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Oregon is poised to set a cap on greenhouse gas emissions. That’s a huge deal.

A “cap and invest” bill would link it to California’s carbon trading market.

Oregon Gov. Kate Brown at a rodeo in 2017.
Natalie Behring/Getty Images

The Pacific Northwest is becoming a veritable hotbed of climate policy. Just months after Washington state passed a comprehensive package of climate bills, its neighbor Oregon is on the verge of passing a fateful bill of its own, one that would have repercussions far beyond the region.

The Clean Energy Jobs Bill (HB 2020A) was voted through by the Oregon Joint Committee on Carbon Reduction last week, the key legislative barrier to passage. Now it goes to the state Ways and Means Committee, then to the full House and Senate, then to the desk of Gov. Kate Brown. Though anything can happen, advocates are optimistic that the bill is headed for passage.

So ... who cares? Why does it matter?

Oregon is not a big state, either in population or economy, but its legislation carries special significance, for several reasons.

Oregon would be only the second US state to mandate not just greenhouse gas emission reductions in the electricity sector, as so many other states and cities have done, but economy-wide emission reductions. Across every sector — electricity, transportation, and industry — emissions would decline 45 percent below 1990 levels by 2035 and 80 percent by 2050.

That’s a big deal in and of itself. What makes it more interesting is that Oregon is doing so by following California’s lead, linking to the Western Climate Initiative, a regional carbon trading system that currently contains California and the Canadian provinces of British Columbia, Nova Scotia, and Quebec. [Correction/clarification, 6/5/2019: only Quebec is formally participating in the WCI trading system. BC and NS are “partners,” but not participants.] It is designing its system with many of the features California pioneered.

In short, Oregon is attempting to demonstrate that a smaller state can join California’s trading system and adopt California’s climate policy model, while still customizing that model to its own unique needs. (California has the country’s largest economy; Oregon is 25th, much less focused on entertainment and high tech and more on manufacturing and services.)

oregon emissions trajectory
Bold.
State of Oregon

That is a risky undertaking, in many ways riskier than the path taken by Washington, Colorado, and other states that have created mostly self-contained climate policies. In adopting California’s model, Oregon also adopts some of the problems and tensions in that model, and by linking to California’s market, it links its political fate to forces beyond its control.

But if Oregon can pull it off — if it can show that California’s model is adaptable enough to help even a smaller state succeed, environmentally and politically — then it could influence other states in the West to take the leap into the regional system, lending it momentum. And even East Coast states, perhaps those contemplating joining the Regional Greenhouse Gas Initiative (RGGI) carbon trading market, will be watching as well. (I suppose Midwest states have their choice of which way to go.)

With federal politics a dumpster fire for the foreseeable future, the steady growth of regional carbon trading systems may be the only viable road to truly national climate policy. There’s a lot riding on Oregon’s success. So let’s take a look at the bill.

Side note: I’m going to focus on the policy, not the story of how the bill got this far, but it’s worth noting that advocates in Oregon have been at this for nigh on a decade now. (The state first considered joining WCI in 2007.) There was a big push for this bill in 2018, but it ultimately fell short. Now it’s back, and better, with Democratic supermajorities to support it. An extraordinarily broad coalition of state interests, from unions to farmers to environmental justice groups to clean energy manufacturers, has held together through repeated setbacks and a daunting amount of work and negotiation. Even more than usual in these cases, there’s a lot of blood and sweat behind this bill.

Oregon is implementing a “cap and invest” program

The best way to think about Oregon’s bill is as a rolling series of public investments in clean energy and infrastructure, job creation, environmental remediation, and community resilience — not unlike, ahem, the Green New Deal — funded by a cap-and-trade system. Thus, “cap and invest.”

We’ll look at the fun stuff, the investments, in a moment. But first, the cap-and-trade system.

