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.

Comments (14)

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  1. jason benson says:

    Just another example of miss-guided politics.
    Inslee in 2005 had no idea what he was doing with respect to energy. His panel convened in Lynnwood and wahla, his book is the proof Inslee is an energy guru, NOT!
    Cap and Trade in Europe has failed, it will fail here.
    Market manipulation will prevail, the former Enron types will get rich, and the environment will be no better off.
    Interestingly, Inslee and Washington State approve the burning of wood in Seattle in order to produce steam. Seattle Steam in the pocket of Inslee and many politicians has convinced Washington the burning waste wood destined for a landfill where GHG will be sequestered is GHG neutral. What is even more surprising is the Steam only burns on a good day less than 8% wood the rest #2 diesel or natural gas and claim 100% GHG neutrality, what a scam, and the City of Seattle supports this notion.
    Moreover Seattle is doing everything legally and illegally to support the continuation of this ridiculous claim.
    The office of Sustainability under Jill Simmons has spent $hundreds of thousands on feasibility studies manipulated to lie to consumers that steam is cheaper, more reliable and less costly than alternatives. All a total lie.
    This fraud is also supported by Larry Phillips of King County. Larry a strong supporter of steam due to heavy contributions and his former aid, Tim Hatley Steams lobbyist, is forcing county buildings to remain on steam despite the 3-4 times more costs associated with steam. This proved out in a recent move off steam at the Courthouse and downtown Jail where natural gas on site energy has reduced heating and hot water costs by 2/3rds saving tax payer $1M a year.

    • JSmns says:

      The City of Seattle would never do this, there are procurement practices in place that would make this susceptible to prosecution.
      Is there proof of Seattle re-opening a closed bid?

  2. Dewaine says:

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

    Because some people think that regulation promotes fairness and growth. I have no idea where they got that impression.

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