Notice of Committee Passage for House Bill 1091 - Update: 10 Year Analysis Completes

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HB 1091, titled AN ACT Relating to reducing greenhouse gas emissions by reducing the carbon intensity of transportation fuel, has been passed by the House Committee on Environment & Energy. The Office of Financial Management has identified this bill as requiring a ten-year projection of increased cost to the taxpayers or affected fee payers.

Ten-year projection:

Fiscal Year		Clean Fuels Program Fee
2022		$
2023		373,731
2024		858,796
2025		930,837
2026		858,796
2027		930,837
2028		858,796
2029		930,837
2030		858,796
2031		930,837
Total:		$ 7,532,263

Department of Ecology:

Section 12 would authorize Ecology to require a fee from persons that register or report under the provisions of this chapter. Ecology would adopt rules following an opportunity for public comment that would determine the payment schedule and fee amount. The fee amount would be required to be set so that receipts equal but do not exceed the projected direct and indirect costs for Ecology’s and Commerce’s development and implementation of the program.  

Ecology would be required to establish rules by January 1, 2023, under section 3. Ecology assumes the fee authorized in section 12 would start on this date.  Based on the start date for fee implementation, Ecology estimates that the latter 6 months of FY 2023 expenditures for the Clean Fuels program would be fee-recoverable, and all future expenditures would be funded through fee revenue in the Clean Fuels Program Account.  

Per section 12, the fee amount would be set so that receipts equal but do not exceed projected direct and indirect costs for Ecology's and Commerce’s development and implementation of the program. Cash receipts are estimated to equal expenditure estimates in the new Clean Fuels Program Account beginning January 1, 2023. 

Individual fee levels and the number of fee payers is indeterminate at this time. Rulemaking and stakeholder feedback will determine which entities will be required to pay a fee and what portion of the program should be supported by each class of participant. 

All fee receipts would be deposited in the Clean Fuels Program Account created in section 12.

Department of Revenue:

Note: This fiscal note reflects language in HB 1091, 2021 Legislative Session.

This fiscal note only addresses those sections of the bill that impact the Department of Revenue (Department).

This fiscal note reflects a revision to the revenue discussion and supersedes fiscal note number 1091-2.

OVERVIEW

The bill creates a low-carbon fuel standard to reduce levels of air pollutants and greenhouse gas (GHG) emissions.

The Department of Ecology (Ecology) must establish standards (the Clean Fuels Program) to reduce the carbon intensity of transportation fuels in Washington, as measured by the life-cycle GHG emissions per unit of fuel energy. The Clean Fuels Program must take effect by January 1, 2023, and must reduce GHG emissions per unit of fuel to 10% below 2017 levels by 2028 and 20% below 2017 levels by 2035. By December 31, 2031, Ecology must adopt standards that are consistent with the state achieving the emissions reductions established in RCW 70A.45.020.

The Clean Fuels Program developed by Ecology must include:  

- GHG emission standards to be met by participants;

- Provisions for achieving the emissions reductions established in RCW 70A.45.020, including the allowance of credits for the production or import of fuels with carbon intensity below Ecology standards or for GHG-reducing activities;

- Methods for assigning compliance obligations and tracking and verifying tradable credits;

- Mechanisms for certain persons involved in transportation fuel supply chain activities that are not directly subject to the fuel standards to elect to participate in the program;

- Cost containment mechanisms, such as the development of a credit clearance market whereby emitters that would not otherwise meet the Clean Fuels Program's emissions standards may purchase credits to meet compliance obligations.

Credit Generating Activities

Participants in the Clean Fuels Program may generate credits from GHG emissions-limiting activities, including:

- Producing or importing transportation fuels with emissions below program standards,

- Carbon capture and sequestration,

- Fueling electric vehicles with electricity certified as zero-carbon, or

- Use of smart vehicle charging technology in fueling vehicles when the carbon intensity of the electric grid is low.

Entities Registering for the Clean Fuels Program

Producers and importers of transportation fuels that do not qualify to generate credits are required to register for the Clean Fuels Program. In addition, other entities must register in order to participate in the Clean Fuels Program and to generate or trade credits.  

