Proponents’ standard message around a carbon regulation – whether it’s a new cap and trade system or the Department of Ecology’s new Carbon Action Rule (CAR) – is to identify a short list of “big polluters” by name and hold them up as the target. But, as Ecology acknowledges, 75 percent of the carbon emissions covered under CAR will not be from this list of companies. They will be from consumers of transportation fuel (gas and diesel, primarily) and natural gas. In other words, Washington’s small businesses, workers, and families will pay for most of the new rule’s costs. Not their list of “big polluters.”
Why is this? Under CAR, distributors of natural gas and petroleum are required to pay for the carbon emitted by their customers. CAR provides these distributors three ways to pay for the carbon emissions of their customers: through reducing their own emissions on-site, investing in carbon-reducing mitigation projects (referred to as “project reductions”), or buying allowances from the State of California or the Northeast’s RGGI (referred to as “market reductions”). In reality, there’s only one way for the distributors to comply and that’s through market reductions.
Let’s start with the on-site reduction option. Distributors of fuel and natural gas don’t emit carbon because the energy combustion is performed by their customers – i.e. on the stoves of restaurant kitchens or gas tanks of parents running kids to soccer practice. So, there’s no “on-site” emissions for distributors to reduce. In section 3.2.3 of CAR’s cost-benefit analysis, Ecology acknowledges that “Some covered parties—such as natural gas distributors—may have little or no options for on-site compliance, but may still combine project-based and market reductions.” In section 3.6 of the cost-benefit analysis, in a discussion of the transfer of costs, it’s acknowledged that on-site reductions are unlikely “because it assumes fuel producers, importers, and distributors will incur costs for internal actions to reduce GHG emissions, but these parties inherently do not have a mechanism with which to comply on-site” (italics added).
Project-based emission allowances are earned when a company finances a project designed to reduce greenhouse gas emissions. The CAR, however, creates an extremely narrow band of eligible projects. Essentially, the only allowable investments would be projects based in Washington (Sections 110 and 180 of CAR) or projects approved under California’s system (Section 190: livestock projects, mine methane, and ozone depleting substances). This creates a very small pool of potential project reductions, making market reductions the primary way distributors will comply. With 75 percent of emissions covered by CAR emanating from consumers of gasoline, diesel and natural gas (i.e. every Washington citizen), this compliance cost will be passed along in the form of higher prices.
We know that the overwhelming majority of CAR’s costs will be borne by consumers. Bill Drumheller of Ecology made this clear during a November 18, 2015 webinar (time code 1:15) in advance of the rule being published:
“Roughly three quarters of the emissions we’re talking about in this program are what I will call indirect emissions – these are emissions associated with transportation fuel that’s produced and used in Washington and the natural gas that’s supplied here in Washington.
“The regulated party doesn’t have the direct ability to influence up and down how those emissions are used. In those cases it’s the end user – the driver or the homeowner who heats their house…
“This is three-quarters of the emissions. We’re talking about a lot of emissions. And for these emissions we need to find emissions reduction projects and tap into external carbon markets to get the reductions necessary.”
We know that these costs will be taken from Washington families, workers, and small businesses and shipped to the State of California, the Northeast U.S., and Wall Street speculators. And we know that the cost of complying through these external markets has been underestimated by Ecology.
So, what is it going to cost Washington consumers to comply with CAR? We’ll explore CAR’s price impacts to gasoline, electricity and natural gas in our next post.