Oregon will set a statewide cap on emissions. Every entity emitting more than 25,000 metric tons of carbon dioxide equivalent (CO2e) must purchase allowances equal to the tons of CO2e they emit. Over time, the number of allowances available steadily declines — 45 percent below 1990 levels by 2035, and 80 percent by 2050.

Carbon allowances are initially auctioned. Like California’s, Oregon’s auctions will have both a “price floor” (below which prices may not fall) and a “price ceiling” (above which they may not rise), as well as a reserve of allowances set aside to stabilize prices in the event of unforeseen fluctuations.

After they’re auctioned, allowances are tradable. If an emitting entity buys more than it needs, it can sell them or “bank” them for use in future compliance periods. (Some critics, cognizant of California’s problem with oversupplied allowances, are not fans of the banking feature.) The system effectively makes carbon emissions into an increasingly scarce currency.

And note: Because Oregon will be part of the WCI, it can buy allowances from, and sell them to, entities in California or the provinces too.

The cap covers all fossil fuels distributed in Oregon (including transportation, heating, and industrial fuels), all electricity generated or imported for use there, and a range of industrial processes that produce GHGs as a byproduct. All told, roughly 100 entities, representing 80 percent of the state’s GHG emissions, would be covered by the program.

Sunrise over Portland, Oregon.
Sunrise over Portland, Oregon.
Shutterstock

Exemptions from the cap

One of the recent improvements to the bill is an amendment that would eliminate an exemption for imported electricity and another exemption for Intel, the state’s biggest employer. With that, there are effectively no exemptions for major polluters in the sectors under by the cap — a noteworthy achievement for a bill like this.

Among the sectors not covered by the cap at all are “fuels used in aviation, watercraft, or locomotives,” agriculture, and land use.

A few industries start out with free allowances

By default, pollution allowances are auctioned. But in three notable cases, they will be distributed for free. (This section is slightly technical; if you’re not into the nitty-gritty, feel free to skip it.)

1) Emissions-intensive, trade-exposed (EITE) facilities

Under any state carbon pricing program, there is always the worry that local industries will simply relocate to nearby states with no carbon price — so-called “leakage,” whereby emissions aren’t so much reduced as relocated. (The California cap-and-trade system has faced recurring questions about leakage.)

Of particular concern are “emissions-intensive, trade-exposed” (EITE) facilities, which, as the name indicates, generate a lot of pollution and are vulnerable to competition from other states (think concrete or steel making). If they face increased costs, they are likely to move or shut down, hurting local economies.

Two things are notable about Oregon’s diverse manufacturing facilities. First, according to the state’s analysis, all 30 or so of them qualify as EITE under California’s guidelines. Second, they represent a relatively modest slice of the state’s economy and emissions, so sheltering them doesn’t cost much.

Oregon’s solution for EITE facilities comes in two phases. From 2021 to 2024, they will be granted free allowances equal to 95 percent of their pollution output. (This will amount to a small, 5 percent carbon fee.)

From 2025 to 2050, they will be granted free allowances based on a best available technology (BAT) benchmark, i.e., “the fuels, processes, equipment and technology that will most effectively reduce the greenhouse gas emissions associated with the manufacture of a good, without changing the characteristics or quantity of the good being manufactured, that is technically feasible, commercially available, economically viable, and compliant with all applicable laws.” Those BAT benchmarks will be updated every nine years.

In this way, EITE facilities won’t be pushed out of state, but they will face pressure to upgrade to the most carbon-efficient processes available.

The updating of BAT benchmarks seems weirdly infrequent to me, but otherwise, to my eye, this looks like a pretty clever way to solve the perpetual EITE problem.

2) Natural gas utilities

Natural gas is an interesting problem. Today, roughly half of Oregon’s buildings are heated by natural gas. On one hand, the state wants to encourage residents and businesses to convert from natural gas heat to electric heat pumps. On the other hand, it doesn’t want to push gas prices up too fast and hurt vulnerable ratepayers.

heat pump
Goodbye, natural gas furnace. Hello, heat pump.
Shutterstock

Here, again, the state has a two-part solution.

