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Opinion: Cap and Trade, Or No Cap and All Tax?

An old saying in the halls of Olympia is, “When in doubt, read the bill.”  This is a review of Gov. Inslee’s cap & trade legislation and offers the following observations and questions in full candor.

ANALYSIS & OPINION: THE CARBON POLLUTION ACCOUNTABILITY ACT OF 2015

On the wings of the Washington Environmental Council, Governor Inslee is proposing to tax “big polluters” to reduce carbon emissions and raise revenue – a win/win/win as he calls it. We see it differently.

HB 1314 does raise revenue. But the mechanism for doing so appears to be squeezing Washington State companies out of state or out of business – which most Washingtonians, particularity the many people who work at those companies, will likely consider a big loss.

The Inslee administration has not defined all aspects of the proposal, but based on our reading here are some things to keep an eye on.

WHO IS COVERED AND WHO GETS OUT?

HB 1314 states any entity that produces 25,000 tons of carbon emissions or more is a “covered entity.” According to the Federal EPA FLIGHT data about 130 facilities would qualify, but it could be less. Broken down by region we start to see red flags concerning the economic impacts of the policy.

Only 10 facilities are located in King County. The list includes companies with high value goods, including Nucor Steel, Boeing, the Cedar Hills Landfill, two cement plants, not to mention the University of Washington. Zooming out to King, Pierce, and Snohomish counties, there are only 30 facilities. In other words its not hard to see why the urban core is more favorable to the concept. Economic growth is up, and will likely out pace any job loss from these employers. But what about the rest of the state, where the economic picture isn’t so rosy?

It’s outside the Puget Sound corridor where we see the strongest concentration of these companies. In many cases these companies are the key employer supporting whole towns and populations of people. Every significant rural food processor providing services to farmers’ crops, work to suppliers and tens of thousands of Latino employees in Washington state, is on the list. Alcoa, maker of aluminum that will be used in electric car batteries, the new more fuel efficient f-150, and a high paying employer in northern Washington, is on the list too.

Last week, in the hearing on the bill, Cliff Traisman, lobbyist for the Washington Environmental Council and the wind farm industry, stated that the bill would put no one out of business.  But looking at the mechanics, that statement doesn’t pass the straight face test.

The cap and allowances are not based on any reasonable assumption of actual waste in these facilities or opportunities for greater efficiency. The cap is based on what was envisioned as system wide reduction targets put in place by the legislature several years ago.  If your intent is to reduce carbon by a massive amount, realistically somebody has got to go.

Déjà vu: Point versus Non-Point

Is it just us, or does this strategy remind you of the approach Governor Inslee and the WEC have used to go after “point source” water pollution of facilities? Point sources can be factories, processing plants, or shipyards. The archetypal image is a pipe leaking toxic sludge into a river bed. At one point in time this was a real issue, and public policy went after these folks aggressively virtually eliminating it. But it didn’t solve the problem for our salmon and orcas.

That’s because while point source was a problem, it wasn’t THE problem. The biggest contributor to water pollution is non-point water pollution coming off cars, streets, and pipes, which go virtually unregulated. But sources like the City of Seattle are a lot harder to squeeze than a company. And so the company gets hit unfairly hard.

In HB 1314, Reps Fitzgibbon and Hunter do the same for carbon pollution.  The majority of all carbon comes from the transportation sector. The most massive amounts of which are emitted from transportation vehicles in King, Pierce and Snohomish county. But these sources are treated like non-point source emitters, and get off scott-free.

While Microsoft and Amazon are not on the list, we have to wonder what would happen if they were responsible for the carbon emitted by all the vehicles driving to and from the office. Would they surpass the many “big bad polluters” that are on the list and destined to be shut down?

This would be one thing if at least it was a policy consistently administered, but there is major irony in the Centralia TransAlta coal plant, the state’s largest single source of facility-based carbon emissions, being excluded from the cap. Powering Puget Sound with dirty coal is somehow OK for 10 years, while the rest of the state pays.

THE MECHANICS

So how do french fries and low-paid Latino workers get clobbered?

HB 1314 sets an overall allowance of carbon for emissions by “covered entities.” Each year the number of allowances are ratcheted down. It does not ensure that total carbon in the state goes down, only for covered entities. No regulation is being put in place to slow down the non-point carbon emissions of vehicles or office towers in booming Seattle, Bellevue, and Redmond.

