Kevin Tempest, Low Carbon Prosperity Institute
This technical memo presents modelled jobs and other benefits from investments through 2030 that could be catalyzed by revenue from Substitute Senate Bill 5126 (SB5126), the Climate Commitment Act. In this technical memo, I describe methodology, modelling, and revenue and investment results.
I consider only investments directed by the state, and the extent to which those investments leverage additional capital. Investments through both the transportation-focused Forward Flexible Account (FFA) and the Climate Investment Account (CIA) are considered.
Summary of Results
Based on investments deployed through 2030, totalling $3.7 billion to $4.1 billion, we project a range of between 160,000 and 195,000 full-time equivalent (FTE) job-years, $11 billion to $13 billion in employee compensation, $14 billion to $17 billion in economic value added to the state, $7.0 to $10 billion in climate benefits, and $15 to $21 billion in public health benefits (Figure 1).
Figure 1: Estimated investments deployed through 2030 from revenue raised by SB 5126 and outcomes from investments (top graph: billions of dollars, bottom graph: FTE job-years)
These projected results of investments using revenue generated from the Climate Commitment Act through 2030 include assumptions that investments are consistent with the Resilient Recovery Portfolio described in joint research between the Low Carbon Prosperity Institute and Climate XChange, and that investments leverage additional funding sources at similar ratios of the Washington State Clean Energy Fund or the California Climate Investment program (3.4 to 3.7 dollars leveraged per dollar invested by the state).
Revenue projections and allocations
For the purposes of modelling the investment impacts of revenue raised through the Climate Commitment Act, I base this analysis off the recent Fiscal Note for Substitute SB 5126 (the Fiscal Note) published on March 8th, 2021. This fiscal note concerns the substitute version with amendments of SB 5126 that advanced out of the Senate Committee on Environment, Energy & Technology on February 25th. In this fiscal note, several updates to the original bill are implemented, the most material of which are:
- Exemptions for most biomass, biofuels, and all aviation;
- Defining petroleum refineries as “Emissions-Intensive, Trade-Exposed” (EITE) facilities;
- Clarifying that allowances associated with electricity and natural gas (NG) utilities will not be revenue generating for the state and that NG utility coverage starts in 2023, not 2027.
In general, I use the same assumptions for coverage and net purchased allowances as the fiscal note (Table 1), with one exception. The fiscal note methodology includes a likely double counting of a portion of allowances removed from the “Estimated Allowances Purchased” that would otherwise be part of the revenue generating pool of allowances. Specifically, the fiscal note subtracts both 4% of the initial pool of allowances to the “Price Containment Reserve” (PCR), and an estimated lower demand for allowances from ongoing economic recovery after the pandemic-induced recession (“COVID-19 Overallocations”). These removals should not be additive. Rather, the PCR removals should be a subset of the COVID-19 Overallocations. Therefore, I correct for this likely double-counting by only removing a total volume equal to the COVID-19 Overallocations shown in the Fiscal Note, with the PCR removals treated as a subset of that volume (Table 1). The “Net Revenue Generating” volume of allowances in Table 1 are, therefore, higher than the “Estimated Allowances Purchased” in the Fiscal Note while the COVID-19 Oversupply is a smaller volume of allowances than in the Fiscal Note.
Table 1: Allowance Allocation, Distribution, and Purchased Volume by calendar year. The only columns that differ from the Fiscal note are the two farthest right.
The substitute bill and bill amendments specify revenue allocation between two accounts, the Forward Flexible Account (FFA) within the proposed transportation budget and the Climate Investment Account (CIA). The FFA is allocated $272 million in fiscal year (FY) 2023, $551 million in FY 2024, $437 million in FY 2025, and $325 million per year for subsequent FYs into the mid-2030s.
The fiscal note assumes a volume of PCR allowances available in subsequent years at a lower price than the current floor price. In the Fiscal Note, these allowances equal 30% of the PCR withheld allowances from the previous year, and are sold at the previous years’ floor price. This is not the designed mechanism of the PCR, which the bill states is to be used “in the event of unanticipated high costs for compliance instruments.” Allowance prices at the floor price are not an unanticipated high cost of compliance. Therefore, all allowance demand is assumed to be met at the current years’ floor price rather than including a subset at the prior years’ floor price.
The overall revenue generation is determined using the same allowance prices forecast in the original fiscal note which start at $20.6 in 2023 and rise to $33.7 in 2030 (Table 2), a 7% per year increase that aligns with projections for California. This price trajectory is the assumed floor price. This modeling does not project additional revenue from the potential of allowance prices rising above the floor price and does not include any revenue consigned to utilities, which if unused for the intended purposes rather would be available as new state revenue.
To estimate higher revenue potential I evaluate the impact of greater allowance demand arising from two factors: (1) assuming there is no COVID-19 related oversupply, and (2) assuming, as has been common in other carbon trading programs, that offset use is not maximized. Specifically, I assume that up to half of potential offset reliance is foregone and instead allowances generating new revenue are purchased.
Table 2: Climate Commitment Act revenue generation by calendar year through 2030
Revenue allocation and expenditures
Based on the revenue allocations described in the previous section and the total revenue projections in Table 2, the following revenue allocations are projected from this modeling (Table 3). The total projected revenue through 2030 is $3.0 billion for the Forward Flexible Account and $1.5 to $2.0 billion for the Climate Investment Account, a total of $4.5 to $5.1 billion dollars.
