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SUMMARY

In this Low Carbon Prosperity Institute (LCPI) analysis, we explore scenarios of carbon reduction investment performance based on the revenue allocation described in Initiative 1631. The initiative, also known as the “Protect Washington Act”, imposes a steadily increasing carbon pollution fee on most fossil fuel uses and directs revenue toward projects to reduce carbon emissions, as well as investments in forests, water, community preparedness, and support to displaced workers and people with lower incomes. The measure is intended, but not required, to reduce carbon emissions in 2035 to 25% below 1990 levels, consistent with the state’s legislated target.

The initial carbon pollution fee of $15 per (tCO2e) in 2020 increases annually by $2/tCO2e plus urban-area inflation.  As a mechanism to avoid punitive cost increases and reward performance, meeting the state’s 2035 target and demonstrating a continued trajectory towards deeper reductions mid-century would trigger a freeze in the rate of fee increase. Meeting the state goal in 2035 will require a reduction of 30 million metric tons of carbon dioxide or equivalent (tCO2e) relative to current statewide emission levels. LCPI finds that one third of reductions, approximately 10 million tCO2e, should be expected from current trends and existing policies plus the price-elasticity effect of the fee if I-1631 is enacted.  The measure would rely on a robust investment program to achieve the remaining 20 million tCO2e.

LCPI finds that in order for the investment program to meet its target, the average cost paid to reduce carbon emissions must be between $15 and $45 per tCO2e. Performance within the range is primarily dependent on the actual allocation of revenue, which is to be determined by the appointed governing boards subject to legislative appropriation. While 70% of total expenditures are directed toward “Clean Energy & Clean Air” investments, additional claims on those funds may diminish the amount made available for direct emission reduction activities.  LCPI evaluates two scenarios for revenue allocation, one in which two-thirds of total expenditures are directed toward activities which reduce carbon emissions, and another in which one-third is allocated. The results of this analysis have important implications for the design and strategy of investment plans.

Factoring in the impact of a rising fee on investment decisions, this range of necessary investment cost-effectiveness can be compared to what ​California’s Climate Investments​ from its Cap and Trade proceeds has experienced ($67/tCO2e) or to British Columbia’s early experience with carbon reduction investments located within the Province (~$20 CDN / tCO2e).  Given the larger volume of carbon reduction I-1631 would target, the carbon fee investments must at least match the performance of those in California and B.C, a challenge the state is more likely to fail should competing priorities or discretionary shifts in allocation erode the funding made available for carbon reduction.

In an ideal scenario, the priorities I-1631 seeks to address are all achieved within the target investment price range, triggering the fee-freeze and accomplishing multiple aims. In reality, the board is likely to encounter trade-offs and must ably manage tensions if the initiative is to “Clean Up Pollution”1 to promised levels.

ANALYSIS

This analysis aims to answer the following central question:  

What cost-performance must I-1631 investments in carbon reduction achieve in order to meet the state’s 2035 emissions target and trigger a freeze in the rate of fee increase?

To better understand how I-1631 might work to meet its goals, LCPI deployed its Greenhouse Gas Reduction Explorer modeling tool. The Explorer is built upon the state’s Carbon Tax Assessment Model (CTAM) and has undergone review by the Washington Departments of Commerce and Ecology. CTAM is the same program used by OFM for the I-1631 fiscal note.  Lawmakers and other stakeholders have relied on the Explorer’s data-driven approach to evaluate possible policy outcomes of price signals (e.g. the fee) and targeted investments.

Unlike the revenue neutral carbon tax which appeared on ballots in 2016, Initiative 1631 is a carbon pollution fee which generates revenue for investments guided by an appointed board. Of total expenditures, seventy percent is allocated to Clean Energy & Clean Air for projects to reduce carbon emissions, as well as transition assistance for displaced fossil fuel workers and people with lower incomes; twenty-five percent to forest and water projects; and five percent to a category called “healthy communities”.2  While substantially different in implementation, these priorities are largely similar to those seen in other price-and-invest legislative proposals such as SB 6203.

