New Carbon Regulation Would Pay Companies to Offshore Production

Jan 8, 2016

On Wednesday, Governor Inslee offered his latest carbon regulation. This effort comes after his cap-and-trade proposal was killed by House Democrats in the 2015 legislative session. 

We are still reading through the regulation, but a few things stand out from Ecology’s initial presentation of the rule.

Paying Companies to Leave the State
The problem with regulatory approaches is that once regulators set a goal, they cannot anticipate all the various ways companies can comply – some productive, some counterproductive. The regulatory approach offered by Ecology on Wednesday would actually end up paying energy-intensive companies to leave the state, taking their jobs and emissions with them, but not helping the environment.

When asked if Aloca shutting down their production would count toward meeting carbon reductions targets, Ecology admitted it would, saying “they would get credit.” This is problematic for a variety of reasons. First, reducing production to get below the targets doesn’t actually help the environment, it simply shifts production to other jurisdictions where companies may actually emit more CO2 to produce the same product. There is no worldwide reduction in emissions, but Washington gets to claim it helped.
Second, a company that shifted operations overseas would actually get paid under this rule. Companies that reduce emissions more than necessary are allowed to sell the additional reduction on the market. Thus, a company that shuts down can profit by selling the resulting carbon “reductions.” They actually get paid for leaving the state, taking jobs and carbon emissions with them.

This is the worst of all worlds.

Increasing the Cost to Comply
One positive aspect of the rule is that it provides flexibility to companies when complying with the rule. Companies can reduce their own emissions or invest in efforts that reduce carbon emissions elsewhere, allowing companies to create the largest amount of reductions for the least cost. This is simple trade economics: do what you do best, and buy from others when they can do it better. 
Unfortunately, politics is undermining this important principle. A reporter from The Stranger lamented during the press conference that California would get money instead of Washington. The Washington Climate Collaborative worried the system would be a “money transfer from Washington to California and Wall Street.” This may be a nice talking point, but it is counterproductive and, for the most trade-dependent stat in the nation, is a costly mindset.

By taking away out-of-state options to cut emissions, companies would be forced to pay more to meet the same carbon reduction goal.  Some claim this would create more jobs, but it actually makes it more likely companies would have to leave the state or resort to other drastic measures – like shutting down all or part of the plant – to achieve the goal. While the rule is a poor approach to reducing carbon, it doesn’t make sense to make it even more onerous and wasteful. 

Back Door Low-Carbon Fuel Standard
Last year, both parties agreed to budget language that prevented the Governor from sidestepping the legislature and unilaterally instituting a “Low-carbon fuel standard” (LCFS). This new rule, however, includes some of the same elements as the LCFS. 
For example, the Department of Ecology said companies that install electric vehicle charging stations could get credit under the new rule. The LCFS proposal contained exactly that same element. Oil companies covered by the rule could also blend ethanol into their fuel and get credit for a reduction in CO2 emissions – exactly as they could under the LCFS.

The response will likely be that the new proposal isn’t just an LCFS, it goes beyond fuel. But, if the legislature wasn’t supportive of limited authority, they probably won’t be supportive of expanded authority covering the same area.

One of our complaints about the LCFS was that it made no sense to mandate carbon reductions in one specific area and add a cap-and-trade system that would affect the exact same sector. From that standpoint, the addition flexibility to reduce carbon wherever it makes the most sense is a welcome change. The change, however, appears to make a virtue of necessity rather than being an admission their previous approach was irrational. This appears to be an effort, in part, to get around the LCFS restriction by doing the same thing under a different name.

Unscientific Targets
Finally, if there is any doubt that this is an arbitrary rule, ask why Ecology chose to reduce emissions by five percent every three years. It is not a coincidence that they chose five percent and there are five fingers on our hand. They didn’t base the target on any objective analysis. 

Washington is already a low-carbon state – emitting about one-third less CO2 per capita than the national average. As a result, it will be more costly and difficult to reduce emissions by five percent here than in, say, Ohio where switching from coal to natural gas would yield a significant reduction. We can’t do that. Arbitrarily choosing five percent does not take this into account and substitutes the desire to be seen as a “leader,” for science and environmental effectiveness.

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