First, gas utilities will receive 100 percent free allowances to cover their low-income residential customers, to protect them from price spikes.

Second, they will receive 60 percent of the remaining allowances for free. However, that 60 percent of allowances will be “consigned,” meaning that the utilities must sell those allowances and use the proceeds for “activities or technologies designed to reduce GHGs, acquire renewable natural gas, and [at least 25 percent] provide rate relief.”

In other words, gas utilities will have to use the value of the allowances they’re given in a way that benefits customers, not investors. And that spending will be under the oversight of the state public utility commission (PUC).

As of 2022, the free consignment allowances will begin declining at the rate of the economy-wide allowance budget, until eventually gas utilities are buying allowances at auction for all but their low-income customers (who will hopefully have mostly electrified by then).

This is also a pretty clever solution, in my amateur judgment. You can spin it to make it look like a “giveaway,” but the value of the allowances is going to ratepayers, protecting them from price spikes and forestalling political blowback. And it forces natural gas utilities to continually funnel money into GHG reductions.

3) Electric utilities

Have I mentioned this bill is complicated? There’s a whole fact sheet on how it deals with electricity.

The short version: State electric utilities are already subject to some existing Oregon laws. In 2016, the state passed the Clean Electricity and Coal Transition Plan, which did two big things. First, it boosted the state’s renewable energy mandate to 50 percent renewables by 2040. Second, it mandated that utilities completely divest themselves of coal power by 2030. (Coal is now roughly 32 percent of the state’s electricity mix, so that is no small undertaking.)

Utilities are already making (and paying for) changes to meet those targets. The worry is that if they have to pay for allowances as well, ratepayers, who will ultimately bear the cost, will be paying twice for the same changes.

So from 2021 to 2030, during the coal phaseout, investor-owned utilities (IOUs) will be granted free allowances equal to 100 percent of their retail load, per the forecasts they submit to the PUC.

After 2030, when the phaseout is done, the free allowances to IOUs will decline from their 2030 level by a constant annual amount such that they reach 80 percent reductions by 2050.

For public utilities, the setup is slightly different. They will be granted 100 of their retail load in allowances in 2021; every year thereafter, they decline at the same rate as the overall cap, with the proviso that they never fall below 20 percent.

Here, too, what might be spun as a giveaway is, upon closer inspection, a smart bit of policy. The thing is, Oregon is relying heavily on electrification of transportation and industry to reduce emissions. Keeping electricity rates as low as possible encourages electrification.

Wind generators in Sherman County, Oregon, wheat country.
Wind turbines in Sherman County, Oregon, wheat country.
Shutterstock

What about those pesky offsets?

A carbon offset is an alternative means of complying with the cap. Instead of reducing its own emissions by a ton, a regulated entity can purchase an offset that represents a ton of emissions reduced in a sector outside the cap (like agriculture or forestry). In theory, the program will produce the same total amount of emission reductions, just not all within regulated sectors.

Offsets have many, many critics. Some object on principle to polluters “buying their way out” of pollution reductions. Some note that the polluters who buy their way out are often located in low-income and minority communities, so offsets have discriminatory effects. And some note that many offset projects in the past have proven fraudulent or fallen short of their promises. (See here for a recent expose on forestry credits in the California system and here for a response adding some important context.)

The Oregon bill allows offsets for 8 percent of compliance. And it is positively bursting with language and provisions meant to answer critics.

All offsets must come from projects in the US. No more than half (4 percent) of offsets can come from projects that do not have direct environmental benefit in Oregon. And the offset program must prioritize projects that “benefit impacted communities, members of eligible Indian tribes, and natural and working lands.” The bill will create an offsets advisory committee to help develop and update rules that will achieve these priorities.