To answer the central question we considered the following factors concerning I-1631:

  • Scope of Emissions Coverage — Energy intensive trade exposed (EITE) businesses, which are highly sensitive to the cost of energy, are exempt, as are coal plants under closure agreements, and airplane and maritime fuels.3  In total, nearly 30 percent of fossil fuel emissions from in-state activities are exempt.4  LCPI modeling incorporates expected reductions from existing policies into its baseline assumptions, such as the closure of the Centralia Coal Plant. In the absence of I-1631, existing policies and consumption trends are projected to decrease state emissions from 96 million tCO2e in 2018 to 90 million tCO2e in 2035.
  • Response to Pricing Carbon — Businesses and consumers respond to higher prices by buying less fossil fuels or shifting to less carbon intensive products, an effect called “price elasticity”.  LCPI estimates the price elasticity response to the fee will reduce cumulative statewide emissions by 3 to 5% over the 2020-2035 period, including 4 to 5 million tCO2e in 2035 (Figure 3: top, green shaded portion).  That is enough to decrease projected state emissions in 2035 to 85 or 86 million tCO2e.
  • Investment Performance within Available Funds — Investment plans to purchase projects that certifiably reduce the use of fossil fuels are intended to provide roughly 80% of the ambition required to meet the state’s 2035 goal. Project opportunities are constrained by overlay criteria, multi-jurisdictional approval processes, and competition with other priorities for funding.  LCPI modeled two scenarios as upper and lower bounds of the revenue made available for carbon reduction projects. More money made available for carbon reduction enables the fund to afford a wider range of projects to meet its 2035 goal.

LCPI analysis does not attempt to project the likelihood of the state being deemed on track to achieve its 2050 goals.  The results demonstrate what investment performance would be required for the board to have a reasonable justification for freezing the fee: meeting the state’s 2035 emissions target.  We assume carbon reductions from investments only occur from the Clean Air & Clean Energy expenditures, which includes retained credits by utilities.

Revenue Generated

The pollution fee is assessed on the use of fossil fuels in increments of one tCO2e. Assuming no freeze, the fee of $15/tCO2e in 2020 would rise to $45 (USD 2020; $63 in year 2035 dollars) by 2035, and $75 (USD 2020) by 2050.

LCPI projects the fee will generate approximately $12 to $13 billion through 2035, in addition to $4 to $5 billion in utility retained credits (expressed in present day dollars: USD 2017). Of total expenditures, seventy percent is directed toward Clean Air & Clean Energy investments, which includes uncapped and uncertain allocations for worker-transition support programs and the elimination of cost burdens created by the fee on people with lower incomes. Utilities may retain and implement any potential fee obligation, totalling as much as forty percent of Clean Air & Clean Energy expenditures as credits for approved investments. Otherwise, those funds revert to the state treasury within the Clean Air & Clean Energy Account.

The model assumes that reductions through investments reduce the quantity of fossil fuels that will generate revenue for the program. In the extreme, additional fees of $3 billion (a 20% increase, in USD 2017) would be collected through 2035 if investments accomplish no additional carbon reduction, resulting in both higher emissions and total fee collection than under these projections.

Initiative 1631 Emission Reduction Goals

The initiative tasks investment plans to achieve a reduction consistent with the state’s 2035 statutory GHG goal. It provides the following terms under which the pollution fee will freeze:

“The pollution fee is fixed and no longer increases, except for annual increases for inflation, when the state’s 2035 greenhouse gas reduction goal is met and the state’s emissions are on a trajectory that indicates that compliance with the state’s 2050 goal is likely, as those goals exist or are subsequently amended, as determined by the board.”

Additionally, it provides this guidance on the expectations of the investment program:

“The investment plans must prescribe a competitive project selection process that results in a balanced portfolio of investments containing a wide range of technology, sequestration, and emission reduction solutions that efficiently and effectively reduce the state’s carbon emissions from 2018 levels by a minimum of twenty million metric tons by 2035 and a minimum of fifty million metric tons by 2050 while creating economic, environmental, and health benefits. The emission reductions to be achieved under the plan should, in combination with reductions achieved under other state policies, achieve emissions reductions that are consistent with the state’s proportional share of global carbon reductions that will limit global temperature increases to two degrees centigrade and preferably below one and one-half degrees centigrade.”

