Carbon pricing efforts are not just picking up steam in New England, a similar fight is underway in the northwest. On Thursday afternoon Washington’s state Senate Committee on Ways & Means approved a substitute bill of Governor Jay Inslee’s carbon tax legislation. Inslee has been a climate champion in the Northwest, pushing multiple carbon pricing initiatives since 2015 despite substantial resistance from the legislature and courts.
His 2018 plan has been in constant flux since it was introduced last month but has achieved significant victories this month, namely passing both the Senate committee on Energy, Environment, and Technology and the Senate committee on Ways and Means. But discussions around this bill are still running hot – various groups and officials have come out with hard stances for/against the various design factors of the bill, particularly the list of industrial exemptions. As such, here is a quick dive into the bill’s current status, what industries are exempt, and whether these exemptions make sense.
The Current Bill
Passing this bill through the Senate Committee is a huge victory – to our knowledge it is the first time that a carbon fee was voted on and passed by subnational politicians – but there is still a long way to go. The most recent version calls for a price tag of $12 per ton of carbon starting in 2019, increasing annually by $1.80 per ton starting in 2021 until it reaches a cap of $30 per ton in 2030. This is a more modest proposal than the Inslee’s original plan, which started at $20 per ton, had a 3% percent increase in price each year with no cap.
With regards to exemptions, the bill recognizes that “some industries are energy-dependent and trade-exposed and thus have independent incentive to be energy efficient. These industries are exempt from carbon taxation in order to allow them to remain globally competitive and ensure these industries and jobs remain in Washington.” The idea makes sense on paper, as long as it’s done fairly – the bill proposes that the department of commerce establish an objective numerical process for evaluating industries that qualify for exemption.
However, the bill subsequently lists a whopping 67 industries, listed by their North American Industrial Classification System (NAICS) codes, that are guaranteed exempt status “notwithstanding the criteria established”. In addition to these industries, the bill also exempts “transition coal power”, which is catered towards TransAlta’s few coal-fired power plants in the state that are still transitioning to natural gas. This raises concerns for local advocates – why establish an objective numerical process for determining exemptions, only to prematurely exempt large swaths of polluting industries?
Whether or not these moves were political depends on who you ask. “What you’re doing is exempting the companies that have the most lobbyists,” claims Sen. Doug Ericksen of the Senate Committee on Energy, Environment, and Technology. That position certainly resonates with environmental groups – why would we give industries a free pass on polluting? Why offer any exemptions at all? The absolutist argument feels compelling, but the answer to these questions is much more nuanced. Here’s what you should know:
1) What Industries Are Guaranteed Exemption?
- 5 industry codes on chicken and turkey production
- 33 industry codes on industrial food processing – wide variety of products included
- 5 industry codes on paper mills and wood refineries
- 1 code for Petroleum Refineries
- 4 codes on chemical manufacturing
- 5 codes on mineral products manufacturing such as cement and glass
- 7 codes on metal and electronic manufacturing such as aluminum, semiconductors, and steel.
- 6 codes on aircraft manufacturing
Additionally, the bill allows electric and gas utilities to “claim a credit of up to 100% against the carbon tax for approved investment in projects that reduce or offset carbon emissions from the utility.” While this is by no means an exemption, it presents opportunities for utilities to circumvent the carbon tax. The efficacy of this rule remains to be seen – it depends on what kinds of projects the Utilities and Transportation Commission (UTC) decides to approve.
2) Aren’t These Industries Washington’s Biggest Polluters?
For the most part, no. Perhaps the only significant contributors on the exempt list are Petroleum Refineries. Using Washington’s GHG Emissions Inventory, we can examine how much of an impact each sector has on the total emissions profile.
By the numbers, Washington’s biggest pollution sources are Transportation (mostly gasoline, diesel, and jet fuel consumption), Residential/Commercial/Industrial (mostly natural gas for home heating), and Electricity (mostly coal and natural gas sources). Majority of exempt codes fall into Agriculture and Industrial Processes, which are collectively about 11.4 percent of Washington’s emissions profile. Further still, only 1.2 of the 4.8 million metric tons of CO2 in the industrial sector fall under exemption. While this is still adds up to a decent chunk of nearly 8 percent, it makes sense to tackle the state’s biggest emitting sectors first.
However, petroleum refineries are a different story. Washington currently ranks fifth in the nation in crude oil refinement – and many of the state’s top emitting firms are oil refineries. In order to achieve aggressive emissions reduction goals, this exemption must be gradually phased out. However, it is important to clarify that this exemption only applies to the direct emissions of the oil refinement process. Crude oil, which is largely imported, is still taxed, allowing us to go after the largest pollution sources first – gasoline consumption, natural gas heating, and coal plants.
Meanwhile, we should keep a watchful eye over both utilities and transition coal. Hydroelectricity is the most popular source of electricity in Washington, but utilities are still responsible for significant emissions from natural gas home heating, and coal is responsible for the majority of emissions in the electricity sector. The effectiveness by which emissions can be reduced in the these areas, which total about 40 percent of Washington’s emissions, will depend on how effective the UTC is in holding companies accountable to their offset programs, as well as how quickly TransAlta can transition away from coal.
3) Why Exempt These Industries?
Washington’s exempt NAICS codes make up approximately 948 establishments in the state, employing almost 51,000 citizens and providing over $3 billion in annual wages. If Washington were to lose these industries to states without carbon pricing, not only would these industries continue to pollute, but the state would also lose vital economic activity. Here is the economic activity generated by exempt firms in order of magnitude:
Considering their stake in the economy in comparison to their emissions profiles, there certainly is a strong argument to exempt at least some of these industries at the start of the program. However, there needs to be a solid plan to gradually and predictably remove these exemptions over time in order to ensure Washington hits its long-term GHG reduction goals.
The fact that the Senate Committee on Energy, Environment, and Technology would list these industries this early in the bill is entirely political. On principle, the exemptions should be determined purely by objective data analysis. However, given the importance of these industries to the local economy, as well as the need for bipartisan support in order to pass this bill, legislator’s have good reasons to make early promises to powerful economic industries in the state. But just to make sure, we should ask the question that environmental advocates have asked a thousand times:
How Is California Doing It?
While comparisons between different state economies should be taken with a grain of salt, California’s Cap and Trade program is currently the best model to compare against for other US states. How is the most advanced carbon pricing program in the US distributing their exemptions?
Of California’s 358 million allowances budgeted for 2018, nearly half (172 million allowances) are allocated to exempt industries. Looking closer into these exemptions, we find that over 75% of these exemptions are given to natural gas and electricity distributors, who are required by law to pass those savings onto consumers. This acts functionally like a rebate – in other words, 36 percent of total allowances in California are rebated to citizens who pay electricity and gas bills. The real industry exemptions — a total of 47 NAICS codes – add up to approximately 12 percent of California’s total emissions budget, and look quite similar to Washington’s list.
Given Washington’s emissions profile, their allocations may end up looking similar to California. Don’t let the sheer number of industry codes scare you – many of these codes are niche classifications that only require a small fraction of the total exemptions needed. Exemptions for the petroleum and manufacturing industries will be far more substantial, but there are complementary programs to reduce emissions in these sectors. All of these industry exemptions, while understandably off-putting for environmentalists, are indeed a “necessary evil” in order to pass carbon pricing legislation.
This is not to say that big questions remain – legislators will have to debate over the size and inclusivity of their exemption list, as well as establish how to exemptions will be stripped away over time. As the bill continues to evolve, carbon pricing supports should be re-asking the questions posed here to ensure that Washington’s exemptions are fair and reasonable.