Crucially, the state Climate Policy Office may also develop additional rules to restrict the purchase of offsets by polluters that are in already polluted or otherwise impacted areas, or polluters in violation of other state air quality rules. (Regulators intend to prevent pollution “hot spots.”)

The integrity of the offset program will depend on implementation and enforcement, of course, but if you’re going to have offsets, this is about as good as you can do to ensure that they benefit the state. And remember: Oregon is a cash-poor but forest-rich state. It needs to figure out some way to monetize carbon sequestration in those forests, lest they be clear-cut. Offsets, if done thoughtfully, can help with that.

Activists will rightfully be keeping a close eye on this program.

Factories along the Columbia River.
Factories along the Columbia River.
Shutterstock

On spending, the picture is clouded by a coming court case

Enough about regulations. What about all the money the system raises? How will it be spent?

Here, too, matters are lamentably complicated.

Under the Oregon Constitution, money that is raised by taxing transportation fuels must be deposited in the Highway Trust Fund, controlled by the Oregon Department of Transportation (ODOT), and used for transportation purposes.

When gasoline or diesel importers pay for allowances based on the carbon content of those fuels, are they paying a “tax”? If they are, then all the proceeds from that part of the program must go to ODOT. If they are not, then the proceeds can be added to the rest of the revenue for general use.

Ultimately, the question will be decided by the state Supreme Court. Advocates plan to advance a case there as quickly as possible, and they are confident that the court will rule in their favor, that the system is not a tax. (The California Supreme Court ruled that allowances don’t count as a tax under that state’s constitution.)

However, no court case is a sure thing. So the bill is designed as though the proceeds from transportation fuels must go to ODOT.

With that in mind: Proceeds from allowances sold for transportation fuels will go to a Transportation Decarbonization Investments Account (TDIA) within the Highway Trust Fund, which will funnel the revenue toward transportation projects that serve the purposes of the bill: light rail infrastructure, dedicated lanes for bus rapid transit, active-transportation infrastructure like bike lanes and sidewalks, and, of course, repairs and upgrades to increase the climate resilience of existing infrastructure. Electric vehicle charging infrastructure might also qualify, though it depends on ODT.

The money spent by the TDA must prioritize “impacted communities” (the bill’s all-purpose term for low-income and minority communities, communities facing severe climate impacts, and communities transitioning from fossil fuel economies).

The proceeds from the rest of the program will go to a Climate Investment Fund (CIF), which will invest in a broader range of clean energy, energy efficiency, and community resilience programs. By law, 40 percent of the money in that fund must go to projects that benefit impacted communities. (Remember, utilities and EITEs are not paying for most of their allowances in the first decade, so most of this money will come from the sale and burning of methane.)

There is also $10 million annually for a Just Transition Fund, in part to be used to establish an ongoing just-transition plan and program.

Best-case scenario, the Supreme Court rules that the system is not a tax. That puts all the revenue up for possible discretionary use in the CIF. But if the ruling goes the other way, this is a potentially problematic framework to be stuck in.

To see why, check out the government’s latest revenue estimates. They are based on the assumption that Oregon’s allowance price, like California’s, will mostly sit on the price floor. That floor is $16.77 in 2021, rising to $25.75 by 2030. (Side note: In pure carbon-pricing terms, a carbon trading system at the price floor is akin to a very low carbon tax. Like California, Oregon is implicitly relying on other policies and investments, not pricing itself, to do most of the decarbonization work.)

In 2021, total revenue from the program is projected to be $487 million. Of that, $348 million — roughly 71 percent — is transportation money, for the TDA. There’s also $50 million in consigned money (for customer benefit) to natural gas utilities. That leaves $139 million for the CIF, i.e., all the other investments.

