Inslee Proposal to Combine Cap-and-Trade and Low-Carbon Fuel Standard Is Costly and Ineffective

When Governor Inslee signed the regional climate agreement last week, it included two policies he had already advocated publicly as part of the Climate Legislative Executive Workgroup (CLEW) process. It called for a cap-and-trade system and a low-carbon fuel standard (LCFS) which would require fuel to have less carbon per gallon than standard gasoline (among other things). Including both of these policies, however, makes it more expensive to reduce carbon emissions while doing nothing to increase those reductions.

First, cap-and-trade itsself is a poor approach for many reasons. For instance, I agree with Peter Orzag, President Obama’s first budget director, that a cap-and-trade system costs more to achieve the same carbon reduction goal. This is especially true in Washington where the carbon intensity of our energy is dependent on snowpack. When we have low-snowpack years, Washington could rapidly run up against an inflexible cap as we purchase natural gas electricity to replace hydro power, causing the cost of carbon permits to skyrocket and driving energy prices up.

This is precisely why the Congressional Budget Office, led by Orzag at the time, concluded “Analysts generally conclude that a tax would be a more efficient method of reducing CO2 emissions than an inflexible cap.”

Second, for all its problems, the one benefit of a cap-and-trade system is that it sets a goal but allows every covered business and individual to figure out how best to achieve that goal. How that happens is different for everyone and each will find the least expensive and most effective way to cut emissions.

Adding an LCFS or any other regulatory policy, however, undermines all that. Adding an LCFS removes flexibility, saying “we want you to meet the goal by using this particular appraoch whether or not that works for you.” It does not increase total reductions because the cap stays the same. It simply requires everyone to meet the same carbon reduction goal in a more restrictive way. Even worse, the LCFS is one of the worst possible ways to reduce emissions, as the report to the Governor’s climate workgroup shows.

Combining these policies, as Inslee wants and the Pacific Coast agreement requires, compounds these problems. The combination does nothing to increase emission reduction but does increase the cost of achieving those reductions. It is the worst of both worlds.

One argument may be that the LCFS must be added because the cap-and-trade system wouldn’t cover auto fuels. That makes no sense either. If cap-and-trade can cover natural gas for heating, it can cover auto fuels. And, as I mentioned above, applying cap-and-trade on Washington’s electricity would risk significant price volatility for electricity. Applying cap-and-trade to electricity but not to auto fuels would be using it in the worst possible way.

Even more ridiculous is that biofuel companies, who would be the primary beneficiary of an LCFS, already receive a wide range of subsidies. Taxpayers already pay for huge federal subsidies. The federal government requires oil companies to buy biofuels. Washington state requires all motor fuels to include biofuel. Washington state has also given cheap loans to biofuel companies — loans that ended up in default, yielding no environmental or economic benefit but costing taxpayers. None of this mentions the environmental damage from corn-based ethanol or the federal requirement that oil companies buy cellulosic biofuel which does not even exist.

Why do we believe that one more regulation favoring biofuel corporations will make the difference?

As was noted at the CLEW meeting today, Washington’s effort to assess the most effective ways to reduce carbon is unique in the country. Typically, climate policies have been chosen for their sex appeal rather than environmental effectiveness. The Governor’s proposal, however, abandons the very thing that makes this effort unique and worthwhile, ignoring the very research that was at the center of the Governor’s own legislation.

The members of the CLEW should follow the data and reject this costly and ineffective approach.

Print