Two years ago, Washington Governor Jay Inslee signed the state Climate Commitment Act into law. It requires businesses to buy permits for the greenhouse gases they produce. The first auction for permits was held last week, and the state announced that they sold out quickly, with an average price nearly double that of the most recent cap-and-trade auction held by California and Quebec. Kate Yoder, a staff writer for Grist, explains the Washington program to us.
Note: This transcript was computer generated and edited by a volunteer.
Dave Miller: This is Think Out Loud on OPB. I’m Dave Miller. We start today with Washington’s new program to reduce carbon emissions. The Washington legislature passed the Climate Commitment Act in 2021. Among other things, it requires businesses to buy permits for the greenhouse gasses they emit. The first auction for those permits was held last week. They sold out quickly with an average price nearly double that of the most recent cap-and-trade auction held by California and Quebec. Kate Yoder is a staff writer for Grist. She has been writing about Washington’s law and she joins us now to talk about it. Welcome to Think Out Loud.
Kate Yoder: Thanks for having me.
Miller: Let’s start with the real basics here. Can you just remind us how a cap-and-trade system works in general?
Yoder: Of course. So the way that the economy is set up, companies don’t have to pay for the carbon dioxide they emit, even though it’s causing all these problems related to climate change. So cap-and-trade is one way of trying to change the economy, to correct that by putting a price on emitting carbon dioxide. And how it works is that the government will say, “Here’s the limit on how much carbon dioxide can be emitted in our state this year.” And that’s the cap part and that cap gradually goes down over time and then they’ll sell off the rights to cause emissions in these chunks called permits. And businesses bid on these at auctions and in a program like cap-and-invest, the revenue goes toward investments to address climate change, and because companies in cap-and-trade have to pay for the carbon they emit, they’re incentivized to emit less of it.
Miller: Many of our listeners will remember Oregon’s relatively recent history of democratic failures to pass a cap-and-trade or cap-and-invest bill because of Republican legislative walkouts. What did that effort look like in Washington?
Yoder: Well, it was slightly less dramatic but still pretty messy. There were more than a decade of attempts, there was a pile up of failed bills in the legislature that couldn’t get support. And there were also two really high profile attempts to put a carbon tax on the ballot that failed in 2016 and 2018 and no one could really agree what the best system was. But then two years ago, this cap-and-invest bill finally passed, which I think kind of surprised a lot of people because it had been so long. And part of that was, it took a decade to build this really large coalition of different groups across the state to support a policy like this from environmentalists and Native American tribes to businesses. And the bill also passed at a time when the legislature was just more friendly to passing climate legislation.
Miller: California has had a cap-and-trade system for about a decade now. And as you’ve reported, the Washington system was designed partly with California’s experience in mind and that includes offsets. What kinds of problems has California seen with offsets?
Yoder: Yeah, there’ve been a few issues undermining the program. So it just hasn’t been super strict on certain issues. California has struggled with having too many permits, those are called allowances, on the market and then with carbon offsets, there can be some pretty tricky math involved there. They can be unreliable. For example, if a company chooses to plant trees to try to suck up that same amount of carbon they emit to kind of comply with the program. In theory that works, but often in real life, there’s all these increasing forest fires and those burning trees can release that carbon and so that can erase progress on climate change. And so California struggled a little with that.
Miller: So how will offsets be handled differently in Washington?
Yoder: Washington just has some stricter rules around offsets. So companies are only allowed to use offsets for a pretty small portion of their emissions reductions, around 5%. And more importantly, when a company does use an offset, it still uses up one of those emissions permits from the total pool. So that cap on carbon is still going down. That means that even if a company used an offset, like a forest, to comply with the program and then that forest caught on fire, Washington would still be meeting its emissions goals.
Miller: There’s also the issue of environmental equity. What happened in California in the years after their system went into effect?
Yoder: Yeah, so their system went into effect in 2013. And studies have shown that since then, that local air pollution in Black and Latino communities has actually increased and that’s something that environmental justice advocates have been worried about. And the research doesn’t necessarily show that cap-and-trade caused those emissions, but it definitely wasn’t doing enough to clean up local air quality. So local communities weren’t seeing the benefits of that program. And that’s been a really big criticism of California’s program.
Miller: How does Washington aim to prevent that?
Yoder: Well, they did this really interesting thing in the policy where they paired cap-and-trade in their law with an air quality program that basically allows the state to crack down on local sources of pollution, both big ones and small ones like transportation and refineries and things like that. So in the law, the State is pairing a market approach with a regulatory approach. And that air quality program is still being figured out. The state just made a list of 16 communities in Washington that are dealing with air pollution problems particularly bad, including South Seattle where I used to live. And then the state is going to concentrate on monitoring and improving air quality in those places, first.