Most of the program’s revenue will go to the TDA. And the disparity only gets wider; by 2029, the CIF gets just $34 million to the TDA’s $359.

oregon transportation emissions Oregon Global Warming Commission

Transportation is the largest share of Oregon’s GHG emissions (and moving in the wrong direction), so it makes sense that the largest share of the revenue is devoted to transportation decarbonization. But let’s just say that having the bulk of the money in ODOT’s hands would not please activists. (The department, like many state departments of transportation, is somewhat besotted with highways.)

Meanwhile, all eyes are on the Oregon Supreme Court.

The question of environmental justice

Environmental justice groups have a long history of opposition to cap and trade, and there is a coalition of such groups opposed to HB 2020 — you can read their case here.

Lots of it is philosophical opposition, the notion that there’s something intrinsically offensive about “paying to pollute” or that carbon trading simply doesn’t work. But insofar as it is about the specifics of this bill, it’s worth reviewing the reasons many EJ groups in the state support it.

Here’s a brief review of some of the provisions and investments devoted to environmental justice.

On offsets, there are provisions ensuring that they do not hurt impacted communities. For instance, polluting entities in poor air-quality areas or entities in violation of other air quality regulations are not allowed to purchase offsets. Offset projects must prioritize benefits to impacted communities, and there’s a special advisory council established to ensure that they do.

Impacted communities are also given priority in use of the TDA funds, and 40 percent of CIF funds must go directly to them.

There will be a Just Transition Fund to establish an ongoing transition plan and funnel money to “workers dislocated or adversely affected by climate change or climate change policies.”

The value of the free allowances that go to utilities must be used to benefit customers, including by lowering their bills, and that process will be overseen by a state regulator, the PUC. If utilities exceed their targets and find themselves with extra allowance revenue, it too must be used for customer benefit, prioritizing weatherization and other bill-reducing strategies for low-income customers.

There will also be a program, prioritizing low-income and underserved customers, that helps transition residents off propane or fuel oil.

In short, the bill is packed with provisions and investments meant to serve environmental justice. Not a single person I talked to, inside or outside the capitol, failed to bring it up, unprovoked. A lot of work went into making this bill fair for vulnerable Oregonians.

Using state investments to boost job quality standards

Oregon’s bill, like Washington’s before it, ties all of its investments to job quality standards. Any project that receives $50,000 or more from either the CIF or the TDA must meet certain criteria, including pay a prevailing wage, offer health and retirement benefits, create an apprenticeship program, and demonstrate a history of compliance with worker rules and wage laws.

In dispensing grants, the state will “establish measurable, enforceable goals for the training and hiring” of people from impacted communities and for contracting with women- and minority-owned suppliers.

Projects that get more than $200,000 of state money must use a project labor agreement, laying out these conditions.

This means a lot of good new jobs, one reason the building trades council has signed on.

Building things in Portland.
Building things in Portland.
Shutterstock

What about the economic impact?

Oregon’s Climate Policy Office asked the research consultancy Berkeley Economic Advising and Research (BEAR) to do an economic assessment of the program. It’s more than 150 pages, if you want to jump in, but I’ll share a few of the highlights.

First, the main thing to remember about pretty much any carbon pricing system is that its overall effect on the economy, good or bad, is going to be small. It’s just not that big a factor in a large economy.

“In the most extreme cases, the overall effect to the Oregon economy is on the order of approximately 1% of gross state product,” BEAR writes. “With the Oregon economy historically growing by 2.7% annually, this means even the most aggressive climate policies would still result in overall net positive economic growth.”

Got that? Even in the worst-case economic scenario for this bill, Oregon’s economy would continue to grow.

But the effect of the program on the economy is likely to be positive, not negative. “Generally,” BEAR writes, “we find that while there are adjustment costs, the overall benefits to the economy outweigh the costs.”

In fact, the more aggressive scenarios create more benefit. “Reducing 2035 emissions 45% below 1990 levels will confer greater benefits on the state economy [than a slower, more gradual decline], adding about 1% to GDP and about 17,000 new jobs,” BEAR writes. “Sustaining these reductions to 80% below 1990 by 2050 would increase GDP over 2.5% and add about 50,000 new jobs.”