Yet for those who are covered entities, is this the beginning of the end?  Once a cap is set, a company (i.e., french fry plant) must buy enough carbon units to stay in business.  If one does not have equal units to their carbon emissions or be able to pay the millions in penalties, the business cannot stay open and must be shut down.

Perhaps most importantly, each year the overall number of carbon units is decreased.  One might liken it to a game of “musical chairs.” Each round there are fewer chairs – fewer chairs means fewer companies will exist.

Complicating the game, more people can show up and buy a carbon unit, even if they don’t need it. For instance, Mr. Steyer, the billionaire from California who spent millions on campaigns in Washington State, can buy carbon units and sit on them. Shrinking the available pot for everyone else.

In an even greater act of California love, the auction for carbon units will be linked to California.  Allegedly, this will help keep companies from leaving by taking away the competitive advantage to move to another state. The logic of beating “leakage” by spreading the cap everywhere strikes us as a delusion of grandeur. The more potent worry is that linking with California would enable California companies to come buy carbon units which Washington State firms should be entitled too.

We are reminded of the 1974 movie “Chinatown” with Jack Nicholson and Faye Dunaway. The movie was about Los Angeles growing and running out of water.  Northeast of Los Angeles was a lush agricultural area of irrigated farms called Owens Valley. Corrupt government officials worked with rich LA millionaire developers to go buy each farm and the “water rights” one by one. Los Angeles got the water it needed to grow and Owens Valley suffered ruining farm families and their workers. This is a well-documented historical incident.

HB 1314 sets Washington State rural growers, processors and Latino employees to be the next devastated Owens Valley.  Gov. Inslee has predicted WA carbon units at auction will be lower than the price of California units.  Will such a situation let California companies buy WA carbon units, where Californians stay in business, and WA companies go out of business?  Looks that way.

NOW WHO WOULD BE FIRST IN WA TO GO OUT OF BUSINESS?

Applying all we learned from our collective minor in economics, we’d expect high value products such as Eastern Washington landfills where Seattle dumps its overflowing garbage would stay. Well-paid techies could afford the premium. It may reduce the value of that big tax break they received, but Boeing planes are likely to stay (at least for a little while longer). Coal-electricity-running servers in Redmond will keep humming.

Food processing plants, the anchor of rural agricultural areas, that provide processing for myriads of farms and their Latino workers will be eliminated. Potatoes aren’t worth much. The cost of shipping them farther for processing makes them worthless, so even relocating to Idaho may not save them.

There is some recognition that this sort of thing will happen. In the legislation, 4% of all carbon units are set aside in a special “Allowance Price Containment Reserve” auction for companies who cannot afford to buy enough units to stay in business. If they still can’t afford it, they are gone. If the need for the struggling companies is 15%, it doesn’t matter, only 4% is available.

Oh the bill is not entirely without compassion. How pleased we were to see a government fund to help devastated rural areas to study ways to create new jobs for the thousands who will lose theirs. See Section 12. Such programs have worked wonders for the economically depressed Grays Harbor area. Or maybe not…

Our worry subsided when we found an off-ramp for companies to comply without buying carbon credits. A company can do “offset credits” — in other words do actual reduction of carbon via another project. It sounded great until the ghost of I-937 reared its ugly head. While the bill would allow a potato processor to spend money to do reduce methane from a mining operation, it would not be allowed to spend the money to reduce its own carbon!

CARBON REDUCTION & HB 1314

We appreciate the challenge that global climate change presents, and respect the aspiration of some lawmakers to “lead the world” on this one. But we are more bearish than the governor on Washington state’s ability to sway the global market here. At the end of the day we see the governor and his Seattle environmental coalition asking yet again for a lot of sacrifice without much in the way of benefit.

Whether it’s HB 1314 or a Low Carbon Fuel Standard (LCFS), it will have a negligible impact on global carbon, but will cost Washington residents, particularly low-income and ethnic groups, heavily. The best justifications for these bills are political. Pleasing a base or setting up folks for their next elected position. The results as we see them are just not that compelling.

We remain optimistic that someone in Olympia will come up with a better plan that reduces carbon in a way that returns value back to Washington residents, and doesn’t completely sell us out to the Californians.