With the inclusion of fuel products made in Washington state refineries but exported out-of-state in Gov. Jay Inslee’s cap-and-trade program, estimates say the state will bring in an added $300 million, upping the total annual revenue to $1.3 billion and more than $500 million for education programs.
But the key question hanging over this change – and now the broader debate over cap-and-trade – is whether this extra money is a tab that will ultimately get picked up by out-of-state drivers in Oregon and Alaska, which take an abundance of the petroleum products refined in Washington state.
In 2013, Washington state’s five oil refineries made 606,200 barrels of finished petroleum products per day, mostly gasoline, diesel oil and jet fuel, according to a Washington Research Council report issued last December. Half of those were sold within Washington, and another 37 percent domestically, mostly in Alaska and Oregon but also California, according to the report.
Lawmakers in Olympia have toyed with the idea of slapping taxes onto exports of petroleum products over the last several decades, only to trigger sharp rebukes from their neighbors to the south and northwest whose residents would ultimately end up paying for it.
The last proposal was brought forth in 2009 at the bottom of an economic recession, when Democratic Reps. Jeff Morris of Mount Vernon and Jim Moeller of Vancouver proposed a 2.5-cent-gallon tax on exports of fuel to raise money for transportation projects. Another bill would have removed entirely the exemption for exports, subjecting it to the full 37.5 cent per gallon excise tax.
The bills didn’t go anywhere that legislative session, but the news alone prompted the Alaska Legislature to propose a $15 surcharge on every barrel of crude oil shipped to Washington if it imposed the export tax. House Speaker Mike Chenault said at the time it was only fair.
For decades, oil drilling on Alaska’s North Slope has provided crude oil for Washington fuel refining and consumption. That has tapered off in recent years in favor of greater volumes of crude oil shipped by rail from the upper Midwest.
It also raises old arguments about whether such a tax would be unconstitutional because it would violate the commerce clause of the U.S. Constitution. Inslee’s cap-and-trade program isn’t a gas tax, of course, but it could foster similar debate and controversy.
Speaking with reporters Tuesday morning, Inslee said the decision to include export fuels under cap-and-trade was justified by the need to provide funding for schools.
“It produces significant help for our children,” Inslee said. “It’s a very significant revenue source. I don’t think there’s anything untoward in its application. I don’t think there’s anything unusual. I think it was an appropriate decision and very helpful to our budget writers.”
HOW IT WORKS
Under Inslee’s proposal, cap-and-trade would cover that 27.4 million metric tons of carbon associated with domestic exports. Fuel that ends up in California, which operates its own cap-and-trade program, is exempted. Same goes for British Columbia, which takes a portion of the international exports, because the province levies its own carbon tax on fossil fuels.
Cap-and-trade’s mechanisms makes the fuel suppliers – the refineries – liable for the emissions created in the eventual combustion of it in car or truck engines. That adds to the overall emissions profile each oil company is responsible to buy allowances for, which are sold at quarterly auctions. The state sets the minimum price for the allowances, called permits to emit, based on a per-metric ton price. The Office of Financial Management says the starting point will be $12.90 when the auctions kick off in 2016 – if cap-and-trade passes the Legislature this year.
Cap-and-trade will cover the vast majority of Washington state’s carbon emissions, 75 to 80 percent, which is not just industrial production, manufacturing and factories, but also energy consumption from carbon-based sources. That’s gasoline or diesel from driving, natural gas for home heating and cooking stoves, and electricity if it’s from coal or natural gas.
But the legislation carved out exemptions for airline fuel, waste management, agriculture, tribes and military facilities. That’s 22 percent of statewide emissions, according to a memo presented to the House Appropriations Committee last week. In its place, the bill includes export fuels amounting to 27 million metric tons of carbon.
The brunt of cap-and-trade’s costs, however, will fall on the oil companies. According to a presentation from Inslee carbon market adviser Chris Davis last week, the refineries will be on the hook for 61 percent of the annual costs of cap-and-trade, almost $800 million of the $1.3 billion.
