Notice of Committee Passage for Substitute Senate Bill 5126 - Update: 10 Year Analysis Complete

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SSB 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		GHG Allowance Auction Revenue	GHG Emissions Allowance Auction Revenue	Greenhouse Gas Reporting Fee	Total
2022		$ 0	$0	$0	$ 0
2023		0	237,341,284	0	$ 237,341,284
2024		0	481,697,161	0	$ 481,697,161
2025		54,814,274	436,744,000	0	$ 491,558,274
2026		173,755,705	325,000,000	1,291,984	$ 500,047,689
2027		204,193,976	325,000,000	1,281,204	$ 530,475,180
2028		227,419,532	325,000,000	1,281,204	$ 553,700,736
2029		218,227,853	325,000,000	1,281,204	$ 544,509,057
2030		200,557,058	325,000,000	1,281,204	$ 526,838,262
2031		195,501,637	325,000,000	1,281,204	$ 521,782,841
Total:		$ 1,274,470,035	$ 3,105,782,445	$ 7,698,004	$ 4,387,950,484

Department of Ecology:

The following changes in SSB 5126 would change GHG emissions allowance auction revenue estimates, compared to SB 5126:

•  Section 9 would establish a new selection of GHG data years for calculating share of baseline allowances attributed to covered entities. In the revenue estimates, this shifts the baseline emissions for all entities accordingly.

•  Section 9 would exempt carbon dioxide emissions from the combustion of biomass or biofuels.  For the revenue estimates, biogenic emissions are excluded to reflect this exemption; biomass-based fuel producers would receive exemptions if able to prove 50% lower lifecycle emissions, compared to petroleum-based fuels; current reporting biomass-based fuel producers had been exempted for being under the emissions threshold in SB 5126 and would continue to be exempted in the current version.

•  Section 12 would provide EITE status in the first compliance period for covered entities engaged in petroleum refining; the revenue estimates use an assumption that the intent of this language is to provide EITE status to petroleum refinery facilities located in Washington.

Note regarding the Clean Energy Transformation Act:  Revenue estimates do not account for changes in GHG emissions related to the Clean Energy Transformation Act, which could have an indeterminate impact on auction revenue approaching and following calendar year 2030.

Cash Receipts from Purchases of GHG Emissions Allowances:

Under section 11, auction proceeds would be collected by the financial services administrator and transferred to the State Treasurer for deposit as follows:  

The initial auction revenue up to the amounts specified below would be deposited in the Forward Flexible Account (FFA), not to exceed $5,200,000,000 dollars over sixteen years, and the remaining proceeds would be deposited into the Climate Investment Account (CIA) created in section 23.

a)         FY 2023: first $272,019,000 to the FFA, with the remaining auction revenue to the CIA;

b)         FY 2024: first $551,238,000  to the FFA, with the remaining auction revenue to the CIA;

c)          FY 2025: first $436,744,000 to the FFA, with the remaining auction revenue to the CIA;

d)         FY 2026 through FY 2037: first $325,000,000 to the FFA, with the remaining auction revenue to the CIA;

For fiscal year 2038 and each fiscal year thereafter, fifty percent of auction proceeds would be deposited in the Forward Flexible Account, and the remaining auction proceeds would be deposited in the Climate Investment Account. 

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 the first compliance period, calendar years 2023 to 2026, would have to be adopted through rulemaking by October 1, 2022.  For purposes of revenue assumptions, allowance budgets for the first and second compliance period beginning January 1, 2027 are based on currently available GHG reporting data and the statewide GHG inventory published in accordance with RCW 70A.45.020.

Section 9 would designate the criteria for program coverage and criteria for participation for groups of covered entities that would enter the program during the first and second compliance periods. The first compliance period would begin January 1, 2023, and the second compliance period would begin January 1, 2027.

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

The average annual eligible emissions from 2015 to 2019 (excluding biogenic emissions, which would be exempted as biomass under section 9) were calculated for all entities meeting the thresholds and criteria for each compliance period, as described in Section 9.

The total baseline annual emissions for covered entities in the first compliance period was calculated to be 56.5 MMT CO2e, which is 58% 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 four-year average of annual emissions for 2015 through 2018 in the Statewide GHG Inventory Report, published January 2021) is projected to be 97.9 MMT CO2e

The goal for emissions reduction from 2023 to 2030 is 49.8 - 97.9 = -48.1 MMT CO2e

The emissions reduction goal for covered entities, based on their 58% share of statewide emissions is calculated to be -36.4 MMT CO2e over the eight-year compliance period through 2030.

Emissions allowances would need to decline by 6.1% each year for all entities incurring coverage obligations during the first compliance period, 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 each of the covered entities during this compliance period. This would results in a total allowance budget of 52.9 MMT CO2e. The budget would continue to decrease from the baseline by an additional 6.1% of baseline emissions each successive year.

During the second compliance period, starting on January 1, 2027, the reduction curve for entities continuing from the first compliance period would be remain at 6.1% of initial baseline emissions.  For new CO2e emissions that would be added to the program for the second compliance period, the reduction pathway would be 12.3% of baseline emissions each year.  The baseline calculated emissions for entities incurring a compliance obligation in the second compliance period is 17.6 MMT CO2e, and the CY 2027 allowance budget would be reduced by 12.3%, adding 15.4 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 11, 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 all available allowances subject to auction would be sold at each auction.

Section 12 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 8, 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 allocation of seventy-five percent of EITE entities’ allowance budgets (the allocation specified for calendar year 2026) is assumed to continue for future calendar years.

