Washington's carbon-pricing program nears $1 billion in revenue, far outpacing early estimates


Washington's latest auction of carbon-emission allowances raked in $62.5 million last week, with revenue from the state's carbon-pricing program now nearing a billion dollars and far outpacing early estimates.

The state Department of Ecology announced Wednesday the results of its special auction held last week because the previous quarterly auction in May exceeded a "trigger" price of $51.90 per allowance.

In all, about 18.4 million carbon allowances have been sold this year, hauling in more than $900 million. Each allowance represents one metric ton of emissions from the state's biggest greenhouse-gas polluters.

The auctions have raised nearly as much as state officials initially estimated for the program's first two years. Carbon allowances sold for nearly $50 in the first auction in February, more than $20 above the costs in California's market, which began a decade earlier.

The program's high compliance costs have surprised the authors of the climate legislation that created the program, and have drawn ire from oil and gas industry officials and Republican lawmakers.

The carbon-pricing program is the cornerstone of the 2021 Climate Commitment Act, requiring the state's biggest polluting businesses to reduce their emissions or purchase allowances to cover their emissions.

The number of allowances available at auctions will ratchet down over time, ramping up pressure on the industries to lower their emissions. The aim is to be mostly carbon free by 2050, in an effort to meet the targets of the Paris Agreement, which sets out an international framework to limit global warming to 1.5 degrees Celsius (or 2.7 degrees Fahrenheit).

Lawmakers this year budgeted about $2 billion in anticipated revenue from the auctions for projects intended to reduce emissions and improve air quality over the next two years.

The recent special auction, intended to act as a pressure-relief valve for a volatile market, is one facet of the new carbon-pricing program. Allowances were sold at two preset prices: $51.90 and $66.68. The allowances were divided equally into each price tier.

The special, fixed-price auctions were written into the state's climate law to give polluting businesses the flexibility to buy allowances at a set rate, before heading into future auctions where there's a risk of not bidding high enough to secure allowances, or potentially spending more money on permits to pollute. Allowances sold for $56.01 per ton in the most recent quarterly auction.

"The idea is, yes, we want to try to cap emissions, but it doesn't make a lot of sense for customers in one state to pay outrageously more than anyone else to reduce the carbon emissions of just that one state," said James Bushnell, a professor in the Department of Economics at the University of California, Davis.

"Volatile emissions prices can increase costs, undermine public support for emissions reductions and dampen innovation," Bushnell wrote in a blog post. "This is why cost-containment measures are so important."

When the Legislature passed Washington's carbon cap program in 2021, Ecology estimated it would bring in around $220 million in 2023 and close to $500 million every year after that through 2040. Those estimates were based on the prices fetched at auctions in California and Quebec, which both have similar carbon-pricing systems.

Revised estimates based on the rising cost of the allowances in 2022 suggested the state would bring in over $480 million in 2023. But Washington has blown those initial estimates out of the water.

In the second quarterly auction, Washington's allowances sold for over $25 per ton more than the most recent auction held for polluting businesses in California and Quebec.

"The cap was just set a bit more ambitiously in Washington, largely because it was set later and Washington doesn't have as much low-hanging fruit in terms of low cost ways of reducing carbon emissions," said Bushnell. "Most of the emissions are coming from transportation fuels and natural gas and those are tougher nuts to crack."

Utilities like Puget Sound Energy were placed on a fast track for emission reductions through both the state's 2019 Clean Energy Transformation Act, which calls for utilities to become carbon neutral by 2030 and carbon free by 2045, and the statewide carbon cap.

PSE in an email said the utility "is concerned about the high costs of Washington's cap-and-invest program" with cost-control mechanisms "triggered so early in the program."

"We support linkage of Washington's cap-and-invest program with California and Quebec's market — a market that has been effectively driving down emissions for over 10 years," a PSE spokesperson continued. "We believe linkage is critical to controlling costs for customers, while driving meaningful and efficient reductions in emissions."

PSE serves some 1.2 million electric customers and 850,000 natural gas customers mostly in Northwest Washington.

The state Utilities and Transportation Commission recently approved the utility's request to begin charging natural gas customers for costs associated with compliance with the state's program.

The average residential natural gas customer will see an increase of about 3% beginning Oct. 1, the utility said. Effects on electricity rates are still being determined.

Nearly 90% of those who participated in the second quarterly auction in May were businesses required to pay for their emissions, according to Clean and Prosperous Washington, a climate policy group. Businesses eligible to participate included Puget Sound Energy and other energy providers, oil companies like Shell and Washington State University. The remainder were investors.

Before the state's first auction, some fuel suppliers were raising the price of fuel in anticipation of their compliance costs with the new program. At least one oil company has added a line item listed as "cap at the rack," a reference to the state's new program, of more than 50 cents per gallon of diesel sold at the wholesale level. That amount is similar to estimates of compliance costs from industry and academic sources.

"When you use a product that pollutes, you don't want customers to just ignore the impact on the environment," Bushnell said. "Although it's politically very awkward to talk about higher fuel prices, from an environmental economics perspective, that's kind of the point."

"You want firms and customers and everybody to sort of realize that, 'Oh, yeah, hey, wait, the air isn't free,' " he continued. "And if using this energy is actually causing damage to the air or the climate, we want that reflected in everybody's decisions on what kind of car to buy, and what kind of appliances to buy, and all of that."

Businesses covered by the program — those emitting more than 25,000 metric tons of carbon dioxide per year — do not need to turn in any allowances to the state to comply with the law until November 2024. Then, one third of 2023 emissions are due. The rest of allowances for the first compliance period are not due until November 2027.

The Climate Commitment Act aims to reduce the state's production of carbon dioxide, methane and related gases to 45% below 1990 levels in the next seven years, 70% below 1990 levels by 2040 and decarbonize by 2050.

Washington state's greenhouse-gas emissions in 2019 reached their highest level since 2007: 102 million metric tons. It was a 7% increase from 2018, and 9% higher than 1990 levels.

Some polluters, like natural gas utilities and oil refineries, initially get a generous portion of their allowances free, but are required to buy more if they plan to release greenhouse gases above the allotted levels.