Timothy L. McMahan | Solar Industry Magazine | March 5, 2019
The Green New Deal, rolled out in early February by U.S. Rep. Alexandria Ocasio-Cortez, D-N.Y., and Sen. Edward J. Markey, D-Mass., brings fresh focus to looming climate risks, with a seemingly audacious proposal to transform the nation’s economy.
But this effort is not new. It borrows from President Franklin Roosevelt’s “Second Bill of Rights,” announced in his 1944 State of the Union Address. Setting the narrative for a post-war America marked by Jeffersonian prose – “these economic truths have become accepted as self-evident” – the president stated, “It is our duty now to begin to lay the plans and determine the strategy for the winning of a lasting peace and the establishment of an American standard of living higher than ever before known.”
With a list of inalienable social and economic rights, Roosevelt said, “All of these rights spell security. And after this war is won, we must be prepared to move forward, in the implementation of these rights, to new goals of human happiness and well-being.”
The rollout of the Green New Deal was bumpy, with rookie congressional staff mistakes handing Republicans an easy target to denigrate. Regardless, the Green New Deal aims to be a lens through which legislators’ accountability will be judged. More manifesto than mandate, initiatives range from a 10-year transition to a 100% clean energy economy, infrastructure investments, guaranteed employment, debt-free college, health care, and advancement of social justice and financial equity. The echoes of Democratic icon President Roosevelt are not coincidental.
The central focus is climate change. The resolution indicates that it is the “sense of the House of Representatives” that the federal government has a duty to achieve net-zero greenhouse-gas (GHG) emissions, invest in infrastructure and industry, and secure – “for generations to come” – clean air and water, climate and community resiliency, healthy food, access to nature, and a sustainable environment, while also achieving justice and equity objectives.
Reflecting the nation’s efforts to solve big problems in the New Deal era, these objectives are all part of a 10-year mobilization that would build resiliency against climate change-related disasters, overhaul aging infrastructure and implement a zero-emission power system, backed up by carbon capture.
Thwarted by two years of the Trump presidency, climate policy at the national level is an important force, but not the only one. Along the western U.S. seaboard, it is nearly certain that climate cap-and-trade programs will be adopted by Oregon and Washington this year or next, establishing a market-driven response to climate change. Much work remains in the coming months to establish fair regulatory systems that truly integrate with California and Canadian cap-and-trade programs, and Washington and Oregon must both find practical strategies to protect energy-intensive industries and jobs that are sensitive to competition from less regulated markets and locations. Both states, however, are poised to adopt and implement cap-and-trade systems.
Market Approach to Climate Change
Here’s how cap-and-trade works. The “cap” is a strict, legislatively established limit on GHG emissions. As the program matures over time, the cap decreases. “Trade” is the market-based approach, where companies buy and sell “allowances” enabling them to emit at a defined amount.
Supply and demand set the price. If the markets function as designed, companies have a strong incentive to cut costs by cutting emissions. A governmental agency distributes the allowances to companies either for free (particularly in the early years of the program) or through an auction. As the emission cap declines over time, industries have an incentive to find efficiencies and lower emissions. Companies that more rapidly cut emissions can sell their allowances to companies that emit more, or they can “bank” them for future use.
Trading markets allow flexibility, increasing the capital to invest in reductions, thereby encouraging even more rapid reductions and rewarding innovation. With finite allowances, total pollution declines as the cap decreases over time.
Cap-and-trade likely works best in larger markets. If markets successfully integrate California, Oregon, Washington and Canadian provinces, deeper emission cuts could be possible. A well-designed and successful program creates one or more GHG-reduction funds, used to further the objectives of state policy to cut emissions.
Since the 2013-14 fiscal year, California has appropriated more than $8 billion to fund programs aimed at reducing GHG emissions and improving the economy, health and equity in communities. The policy framework behind these funds helps to explain the linkage in the Green New Deal between rapid climate change action and the utopian list of community enhancements that echo Roosevelt’s vision. The Washington and Oregon proposals are similar.
California Sets the Stage
With one of the world’s largest economies, California’s original emission-reduction goals were set forth in A.B.32 in 2006. This bill has now been in place for over a dozen years, having survived legal challenges. California’s cap-and-trade program (a cornerstone of the California carbon-reduction program) was extended last year through 2030, with deepened regulatory targets reducing emissions 40% below 1990 levels by 2030.
California concluded its 2018 legislative session with the passage of S.B.100, increasing the state’s renewable portfolio standard, transitioning the electricity grid to 100% carbon-free energy by 2045. Former Gov. Jerry Brown’s signing of S.B.100 was coupled with the issuance of Executive Order B-55-18, directing the state to achieve carbon neutrality in all sectors by 2045 and net-negative GHG emissions thereafter.
Based on 2016 GHG reporting, California has already met its 2020 GHG-reduction target. From 2001 to 2016, the carbon intensity of California’s economy decreased by 38%, while the state’s gross domestic product grew 41%. The state’s economic modeling predicts that annual growth in California gross domestic product from 2021 to 2030 will not change, compared with a business-as-usual reference case, as a result of the state’s continued implementation of GHG-reduction programs. The state’s research also finds that California climate change policies have spurred sustained and significant growth in clean energy industries, though each sector studied did not have even growth year over year.
Critics of the California cap-and-trade program abound, and they question whether the program can take credit for the drop in GHG emissions or has led to any decrease in localized pollutants, considering that GHG emissions from some industrial sectors actually increased during the first years of the program. Others query whether California’s continued economic success can be tied to its climate change policies. Nevertheless, California has continued to expand the program, linking to similar markets in Quebec and Ontario.
