Notice of Committee Passage for Engrossed Second Substitute Senate Bill 5126. PL - Update: Passed Legislature

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E2SSB 5126.PL, 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 AQHDIA	Auction Revenue - to CERA	GHG Reporting Fee	Total
2022		$0	$0	$0	$0	$0
2023		73,272,259	20,000,000	127,341,000	0	$ 220,613,259
2024		77,271,977	10,000,000	356,697,000	0	$ 443,968,977
2025		67,657,286	10,000,000	366,558,000	0	$ 444,215,286
2026		72,732,184	10,000,000	359,117,000	1,291,984	$ 443,141,168
2027		101,416,116	10,000,000	359,117,000	1,281,204	$ 471,814,320
2028		126,759,356	10,000,000	359,117,000	1,281,204	$ 497,157,560
2029		116,715,310	10,000,000	359,117,000	1,281,204	$ 487,113,514
2030		97,698,300	10,000,000	359,117,000	1,281,204	$ 468,096,504
2031		101,271,424	10,000,000	359,117,000	1,281,204	$ 471,669,628
Total:		$ 834,794,212	$ 100,000,000	$ 3,005,298,000	$ 7,698,004	$ 3,947,790,216

Department of Ecology:

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.

Note regarding Transportation Revenue Act Contingency: Section 22 would delay compliance obligations under the act unless a separate additive transportation revenue act were to become law, as defined in section 22 (7). The fiscal note assumes that these conditions would be met; in the event that these conditions were not met, Ecology would suspend compliance obligations for covered entities.  This could reduce costs and auction revenue during the suspension of compliance requirements. 

Cash Receipts from Purchases of GHG Emissions Allowances: 

Under section 12, auction proceeds would be collected by the financial services administrator and transferred to the State Treasurer for deposit as follows:  

Auction revenue up to the amounts specified below would first be deposited in the Carbon Emissions Reduction Account (CERA) each fiscal year, 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 28 and the Air Quality and Health Disparities Improvement Account (AQHDIA) created in section 31.

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

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

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

d)         FY 2026 through FY 2037: first $359,117,000 to the CERA, with the remaining auction revenue to the CIA/AQHDIA;

For fiscal year 2038 and each fiscal year thereafter, fifty percent of auction proceeds would be deposited in the Carbon Emissions Reduction Account, and the remaining auction proceeds would be deposited in the Climate Investment Account and Air Quality and Health Disparities Improvement 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 10 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.  

The average annual eligible emissions from 2015 to 2019 (excluding biogenic emissions, which would be exempted as biomass under section 10) were calculated for all entities meeting the thresholds and criteria for each compliance period, as described in Section 10.  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.

Per section 13, emissions allowances for energy-intensive, trade-exposed (EITE) entities would decline by 3% in the first year of the second and third compliance periods.  Future allowance budgets and no-cost allocations would hold at the same levels if the legislature were not to adopt a compliance obligation for EITE by December 1, 2027.  For purposes of this fiscal note, the allowances are held at the calendar year 2031 levels through calendar year 2040.

Emissions allowances would need to decline by roughly 7.1% each year for all non-EITE 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 7.1% from the baseline annual emissions for each of the covered entities during this compliance period. The budget would continue to decrease from the baseline by an additional 7.1% of baseline emissions each successive year.

During the second compliance period, starting on January 1, 2027, the reduction curve for non-EITE entities continuing from the first compliance period would be remain at 7.1% 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.  

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

Per section 12, 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 13 would provide for an allocation of free allowances equal to the allowance budgets to EITE entities.

Section 13 (3) would provide for a carbon intensity (CI) benchmarking pathway for EITE allowance allocations; because the allocations would be based on the benchmarks, which would be calculated based on consultation with industries and rulemaking, impacts to allowance budgets and no-cost allocations from CI calculations would be indeterminate and are not considered in this revenue estimate.  The CI benchmarks would be a different metric from the allowances used in this revenue model.    The application of CI benchmarks would have an indeterminate impact on allowance budgets, allocations of no-cost allowances, and auction revenue.

Section 14 would provide for an allocation of no-cost allowances to be distributed directly to electricity utilities 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.   

Section 15 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 15 (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 16 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 17 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.  

Section 19 (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.

Section 9 (2) would require annual allowance budgets to be reduced by the emissions equivalent of offset projects.  

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.

The reduction of the auction allowance budget for estimated offset usage and the less stringent compliance curve for EITE reduces the number of available allowances to purchase in auction for all entities that would not receive allocations of no-cost allowances.  The percentage change in the auction allowance budget from a scenario excluding these factors is used to calculate a purchase price by increasing the floor price by the percentage reduction of available allowances each calendar year resulting from offset adjustments and compliance pathway adjustments to compensate for the EITE compliance curve.  Estimated purchase price is still conservatively low when compared to CA projected ceiling prices (included for reference purposes only).

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 Carbon Emissions Reduction Account, the Climate Investment Account, and the Air Quality and Health Disparities Improvement Account based on the allocations specified in Section 12 and specified revenue in section 31.

Per section 28, after 5% of revenue earnings is reserved for administrative costs, beginning July 1, 2024, the Treasurer would transfer 75% of the Carbon Investment Account balance to the Climate Commitment Account created in section 29, and 25% of the balance to the Natural Climate Solutions Account created in section 30.  The revenue tables do not include the Treasurer transfers, only the distributions of auction revenue as specified in section 12.

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 Fee Revenue:

Section 33 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 33 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:

ASSUMPTIONS

- A transportation funding act meeting the conditions in 22(7) is passed, so there is no delay to the bill's compliance obligations.

- Ecology will administer the program described in Sections 8-24, 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 between one another. 

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 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

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