Section 12 (1) (j) would include petroleum refining operations with North American industry classification system (NAICS) codes beginning with “324” as EITE entities.  This fiscal note assumes that the intent is to provide EITE status for petroleum refinery facilities located in Washington State.  Based on this assumption, the EITE allocations are assumed only for emissions associated with petroleum refining facilities.

Section 13 would provide for an allocation of no-cost allowances to be distributed directly to electricity generators in order to mitigate potential impacts on electricity rates. This fiscal note assumes that all electricity utilities and providers supplying electricity to Washington State rate payers would receive no-cost allowances equivalent to their allowance budgets for each year of program coverage.   Investor-owned electricity providers would be required to consign all no-cost allowances to auction for the benefit of rate payers.  Consumer-owned electricity utilities and providers  would be allowed to consign no-cost allowances to auction for the benefit of ratepayers.  

Section 14 would require Ecology to adopt rules for allocating no-cost allowances to natural gas utilities for the benefit of Washington State rate payers.  This fiscal note assumes that all natural gas utilities supplying natural gas to Washington rate payers would receive free allowances equivalent to their allowance budgets for each year of program coverage.  Section 14 (2) would require natural gas utilities to consign a specified percentage of the no-cost allowances to auction each calendar year for the benefit of rate payers, prioritizing low-income customers.

Section 15 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 16 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. Revenue estimates assume all allowances not in the price containment reserve would be purchased at the estimated floor price for the year.

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

Section 17 (3) (a), (b), and (e) would provide for regulated entities to meet up to 5% of compliance obligations with offset credits in the first compliance period, and up to 4% of compliance obligations in the second compliance period, and ongoing, for offset projects; entities can apply offset projects on federally recognized tribal land to meet an additional 3% of compliance obligations in the first compliance period and 2% of obligations in the second compliance period.  Revenue estimates assume maximum usage of offset credits - offset credits are removed from the net priced allowances.

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. 

Total proceeds from auctions for each calendar year, starting with calendar year 2023, were estimated for each corresponding fiscal year, based on an assumption of all required allowances being purchased equally across each of the four annual auctions.

The fiscal year-based auction revenue is estimated in the Forward Flexible Account and the Climate Investment Account based on the allocations specified in Section 11.

The amount paid by each fee payer would be based on the fee payer’s GHG emissions and the number of allowances purchased.

Greenhouse Gas Reporting Fees:

Section 24 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 24 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 70A.15.2200, 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 fiscal note.

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 SSB 5126, 2021 Legislative Session.

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

CURRENT LAW:

Washington does not currently have a cap and trade system and there is no Washington-based market for businesses to trade carbon allowances.

DIFFERENCES FROM PREVIOUS VERSION:

Section 11(7) of the substitute bill creates the forward flexible account (the climate investment account is created in both the current version and the previous version). In the substitute bill, auction proceeds are deposited first in the forward flexible account before funding the climate investment account. Receipts in the forward flexible account may only be spent for transportation projects or other projects identified in an omnibus transportation appropriation. 

Section 9 of the substitute bill revises the set of entities subject to the greenhouse gas emissions cap. Most notably, the cap is extended to include entities that supply or use natural gas in excess of 25,000 metric tons (MT) of carbon dioxide (CO2) equivalent.

OVERVIEW

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

Allowance Auction and Trading

The bill requires Ecology to set the annual allowance budget to ensure that the emission limits for 2030, 2040, and 2050 in RCW 70A.45.020 are met. The bill stipulates that 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 should link the auction and allowance trading system with other jurisdictions.

New Accounts

The substitute bill requires the transfer of auction proceeds to the state treasurer for deposit in designated accounts. A financial services administrator contracted by Ecology will conduct the auction and transfer the funds. Auction proceeds up to approximately $272 million in fiscal year 2023 will first go to the forward flexible account created in this bill. (Higher amounts are designated to the forward flexible account for later years.) Upon appropriation, revenues in the forward flexible account may be used only for transportation projects. After funding the forward flexible account, any additional auction proceeds raised in the auction will be deposited in the new climate investment account. Upon appropriation, money in the climate investment account may be used to cover the program's costs, to implement the working families tax rebate, for programs that mitigate greenhouse gas impacts in overburdened communities, for clean transportation programs, for natural climate resilience solutions, for clean energy transition and assistance programs, and/or for 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 7-21, including the emission allowance auction and market.

- The emission allowances budgeted by Ecology for a compliance period may be purchased at auction and/or traded in secondary markets.

- Auction sales of emission allowances and sales on secondary markets will begin in January 2023.

- The market price of emission allowances are determined by market participants participating in auctions and otherwise buying and selling allowances from one another. 

Background

- 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.

- 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 emission allowances 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 emission allowances will meet the taxable receipts threshold to be required to pay the higher 1.75% services and other B&O tax rate.

- 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.

B&O Tax Collections (Example)

- For example, if in FY 20XX:

     - The market price of emission allowances is $20 per allowance, with each allowance representing 1 MT of CO2-equivalent emissions;

     - The year begins with 20 million emission allowances available, including allowances budgeted by Ecology for auction in FY 20XX and unused allowances carried over from the previous year. 

     - Of these, 15 million allowances are either utilized in FY 20XX by the original owner of the allowance or banked for future use;

     - The remaining 5 million allowances are sold to other entities on Washington's emission allowance market during FY 20XX;

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

$20 x 5 million x 1.75% = $1.75 million.

The example above is provided to illustrate the calculation of the B&O tax on sales of emission allowances 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
Department of Commerce

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