Miller: We’ve been using both of these phrases, “cap-and-trade” and “cap-and-invest.” What’s the difference?
Yoder: I think they are pretty similar, but they do have a different emphasis. With cap-and-trade, you’re emphasizing the idea that these emissions permits are being traded between companies and with cap-and-invest, the emphasis is not just on putting a price on carbon, but also investing in climate solutions. So the revenue from the auctions is going straight to programs to reduce emissions and build clean energy and also adapt to the effects of climate change to help communities deal with those.
Miller: What actually happened with the auction last week?
Yoder: The permits sold out at the auction and the average price was around $49 per ton of carbon dioxide. So that’s the price that companies bid up to. And so that raised, I think the estimate is roughly $300 million for these programs to reduce emissions. And over the course of the next two years, it’s supposed to raise an estimated $1.7 billion.
Miller: I noted in my intro that that price you just mentioned, about $49 a ton, it was way higher than the most recent auction that California and the Canadian province of Quebec had where the final price was about $28 per ton of CO2. How do you explain that? Why was Washington’s price so much higher?
Yoder: Yeah, I was surprised by that and I actually called up some experts yesterday to try to understand why. And they said that Washington’s program is just a tighter program that requires stronger emissions cuts. So basically that creates more competition for these allowances which drives up prices a bit. But the price, while it was maybe slightly higher than expected, that’s about what Washington officials thought it would be. And they say it’s a pretty promising sign for Washington’s market.
Miller: Is it possible that these two states, Washington and California, skipping over Oregon and Quebec on the other side of the continent, that they’ll combine their markets?
Yoder: Washington is actually looking into that possibility now. And interestingly, there’s a provision in the law that says that they can only link up with California and Quebec’s market if the state determines that it won’t negatively affect communities overburdened with pollution in either place, in any of those places. So the state is supposed to have a recommendation, after talking with experts and doing research on that, on whether they can link up with those markets by the end of the summer.
Miller: But it sounds like that would be contingent on either the Canadian province or California to show that they have some kind of environmental equity guardrails in place that are similar to what Washington lawmakers put in effect?
Yoder: I think that’s the case. I’m not quite sure what that would look like, but yeah, essentially there would need to be more regulations or a slightly different approach, I imagine, to make sure that pollution isn’t increasing.
Miller: Do we know yet what Washington is going to be doing with the money it collects from these sales? I mean, as you noted so far it’s, it’s about $300 million dollars with this first sale, but we’re talking about, over $1.5 billion shortly.
Yoder: So the state is figuring out exactly how much money is going into these different programs in the budgeting process and that should be wrapped up by the end of next month. But some of the programs to reduce emissions are, they’re going to concentrate on buildings, like heat pumps and transportation. Washington might copy, California has this program where they issue vouchers for electrifying trucks and buses that they say have worked really well. So Washington might try to copy that, building wind and solar projects, programs to clean up the air and prepare communities for the effects of climate change. And there are some stipulations about where that money is going to be spent. So at least 35% of the money is supposed to go to projects that benefit vulnerable communities and then 10% on top of that toward projects that benefit Native American tribes.
Miller: How do you actually measure the effectiveness of a cap-and-trade or cap-and-invest system? And how do you know that it is actually lowering emissions?
Yoder: I mean time will tell. I think in Washington and other places as well, emissions are also in tandem being lowered by other policies around, like a clean fuel standard, electric vehicle mandates and making buildings more efficient, by managing that, like heat pumps are installed in new buildings. So there’s kind of this whole suite of policies, so you need an expert who could kind of look back at how emissions have decreased in different sectors and analyze those different policies and the data to figure out what’s making the biggest difference.
So cap-and-trade is really aimed at making companies clean up their operations. And there are a couple exceptions, like not all companies have to pay under Washington’s program for legal reasons and political ones, but the program does cover 75% of the state’s total greenhouse-gas emissions. And then their goal is by 2050 to decrease Washington’s emissions by 95%. And that’s compared to the carbon emissions from 1990. So essentially, cap-and-trade or cap-and-invest, it’s just another tool in the toolbox to try and tackle climate change from all these different angles.
Miller: Kate Yoder, thanks very much.
Yoder: Yeah, thank you for having me.
Miller: Kate Yoder is a staff writer for Grist. She joins us to talk about Washington State’s first carbon allowance auction. It was held last week.
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