Editor’s note: This is the first of an ongoing series tracking Gov. Inslee’s climate-control-agenda through the 2015 legislative process.

By COOPER INVEEN
WNPA Olympia News Bureau

OLYMPIA — At the core of Gov. Jay Inslee’s plea for stricter remedial climate legislation is an attempt to put a cap on Washington’s pollution.

Inslee, who has made climate change his signature issue since his time as a congressman, and now as governor, has introduced the Carbon Pollution Accountability Act, which would direct the Department of Ecology to set a statewide cap-and-trade market for regulating carbon emissions.

What is this cap-and-trade scheme anyway?

In short, government sets a limit — or cap — on the total amount of a polluting substance that may be produced, then companies can purchase credits — or allowances — allowing them to legally produce a share of the maximum amount of that substance that is allowed by the act.

In Washington’s case, that substance is carbon dioxide, a greenhouse gas that scientists have linked to the Earth’s rising temperatures. The proposed system would target 130 operations, from oil refineries to public universities, that are annually each responsible for emitting more than 25,000 metric tons of CO2 into the air.

“While Washington’s emissions are only a small part of the global emissions of greenhouse gases, the state must act to reduce its own emissions while providing leadership and a model for action by other jurisdictions to address their own emissions,” reads the bill’s first section.

The Department of Ecology would be responsible for auctioning off a certain number of pollution allowances every three months. Those who want to pollute the most would have to outbid others for that privilege.

The right to purchase these allowances isn’t reserved for big-time polluters though. In fact, under Inslee’s proposed system, anyone can register as a “general market participant” in the auctions, as long as they don’t buy up more than 4 percent of what’s being offered.

“The consequence of that is of course that it reduces the effective amount of pollution emitted,” Washington State University economist Jonathan Yoder said. “If an environmental group, for example, purchases 10 tons of emissions credits and then just holds them, that means there are 10 tons of emissions credits that can’t be used for emissions. So that lowers the effective cap through the market activity itself.”

It’s estimated that pollution allowances could start at as little as $12 per ton, a price that is expected to rise as the cap is gradually brought down and allowances become more valuable. Inslee estimates the proposal would generate $947 million in its first year, a revenue stream he says would be mostly split between education and transportation programs. If the system is adopted in Washington it could officially go into action in June 2016.

The “trade” part of cap-and-trade adds a thick layer of complexity to the governor’s plan, leading some to question whether the system can be successfully implemented at all.

A cap-and-trade system would allow polluters to buy, sell and trade their carbon allowances with each other. That way if one firm is able to easily cut back its emissions, it could sell off the remaining allowances to a firm that might be struggling to comply with the standards. Because of the limited amount of allowances on the market, the struggling firm would then be able to continue operations without exceeding the cap.

That cap placement is key to the success of any cap-and-trade program.

As emission levels fluctuate, so does the value of an emissions cap. If carbon-based fuel use is low, the cap should be lower; if it is high, the cap should be high enough so polluters could adapt to it without going out of business. But accounting for these variations within a cap-and-trade system may be challenging, and Washington has its own unique problems to worry about.

With 72 percent of Washington’s electricity coming from hydroelectric power, energy reserves are largely dependent on the amount of snow and glacial ice that melt into the state’s rivers. But snowpack levels in the Cascade and the Olympic mountains varies wildly from year to year, and carbon-based energy sources are largely used to fill the gaps left behind in hydropower’s absence.

Analyst Todd Myers of the Washington Policy Center worries that Washington’s dependence on unpredictable variables when securing its clean energy could mean that the state’s varying carbon-based fuel consumption would render any CO2 cap largely useless.

“The problem is that when you have a hard cap and the carbon intensity of your electricity can double or be cut in half over the course of just one year, you’re going to see huge price swings,” he said.

One proposed remedy for dealing with unpredictable market factors is to include what Yoder calls a “safety valve” in the legislation: give the program’s administrators enough flexibility to increase or decrease the cap when necessary.

Although the specifics of Inslee’s proposed cap-and-trade program have yet to be fully outlined, Yoder suspects that a cap-adjustment mechanism would be included in the final product.

“I think it’s almost certain to happen,” he said. “I think it’s highly likely that some kind of safety valve will be built into a proposed cap-and-trade program.”

The issue then becomes determining the circumstances under which a cap-readjustment would be allowed while not making it so easy to change that it would undermine the point of a cap in the first place. That decision, Yoder says, will ultimately be left to the Legislature.

Inslee’s proposal would also allow for polluting firms to exchange allowances with firms outside of Washington, like those in California. But whether the emissions should be counted where they are produced or where they are consumed, Myers said, is a question that illustrates a critical flaw in the state’s cap-and-trade design.

“In the summer, we send electricity to California from our hydroelectric power generation systems, but in the winter, California power generators send us electricity created primarily from natural gas,” Myers said. “Based on this situation, if [carbon] was counted where it was generated, Washington wins. If it’s counted where it’s used, California wins.”

In other words, even though both states exchange electricity with each other, California’s contribution comes directly from carbon-based fuels, leaving those producers responsible for purchasing carbon allowances. If the governor’s cap-and-trade proposal is enacted, it would be up to lawmakers to find a balance between penalizing those who emit greenhouse gas while holding those who consume products produced from that source accountable as well.

Even without the program’s logistical issues, it’s unclear whether Inslee’s cap-and-trade proposal can win over GOP lawmakers. At a forum held by the Associated Press in Olympia Jan. 8, the governor admitted he expected the proposal to face “heavy skepticism.”

Twin measures detailing a carbon pollution market program to reduce greenhouse gas emissions, SB 5283 and HB 1314, had first readings Jan. 19 in their respective chamber and are likely to be at the forefront of the Legislature’s climate-action debate this year. The senate version is being referred to the Energy, Environment and Telecommunication Committee, while the house bill goes to its Committee on Environment for a public hearing Jan. 27.