LCPI estimates that a reduction of 20 million tCO2e in 2035, in addition to the impacts of price elasticity and existing policies, shall place the state in compliance with statutory limits of 25% below 1990 greenhouse gas emission levels, equal to 66 million tCO2e in 2035.

Available Funds Scenarios

To understand the investment performance required to meet the target, LCPI modeled the following two scenarios as upper and lower bounds of the revenue made available for carbon reduction through the year 2035:

  • Reduction-centric: Nearly all Clean Air & Clean Energy expenditures (70% of total initiative expenditures) are directed toward projects with the primary aim of carbon reduction, with only a small percentage going to worker-support programs.
  • Reduction-peripheral: Roughly half of the Clean Air & Clean Energy expenditures (33% of total initiative expenditures) are directed toward projects with the primary aim of carbon reduction, with a more substantial share used in ways that do not directly reduce carbon emissions, including triple the amount going toward worker-support programs relative to the reduction-centric scenario.

Clean Air & Clean Energy expenditures for both available fund scenarios are considered to include any utility retained credits.5  LCPI did not evaluate a scenario where the goals or investment account allocations themselves are further amended by the legislature or adjusted by the governance board, which would be purely speculative.

The scenario assumptions are based on two potential diversions from Clean Air & Clean Energy Account expenditures to priorities other than carbon reduction as specified in the initiative text.

  1. Direct bill assistance. A minimum of 15% of Clean Air & Clean Energy expenditures, inclusive of any utility credits, is directed “to prevent or eliminate the increased energy burden of people with lower incomes as a result of actions to reduce pollution, including the pollution fees collected from large emitters in this chapter.”6  We used a range of 0% (reduction-centric scenario)7 to 25% (reduction-peripheral scenario)8 of expenditures going toward bill assistance in the form of cash rebates or payments, which we assume produces no carbon reduction benefit. Such use of funds could actually increase emissions relative to projections as the resulting reduction in energy costs for lower income households would increase the quantity they consume. Refer to Appendix A for more details on these shares of expenditures.
  2. Displaced worker support.  The worker-support program requires $50 million after four years, replenished annually with “additional moneys from the fund if necessary” and no annual maximum.  A recent report by the Political Economy Research Institute (PERI) evaluates the worker-support costs of six different policy package combinations and the workers who receive them.9   The PERI report finds that the average annual wage for the professions most likely to receive worker support is $150,000 dollars. The costs of these six scenarios averaged $80 million per year with a range of $5 million to $294 million per year. Excluding the biggest outlier on each end, the range is $43 million to $114 million per year.  We simplify this, ramping up funds after $50 million over four years to reach a 2020-2035 average of $40 million per year for the reduction-centric scenario and $120 million per year for the reduction-peripheral scenario.

Investment Cost-Performance Pathways

Investment costs are measured by the amount paid to certifiably remove one tCO2e from the atmosphere ($/tCO2e). LCPI projections describe necessary system averages, net of inefficiencies. A system inefficiency could include an abandoned or more expensive than anticipated project, or additional costs to administer the account.10

To establish a necessary cost-performance range, LCPI applied potential investment pathways to each scenario. The first pathway is Deployment-Driven, which assumes the cost to reduce a unit of carbon increase 5%/year as “low-hanging fruit,” is used.  The second pathway is Technology Driven, which assumes the cost decreases 5%/year with the advent of lower cost technology solutions.  In Appendix B are additional results, including a middle cost path which assumes No-Change in investment cost-effectiveness over time. For all investment pathways, an average 10-year carbon reduction lifetime for an investment is assumed, such that any capital investments made from 2026 onwards will, on average, still be directly reducing carbon emissions in 2035 (and year 2025 onwards for 2034, etc).11

Each investment pathway also leads to a different result in terms of cumulative emissions reductions over the 2020-2035 period. More cumulative reduction is expected under the deployment driven pathway (250-280 million tCO2e), than under a technology driven pathway (160-170 million tCO2e).

