After efforts to unite the West under a carbon-trading program stalled for nearly a decade, Oregon will decide this month whether it wants to follow in California’s footsteps. This bill would make Oregon the second state after California to rely on the market for emissions reductions throughout the entire economy. Supporters say that expanding the cap-and-trade market to Oregon could increase competition, lower compliance costs, and speed decarbonization of the West. But others worry a failure in Oregon could hurt carbon trading’s chances in other states.
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After efforts to unite the West under a carbon-trading program stalled for nearly a decade, Oregon will decide this month whether it wants to follow in California’s footsteps.
A bill winding its way through the Oregon legislature could finally give California a U.S. partner in the cap-and-trade program it shares with the Canadian province of Quebec. Other states have embraced carbon trading to curb greenhouse gases pumped out by power plants. But this bill would make Oregon the only state besides California to rely on the market for emissions reductions throughout its entire economy.
“California really led with all-in, and I want Oregon to be all-in, too,” said Oregon state representative Karin Power, a Democrat who co-chairs the policy committee spearheading the bill. “We can do this. We know that science tells us we have to.”
“It’s like us going back and seeing an old friend.”
California set itself up to be a global leader in reducing greenhouse gas emissions, but it never intended to go it alone. While the bill doesn’t automatically connect Oregon to California’s market, it creates a compatible system so they could link up down the line—and according to Power, that’s the ultimate goal. Supporters say that expanding the cap-and-trade market to Oregon could increase competition, lower compliance costs, and speed decarbonization of the West.
“It’s like us going back and seeing an old friend,” said Rajinder Sahota, who oversees climate programs including cap and trade for the California Air Resources Board. “It’s very exciting to see them get this far. I know how hard they’ve worked.”
Oregon’s bill still needs to survive the House and the Senate before it ends up on the governor’s desk by the end of June. Still, its chances are looking good with a Democrat supermajority in the Oregon legislature. The current bill sets ambitious targets for greenhouse gas reductions over the next 30 years: 45 percent below 1990 levels by 2035 and 80 percent below 1990 levels by 2050.
The cap-and-trade system it sets up to meet those targets looks a lot like California’s. Big greenhouse gas producers across the economy, like power plants and heavy industry, can work toward those targets by upgrading their facilities, or by using credits. Each credit allows a company to emit a certain amount of greenhouse gases, and the number of credits the state issues drops every year.
Oregon will give away some of those credits, also called allowances, to discourage companies from fleeing the state and protect low-income customers from spikes in gas and utility bills. The rest, they’ll sell at auctions. Companies can use these credits, trade them, or hold onto them — a controversial practice known as banking.
Will Oregon’s constitution prove a sticking point?
Auction income will help fund statewide greening projects to reduce or soak up greenhouse gases, help Oregon adapt to climate change, or transition the state to clean energy. But Oregon’s constitution could throw a wrench into those plans, because income linked to fuel sales for vehicles might be restricted to road and highway projects. The state won’t know for sure without a court decision.
That worries Danny Cullenward, policy director at climate change think-tank Near Zero and a member of the Independent Emissions Market Advisory Committee, who thinks restricting where the revenue can go could hurt the program’s popularity. “The political economy of the process turns on the way we use revenue,” he said. “If you spend money on targeted sectors, they might support your work. Oregon doesn’t really have that flexibility.”
Here’s why that matters: if Oregon’s cap-and-trade program crashes and burns, it will hurt the chances of carbon trading in other states. When it comes to market-based programs, “there’s a growing perception that they’re ineffective and that they’re being used to delay or defray action,” Cullenward said. “If it continues to not go well, it’s going to increase resistance to these programs among the climate activist community whose support is essential.”
“One seller and one buyer don’t get to set the price.”
Of course, there’s a lot to work out before we know what the promises and pitfalls of Oregon’s program really will be. And one lingering question is whether Oregon will join California and Quebec in a cap-and-trade market called the Western Climate Initiative. Oregon’s return to the fold would allow companies in Oregon, California, and Quebec to trade credits across state lines.
When it comes to markets, bigger is better, according to the air board’s Sahota. Oregon, for example, may have business sectors where it’s faster or cheaper to decarbonize than in California—or vice versa, she said. More companies buying and trading allowances also means more competition, and fewer opportunities to collude and manipulate the market. “One seller and one buyer don’t get to set the price in the program,” she said.
One common critique of California’s cap-and-trade system is that too many allowances are floating around the market and sitting in companies’ pockets. The concern is once the low-hanging, greenhouse-gas-reducing fruit are off the tree, industries will trot out banked allowances instead of making difficult changes to reduce emissions.
Sahota doesn’t share that concern. She pointed to a recent auction where allowances sold above the minimum price. “If there were too many allowances, the auction prices would not be above the floor price,” she said.
Michael Wara, director of the Climate and Energy Policy Program at Stanford University, suspects that Oregon might help soak up some of California’s allowances because its hydropower-heavy electricity sector is already pretty clean. Reducing emissions from transportation or industry could be more challenging, so Oregon may wind up buying allowances from California companies still able to make easier carbon cuts.
“Basically that’s like Oregon paying California to reduce its emissions for it,” Wara said. “People have wondered if that would really happen, if it would be politically sustainable — and it seems like maybe it is.” Quebec’s power sector, after all, is also heavily reliant on hydropower, and its cap-and-trade system has survived its union with California for years.
“No other U.S. state has followed California down this road.”
Beyond the cap-and-trade market itself, Dallas Burtraw, Dairus Gaskins Senior Fellow at the Washington D.C. think tank Resources for the Future, is optimistic that an Oregon cap-and-trade program could give a boost to the clean tech market. Sending a signal of regulatory certainty could ease investments in electric vehicle charging stations, or a hydrogen super-highway, he said.
“That makes the California program even more robust because the program design is starting to propagate,” Burtraw said. “Investors can say, ‘Oh this gives me some confidence that this is what the world is going to look like in the future.’”
Wara said he thinks Oregon’s push toward cap-and-trade would be more significant politically than economically given its small size. “No other U.S. state has followed California down this road,” he said. “Oregon does it now, next session, you come back and maybe Washington has another run at it, maybe somebody else. New Mexico is another potential target.”
Oregon representative Power is also optimistic Oregon could kick-start a bigger movement. “Oregon is a state that most people in the rest of the country can’t pronounce. If we can do it, then it’s not just California being an outlier,” she said. “This is doable, and other states should follow us.”