Governor Kate Brown

Oregon Climate Action Program - Summary and Analysis
 
The Oregon Climate Action Program - HB 2020​
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Summary of Oregon Climate Action Program
 
 
Potentially Regulated Entities and Emissions

Potentially Regulated Entities under Oregon Climate Action Program​ - This document lists and explains the entities and emissions potentially regulated under the Oregon Climate Action Program, including natural gas, point source, and electricity sector emissions. 
 
  

 - Estimates of potential proceeds of allowance sales based on analysis of the economy wide emissions cap and the allowance allocations outlined in HB 2020. 
 
FAQ  - Explaining the Oregon Climate Action Program
 
Background:

Cap-and-trade is a market based approach to reducing greenhouse gas emissions across multiple sectors in the economy. A cap-and-trade program sets a firm cap on emissions that declines gradually over many years to achieve specified greenhouse gas reduction goals. The state distributes a fixed quantity of emissions allowances each year. Each allowance permits an entity to produce 1 ton of emissions per year. Large emitters who are covered by the program either reduce emissions or acquire an emissions allowance. Emitters can acquire an allowance directly through auction, through trade with other entities, or in certain cases, they may receive allowances directly from the state.

Cap-and-trade creates a carbon market that incentivizes emissions reductions through innovation and investments in clean technologies. It imputes a carbon price on greenhouse gas emissions that encourages reductions to occur in the economy where they cost least. The total quantity of emissions across sectors is fixed by the cap, but market incentives determine how reductions are achieved. Cap-and-trade is widely viewed as an economically efficient and environmentally effective approach to addressing climate change.

As of 2018, seventy national and sub-national jurisdictions​ worldwide have either implemented or scheduled carbon pricing programs. Their combined emissions represent approximately 20% of global greenhouse gas emissions. This list includes ten U.S. states, Canada, Mexico, China, and Europe. The total value of the carbon priced under these initiatives exceeds $79 billion.

The first use of a cap-and-trade system was in the 1990s in the U.S. to address sulphur dioxide emissions responsible for acid rain. Today, nine Northeast and Mid-Atlantic states participate in the Regional Greenhouse Gas Initiative (RGGI), an emissions trading program to reduce greenhouse gas emissions in the power sector. Other states are now looking to join RGGI and RGGI states are exploring an extension of the program to include transportation emissions. California launched its cap-and-trade program in 2013 as part of the larger Western Climate Initiative. It covers emissions from transportation, industry, and the power sector.

The Western Climate Initiative (WCI), Inc. is a nonprofit corporation that provides the administrative and technical services to operate the greenhouse gas cap-and-trade market between its member jurisdictions. California, Quebec, and Ontario are fully linked members of WCI, meaning that allowances issued by any of the member governments may be bought, traded, and used for compliance by regulated parties in any of the member jurisdictions.  Nova Scotia joined WCI in May 2018 to use the WCI software platform to manage its allowance market but is not linked to the larger inter-jurisdictional market. The WCI is governed by a board of representatives from the member jurisdictions and has six full time staff.

WCI Inc. was formed following the completion of a greenhouse gas cap-and-trade program design developed by 7 Western U.S. states and 4 Canadian provinces. That program development was initiated in February 2007 when the governors of Oregon, Arizona, California, New Mexico and Washington signed an agreement to form the Western Regional Climate Action Initiative. Montana, Utah, British Columbia, Manitoba, Ontario and Quebec joined this effort the following year. The purpose of this multi-jurisdictional collaboration was to identify, evaluate and implement ways to reduce GHG emissions collectively across their borders. This effort was largely concluded by 2010 with the development of a design for a cap-and-trade program that could be independently established by states and provinces and subsequently linked. This linkage across states and provinces allows the sub-national jurisdictions to collectively form a larger and more economically diverse market for targeting emissions wherever they are most efficiently reduced.

California and Quebec were the only jurisdictions to initially adopt regulations to implement the cap-and-trade program. Their programs began operation in 2013 and linked the following year. 

Linkage Agreements

Oregon can utilize the WCI Inc. platform to administer the auction component of its proposed cap-and-trade system. It can access the auction platform independently without formally linking with other jurisdictions and administering joint auctions.