Table 3: Revenue allocations from the Climate Commitment Act ($, millions)
Expenditures from raised revenue
To determine the impact of investments, generated revenue is deployed with a lag of one to two years between collection and investment. In other words, half the revenue is invested the year after it is collected and the remaining half is invested two years after it is collected. The modelled expenditures are shown in Table 4, and total $2.5 billion from the Forward Flexible Account and $1.1 to $1.6 billion from the Climate Investment Account, for a total of $3.7 to $4.1 billion in investments made through 2030.
Table 4: Modelled investments from the Climate Commitment Act ($, millions)
Projected economic, health, and climate benefit returns on investment
To project the potential benefits of full-time equivalent (FTE) job-years, employee compensation, total economic value added, health benefits, and climate benefits, two types of multipliers are applied to the projected investments in Table 4.
The first is a leverage ratio, where state spending attracts investments from other sources, private or public, including federal. Two examples of leveraging are utilized for this analysis: The 2020 California Climate Investment Annual Report shows a leveraging ratio of $3.7 per state dollar spent, which does not include even higher leveraging of the high-speed rail program. The Washington state Clean Energy Fund reports a leveraging ratio of $3.4 per state dollar spent. These leveraging multipliers, ranging from 3.4 to 3.7, are applied to the revenue allocations in Table 4, resulting in greater total impact of investments.
The second set of multipliers are based upon the 2020 Building Back Better: Investing in a Resilient Recovery for Washington State study. Specifically, Tables A.1 and A.2 of that study contain the economic, health, or climate benefit return per million dollars of investment for a range of 14 different programs containing 18 different projects.
To estimate the potential economic impact of investments from the Climate Commitment Act based on Resilient Recovery Portfolio consistent expenditures, the 14 programs in the portfolio were sorted by those more likely to be financed through the FFA and those more likely to be financed through the CIA. Within each of those accounts, the relative share of investments from the 2020 Study’s Resilient Recovery Portfolio are maintained.
The Resilient Recovery Portfolio projects are binned based on the following account allocation:
- The Forward Flexible Account programs include, in order of highest to lowest allocation: Low Carbon Buses & Trucks, Electric Ferries, Light Rail – Sound Transit Federal Way Expansion, Transit-Oriented Community Development, and High-Speed Rail;
- The Climate Investment Account programs include, in order of highest to lowest allocation: Wildfire Prevention & Preparedness, Home Energy Efficiency & Renewables, Urban & Community Forestry, Yakima Basin Ecosystem Restoration, Low Carbon Agriculture: Dairy Digesters, Low Carbon Agriculture: Agricultural Water Efficiency, Low Carbon Freight Operations: Rail-Bed Replacement, 100% Clean Power Readiness: Hydro Expansion and Upgrades, Low Carbon Freight Operations: Multi-Source Facility Projects, 100% Clean Power Readiness: Grid Resiliency & Optimization, and Low Carbon Freight Operations: Sustainable Industrial Manufacturing Zones.
The multipliers, expressed as returns per million dollars invested, are shown in Table 5.
Table 5: Investment multipliers (per million dollars invested) for a range of job, economic return, and societal benefits.
Results: Forecasted investment impacts
The lower revenue forecast assumes no additional demand for allowances and a lower leveraging ratio on investments of 3.4. The higher revenue forecast assumes extra revenue for the Climate Investment Account from additional allowance demand and a higher leveraging ratio of 3.7. The results are shown in Table 6, which includes total employee compensation, total value added, climate benefits, health benefits, and the total (sum of climate and health) benefits.
Table 6: Job, economic return, and societal benefits from lower to higher modeled range of outcomes of invested revenue through 2030
Note that while the employee compensation and value added are anticipated to accrue on a similar timescale to the investments, the climate and health benefits would be expected to accrue both during and after the investment time frame analyzed here.
Potential program impacts beyond the scope of this memo
This memo describes expected benefits from direct investments from new state revenue through the FFA and CIA mechanisms, assuming those investments remind consistent with a Resilient Recovery Portfolio approach to investing. The impact of other investments resulting from the program are not evaluated, including:
- Investments necessary to comply with the program (both for direct reductions, which is the primary compliance mechanism, and through secondary compliance by offset purchase, at least half of which must be from in-state programs);
- The use of proceeds that are consigned for specific uses to power and natural gas providers and utilities.
The activities and investments made within these various categories will offer additional jobs, economic, health, and climate impacts. At the same time, increases in fuel costs associated with program compliance can be anticipated to have a dampening effect, although these are likely to be small compared to the benefits from pollution reduction and investments.
I would like to thank everyone who made the original Building Back Better report possible, and particularly the team at Climate XChange for their assistance and review for this new analysis: Jonah Kurman-Faber, Ruby Wincele, Amanda Griffiths, and Zac Pinard.
 $400 million in leveraged funding on $118 million in awarded funds: https://www.commerce.wa.gov/wp-content/uploads/2020/12/ECPAC-Report_11-24-2020.pdf
 Kevin Tempest, Jonah Kurman-Faber & Ruby Wincele, Building Back Better: Investing in a Resilient Recovery for Washington State, 11 WASH. J. ENVTL. L. & POL’Y 195 (2021). Available at: https://digitalcommons.law.uw.edu/wjelp/vol11/iss2/4