Oregon’s Proposed “Cap-and-Invest” Legislation
In the 2018 Oregon legislative session, two bills were proposed that would have established a comprehensive carbon regulation system. The Clean Energy Jobs Bill would have created a “cap-and-invest” program, setting a cap on GHG emissions. The bills did not move out of committee, failing to make it to floor votes.
The legislature passed budget items for
a Carbon Policy Office and for the Department of Environmental Quality
to lay the groundwork to implement a cap-and-trade (branded as
cap-and-invest) program by 2021. Meanwhile, last summer, a Joint
Committee on Carbon Reduction worked to refine the Clean Energy Jobs
Bill, aimed at passage in 2019.
On Jan. 31, the Oregon legislature issued its Oregon Climate Action Program, now in bill form as H.B.2020, which establishes a Carbon Policy Office charged with overseeing the implementation of the overall cap-and-trade/invest program. The office has the directive to achieve a reduction in total levels of regulated emissions to at least 45% below 1990 emissions levels by 2035 and to achieve a reduction in total regulated emissions levels to at least 80% below 1990 emissions levels by 2050.
The Oregon legislation faces considerable refinement during the 2019 session. Fundamentals include placing a cap on total anthropogenic GHG emissions regulated through setting annual allowances (effective 2021), establishing market-based mechanisms to demonstrate compliance, and providing declining allowances for certain industries as a transition tool, aimed at the 2035 80% GHG-reduction mandate.
Allowances for “emission-intensive, trade-exposed processes” for a number of industries would soften the risk of lost jobs (mitigating “leakage” of such industries to competing states and countries that do not impose emission limitations), at least in the short term. Carbon offset projects and credits are authorized in Oregon and in other jurisdictions that have a “linkage agreement” with Oregon. This key component anticipates integration with California, Washington and Canadian markets.
Oregon’s investment strategy requires much definition and revision, including the disposition of mitigation payments. Proceeds from mitigation payments, including proceeds from carbon allowance auctions, will be invested in a number of investment accounts and funds intended to decarbonize. These accounts would include transportation decarbonization and fuel efficiency; renewable energy investments; transmission and storage projects; carbon reduction in agricultural and forestry practices; investments in fish, wildlife and ecosystems; and investments in communities considered most impacted by climate change.
Washington’s Race to Catch Up
In the final weeks of Washington State’s 2018 regular legislative session, all eyes were on Gov. Jay Inslee’s carbon tax plan. S.B.6203 died in the democratic-led Senate, but had the bill passed, Washington would have been the first state to impose a tax on carbon emissions.
Shortly after the bill died, an advocacy group filed an initiative with the Secretary of State for the 2018 fall election to impose an aggressive carbon pricing program. Initiative 1631 proposed an annually increasing carbon fee (considered by industry to be a tax) until GHG-reduction goals were met. All money collected from the fee would be placed in a “Clean Up Pollution Fund.” Money from the fund could only be used to invest in clean air/clean energy, clean water, healthy forests and healthy communities. The initiative also attempted to provide a statutory basis for Washington’s Clean Air Rule, which had recently been struck down in a court challenge. Washington voters defeated Initiative 1631 by a 56 – 44% margin.
Having failed to address climate change through a carbon tax, the Washington legislature is now working on legislation modeled closely on Oregon’s bill. The Washington legislation is nascent, lacking Oregon’s experience over the last several years to develop the policy framework. The Washington concept needs work, and it leans on agency rulemaking to flesh out the program. The proposal sets forth the centerpiece as a “cost-effective carbon pollution market” for reducing GHG emissions, capable of being integrated with emissions-reduction programs in other jurisdictions.
Like Oregon, Washington aims to soften the blow by enabling allowances for energy-intensive, trade-exposed entities, also establishing an auction process and carbon offset credits. The Washington approach links the program to “other jurisdictions with established market-based carbon emissions reduction programs” to “broaden the carbon market to provide Washington businesses with greater flexibility and opportunities for reduced costs to meet their compliance obligations.” The Washington legislation proposes to establish a “Carbon Pollution Reduction Account” beginning in 2021, distributing funds to various “energy transformation” funds, with 25% earmarked for climate impact resilience.
An Integrated Western Seaboard Market
Western seaboard state legislatures likely have the votes, with Democratic governors poised to sign. An integrated Western seaboard state market would fundamentally transform how GHG emissions are regulated, commanding the rest of the nation to pay attention. Cap-and-trade programs are complex, and the measure of success in California continues to be debated.
That said, generations ago, Republican President George H.W. Bush signed into law the world’s first cap-and-trade system to control pollution. In the past 20 years, a national allowance trading system has succeeded in significantly cutting sulfur dioxide, the major contributor to acid rain. The program spurred industry innovation, resulting in faster-than-expected reductions.
The Western seaboard states are not waiting for Congress, nor are they placing their bets on utopian manifestos. Cap-and-trade programs do not promise a 10-year transition to a 100% carbon-free economy. But they do challenge industry to participate in market-based programs that, if successful, will spur innovation and stimulate private and public investments.
More than a decade ago, with an eye toward the national sulfur dioxide reduction model, California initiated the nation’s market-based efforts to curb GHG emissions. Oregon and Washington are poised to expand that effort, linking carbon credits and offset programs into California and Canada trading markets. Oregon and Washington legislatures need to resolve plenty of nettlesome challenges.
However, if successful, along with emission reductions, investment funds would infuse capital into substantial efforts toward climate resiliency and clean energy, with ambitious goals to make investments in economic and social programs that could soften the impact of climate change on communities. Washington’s experience shows little public appetite for a carbon tax approach.
Cap-and-trade will not meet the lofty expectations of the Green New Deal. But it just might work.
Timothy L. McMahan is a partner at Stoel Rives LLP practicing in the areas of energy, land use, real estate development, and environmental and municipal law. He also chairs Stoel Rives’ climate change practice initiative. McMahan can be reached at email@example.com.