Notice of Committee Passage for Senate Bill 5126

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SB 5126, titled AN ACT Relating to the Washington climate commitment act, has been passed by the Senate Committee on Environment, Energy & Technology. 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		Climate Commitment Allowance Auction Revenue	Greenhouse Gas Reporting Fee	Total
2022		$0	$ 0	$
2023		255,652,558	0	$ 255,652,558
2024		519,178,584	0	$ 519,178,584
2025		530,295,536	0	$ 530,295,536
2026		537,720,864	1,284,781	$ 539,005,645
2027		831,977,021	1,274,001	$ 833,251,022
2028		1,092,216,811	1,284,781	$ 1,093,501,592
2029		1,023,276,842	1,274,001	$ 1,024,550,843
2030		933,208,961	1,284,781	$ 934,493,742
2031		0	1,274,001	$ 1,274,001
Total:		$ 5,723,527,177	$ 7,676,346	$ 5,731,203,523

Department of Ecology:

Under section 9, auction proceeds would be collected by the financial services administrator, and this fiscal estimate assumes that they would be deposited via wire transfer into the Climate Investment Account created in section 20.  Auction revenue estimates were calculated based on program requirements as established in the bill, and the following assumptions. 

Ecology would be required to set annual greenhouse gas allowance budgets, which would be designed to reduce emissions over time in order to meet statewide emission limits established in RCW 70A.45.020.  The initial annual allowance budgets, for calendar years 2023 to 2026, would have to be adopted through rulemaking by October 1, 2022.  For purposes of revenue assumptions, allowance budgets for phase two (beginning January 1, 2027) are based on available GHG reporting data at the time.

Section 7 would designate the criteria for program coverage and criteria for participation for two phases. Phase one occurs between January 1, 2023 – December 31, 2026. Phase two occurs from January 1, 2027 to December 31, 2030.

Beginning January 1, 2023 a maximum of four auctions would be held per calendar year.

The average annual eligible emissions from 2014-2018 (excluding biogenic emissions) were calculated for all entities meeting the thresholds and criteria for each phase as described in Section 7.

The total baseline annual emissions for covered entities in the first phase is calculated to be 54.3 MMT CO2e, which is 56% of total statewide emissions. 

Statewide emissions would be limited to achieve the reductions specified in RCW 70A.45.020, which are as follows: 45% below 1990 levels by 2030, 70% below 1990 levels by 2040, and 95% below 1990 levels

by 2050.

1990 statewide emissions were 90.5 MMT CO2e

The 2035 statewide emissions target is 49.8 MMT CO2e

The 2022 statewide emissions estimate (based on a three-year average of annual emissions for 2015 through 2017) is projected to be 97.0 MMT CO2e

The goal for emissions reduction from 2023 to 2030 is 49.8 - 97.4 = -53.8 MMT CO2e

The emissions reduction goal for covered entities, based on their 56% share of statewide emissions is calculated to be – 30.1 MMT CO2e over the eight-year compliance period through 2030.

Emissions allowances would need to decline by 6.1% each year during phase one, starting with calendar year 2023. This reduction pathway assumes that non-covered entities would also be voluntarily reducing emissions at a rate proportionate to the regulated/covered entities, based on the non-covered entities’ portions of statewide emissions.  

The initial allowance budget for January 1 to December 31, 2023, would equal a calculated reduction of 6.1% from the baseline annual emissions for phase one entities. This results in a total budget of 53 MMT CO2e. The budget would continue to decrease from the baseline by an additional 6.1% of baseline emissions each successive year.

During phase two, starting on January 1, 2027, the reduction curve for entities continuing from the first compliance period would be 6.1%.  For new CO2e emissions that would be added to the program for the second compliance period, the reduction pathway would be 12.2% of baseline emissions each year.  The baseline calculated emissions for entities incurring a compliance obligation in the second compliance period is 31.1 MMT CO2e, and the CY 2027 allowance budget would be reduced by 12.2%, adding 27.3 MMT CO2e to the CY 2027 allowance budget.

Ecology would be required to auction all allowances on a quarterly basis.

Each covered entity would need to purchase an allowance for each ton of carbon dioxide it emits.

Per section 9, Ecology would hold a maximum of four auctions for allowances annually. Ecology assumes the auctions for the first period would be conducted January, April, July, and October 2023. The schedule is assumed to remain the same for future compliance periods.

Ecology assumes that 100% of available allowances would be sold at each auction.