One of the key elements of the WCI cap-and-trade program design is the ability to link the resulting carbon market across multiple jurisdictions. The signature element of linkage is that an allowance issued by one jurisdiction is equally useable by regulated entities in another linked jurisdiction. So long as jurisdictions adopt programs with similar program design, this linkage provides a way for individual states or provinces to join a larger and more economically diverse market. This allows for more cost effective and stable markets than may otherwise be achieved within individual jurisdictions.

Several general requirements are considered before linking a WCI cap-and-trade program with another jurisdiction. These requirements ensure the overall integrity and stringency of the program and ensure that linkages with other jurisdictions won’t undermine the greenhouse gas reductions to be achieved or the integrity of the linked market system.

1. Equivalent Stringency: The non-WCI jurisdiction proposing to link with WCI has adopted program requirements for greenhouse gas reductions that are equivalent to or stricter than those required by those already linked WCI jurisdictions.

 

2. Program Enforceability across Jurisdictions: Under the proposed linkage, each linked WCI jurisdiction is able to enforce its program against any entity subject to the requirements of the individual jurisdictions’ regulations, and against any entity located within the linking jurisdiction to the maximum extent permitted under existing laws.

 

3. Program Enforcement: The linking jurisdiction provides for enforcement of program requirements that are equivalent to or stricter than those of already linked WCI jurisdictions.

 

4. Liability: The proposed linkage and any related participation of currently linked WCI jurisdictions shall not impose any significant liability on those jurisdictions for any failure associated with the linkage.​ 

Oregon measures GHG emissions primarily by receiving emissions data from the emissions sources via the GHG Reporting Program at the Department of Environmental Quality. That program collects emissions data from companies supplying fossil fuels such as gasoline, diesel and propane, electric and natural gas utilities, as well as large industrial emitters. Click here​ for more information about the GHG reporting program.

The figure below shows how Oregon's GHG emissions have changed since 1990. Most recent estimates for emissions in 2017 are around 65 million tons, compared to 56 million tons in 1990. Oregon's emissions did not rise gradually over this period, but rather rose sharply in the 1990s to a peak of 70 million tons in 2000. Emissions were roughly stagnant through the early 2000s, before declining with the onset of the national economic recession in 2008. Emissions have risen as Oregon's economy has rebounded in recent years. This rise is chiefly from emission increases in the transportation sector. For more information Oregon's GHG emissions see data collected​ by the Department of Environmental Quality and the most recent report from the Oregon Global Warming Commission.

Oregon's GHG emissions.png

Oregon has already implemented many programs aimed at transitioning to clean energy, including energy efficiency initiatives, a renewable portfolio standard, a low carbon fuels standard, electric vehicle incentives, and a mandate to eliminate coal from Oregon’s electricity mix by date-certain. None of these policies directly regulate greenhouse gas emissions. They do, however, contribute to emissions reduction through the transition to greater efficiency and cleaner energy technologies. These programs can complement a cap-and-trade program in Oregon, as they have in other jurisdictions, by reducing a covered entity’s reported emissions and its demand for allowances.​

Oregon Climate Action Program

The Oregon Climate Action program is designed to reduce emissions to target levels informed by the best available climate science; help communities and​ natural resource based industries develop greater resilience and adapt to climate change; enhance the capacity of natural and working lands to sequester and store carbon; and assist families, workers, and businesses with the transition to a low-carbon future.​

The Oregon Climate Action Program will cover approximately 80% of greenhouse gas emissions in Oregon. Emissions covered by the program include:

  • Transportation fuels: Diesel and gasoline supplied in Oregon used in vehicles
  • Electricity: All electricity generated in Oregon, and electricity imported for use in the state
  • Natural gas: All gas supplied in Oregon for use in buildings
  • Large industrial sources: Facilities emitting over 25,000 tons CO2e from natural gas use, emissions from specific manufacturing processes, and landfills
  • Other fossil fuels: This includes propane, home heating oil, and distillate fuels used in non-transportation

Click here for more detailed data on these emissions sources.

Emissions sources covered by the cap_chart.PNG


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Emissions from fuels such as gasoline, diesel, and propane will be regulated at the companies importing the fuels for distribution within Oregon.

Emissions from natural gas will be regulated at the natural gas utilities for their direct sales to residential, commercial, or industrial customers.

Emissions from natural gas sold by marketers and other distributors will be regulated at those companies, not at the utility.

Emissions from electricity generated in Oregon will be regulated at the generating facilities.

Electricity imported for use in Oregon will be regulated at the entities scheduling this power for delivery in the state.

