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Recently WSPA retained a NERA Economic Associate Director to predict allowance prices, household costs, and energy-intensive sector output impacts for the Climate Commitment Act.  No model should be treated as usefully predictive when it does not provide sufficient detail of the methodology and assumptions.  This analysis is far from meeting that bar and, therefore, should not be depended upon for any predictive value.  Even an initial read of their modeling summary indicates several potential weaknesses in the projections.

  • It ignores the price protections in the Climate Commitment Act – the Act requires “an auction ceiling price to limit extraordinary prices” and a price containment reserve and auction amongst other cost-containment safeguards, however the modelling appears to fully disregard any price ceiling.
    • While uncertainty is inherent in any model or projections, this particular projection neglects to even mention that a price ceiling or price containment auction exist in the program which is unusual and misleading.
  • It projects allowance prices that are inconsistent with real-world examples and other models while providing no rationale for why prices would be up to an order of magnitude higher for Washington:
    • For over eight years, allowance prices in California and Quebec (Western Climate Initiative or WCI) have never come close to the prices projected for Washington, having most recently sold for around $18. This remains close to that programs floor price, yet the WSPA/NERA model assumes a price that would almost immediately reach 3 to 10 times the price floor;
    • The state’s fiscal note forecasts allowances prices of $22 in 2024 and $34 in 2030;
    • A full and transparent study examining an ambitious Cap-and-Invest program in Colorado completed by Resources for the Future projects average allowance prices in 2030 of $27 (linked to CA) to $75 (not linked to CA). Washington’s unique advantages (power grid, heating demand) could keep compliance costs lower.
  • It provides little detail on whether and how it applied cost containment options that are in the CCA:
    • Options such as banking of allowances, use of a limited quantity of offsets, and trade of allowances are included as cost-containment compliance mechanisms. There is no description about how these options are handled for the projected costs. Banking is not even mentioned as a mechanism in the program, let alone any description of how it is considered by the model.;[1]
    • The study appears to ignore mechanisms that lower cost-burdens, particularly for low-income utility rate-payers that may return more than any initial cost increase, and investments to increase efficiency.[2]  At the extremely unlikely allowance prices projected, the state would be looking at as much as $5 billion dollars to invest in reducing our reliance on fossil fuels and decreasing cost burdens on households through efficiency and lower carbon fuels.  This would have immediate and substantial impact on the emissions in the state and, therefore, the necessary costs of compliance;
    • Given this evidence, it is plausible and perhaps likely that the projections reflect not this Cap-and-Invest program, but rather a direct carbon tax.
      • Based on past experience modelling numerous carbon taxes for the state of Washington, the per ton cost estimates for the unlinked program appear much closer to what is required from a carbon tax that does not reinvest revenue, relying only on reduced demand from price increases. Without additional modeling details, it is impossible to say just how closely the projections reflect a cap-and-invest program as opposed to a more direct carbon tax approach.
  • It is, however, consistent with other studies in that linking to broader markets should lead to lower overall compliance costs, although the degree of cost-savings this linking could unlock is challenging to project.

 


[1] Accurate treatment of offsets, banking, and trading would likely lead to some divergence between the allowance price and the cost of a gallon of fuel.  Over the full range of $75 to $322 for an allowance the cost impact on a gallon of fuel is tightly coupled, indicating a strong likelihood that these cost-containment mechanisms are not being accurately accounted for.

[2] The summary states a modeling approach which “assumed that the net revenues from the auctioned allowances would be given back to the Washington economy without any new distortions”.  This would indicate a net impact that is much lower than the upfront cost of allowances, but it seems unlikely that this is reflected in the summary table.

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