Section 10 would provide for an allocation of free allowances to be available for Energy Intensive Trade Exposed (EITE) entities, which would decline over time. The annual allocation of allowances for direct distribution to an entity identified as emissions-intensive and trade-exposed during phase one of the program would be equal to the covered entity’s proportional obligation of the program budget for phase one established under section 6, multiplied by:

(a) During calendar year 2023, ninety percent;

(b) During calendar year 2024, eighty-five percent;

(c) During calendar year 2025, eighty percent; and

(d) During calendar year 2026, seventy-five percent.

Rulemaking would determine the allocations to be provided in calendar year 2027 and beyond.  For purposes of this fiscal note, the seventy-five percent adjustment from calendar year 2026 is assumed to hold.

Section 11 would provide for an allocation of free allowances to be distributed directly to electricity generators in order to mitigate potential impacts on electricity rates. This fiscal note assumes that all phase one electricity suppliers would receive free allowances at their base rate of emissions through calendar year 2027.

Section 12 would require Ecology to adopt rules for allocating no-cost allowances to natural gas utilities in an amount equal to emissions attributable to provision of natural gas service to low-income residential customers.  Based on  the U.S. Census American Community Survey estimates, 9.8% of Washington residents met poverty criteria in 2019. This fiscal note assumes that 15% of natural gas residential customers would be classified as low income, and a proportionate share of baseline natural gas utilities’ GHG emissions would be attributed to these households and allocated as no-cost allowances. 

Section 13 would authorize establishment of an emissions containment reserve, allowing available allowances to be placed in reserve to meet emissions limits per RCW 70A.45.020.

Section 14 would require Ecology to set a minimum of 4% of the total number of allowances available aside for a price containment reserve during the years 2023 through 2026. The department would establish by rule the amount to be placed in the reserve beginning in the 2026 compliance period.  California holds vintage allowances several years back. To provide a conservative estimate, this estimate assumes that 30% of the prior year’s reserve will be sold at the prior year floor price each year, leaving unsold allowances in the reserve.  This revenue estimate also assumes that Ecology maintains the 4% minimum through the time period for this fiscal estimate.

Ecology would also be required to establish by rule auction floor prices. Allowance floor prices in California are projected to grow approximately 7% per year, from a current price of $16.68 in 2020 to

$33.73 in 2030. Ecology assumes that allowance prices in Washington would be equivalent to those in California. Cost of allowances is estimated to start at $20.60 in 2023 and increase by 7% each year in ensuing years through compliance year 2027. Revenue estimates assume all allowances not in the price containment reserve would be purchased at the estimated price for the year.

All allowances are estimated to be purchased at floor prices.  Actual prices can vary, based on the conditions of the allowance market. This assumption results in a minimum revenue estimate. 

Section 15 would require Ecology to adopt by rule protocols for establishing offset projects and securing offset credits that may be used to meet a portion of a covered or opt-in entity’s compliance obligation. In phase one, a covered entity may use offset credits for up to eight percent of the compliance obligation.  The allowable coverage of compliance obligations would decrease to six percent in phase two. Revenue estimates assume maximum usage of offset credits to meet compliance obligations, reducing purchased allowances by eight percent each year for phase one and six percent each year for phase two.

Over Allocations attributed to COVID-19 – The Rhodium Group published a report on estimated GHG emissions changes in the future, depending on the recovery rates from the COVID-19 pandemic. This study is available at this link (https://rhg.com/research/taking-stock-2020/) and supports an assumption that the carbon market may have excess allowances in the future. Excess allowances are subtracted from the net priced allowances and are based on estimated emissions reductions following a curve informed by the Rhodium Group study. The net effect is a reduction in revenue based on the excess allocations. The assumed emissions reductions and over-allocations for this analysis, and a link to the complete study.

Total proceeds from auctions from January 1, 2023, to June 30, 2030, were estimated for each corresponding fiscal year.  Because the Clean Energy Transformation Act will support a clean energy transition by 2030, the number of allowances to be purchased for calendar years 2031 and beyond cannot be estimated at this time; fiscal year 2031 allowance auction revenue is indeterminate.

Allowance costs for each covered entity would vary based on the number of available allowances and auction activity.  Floor prices are estimated to be $20.60 per allowance in calendar year 2023, and increase by 7% each year in ensuing years.

