Cap and Trade: Lawmakers Face Transportation Conundrum

A historic bill to reduce Oregon’s greenhouse gases is on the cusp of passing if fuel suppliers can be brought on board.

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As cap-and-trade legislation makes headway in the Oregon Legislature, lawmakers are faced with the challenge of ironing out details of how to fold in the transportation sector under the carbon-reduction program.

The bill, known as HB2020, would restrict the state’s greenhouse gas emissions over time through a market-based cap-and-trade program, which gives businesses more flexibility to reduce carbon output than direct regulation.

Transportation-related businesses, including trucking associations and fuel suppliers, are pushing back on details of their inclusion under the program’s emissions cap and have asked for a delay in the timeline for complying.

Rep. Karin Power (D-Milwaukie), who is close to the negotiations, says lobbyists for the transportation sector remain “unhappy” with the legislation and have asked to be phased into the program over time, similar to what happened in California’s carbon-pricing program.

California’s cap-and-trade program started in 2013, but emissions from transportation were not included under the cap until 2015.

Rep. Power does not support a delayed phase-in because this would mean Oregon’s carbon program could not link with California and Quebec, the two active participants the Western Climate Initiative, a coalition of Western states and Canadian provinces. Both California and Quebec have cap-and-trade programs that include transportation emissions.

Joining those jurisdictions’ carbon market without Oregon’s transportation emissions “would weaken their systems,” says Rep. Power, who added that “the costs of going it alone are unknown.”

Lawmakers are also unwilling to grant free emissions allowances to fuel suppliers to lessen the cost of compliance, because they can’t guarantee oil companies would not monetize these allowances for shareholder profits.

The transportation sector accounts for the majority of the state’s emissions at 40% of the total, and they are growing as the population increases. Leaving the sector out would make it difficult for the state to meet its greenhouse gas reduction goals.

Speaking at the Oregon’s Energy Future Conference in Portland this week, Mike Freese, a transportation-sector lobbyist for The Romain Group, said passage of the cap-and-trade bill is likely, but that the transportation piece “is still a hang-up.” The bill is currently being debated in the Joint Committee on Ways and Means.

Legislators are also concerned about how the bill could increase gas prices, which would have a greater impact on rural residents who drive more than people living in urban areas and who have limited access to public transportation. The problem is exacerbated by provisions in Oregon’s constitution, which stipulate any tax on motor fuel cannot be used for anything other than upgrades to highway infrastructure.

A companion bill, HB3425, aims to defray the increased costs at the pump by requiring a portion of money set aside in a transportation fund to be used to credit low-income households for higher motor-fuel expenses.

If HB2020 passes, Oregon would be the second state in U.S., aside from California, to have an economy-wide limit on greenhouse gas emissions.

Although slow to catch on in the U.S., carbon-pricing programs are common internationally. Twenty percent of the world’s greenhouse gases are covered by a carbon price.

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The largest cap-and-trade program is Europe’s EU Emissions Trading System. Several East Coast states are part of the Regional Greenouse Gas Initiative, a cap-and-trade program solely for the electric utility sector.   

Proposals for Oregon to put a price on carbon have been in the works for the past 15 years, ever since the state joined the Western Climate Initiative. Although lawmakers have made little headway on a cap-and-trade proposal, this year the chance of passing one is the highest it has ever been, given the majorities the Democrats have in both the House and Senate.

Starting in 2021, Oregon’s carbon program aims to reduce statewide greenhouse gas emissions 45% below 1990 levels by 2035 and 80% below 1990 levels by 2050. Companies that emit more than 25,000 metric tons of greenhouse gases must comply with the program. Most emitting sectors are included, except for agriculture and forestry.

Regulated companies can buy allowances — each equal to 1 ton of greenhouse gases — at frequently held auctions. Each company complies by surrendering allowances that equal their emissions in a given period. As the emissions cap gets smaller, the amount of allowances in the system declines, making it more expensive for heavy emitters to comply, while making compliance cheaper for companies that have made emissions reductions.

Companies that have an excess of allowances can sell to emitters that need extra, thereby creating an extra financial incentive for companies to reduce emissions.

The legislation allows investor- and consumer-owned utilities to get allowances for free because of the carbon-reduction targets utilities have already undertaken under existing regulations. Electric utilities are also limited in how much they can increase rates under public utility sector rules.

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The natural gas sector also receives a portion of allowances for free to cover emissions from providing service to low-income residents. Manufacturers that are vulnerable to losing business through price fluctuations caused by the carbon price are also allocated a portion of allowances for free based on a formula. 

If it passes, the legislation would mark a new era in Oregon’s carbon-reduction efforts – one that may propel other states to pass their own bills. 

“A lot of states are looking at Oregon now,” said Nancy Hamilton, co-director of trade group Oregon Business For Climate, at the Oregon’s Energy Future Conference. “We need to lead. Other states are looking to follow.”

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