Oregon Poised (Again) to Cap Carbon Pollution

Autumn at Mount Hood
Credit: Landscapes in The West by Jeff Hollett

But Senate Proposal Needs Key Improvements to Merit Passage in Upcoming Legislative Session

Last year, Oregon legislators were on the cusp of passing a landmark bill (HB 2020) to cap carbon pollution and invest in clean energy solutions when Senate Republicans pulled the rug out at the last minute and fled the state to deny a quorum. The result marked a stinging setback in Oregon’s decades-long quest to enact a cap-and-invest program, but Governor Kate Brown and lawmakers vowed to persevere. And so they have – on Monday, the Senate Interim Committee on Environment and Natural Resources will hear testimony on a revised proposal (summary available here), known as LC 19, for consideration in the upcoming legislative session, which kicks off Feb. 3.

Room for Improvement

The Senate proposal retains the twin pillars of what made HB 2020 historic: (i) an economy-wide limit on greenhouse gas emissions out to mid-century; (ii) in a state other than deep green California. But with an eye toward keeping enough Republicans in their seats and shoring up some Democrats, this latest proposal backslides too far from HB 2020 in two key areas; namely, the treatment of transportation fuels and industrial natural gas.

1. Transportation Fuels

To assuage concerns about the potential cost impacts at the pump in rural areas, where clean alternatives are in shorter supply, the Senate proposal would phase in compliance obligations on transportation fuel suppliers geographically. Only gasoline and diesel sold in the Portland metro area (home to 60% of Oregonians) would generate a compliance obligation from the outset in 2022. The state’s other metro areas would come next in 2025, plus any city that receives at least 10 million gallons of gasoline and/or diesel delivered annually. But fuels sold outside metro areas and at trucks stops near the border, currently about 13% of the state’s gasoline and 16% of diesel, according to the Oregon Department of Transportation, would remain effectively exempt unless 19 of the state’s 36 counties pass ordinances to opt-in.[1] To entice those counties to participate, investments funded by allowance sales to fuel suppliers would be largely restricted to metro areas.

While the proposal reflects challenging political constraints, it nonetheless raises several concerns that bear close attention. Bifurcating the state into covered areas and exempt areas could simply induce drivers near the borders to fill up in exempt areas, dampening the incentive the program provides to reduce consumption and resulting in higher emissions.[2] The effect may be small at the outset, if allowances prices are low, but the proposed exemption applies indefinitely. Implementing the proposal would also require diligent monitoring and enforcement to prevent fraud, as fuel sellers can avoid compliance costs by inflating reported sales to those regions and will exploit any opportunity to game a new system. Finally, the differential treatment may pose an insurmountable hurdle to link with California and access its large market, which would increase costs in Oregon and present potential liquidity concerns down the road.

A better approach would capitalize on the proceeds generated from charging oil companies for their carbon pollution to steer more benefits to Oregon’s rural areas. California’s rural counties receive a disproportionate share of the state’s climate investments, with programs that fund clean agricultural equipment, vanpools for farmworkers, generous rebates to scrap older, high-polluting cars and replace them with cleaner and more efficient options (new or used), new rail links to overcome long commutes and bring economic growth to isolated areas, and more. Perversely, by shutting out rural counties from local investments as the starting point, the Senate proposal could perpetuate rather than remedy the disparity in access for Oregonians to clean and affordable transportation options.

2. Industrial Natural Gas

The Senate proposal splits the point of regulation for the process emissions and onsite natural gas emissions of certain industrial entities. Industries designated as “energy intensive and trade exposed” would only be directly regulated if their process emissions exceed the minimum threshold, under an output-based formula that would hold them harmless indefinitely if they are using “best available technology.” For their natural gas emissions, compliance would move upstream, and gas utilities would receive a commensurate increase to their allowance allocation that would be consigned and monetized on their behalf.

The consigned proceeds would be returned volumetrically (i.e. rebates are directly proportional to emissions) until 2025 at which point these gas users would have the option of taking an annual haircut, declining in proportion with the statewide cap, or undertaking periodic energy audits. If they take the audit route, they would have access to state funds to help finance the identified efficiency improvements. By implementing measures with a payback period of five years or less, they would remain eligible for volumetric rebates until 2030, and bill credits equal to 97% of the carbon costs from their gas use thereafter (the remaining 3% would help recapitalize the fund).

Like the proposal for transportation fuels, the revised treatment for natural gas is intended to respond to concerns about energy costs for sensitive industries like nurseries, paper mills and food processors (it would also shrink the pool of regulated manufacturers from around 30 to 10). Unfortunately, it also goes too far in the wrong direction, foregoing reduction opportunities and reducing the effectiveness of the program. Volumetric rebates eliminate any incentive to reduce emissions that the program provides; keeping that option available until 2030 would functionally exempt those entities for their gas use for nearly a decade. Bill credits should be calculated independent of usage, which rewards more efficient users. While we are pleased to see a focus on both energy efficiency and fuel switching in the audit compliance pathway, taxpayers shouldn’t foot the bill for industrial gas users to clean up their act (particularly any bad actors with environmental, health or safety violations). A revolving loan fund – not grants – should instead be created out of the proceeds consigned on their behalf, as the emissions and energy cost savings that those investments deliver will more than offset smaller rebates. Finally, as was the case in HB 2020, the Senate proposal should afford regulators more discretion on how to invest consigned proceeds on behalf of other gas users to avoid locking-in dependence on gas infrastructure that’s incompatible with Oregon’s long-term climate goals.

Unlike the electric sector, which is subject to increasing clean energy requirements via a Renewable Portfolio Standard, Oregon lacks comparably robust complementary policies to reduce dependence on natural gas as a heating fuel. That makes it more important for the cap-and-invest bill to both preserve the carbon price signal end users see to encourage emission reductions and ensure proceeds are available to invest in cleaner alternatives.

A Framework for Progress

NRDC remains committed to working with legislators, the Governor’s office and our local partners in the Renew Oregon coalition to pass a bill that provides a strong foundation to curb carbon pollution and improve upon over time. But with the program spelled out in painstaking detail in this legislation (the Senate proposal clocks in at 156 pages), making course corrections down the road in implementation will be more difficult. It’s imperative that lawmakers get the initial scaffolding right for Oregon to build toward a healthier, cleaner and more inclusive economy.

[1] The emissions from those fuels would still fall under the cap but the state would assume the compliance obligation and retire allowances on their behalf.

[2] Although the emissions are still under the cap, such an effect would constitute leakage if the program ultimately settles at the floor or ceiling price (i.e. below or above the cap), which modelling on California’s program has identified as the most likely outcome.