Washington State’s Climate Change Fight: Clean Fuels Standards And Cap-And-Trade Program

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Washington recently joined California, Oregon, and British Columbia in adopting a clean fuels standard that mandates reductions in greenhouse gas (“GHG”) emissions attributable to transportation fuels. In the final days before the close of the 2021 legislative session, the Washington state legislature passed House Bill 1091 directing the Department of Ecology (“the Department”) to implement such a program beginning no later than January 1, 2023. While many aspects of the program will not be fully developed until the Department goes through its rulemaking process, the bill contains a number of mandatory provisions, including the following:

  • Implementation: The start date for the clean fuels program is no later than January 1, 2023. However, this timeline is tied to the passage of a new transportation spending bill (i.e., enacted after April 1, 2021) in which the state fuel tax is to be increased by an “additional and cumulative tax rate of at least five cents per gallon of fuel.”
    • Governor Inslee used his partial veto power on this particular subsection, but this action is likely headed for the courts. Governor Inslee’s partial veto authority only permits vetoes of full “sections” of legislation; this provision was included in a “subsection,” so other parts of the section remain in effect after the veto. Earlier in the legislative session, a proposed house bill that looked to increase the current 49.4 cents per gallon state tax by 10 cents in 2021 and another 8 cents in 2022 failed to pass. If the partial veto is overturned, the fuel tax provision may have the effect of a “poison pill” that delays, and possibly precludes, implementation of the program.
  • Reductions: The bill requires the reduction of GHG emissions attributable to each unit of transportation fuels to fall 20 percent below 2017 levels by 2038. In 2023 and 2024, no more than a 0.5 percent reduction per year may be required, with the maximum allowable percentage reduction increasing to 1.5 percent per year by 2028.

Beginning in 2028, the bill prohibits the Department from moving beyond an overall 10 percent carbon intensity reduction unless certain conditions have been met, including that (1) there is “[a]t least a 15 percent net increase in the volume of in-state liquid biofuel production and the use of feedstocks grown or produced within the state” relative to 2023 and (2) at least one new biofuel production facility “representing an increase in production capacity or producing, in total, in excess of 60,000,000 gallons of biofuels per year” has been fully permitted.

  • Generation: The bill allows for the generation of credits from a range of activities including carbon capture and sequestration projects and the fueling of battery or fuel cell electric vehicles. The Department must also allow the generation of credits from state transportation investments funded in an omnibus transportation appropriations act, but these are capped.
  • Harmonization: The bill requires the Department to seek to adopt rules that are in accord with other states’ clean fuels programs’ compliance requirements. Specifically, the harmonization requirement applies to states that have adopted their own low carbon fuel standards (or similar GHG emission requirements) applicable to transportation fuels and those that “[s]upply, or have the potential to supply, significant quantities of transportation fuel to Washington markets,” and vice versa; i.e., to those states which Washington supplies with transportation fuel.

The program must also include certain cost containment mechanisms, such as a credit clearance market, with the maximum price for credits set consistent with pricing in other states that have adopted similar clean fuels programs.

  • Prohibitions: The program must include mechanisms for the certification of electricity with a carbon intensity of zero or lower than the standard adopted by the Department but explicitly prohibits the Department from requiring a carbon intensity of zero in order to generate credits from use of electricity as a transportation fuel.
  • Exemptions: The bill exempts fuels used for aviation, vessels, locomotives, military tactical vehicles, and, until January 1, 2028, logging, off-road, agriculture and mining.
  • Projections: The Department of Commerce, in consultation with the Department, the Department of Agriculture and the Utilities and Transportation Commission, must develop a “periodic fuel supply forecast” that projects the availability of fuels to Washington necessary for continued compliance with the requirements of the clean fuels program.

The bill authorizes a forecast deferral if the fuel supply forecast projects that there will be less than 100 percent of the credits available for regulated parties to comply with the applicable clean fuels standard for that period.

The Department is also authorized to grant a temporary deferral to a regulated party that is unable to comply with the clean fuels program “due to reasons beyond [their] reasonable control.” The Department may consider the fuel supply forecast in evaluating whether to issue a deferral.

Washington also passed a cap-and-trade bill (Senate Bill 5126) that covers, among other entities, suppliers of fossil fuels whose sales result in 25,000 metric tons or more of carbon dioxide equivalent emissions. Covered entities whose sales of fuels would result in GHG emissions exceeding an annual allocation would be required to purchase allowances. The amounts of needed allowances look to increase in time relative to the reductions in emissions of GHGs mandated under statute. The legislation allows covered parties to allocate the responsibility to obtain these allowances contractually, but the Department must be notified of the agreement at least 12 months prior to the compliance obligation period for which the agreement applies. Beginning on January 1, 2027 — the second four-year compliance period — the benchmark will be 3 percent below the first period baseline. And, for the third compliance period, beginning January 1, 2031, the benchmark will be 3 percent below the second period baseline. Like Washington’s clean fuels program, the legislature intended that the cap-and-trade bill would go into effect only if the legislature also approved a five cent per gallon minimum fuel tax. However, Governor Inslee vetoed the section of the bill that tied the implementation date of the program to the passage of the fuel tax.

Takeaway

House Bill 1091 provides the basic building blocks of the clean fuels program. Many of the details will be negotiated during the rulemaking process. As we move closer to the 2023 implementation date, regulated entities operating in Washington or any of its neighboring states, and parties looking to export fuels into the Washington market, should continue to track the progress of the Department’s rulemaking process and any subsequent litigation arising from Governor Inslee’s partial vetoes. As to Senate Bill 5126 and the establishment of the cap-and-trade program, exporters of fuel to the State of Washington should be prepared to engage in the regulatory framework resulting from the legislation.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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