added that fuel is exempt in a farm truck carrying cows to market, but the same truck carrying waste from french fries production for livestock feed is not exempt because that waste is a manufactured product.

Finally, Washington’s ferry’s system is suffering multiple breakdowns in its fleet of old diesel vessels. Inslee with his budget proposal and Rep. Jim Walsh, R-Aberdeen, with a bill both propose using cap-and-invest income to pay to build at least one new hybrid electric-and-diesel ferry.