Large industrial entities with reported emissions > 25,000 tons will be directly regulated for their process related emissions and natural gas emissions. Emissions from the gas that serves these entities will be subtracted from the emissions obligation of the natural gas utility or marketer that serves them.

The cap declines by a constant tonnage amount each year to achieve a 45% reduction in capped sector emissions below a 1990 baseline by 2035, and an 80% reduction in capped sector emissions below a 1990 baseline by 2050.

Assuming a start date in 2021, total emissions covered by the cap need to decline by a total of 43.4 million metric tons over the 29 year program period to achieve the 80% below 1990 target.

Under business-as-usual, emissions from sectors covered by the Oregon Climate Action Program are projected to reach 50.0 million metric tons, an 8% increase from 1990 levels. With the cap proposed in the Oregon Climate Action Program, emissions in capped sectors will fall to 25 million metric tons by 2035, a 45% reduction below their 1990 levels. By 2050, emissions from capped sectors fall to 9.2 metric tons, an 80% reduction below their 1990 levels.

In comparison, California’s program, which began in 2013, has set an interim target of 40% below 1990 levels by 2030. Quebec, which also began in 2013, is on a trajectory to achieve a 38% reduction by 2030. 

OCAP trends.png


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​​The Oregon Climate Action program will distribute the majority of allowances through regularly occurring auctions. In a standard auction, entities bid for allowances and allowance prices are gradually increased until all excess demand is eliminated. All allowances are then sold to those bidders at this market clearing price. 

Proceeds from the sale of allowances at auction are deposited in an account with the state treasury. The Oregon Climate Action program designates those proceeds for activities that achieve the programmatic goals.
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The Oregon Climate Action program includes certain cost control measures. The allowance auction will have a price floor and a price ceiling to prevent allowance prices from reaching too high or too low. The implementing agency can also release allowances from a Price Containment Reserve if it determines allowance prices are trading at too high of a price.

Additionally, the Oregon Climate Action program allows for banking and trading of allowances. This helps to ensure ample liquidity in the market, while providing flexibility for regulated entities. The ability to “bank” allowances for future use encourages early action to reduce emissions, a climate benefit.

Lastly, the Oregon Climate Action program allows entities to use certified carbon offsets for no more than 8% of their compliance obligation. Offsets, which result from greenhouse gas reductions in sectors not covered by the cap-and-trade program, have historically traded at a discount relative to the price of allowances.​

The Oregon Climate Action Program covers emissions associated with facilities that generate electricity in Oregon and emissions associated with power imported to serve customers in Oregon. For electricity generated in Oregon, the point of regulation is the generating facility. These facilities would be responsible for emissions reported to the state as a generator.

For imported power, the point of regulation is defined as the entity that first schedules the imported power for delivery and consumption in Oregon. Those entities will be responsible for emissions associated with the power they schedule onto the grid in Oregon. Multi-state entities like Pacific Power, Bonneville Power Administration, and Idaho Power have balancing authorities that cross multiple jurisdictions. Those entities report emissions to the state based on their systems’ emissions factors that reflect the mix of generating resources they use to serve their multi-state systems. This factor, multiplied by the load they serve in Oregon, determines their emissions regulated under the program. This approach to regulating imported power is comprehensive and should account for all emissions associated with power imported to serve load in Oregon. It is expected to cover the following entities:

·          PGE for the electricity they import and distribute to their retail customers

·          Pacific Power for the electricity they import and distribute to their retail customers in Oregon

·          Idaho Power for the electricity they import and distribute to their retail customers in Oregon

·          Bonneville Power Administration for the electricity they provide to Oregon consumer-owned utilities; (BPA will need to acquire a waiver from the federal government to participate in a state regulatory program)

·          PNGC for the non-BPA electricity they provide to Oregon consumer-owned utilities

·          Consumer-owned utilities or other entities working on their behalf for non-BPA electricity provided to consumer-owned utilities

·          Electricity service suppliers for the electricity they provide their direct-access customers

​The program will exclude emissions associated with imported power scheduled for a consumer owned utility if those emissions annually average less than 25,000 tons.​

Investor Owned Utilities

The Oregon Climate Action Program is designed to encourage electricity providers to shift toward cleaner sources of energy. An electrical grid powered by wind, solar, hydropower and other renewable resources will reduce emissions associated with electricity consumption, and it can help reduce emissions in other sectors (e.g. transportation) as technologies switch to clean electricity.

