Cap-and-Trade Policy Potential in Oregon: Addressing Emissions Leakage

Oregon is among a number of states considering policies to reduce carbon emissions by pricing carbon, an effort that has been underway there for a decade. In 2015, a highly publicized ballot measure for a state-level carbon tax (HB 3252) ultimately failed. The defeat of that bill and others like it, however, have left the door open for new proposals. This year, lawmakers in Oregon are debating policy options aimed at reducing carbon emissions via an economy-wide cap-and-trade program. Both an emissions cap and tax remain under discussion and a number of bills have been introduced in this year’s legislative session­, with an eye toward passage in 2018. But the prospects for proposals currently under debate are uncertain.

One critical issue is how to account for potential emissions “leakage.” In other words, how can a state-level carbon policy address concerns that capping emissions in Oregon would cause emissions to increase beyond the state’s borders? Any state or jurisdiction considering carbon pricing policies must decide whether and how to reduce emissions leakage. For the Oregon context, RFF’s Joshua Linn and Dallas Burtraw recently provided advice on how policymakers might balance the desire to reduce emissions leakage and at the same time preserve the integrity of the program’s economic and other objectives.

Complicating matters, the 2018 legislative session in Oregon is a mere six weeks long—leaving lawmakers with scant time to hammer out the details of a complex policy. Facing this tight timing, Oregon state officials in have created four working groups seeking input about critical policy design questions related to specific areas: Regulated Entities; Utilities and Transportation; Agriculture, Forests, Fisheries, Rural Communities, and Tribes; and Environmental Justice and Just Transition.

In short, RFF’s Linn and Burtraw write, “As Oregon considers cap-and-trade, the state is looking for a policy design that will achieve environmental and economic goals, including minimizing leakage,” explaining “that the distribution of emissions allowances is a powerful tool for meeting these goals.” They highlighted four key points in their public comments:

1. Oregon can use the allocation of emissions allowances to balance the benefits of auction revenue with the benefits of minimizing leakage.
2. The state can reduce or eliminate leakage using output-based updated allocation, recognizing that doing so has an opportunity cost because it diverts allowance revenue from other potential uses.
3. We recommend simple allocation rules based on available data.
4. For allocation to be effective at reducing leakage, covered facilities must anticipate that the allocations will be updated based on their production levels. Allocation rules can be updated based on new information as the cap-and-trade program unfolds.

Read the full issue brief for more details: Combating Emissions Leakage from Oregon’s Industrial Sector.