Economic growth and new jobs, woo! All it requires is “a fundamental restructuring of the state’s energy system, including electrification of at least the light vehicle fleet, deep decarbonization of the electrical sector, and dramatically reduced direct use of natural gas in heating and industrial applications.” No bigz.

There are three basic reasons the program will boost growth.

First, it will reduce local air and water pollution, which research has shown have innumerable negative effects, from cognitive impairment to respiratory ailments to lost productivity. About a third of the new economic growth from the program will come just from the benefits of lowering pollution, which is remarkable when you think about it.

Second, allowance prices are expected to stay low, especially in the first decade (projections after that are, necessarily, more speculative).

BEAR expects complementary policies — Oregon’s renewable energy mandate, its coal bill, its clean fuels program — to drive the diffusion of cheaper, cleaner technologies, and the savings from those new technologies to more than offset higher fuel costs. (Allowance prices from 2030 forward largely depend on how effective those complementary policies turn out to be.)

“Decarbonization will be driven by adoption of cost saving technologies, not higher fuel prices, in the electric power and transportation sectors,” BEAR writes.

oregon allowances BEAR

Another reason allowance prices might stay low, though BEAR doesn’t mention it, is that Oregon will be linked to California’s system, which is wildly oversupplied with allowances at the moment and for the foreseeable future. It’s holding prices low, so much so that there are worries the state may miss its interim target. (More on that here.) Much will depend on the transparency and effectiveness of Oregon regulators.

Third, the financial savings that Oregonians harvest in energy will be “recycled to stimulate more job-intensive employment and income growth.” Every dollar diverted from the gas pump to other goods and services produces 16 times more jobs, BEAR notes. Money stays in the state, in local economies, rather than going out of state to fossil fuel producers.

In short, the cap-and-invest program is projected to be a positive, if modestly so, contributor to Oregon’s economic health.

If Oregon can do it ...

All right, that’s a lot of wonkery. (Congratulations to all 12 of you who got through it.) To conclude, let’s take a step back and remember the larger significance of this bill.

Oregon is setting a declining statutory cap on economy-wide GHG emissions. That’s a huge deal.

It will be only the second state to do so, but in many ways, it’s a more interesting and instructive case than the first, California. Like most states, Oregon is not nearly as populous, wealthy, or liberal as California. It has no big entertainment industry and not that much high tech — more like manufacturing, construction, and “other services.”

In terms of GDP, it’s right in the middle of the US state pack. It is — and I mean no insult by this, I love Oregon dearly — a more ordinary state than California.

But that makes it a state that lots of other states can learn from. The negotiations required to bring all its various parties to agreement were long, grinding, and unsexy, but they have blazed a trail, showing how resource managers, businesses, environmental justice activists, and climate hawks can hammer out a compromise with guaranteed emission reductions at the core.

Assuming the bill passes this month, everything will depend on the transparency, thoughtfulness, and persistence of Oregon regulators. As California’s recent stumbles have shown, all the great intentions in the world aren’t enough if regulators are not honest with themselves and forthright with policymakers about the trade-offs required for deep decarbonization. It’s a long road, and regulators will be under constant pressure from industry and other interests to weaken the program, just as in California.

Gov. Kate Brown makes a heart-shape with her hands as she addresses the crowd after winning re-election in Portland, Ore., Tuesday, Nov. 6, 2018.
Gov. Brown loves climate policy!
AP Photo/Steve Dykes

But if Oregon can maintain the integrity of the program — free allowances, offsets, and other potential pitfalls notwithstanding — it will show that cap and invest can work for ordinary states, that California’s model is adaptable enough to yield local benefits.

That could pave the way for other states in the West to join the regional carbon trading system. And who knows, if enough states take on statutory reduction targets and join a common carbon market, we might even end up with something resembling national energy policy.

No pressure, Oregon. Good luck!