The scenario results should be viewed in the context of the carbon price impact on the economics of lower carbon opportunities. As the carbon price increases, some projects in non-exempt sectors may become cost effective over their expected lifetime even without additional investment or incentives, while higher cost projects may come into range of what pencils out.

Table 1: Clean Air & Clean Energy Account, Scenario Summary

 

Average, reduction- centric scenario

Average, reduction- peripheral scenario

Direct Bill Assistance (share of total fee revenue and claimed credits)

0%

25%

Average annual costs of worker support, 2020-35 (USD 2020)12

$40 million

$120 million

Investment performance needed, 2026-2035 average ($/tCO2e, USD 2020)

$41 to $46

$17 to $21

Net of any program inefficiencies, scenario results indicate a range of approximately $15 to $45 / tCO2e (USD 2020) for investments will be necessary to reach 2035 targets and trigger the fee freeze.  The main driver is the amount of monies made available for direct carbon reduction, which ranges from roughly $5.7 billion (USD 2017, of a total $17.4 billion) in the reduction-peripheral scenario, to roughly $11.8 billion (USD 2017, of a total $17.8 billion) in the reduction-centric scenario (Appendix B for detailed results).  The reduction-peripheral scenario requires over 50% cheaper projects than in the more robustly funded reduction-centric scenario.  

The revenue allocation and emissions trajectory for the reduction-centric scenarios and reduction-peripheral scenarios are presented below (Figures 1-3). For each scenario the chart presents an average of the investments effectiveness pathways (deployment-driven, technology-driven, and no change).

Figure 1: Fee allocation by category under reduction-centric scenario

Figure 2: Fee allocation by category under reduction-peripheral scenario

Figure 3: Emissions trajectory under average of both scenarios

Is Required Investment Cost Performance Realistic?

The experience of other jurisdictions, and an overview of reported project costs provides insight into the practicality of investments delivering sufficient reductions within the cost-effectiveness range of $15-$45 / tCO2e.  Marginal Abatement Cost Curve (MAC Curve) analysis provides a useful starting point for assessing projects.  MAC Curves visually order the incremental carbon abatement costs and the available volume of emissions across a suite of project types. Such analyses are underpinned by project-level assessments of carbon reduction economics.  The range of costs spans negative (may require upfront capital but return net value over time, or are economically favorable but face other barriers to deployment) to positive (do not fully return value and likely require financial support to pencil out). Public money may be spent to unlock cost-negative projects, however the benefit will generally flow to the economy rather than back to the state unless designed to recover costs through profit-sharing arrangements.  Utilities may be better positioned to realize these benefits using retained credits, since they tend to have established programs and projects aimed at lower cost-range opportunities, such as Energy Efficiency and switching power dispatch away from coal.13

Figure 4: Example Carbon Reduction Projects Compared to I-1631 Target Zone

Figure 4 above provides a cost-effectiveness comparison of various project types derived from Oregon, along with California’s experience and the range of I-1631 necessary cost-effectiveness. The chart is by no means complete, up-to-date, or specific to Washington state.  However, it demonstrates the general approach. With a fee in place, the impact on project economics needs to be factored in as well.

At the program level, California is the largest economy-wide carbon reduction program in the United states, having managed auction proceeds and investments since 2014.  California’s Climate Investments (CCI) anticipates an average of $67/tCO2e with its board implemented funds.  That cost-performance is skewed by the most-expensive 10% of reductions, projected at $160/tCO2e. Nearly 90% of the best cost-performing investments are projected at $40/tCO2e.14 Similar to I-1631, California’s program includes overlay criteria, targeting a significant share of investments for disadvantaged communities15 while also targeting environmental and economic “co-benefits”, such as other air pollutants.16  Both the cost-effectiveness and available supply of different project types will vary by state, requiring a deep understanding of the applicable regulatory and market conditions that influence costs of abatement.

