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Oregon Revamps Carbon Pricing Proposal for New Legislative Session

Today, state representatives in Oregon are convening for the first time this year, which means that Governor Kate Brown has just 35 days to mobilize support for her carbon pricing push before the legislative session ends. This year’s bill to implement an economy-wide cap-and-trade system is familiar to Oregon legislators, as it’s a slightly modified version of a proposal that provoked strong reactions from state legislators last year.

I have written previous blog posts about Oregon’s long-running attempt to implement a statewide carbon pricing system, and I contributed to two memoranda sent to the Oregon Carbon Policy Office last year that presented the overall advantages of carbon pricing and elaborated on key policy choices facing the state. But after strategic changes were made to this year’s bill, many are wondering whether the modified bill does enough to appease last year’s detractors while still preserving the support of dedicated lawmakers.

As my new issue brief makes clear, this year’s carbon pricing proposal addresses valid concerns from rural communities and industrial companies while still meaningfully helping the state achieve its goal of an 80 percent reduction in greenhouse gas emissions by 2050.

Phase-ins for Rural Areas

One major change has arisen in response to concerns from rural legislators that carbon pricing would disadvantage their local economies. Under the modified bill, for the first three years (starting in 2022), carbon pricing for suppliers of gasoline and diesel would affect only the Portland metropolitan area. By 2025, carbon pricing for these transportation fuels would expand to any metropolitan areas that have delivery of 10 million gallons of fuel or more. Fuel supplied to the state’s more rural areas would not be subject to carbon pricing, though counties have the option to opt in—and if 19 counties do, then carbon pricing would automatically be implemented statewide.

These changes come in response to concerns from rural communities, which have few available opportunities to reduce vehicle miles traveled. This phase-in approach in this year’s proposal is like the approach used in other carbon pricing schemes. California, for instance, began carbon pricing in the power and industry sectors before expanding to the transportation sector two years later; Germany, too, has signaled that it intends to expand emissions trading to include transportation.

And because these rural areas would not have accounted for a significant portion of emissions reductions anyway, the phase-in should not affect the market or emissions projections, nor should leakage be a significant concern, at least in the short run. If this proposal can generate support among rural legislators, all while still pricing about 85 percent of fuels by 2025, then the revamped policy retains its potential for success.

Still, because carbon pricing is most successful when applied widely, I recommend that the legislature consider ways to clarify the state’s eventual commitment to full statewide coverage of transportation. If the state sets clear expectations for a carbon price that will affect all counties at some point in the future, then rural residents might feel motivated now to make more efficient vehicle purchases and land-use decisions, even if, for a period of time, rural counties retain the option to avoid carbon pricing.

Adjustments to Industrial Regulation

Another change in this new bill involves how industrial companies’ emissions are regulated. Under the new bill, compliance standards for natural gas use will apply only to fuel suppliers, rather than downstream to large industrial facilities that burn natural gas. This upstream approach to regulating emissions from natural gas will reduce the number of companies that are regulated directly for emissions from industrial processes. Industries deemed sufficiently “energy intensive” or “trade exposed” will be granted free emissions allowances for emissions related to manufacturing processes, as well as for the increase in costs for their natural gas use. However, those companies will also be required to conduct energy audits and implement efficiency investments that are found to be cost effective.

Some fear that altering compliance responsibility here might limit the impact of carbon pricing, by not sufficiently encouraging downstream companies and energy intensive companies to alter their behavior. However, I argue that these modifications are minor enough to not have a noticeable effect on the success of this carbon pricing push or its likelihood of cutting emissions. Reducing the number of compliance entities comes with the administrative advantage of making the system easier to monitor and regulate. Low administrative costs would be helpful for a state that’s embarking on a fairly novel endeavor—Oregon would be just the second US state to implement an economy-wide carbon pricing system.

Still, Oregon should be careful as it decides how to distribute free allowances to energy-intensive companies—the new bill could inadvertently create an incentive for companies to emit even more, in hopes of receiving more emissions allowances. There are ways to protect these companies while also providing incentives to reduce emissions. This issue, currently unresolved, will likely be a subject of debate for legislators in the weeks ahead.

Implications for Oregon, the Nation, and the World

Ultimately, these modifications will not hinder Oregon’s goals of creating a vibrant, competitive carbon marketplace. And lest these recent adjustments be confused for efforts to limit the scope of carbon pricing, the number of compliance entities under this proposal would be comparable to the number that participated at the start of California’s carbon trading program, and even more than the number that currently participates in the Regional Greenhouse Gas Initiative. The reach of the program could even extend further, as Oregon’s proposal aligns fairly well with guidelines from the Western Climate Initiative, thus opening up future opportunities for linking carbon markets with California and Quebec.

Most importantly, cap and trade in Oregon as currently designed would reduce emissions, likely cause zero disruptions in employment, and eventually promote new clean energy jobs—all while serving as a model for other states that are considering carbon pricing systems of their own.