The Oregon state legislature, on January 31, released its proposed climate action bill. The bill, as introduced, includes a declaration of emergency, a strengthening of Oregon’s greenhouse gas reduction goals, the establishment of a “Climate Policy Office,” and directions to create a cap-and trade program dubbed the Oregon Climate Action Program. If it passes, Oregon will become the second jurisdiction in the world (following California) to implement comprehensive, economy-wide carbon pricing. This bill advances a model for states to develop carbon cap programs that can be customized to fit the local economy and work alongside existing climate policies.
Oregon has an existing target of reducing greenhouse gas emissions by 75 percent relative to 1990 levels in 2050, and it participates in the US Climate Alliance. For years, the Oregon state legislature and governor’s office have been considering market-based climate legislation. In 2018, a legislative effort organized the Joint Interim Committee on Carbon Reduction, and the 2019 bill is the culmination of a months-long effort by this bipartisan, bicameral committee to study options for carbon pricing legislation. RFF researchers provided input to this process through testimony to the Joint Interim Committee and a report on carbon pricing in Oregon for the Oregon Climate Policy Office.
The centerpiece of the bill is the economy-wide cap-and-trade program that sets a maximum quantity of emissions from sources covered in the program and allows for flexible compliance among those sources through emissions allowance trading at a market-determined price. The bill sets a firm emissions reduction goal, draws out a framework for the cap-and-trade program, and directs the newly created Climate Policy Office to finalize the details and implement the program. We lay out here an overview of some key design features included in the bill.
The cap: The bill revises Oregon’s carbon reduction targets, adding an interim target of 45 percent reductions below 1990 levels by 2035 and strengthening the 2050 goal to 80 percent below 1990 levels. The Climate Policy Office is directed to set up a declining annual emissions budget for 2021–2050 that is consistent with meeting the reduction targets. Covered entities will be permitted to bank allowances for use in later compliance periods.
Sectors covered: Most sectors of the economy will be covered in the program, including electricity, transportation fuels, natural gas, and industry. Emitters with over 25,000 metric tons of carbon dioxide-equivalent emissions per year will be covered, but all fossil fuel–fired electricity sources will be covered regardless of their annual emissions. This is the same emissions threshold used in California’s cap-and-trade program.
Allocation of emissions allowances: Electric companies, natural gas utilities, and energy-intensive trade-exposed industries (EITEs) will receive free allowances. The free allocations to utilities are meant to protect ratepayers; the bill also includes a provision for public utility commissions to create different rate schedules to assist low-income customers. Free allocations for EITEs are meant to preserve Oregon’s competitiveness and reduce economic and emissions leakage. The remaining allowances will be distributed through an allowance auction.
Guardrails for auction prices: The Climate Policy Office is charged to establish an annually rising price floor, which should be established with consideration of prevailing price floors in other cap-and-trade programs to enable potential future program linkages. A portion of allowances each year will be allocated to price containment reserves (some of these allowances will be specifically reserved for utility companies and EITEs), and the Climate Policy Office will establish a minimum price for sales from the containment reserve. It will also set a price ceiling at which price an unlimited amount of allowances will be made available. These price guardrails are meant to support the role of an allowance price in driving emissions reductions and to place limits on price increases, for example in the case of an economic shock.
Offsets: Covered entities can meet up to 8 percent of their compliance obligations with offsets, which are credits earned through projects that reduce or remove emissions that are not already regulated, such as forest and livestock projects. Only 4 percent of compliance obligations can be met with offsets from projects outside of Oregon. Additional restrictions apply for certain entities, including those that are in air quality nonattainment areas.
Investment of auction proceeds: The bill establishes some general specifications for the use of funds through a Climate Investments Fund and a Transportation Decarbonization Investments Account. The Climate Investments Fund must allocate specific amounts to Indian tribes and a Just Transition fund, and the bill specifies that funds should also be invested in emissions reduction measures, adaptation and resilience, carbon sequestration, and ecosystem resilience, among others. The Transportation Decarbonization Investments Account is required by law to invest proceeds from the transportation sector back into that sector.
Linking: The bill is designed with capabilities for linking with other cap-and-trade programs in mind, and it sets up a required process for creating linkages. There is a strong precedent for linkages between programs: California, for example, is currently linked with Quebec.
The cap-and-trade program’s design will have big implications for its effectiveness in reducing emissions and its impact on Oregon’s economy. Although specific design decisions will fall to the Climate Policy Office, the framework issued by the legislature signals its prioritization of minimizing the program’s economic impact on Oregon households and businesses, particularly low income households, through free allocation and investment in transition funds; investing further in companion climate policies; and enabling possible future linkages with other cap-and-trade programs. This framework captures the main features of other successful emissions trading programs and launches a regulatory process that appears on track to result in cost-effective emissions reductions.