Another example is the Carbon Neutral Government British Columbia program (formerly Pacific Carbon Trust), which reported 2016 reduction cost performance of $25 CDN / tCO2e following a report after the program’s first seven years (2008-2014) of 4.5 million tCO2e of in-province offset programs for $53.4 million ($12 CDN/ tCO2e).  The Regional Greenhouse Gas Initiative (RGGI) provides another example.  RGGI took effect in 2009 and was recently extended another decade. While RGGI, like California, showed that state-evel actors “could boost economic growth and job creation by imposing a small price on GHG emissions and investing the money to increase energy efficiency and renewables”, the lessons of a power-sector only cap in a multi-state region with a different emissions profile from Washington presents a tougher case for comparison.

Regional project examples that are within a budget to achieve the I-1631 fee-freeze could include: capturing methane from waste, smart meters, electrification or biomass fuel switch, organics and recycling programs, cellulosic ethanol, bus fuel efficiency, reafforestation, and heating/cooling upgrades. On the other hand, many popular projects, some of which are referenced as examples in I-1631, may be far more expensive than what investments must return on average.  Examples include certain types of low carbon biofuels, wind turbines, home solar panels, urban forestry, and transit and intercity rail.   The Yes on 1631 campaign has compiled a list of local investments that are likely representative of those that would be closely considered for funding.  These include investment in five categories: wind power, forestry and water, energy efficiency, and public transit including a focus on rural investments.

At a minimum, I-1631 will need to clearly beat California’s to-date projected investment performance of $67/tCO2e to achieve the 2035 emissions targets.  Working in favor of I-1631 is market pricing. California’s cap-and-trade fee ($15 in latest auction) is lower than the I-1631 price signal, which starts at $15/year and escalates $2/year until the target is reached. The market effect of higher carbon pricing allows the same projects that reduce fee exposed-emissions to need less additional stimulus in Washington to be economically favorable.  

Washington projects launched in 2026 or later – those most likely to directly contribute to the 2035 target – would have an additional decade of experience relative to investments already implemented in California, and the benefit of technological improvement and carbon price certainty to factor into the decision-making process.17  On the other hand, the carbon reductions from the CCI funds implemented to date are projected to reduce only a fraction of the roughly 20% of statewide emissions that I-1631 investments are targeting.  This is also true for the BC offsets and RGGI investments of auction proceeds. That smaller proportional scale may be lower-hanging fruit of cost-effective investments, yet in the case of CCI implemented funding remains more costly than I-1631 needs to deliver.

DISCUSSION & CONCLUSION

I-1631 sets in motion an impressively ambitious program.  Lots of eyes will be upon Washington as the second state in the nation to implement a program of this scope.  While proponents can point to promising evidence that technology trends and shrewd investment strategies will break in its favor, the initiative leaves little to no room to depart from proposed revenue allocations.  To meet its ambitions, investments will need to be managed with the kind of professional high-performance skills seen in commercial investment funds and pursuing co-benefits will need to be carefully considered, if not moderated.  

In an ideal world, all of the initiative’s priorities would go hand-in-hand.  Reality is likely to require a balancing act between greenhouse gas reduction and other priorities, requiring difficult decisions in the face of constraints.  The governance board must weigh the importance of reducing carbon emissions with low income assistance with supplemental wage support for displaced refinery workers with mitigating costs for all consumers by triggering the fee-freeze.18 Managing these competing priorities may mean resisting the pressure to pursue popular projects with too high of cost, and it may require enacting additional accountability tools to maintain adherence to cost-performance over decades of state budgeting cycles.

The development of investment plans will be a critical process step to determine the likelihood of the initiative serving to meet the state’s 2035 emissions target and trigger a freeze in the rate of fee increase. Smart strategies will harness emerging and rapidly cost-declining technologies, adeptly manage the impact on project economics of the carbon price, and seek to maximize the leveraging of state investment with private dollars. Only when these plans clarify the revenue allocations among priorities and the terms under which projects will be considered, will it be possible to forecast real world performance.

The Low Carbon Prosperity (LCP) Institute’s system design work delivers on the need for technically accurate long-term greenhouse gas reduction strategies to guide policy decisions. We explore the opportunities and complex risk factors associated with creating climate policy from the state level up. Policy makers, citizen groups, businesses and other stakeholders can count on the Low Carbon Prosperity Institute to provide sound data-driven analysis on the future of carbon policy regardless of the outcome of I-1631 at the ballot.