Exemptions

The Clean Fuels Program generally does not apply to the following, except in certain instances where producers and importers of such transportation fuels elect to register for the program:

- Transportation fuels exported from Washington;

- Electricity;

- Fuels used in volumes below thresholds set by Ecology;

- Fuels used in aircraft, marine vessels, railroad locomotives, and the operation of military tactical vehicles; or

- Until January 1, 2028, special fuel and dyed special fuels used off-road to transport logs, in construction work, mining and timber harvest operations, and for agricultural purposes.

Reports

Ecology must post annual reports beginning May 1, 2025, on the program-wide number of credits and deficits generated and volumes and average price per credit for each transportation fuel in the program.

EFFECTIVE DATE

The bill takes effect 90 days after final adjournment of the session in which it was enacted.

ASSUMPTIONS

- Ecology will administer the Clean Fuels Program and associated cost containment mechanisms such as the credit clearance market described in Section 4(6).

- Under the Clean Fuels Program, producers and importers of low-carbon fuels will generate tradable credits.

- Producers and importers of fuels that do not meet Ecology's clean fuel standards will generate deficits that can be offset by acquiring credits.

- A carbon credit clearance market allows participants in the Clean Fuels Program to buy and sell credits at prices established by Ecology. 

Background

- The Department currently administers the business and occupation (B&O) tax, which is a tax on the gross proceeds of sales and the gross income of a business.

- The B&O tax applies to most types of business receipts.

- The B&O tax rate for "services and other activities" is 1.5% or 1.75%, with the latter rate applying to entities with more than $1 million of taxable gross receipts in the services and other category.

Applicability of B&O Tax

- Since no specific B&O exemption is created for sales of credits to other entities, it is assumed such sales will qualify as taxable events under the B&O tax and will be taxed at the services and other activities tax rate, as described in RCW 82.04.290.

- It is assumed that all entities selling credits will meet the taxable receipts threshold to be required to pay the higher 1.75% services and other B&O tax rate.  

B&O Tax Collections (Example)

-  For example, if in FY 20XX:

     - The Department of Ecology sets prices at $150 per credit, with each credit representing 1 MT of CO2-equivalent emissions;

     - 1 million credits are earned by Clean Fuels Program participants for credit-generating activities; and

     - One-third of credits generated are banked for future use and two-thirds are sold to other program participants;

- Then the B&O tax collected on such credit sales in FY 20XX would be:

$150 x 1 million x 66.67% x 1.75% = $1.75 million.

The example above is provided to illustrate the calculation of the B&O tax on Clean Fuels Program credits and is not intended as a revenue estimate.

TOTAL REVENUE IMPACT:

Indeterminate

Ten-year projection prepared in consultation with the following agencies:

Department of Revenue
Department of Ecology

The following legislators voted do pass:

Representative Joe Fitzgibbon
Democrat
(360) 786-7952
Joe.Fitzgibbon@leg.wa.gov

Representative Jake Fey
Democrat
(360) 786-7974
jake.fey@leg.wa.gov

Representative Vandana Slatter
Democrat
(360) 786-7936
vandana.slatter@leg.wa.gov

Representative Davina Duerr
Democrat
(360) 786-7928
DUERR_DA@leg.wa.gov

Representative Alex Ramel
Democrat
(360) 786-7970
alex.ramel@leg.wa.gov

Representative Liz Berry
Democrat
(360) 786-7860
Liz.Berry@leg.wa.gov

Representative Kirsten Harris-Talley
Democrat
(360) 786-7838
Kirsten.Harris-Talley@leg.wa.gov


The following legislators voted to refer the bill without recommendation:

Representative Sharon Shewmake
Democrat
(360) 786-7854
sharon.shewmake@leg.wa.gov


The following legislators voted do not pass:

Representative Mary Dye
Republican
(360) 786-7942
Mary.Dye@leg.wa.gov

Representative Matt Boehnke
Republican
(360) 786-7986
BOEHNKE_MA@leg.wa.gov

Representative Keith Goehner
Republican
(360) 786-7954
GOEHNER_KE@leg.wa.gov

Representative Mark Klicker
Republican
(360) 786-7836
Mark.Klicker@leg.wa.gov

Representative Peter Abbarno
Republican
(360) 786-7896
Peter.Abbarno@leg.wa.gov



Legislative Bill Information Website: http://apps.leg.wa.gov/billinfo/

Initiative 960 Website: http://www.ofm.wa.gov/tax/default.asp