Oregon’s electricity sector is already decarbonizing, due largely to market forces driving low carbon alternatives, the state’s renewable portfolio standard, and a state mandate to eliminate coal from Oregon electricity customer rates by date certain. The Oregon Climate Action Program is designed to incentivize further reductions without duplicating costs.

The Oregon Climate Action Program allocates allowances directly to customers of investor owned utilities (IOUs) to account for planned reductions reflected in customer rates. This protects households and businesses served by the utilities from paying twice for the same emissions reductions. For the period of 2021-2030, direct allocation to these companies will follow a forecast of emissions from electricity to serve their retail customers. This forecast will be based on emissions data in the most recent integrated resource plan acknowledged by the Public Utility Commission (PUC) or an update to the plan, as of January 1, 2021. This period corresponds to the timeline during which IOUs are already required to transition from legacy coal to renewable resources. For the period 2031 – 2050, direct allocation to IOUs will decline at the same annual decline as the program’s overall cap, beginning from the allocation made in 2030.

The Oregon Climate Action Program maintains incentives for IOUs to switch to cleaner resources faster, even with a direct distribution of allowances. IOUs that reduce emissions faster than their forecast will have allowances to monetize to the benefit of their retail customers, as approved by the PUC. If IOUs emit more than their forecast, they must acquire additional allowances in the market. This means that utilities will consider a price on carbon equivalent to the market value of those allowances as they approach dispatch and resource planning decisions.

Allowances distributed to IOUs can be only used for compliance with emissions associated with their Oregon retail load, or can be monetized to the benefit of the utilities’ customers. Opportunities could include investments in weatherization, energy efficiency, bill assistance, or transportation electrification. These decisions are to be made for the benefit of utility customers, not the utility’s shareholders. The Public Utility Commission oversees this process in its role as the regulator of investor owned utilities.

Consumer Owned Utilities

Consumer owned utilities in Oregon rely heavily on hydropower, but often balance or supplement that power with market purchases. During periods of low hydro output, they may engage in more market purchases or contract for thermal generation and report higher emissions as a result. The Oregon Climate Action Program directly allocates to entities scheduling electricity for COUs an amount equal to a forecast of their emissions in 2021. That forecast will be based on representative years’ emissions, to be determined in rule making. From 2022-2050, the allocation declines from the amount of allowances allocated in 2021 at the same annual decline as the program’s overall cap.

Allowances distributed to COUs can be used for compliance with emissions associated with their Oregon load, or can be monetized to the benefit of their customers, as overseen by their boards.

Electricity Price Containment Reserve

Each year, an amount of allowances to be determined in rulemaking will be distributed to an electricity price containment reserve. Allowances in this reserve will be used to moderate electricity price increases from unexpected increases in emissions that are outside the control of utilities, such as extreme variability in hydroelectric output.

The Oregon Climate Action Program will cover all GHG emissions from natural gas combustion at different types of entities, depending on how the gas is being brought into the state and the type of entity that uses the gas. Natural gas combustion at a large facility (a facility with more than 25,000 mtCO2e per year) is covered at the level of the specific facility, instead of at the supplier level, and the emissions are subtracted from the supplier’s emissions to prevent double counting. All remaining emissions from natural gas are covered at the natural gas utility or marketer supplying the gas.

The Oregon Climate Action Program provides allowances to natural gas utilities to cover the emissions attributable to low income residential customers. 

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The proposed Oregon Climate Action Program regulates the fossil fuel combustion emissions and industrial process emissions from large manufacturers.  Facilities with emissions over 25,000 mtCO2e annually are regulated directly under the proposed program. Those facilities are responsible for reducing emissions or acquiring enough allowances and offset credits to account for their emissions over a multi-year compliance period.

The proposed Oregon Climate Action Program regulates the emissions from large landfills that report emissions over 25,000 mtCO2e, but excludes any emissions that are captured and used for the generation of renewable energy.  Most large landfills in Oregon have landfill gas capture systems installed that capture some of the methane from the landfill and use it to produce electricity or renewable natural gas, these recaptured emissions are excluded from the cap-and-trade program. 

