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

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2SSB 5126, titled AN ACT Relating to the Washington climate commitment act, has been passed by the Senate Committee on Ways & Means. 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		Auction Revenue	Auction Revenue - to FFA	GHG Reporting Fee	Total
2022		$0	$0	$	$
2023		101,020,158	127,341,000	0	$ 228,361,158
2024		102,957,188	356,697,000	0	$ 459,654,188
2025		94,630,430	366,558,000	0	$ 461,188,430
2026		100,914,180	359,117,000	1,291,984	$ 461,323,164
2027		111,775,115	359,117,000	1,281,204	$ 472,173,319
2028		121,442,597	359,117,000	1,281,204	$ 481,840,801
2029		116,366,145	359,117,000	1,281,204	$ 476,764,349
2030		103,518,865	359,117,000	1,281,204	$ 463,917,069
2031		112,541,010	359,117,000	1,281,204	$ 472,939,214
Total:		$ 965,165,688	$ 3,005,298,000	$ 7,698,004	$ 3,978,161,692

Department of Ecology:

The following changes in 2SSB 5126 would change GHG emissions allowance auction revenue estimates, compared to SSB 5126:

-  Section 9 (3) would delay the inclusion of emissions from landfills until 2031.

-  Section 11 (7) would revise the specified amounts directed to the Forward Flexible Account for fiscal years 2023, 2024, and 2025, and fiscal years 2026 through 2037. 

-  Section 12 would provide that for all compliance periods prior to December 31, 2034, EITEs receive 100 percent no-cost allowances proportional to the cap decline; beginning January 1, 2035, the annual no cost allowance allocation would decline annually between 2035 and 2050 based on the facility's proportionate share of the program budget in 2035.

-  Section 15 would add an emissions containment reserve withholding requirement for the first compliance period.

-  Section 16 would reduce the minimum amount of allowances to be place in the price containment reserve from 4 to 2 percent of the allowance budgets during the first compliance period.

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 over sixteen years, and the remaining proceeds would be deposited into the Climate Investment Account (CIA) created in section 23.

a)         FY 2023: first $127,341,000 to the FFA, with the remaining auction revenue to the CIA;

b)         FY 2024: first $356,697,000 to the FFA, with the remaining auction revenue to the CIA;

c)          FY 2025: first $366,558,000 to the FFA, with the remaining auction revenue to the CIA;

d)         FY 2026 through FY 2037: first $359,117,000 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 GHG 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.  Per section 9, landfills would not enter program coverage until 2031.

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 result 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 20.4 MMT CO2e, and the CY 2027 allowance budget would be reduced by 12.3%, adding 17.8 MMT CO2e to the CY 2027 allowance budget.

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.  Each covered entity would need to purchase an allowance for each ton of carbon dioxide it emits, and 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 be 100% of each entity’s allowance budget in the calendar years 2023 through 2034.  The allocations would decline starting in 2035.  This fiscal note assumes that the decline would be one percentage point a year.  Therefore, in 2035, EITE entities would receive 99% of their allowance budgets as no-cost allowances.

Rulemaking would determine the criteria for EITE designation in calendar year 2027 and beyond. This fiscal note assumes no change in EITE status from the designations established in 12 (1).

Section 12 (1) (j) would include petroleum refining operations with North American industry classification system (NAICS) codes “324110” 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.   Both consumer-owned and investor-owned electricity utilities and providers  would have the option to consign all no-cost allowances to auction for the benefit of rate payers during the first compliance period, and Ecology would adopt rules specifying consignment requirements for the second and subsequent compliance periods.  This fiscal note assumes that all no-cost allowances for electricity would be used to meet compliance obligations for all compliance periods. 

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, and would require 2% of allowances to be placed in the reserve in CYs 2023 through 2026.  The fiscal note assumes that allowances would continue to be withheld to the reserve at the same rate in future compliance periods.

Section 16 would require Ecology to set a minimum of 2% 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.  This fiscal note assumes that allowances would continue to be withheld to the reserve at the same rate in future compliance periods.  

For purchases from the price containment reserve, we looked at reserve price auction activity in other jurisdictions.  California holds vintage allowances for several years. 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 to carry forward.  

Ecology would also be required to establish by rule auction floor prices. Allowance floor prices are assumed to be the same as those in California.  California floor prices 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 18 (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 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 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.

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

Department of Ecology

The following legislators voted do pass:

Senator Steve Conway
Democrat
(360) 786-7656
steve.conway@leg.wa.gov

Senator Karen Keiser
Democrat
(360) 786-7664
Karen.Keiser@leg.wa.gov

Senator Sam Hunt
Democrat
(360) 786-7642
Sam.Hunt@leg.wa.gov

Senator Jeannie Darneille
Democrat
(360) 786-7652
DARNEILL_JE@leg.wa.gov

Senator Christine Rolfes
Democrat
(360) 786-7644
christine.rolfes@leg.wa.gov

Senator Jamie Pedersen
Democrat
(360) 786-7628
jamie.pedersen@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 David Frockt
Democrat
(360) 786-7690
David.Frockt@leg.wa.gov

Senator Mark Mullet
Democrat
(360) 786-7608
mark.mullet@leg.wa.gov

Senator June Robinson
Democrat
(360) 786-7674
june.robinson@leg.wa.gov

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

Senator Manka Dhingra
Democrat
(360) 786-7672
Manka.Dhingra@leg.wa.gov


The following legislators voted to refer the bill without recommendation:

Senator Bob Hasegawa
Democrat
(360) 786-7616
bob.hasegawa@leg.wa.gov

Senator Kevin Van De Wege
Democrat
(360) 786-7646
Kevin.VanDeWege@leg.wa.gov


The following legislators voted do not pass:

Senator Mark Schoesler
Republican
(360) 786-7620
mark.schoesler@leg.wa.gov

Senator Jim Honeyford
Republican
(360) 786-7684
Jim.Honeyford@leg.wa.gov

Senator Judy Warnick
Republican
(360) 786-7624
judith.warnick@leg.wa.gov

Senator Ann Rivers
Republican
(360) 786-7634
ann.rivers@leg.wa.gov

Senator John Braun
Republican
(360) 786-7638
john.braun@leg.wa.gov

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

Senator Lynda Wilson
Republican
(360) 786-7632
lynda.wilson@leg.wa.gov

Senator Keith Wagoner
Republican
(360) 786-7676
keith.wagoner@leg.wa.gov

Senator Chris Gildon
Republican
(360) 786-7648
GILDON_CH@leg.wa.gov

Senator Ron Muzzall
Republican
(360) 786-7618
MUZZALL_RO@leg.wa.gov



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

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