WA carbon auction cost drops as eyes turn to gas prices, repeal vote

Climate Lab is a Seattle Times initiative that explores the effects of climate change in the Pacific Northwest and beyond. The project is funded in part by The Bullitt Foundation, Jim and Birte Falconer, Mike and Becky Hughes, University of Washington and Walker Family Foundation, and its fiscal sponsor is the Seattle Foundation.

The cost of Washington’s carbon-emission allowances dropped by half this month in the state’s latest auction, the first of the year.

For some of the architects and supporters of the state’s landmark climate legislation, the Climate Commitment Act, the decline amounts to something of an “I told you so” moment. They had predicted for months that allowance prices — widely seen as an upward influence on gas prices — would drop.

“We said from day one that this is a new market and a new program that simply needed time to mature,” said former state Sen. Reuven Carlyle, one of the main authors and champions of the policy.

But Brian Heywood, the man behind the effort to repeal the law and ban future carbon-allowance auctions, is also claiming victory.

The precipitous reduction in allowance prices offers a “very, very clear market signal” that speculators and polluters believe Initiative 2117 will pass, Heywood said.

Who’s right?

At least part of that answer could be found at the gas pump in the months ahead, Carlyle and Heywood say.

The state’s latest auction on March 6 raised an estimated $135.5 million from some of the state’s largest climate polluters by selling 5,260,000 allowances (each of which represents a metric ton of greenhouse gas emissions) at a price of $25.76, slightly above the floor price.

Another 2,182,241 allowances offered by utilities that receive free allowances were sold, but the revenue will not go to the state. The revenue is intended to be used by utilities to reduce costs to ratepayers.

That’s a sharp decrease from the average allowance price of $54.86 last year. High prices not only surprised state officials but also triggered two supplemental auctions meant as emergency relief valves to calm the market. In all, last year’s quarterly and supplemental auctions combined with the latest one have raised nearly $2 billion for green initiatives across Washington. 

Mike Faulk, a spokesperson for Gov. Jay Inslee, said in an email the Climate Commitment Act’s main goal is to cut carbon pollution and “that’s what it’s doing.”

“This was another successful auction showing strong demand from companies who have to pay for and reduce the millions of pounds of pollution they put into our air,” Faulk said.

The marked decline in allowance costs was expected and mirrors that of carbon markets around the globe, according to an analysis by Clean and Prosperous Washington. Elsewhere, such as in the European Union, carbon markets saw a decline of as much as 52% in their fifth quarterly auction, said Michael Mann, executive director of Clean and Prosperous.

Public sentiment on the money raised is split, however. Some, like Heywood, see the Climate Commitment Act as a cash grab. He points to high gas prices as the ultimate result of polluters passing the increased costs from the allowances on to customers.

The Climate Commitment Act does influence gas prices, Carlyle acknowledged, but modestly.

Other factors like global supply and demand, Russia’s invasion of Ukraine, pipeline problems and more have a much stronger impact on prices at the pump, he said.

Heywood and others behind the repeal effort are wrong in pointing to the Climate Commitment Act as the main source of Washington’s gas woes, Carlyle said.

“Their entire premise, categorically, top to bottom, upside down and backwards, is inaccurate,” Carlyle said. “They’re not doing anything but saying ‘Look at gas prices’ and ‘Look at state policy.’”

The transportation fuel sector is carrying the burden for statewide carbon emission reductions, said Kevin Slagle, spokesperson for the Western States Petroleum Association. When a similar carbon market program launched in California, other sectors — particularly fossil-fueled energy generation — shared the costs, Slagle said. Transportation fuels were not included in the first compliance period, the petroleum association believes.

When Washington launched its program, fossil fuel companies were included in the first compliance period and their product accounted for the lion’s share of the state’s climate-warming emissions; thus, the largest share of the costs. While refineries received free allowances, fuel suppliers did not.

So some companies may choose to pass costs down to consumers, without any state oversight.

Slagle said the only things that have changed since the last quarterly auction in the state is that lawmakers passed a policy paving the way for a merger with California and Quebec’s joint market, which some have said would reduce compliance costs; and the repeal effort, which the petroleum association opposes, is underway.

BP declined to comment on what may have influenced allowance prices, citing state law that bars them from disclosing bidding information.

Precisely how much the policy does influence gas prices continues to be the subject of debate. Gov. Inslee previously anticipated the increase would amount to “pennies.” He later acknowledged the reality was more expensive but said the state’s analysis had been done in good faith.

In October, state officials said gas likely increased 25 to 35 cents from oil companies passing their costs on. In December, a former economist for the state Department of Transportation claimed he was told to lie about the policy’s influence on the cost of fuel.

With the falling allowance prices, both sides look once more toward gas prices. They dipped in October, bottomed out in mid-February and are back on the rise, remaining well above the national average the whole time.

If prices continue to rise, that will show they move more independently of allowance prices, Carlyle said.

A shrinking margin between Washington’s gas prices and the national average would show a tighter connection to allowance prices, Heywood said. This would mean speculators and polluters put in low bids or didn’t bid at all because they don’t want to be caught “holding the bag” with allowances that would lose value if the repeal effort succeeds.

Mann cautioned against that logic. If the repeal was influencing polluting businesses’ behavior in carbon auctions, that would more likely be reflected in the number of allowances sold, rather than the settlement prices, he said. Every allowance for sale was sold in the most recent auction.

Gas prices are likely to climb, as they usually do before the summer months, but the biggest indicator of compliance costs in fuel prices will be the margin between Washington and Oregon prices, which have been historically aligned, Mann said.

Either way, such a sharp decrease in allowance prices likely makes for a more appealing merger between Washington’s carbon market and the joint one operated by California and Quebec. Linkage, as it’s called, was always a goal and seen as a way to settle Washington’s market further while spreading the influence of a policy meant to drastically ratchet down greenhouse gas emissions and cut dependence on fossil fuels.

Washington’s desire to link markets might actually have played a part in the lower allowance prices, according to Caroline Jones, a senior climate analyst with the nonprofit Environmental Defense Fund. State lawmakers passed a bill in their short session this year meant to make that process easier.

The linkage bill could have given polluters greater confidence “in their ability to buy sufficient allowances in the future in a linked market,” Jones wrote Wednesday.

Money from this month’s auction will bring the total raised to nearly $2 billion. The cash will go to programs across the state meant to improve public health, make clean energy and transportation more affordable and accessible and guard communities against the effects of climate change, Faulk said.