For more information on these point source emissions under the Oregon Climate Action Program, read this explanation: Point Source Emissions under Oregon Climate Action Program​

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There are about 30 large industrial manufacturers in Oregon with emissions above the 25,000 mtCO2e/year threshold and compete on price in competitive national and international markets.  These facilities have limited ability to absorb or pass through a carbon price.  In this case, carbon pricing can lead to leakage, meaning production, and the associated emissions and economic activity, could shift to another jurisdiction with a lower or no carbon price.

To inform the Legislature on how to avoid leakage, the Carbon Policy Office contracted with Vivid Economics to conduct a study of leakage risk​ across these manufacturing sectors.  The report found that all potentially regulated manufacturers in Oregon are emissions intensive and trade exposed (EITE) and the state should provide assistance to mitigate the potential for leakage at these facilities. The Oregon Climate Action Program proposes to directly allocate allowances to these facilities to reduce their cost of compliance given their emissions intensive, trade exposed status.  There are about 30 manufacturers in this category, ranging from cement production to frozen potato production to semiconductor manufacturing.

For more details on large industrial facilities and allowance allocation to those facilities, read this explanation: Point Source Emissions under Oregon Climate Action Program​

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Emissions from transportation fuels such as gasoline, diesel, propane, and CNG will be regulated upstream from the point of retail sale, at the companies importing the fuels for distribution within Oregon.​

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Offset credits represent emission reductions from sources not covered by the cap, and are generally equivalent to an allowance. The program will also allow regulated entities, like utilities, industrial plants, and transportation fuels suppliers, to meet up to 8 percent of their compliance obligation using offset credits. Offset projects must result in greenhouse gas emissions reductions or removals that are real, permanent, quantifiable, verifiable, enforceable, and not otherwise required by law; and are in addition to any other greenhouse gas emissions reductions or removals that would otherwise occur.Offset credits offer an opportunity to spread the incentive for emission reductions to sources not directly covered by cap-and-trade program. Offsets can also serve as an important cost control mechanism, providing lower cost compliance options and thereby dampening potential increases in the market price.

The proposed Oregon Climate Action Program allows regulated entities, like utilities, industrial plants, and transportation fuels suppliers, to meet up to 8 percent of their compliance obligation using offset credits. For more details on the use of offset credits in the Oregon Climate Action Program, read this explanation: Offset Credits under Oregon Climate Action Program​

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The bill designates the Carbon Policy Office at DAS as the implementing agency. In Governor Brown’s budget​, she proposed the creation of a new agency, the Oregon Climate Authority. The Oregon Climate Authority would replace the Carbon Policy Office and the Department of Energy. The Oregon Climate Authority would be responsible for implementing the state’s climate goals, including the Oregon Climate Action Program. The Legislature will consider a bill later this session to create an Oregon Climate Authority.​​

The Oregon Climate Action Program designates proceeds from the sale of allowances at state auction for activities that advance the programmatic goals.  The value of allowances is returned to the economy in ways that ensure the state achieves its climate goals equitably and effectively.

Proceeds from the sale of allowances at state auction are deposited in accounts with the state treasury. Proceeds that are constitutionally dedicated to the state highway trust fund will be deposited in a Transportation Decarbonization Account. Those funds will be designated for highway fund eligible state, county, local, or MPO projects that also achieve the Oregon Climate Action Program goals.

Some funds will be deposited in a Just Transition Fund to provide assistance to workers and their families in the event of displacement. Other funds will be deposited in a Climate Investments Fund for activities and projects that achieve emissions mitigation, climate adaptation, carbon sequestration, and/ or clean energy transition.

Every two years, the implementing agency will issue a report to the Governor and Joint Legislative Committee on Climate Action that outlines the best available opportunities for climate mitigation, adaptation, and carbon sequestration. To inform that report, the implementing agency must consult with other agencies and a citizen’s advisory board that reflects the diversity of Oregon. The Environmental Justice Task Force​ will then review that report and issue its own recommendations to the Joint Legislative Committee on Climate Action and the Governor. The Joint Legislative Committee on Climate Action will then make a recommendation for how to allocate proceeds from the Climate Investments Fund. It will do this every two years as part of the standard state budget process. 

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The economic impacts of cap-and-trade programs have been well studied by economists. Resources for the Future summarized the literature on the economic impacts of cap-and-trade programs in this report​ for the Carbon Policy Office. Additionally, the Carbon Policy Office has commissioned an economic impact analysis of the Oregon Climate Action program. Results will be available shortly. 

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 ​​Issue-Specific Fact Sheets
 
 
 
Offsets​​​​​
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