This makes for a significant shift in cap-and-trade’s mechanics from when it was introduced at the start of the session. In the House Environment Committee in February, the bill was amended to take out fuel distributors – firms that transport finished fuel products to retail or wholesalers – and add the exported fuel emissions. That dropped the total number of firms subject to cap-and-trade from 130 down to about 90, which could still vary.
That’s called moving the cost “upstream” economically, and there’s vastly different arguments about whether that $800 million annual tax just gets absorbed in an industry whose largest companies report tens of billions of dollars in quarterly revenue, or gets passed along to the consumers. Proponents such as the Seattle-based Sightline Institute say the cost of gasoline goes up and down so frequently based on broader market forces that drivers would barely notice the difference.
“The slow and steady price change of about 12 cents per gallon will be swamped by the natural volatility of oil prices that swing up and down by that much and more,” Sightline policy analyst Kristin Eberhard wrote in a post last December.
Lea Wilson, executive director of the Washington State Oil Marketers Association, said any price increase that hits her members, which transport the products to market, would almost certainly get to drivers, based on the small profit margins of pennies per gallon they reap.
“The beauty of this bill is the governor says consumers are not going to pay for it,” Wilson said. “It has to get passed along. Their own staff say that’s a regressive tax.”
EXPORT MARKETS HIT
OFM’s most recent economic analysis of cap-and-trade, issued last week, assumes that gas prices will jump 12 cents per gallon in the first year of the program. That’s similar to a price jump predicted in California this year, which moved to a standard of covering transportation fuels.
Twenty years out, with the per-metric ton tax hitting $45, the price spike in gasoline is forecasted to be 41 cents per gallon.
If those price increases affected the fuel going out-of-state, it would create a situation where Oregon or Alaska residents would be paying higher prices to cover the oil companies’ tax burdens, and thus indirectly funding Washington state programs. Inslee’s proposal calls for 40 percent of the revenue to go to education spending, 40 percent to transportation projects, 10 percent for the working families tax rebate program, among other expenditures.
It’s another element that makes Inslee’s proposal unique. California covers transportation fuels, but not exports. It only exports a small amount of petroleum products anyway, with its 14 refineries and imports supplying a consumer market of 37 million people and a huge economy. British Columbia’s carbon tax doesn’t do that either, which has led to criticism that it’s not fully addressing carbon emissions because it exports large amounts of carbon-creating natural gas and coal.
Whether this is constitutional is a separate issue. The Joint Legislative Audit and Review Committee reviewed the export exemption for the gas tax in 2008, and determined that a U.S. Supreme Court ruling put in a place a four-pronged test to determine if states could add small portions of their gas taxes onto fuel exports.
At a meeting with reporters last week, Davis said the governor and his policy staff are confident the cap-and-trade program would meet constitutional muster.
If it’s smart policy is another question that’s sure to be debated if cap-and-trade moves forward. Sen. Doug Ericksen, R-Ferndale, said he didn’t see a need for a program this sweeping and complicated, and believes enough House Democrats share his sentiment. The Senate passed a bill Ericksen sponsored, SB 5735, which aims to reduce carbon by revamping the state’s renewable energy standard, Initiative 937.
“In reality, he’s struggling to get the votes in his own party,” Ericksen said of Inslee. “Right now, we have the only piece of legislation out there that would create jobs, see a net reduction in carbon, and has passed a legislative chamber.”
House Majority Leader Pat Sullivan, D-Covington, has said cap-and-trade wouldn’t be brought out unless it’s on a list of “necessary to implement the budget” bills, and House Democrats may opt for other revenue sources in proposing their budget, likely next week. He wouldn’t say Monday if House Democrats had decided whether to pursue a capital gains tax, shuttering tax preferences, or revenue from cap-and-trade.
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