GHG Reporting Fees

Section 25 would modify GHG reporting requirements, which would influence GHG reporting workload costs and the number of reporting facilities.   Ecology assumes that fee modifications related to the changes in Section 25 would be set during rulemaking for this section and would incorporate workload changes related to the modification of GHG reporting requirements. The fee changes would take effect in FY 2026.

Under current law, RCW 70.94.151, GHG reporting fees are set to equal but not exceed projected direct and indirect costs for Ecology's development and implementation of the program in the forthcoming year. Cash receipts are estimated to equal expenditure estimates for the GHG reporting program in the Air Pollution Control Account in this analysis, with FY 2026 expenditures assumed to carry forward at the same level in future years.

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

Department of Revenue:

Note:  This fiscal note reflects language in SB 5126, 2021 Legislative Session.

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

OVERVIEW

The Department of Ecology (Ecology) shall implement a program to cap greenhouse gas emissions in the state by January 1, 2023. Under the program, Ecology shall set a budget of annual emissions and distribute emission allowances by auction through a qualified contractor. The program shall also allow participants to buy, sell, and trade allowances to and from other participants.

Allowance Auction and Trading

Ecology must set the annual allowance budget to ensure that the emission limits for 2030, 2040, and 2050 in RCW 70A.45.020 are met. Ecology shall distribute emission allowances by auction not more than four times per year. Ecology must use an electronic tracking system to track compliance and to track the buying, selling, and trading of allowances obtained at auction. To the extent possible, Ecology shall link the auction and allowance trading system with other jurisdictions.

Climate Investment Account

The financial services administrator contracted by Ecology to manage the auction shall transfer the auction proceeds to the state treasurer for deposit in the new climate investment account. Revenues in the climate investment account may be spent on certain specified purposes, depending on appropriation. Money in the climate investment account may be deposited into the state general fund to cover the program's costs, to implement the working families tax rebate, for clean transportation programs, natural climate resilience solutions, clean energy transition and assistance programs, and/or emission reduction projects.

EFFECTIVE DATE

This bill contains an emergency clause and takes effect immediately upon the Governor’s approval.

ASSUMPTIONS

- Ecology will administer the program described in Sections 5-18, including the emission allowance auction and market.

- Emission allowances may be purchased at auction and traded in secondary markets.

- The Department of Revenue 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.

- Unless a specific B&O exemption is created for sales of emission allowances to other entities, such sales will qualify as a taxable event under the B&O tax and will be taxed at the services and other activities tax rate of 1.5% or 1.75%, as described in RCW 82.04.290.

- Given that there is currently no data to estimate the buying, selling, or trading of emission allowances in Washington, the revenue impact to the state general fund from any B&O taxes collected as a result of the sale of carbon credits is indeterminate.

REVENUE ESTIMATES 

TOTAL REVENUE IMPACT: 

      State Government (cash basis, $000): Indeterminate.

      Local Government, if applicable (cash basis, $000): Indeterminate.

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

Department of Revenue
Department of Ecology

The following legislators voted do pass:

Senator Steve Hobbs
Democrat
(360) 786-7686
steve.hobbs@leg.wa.gov

Senator Marko Liias
Democrat
(360) 786-7640
Marko.Liias@leg.wa.gov

Senator Reuven Carlyle
Democrat
(360) 786-7670
Reuven.Carlyle@leg.wa.gov

Senator Derek Stanford
Democrat
(360) 786-7600
Derek.Stanford@leg.wa.gov

Senator Lisa Wellman
Democrat
(360) 786-7641
Lisa.Wellman@leg.wa.gov

Senator Mona Das
Democrat
(360) 786-7692
DAS_MO@leg.wa.gov

Senator Joe Nguyen
Democrat
(360) 786-7667
NGUYEN_JO@leg.wa.gov


The following legislators voted to refer the bill without recommendation:

Senator Tim Sheldon
Democrat
(360) 786-7668
Timothy.Sheldon@leg.wa.gov

Senator Liz Lovelett
Democrat
(360) 786-7678
Liz.Lovelett@leg.wa.gov


The following legislators voted do not pass:

Senator Phil Fortunato
Republican
(360) 786-7660
phil.fortunato@leg.wa.gov

Senator Shelly Short
Republican
(360) 786-7612
Shelly.Short@leg.wa.gov

Senator Sharon Brown
Republican
(360) 786-7614
Sharon.Brown@leg.wa.gov


Not voting:

Senator Doug Ericksen
Republican
(360) 786-7682
Doug.Ericksen@leg.wa.gov



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

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