Summary of Bill: Carbon pollution tax (carbon tax). Imposition. Beginning July 1, 2019, a carbon pollution tax applies to:

the sale or use of fossil fuels within the state of Washington; and

the sale or consumption of electricity within Washington generated through the combustion of fossil fuels.

From July 1, 2019, through December 31, 2019, the tax rate is $20 per metric ton of carbon dioxide emissions. Beginning January 1, 2020, and each calendar year thereafter, the tax rate increases by inflation, as measured by the consumer price index, plus 3.5 percent.

Ecology, in consultation with Commerce, will determine the amount of carbon dioxide emissions derived from the combustion or oxidation of various fossil fuels as part of a carbon calculation. The calculation will include a determination of the carbon dioxide emissions from generating electricity. For the sale or consumption of electricity sourced from an asset controlling supplier (ACS) such as the Bonneville Power Administration, the department will calculate a system emissions factor for all ACSs recognized by Ecology. A system emissions factor reflects the estimated average carbon intensity of power sourced from an ACS, i.e., metric tonnage of carbon dioxide emissions per megawatt hour (MWh). If the source used to generate electricity is unknown or unspecified, the carbon dioxide inherent in the electricity is assumed to be one metric ton per MWh.

Point of Taxation. The carbon tax is imposed on the first sale or use of the fossil fuel in Washington. A sale of fossil fuel takes place in the state when the fossil fuel is delivered in this state to the purchaser or a person designated by the purchaser. A use of fossil fuel occurs in this state when the fuel is consumed by the taxpayer in the state or the taxpayer possesses or stores the fossil fuel in the state in preparation for actual consumption by the taxpayer. For motor vehicle or special fuels, the carbon pollution tax would generally parallel the points of taxation used for fuel taxes.

Exemptions. The carbon pollution tax does not apply to:

fossil fuels brought into this state by means of the primary fuel supply tank of a motor vehicle, vessel, locomotive, or aircraft;
fossil fuels or electricity exported from the state of Washington—export to Indian Country is not considered export outside this state;
the sale or use of coal transition power;
fuel used solely for agricultural purposes;
aircraft fuel;
biogas, biodiesel, cellulosic ethanol, and renewable diesel;
electricity or fossil fuels subject to a comparable pollution tax or charge on carbon content imposed by another jurisdiction, including allowances required to be purchased by another jurisdiction; and
fossil fuels used on-site for manufacturing processes by an energy-intensive trade-exposed (EITE) facility. Commerce must adopt a rule to establish criteria for identifying and certifying potential EITE facilities by July 1, 2019.

A light and power business or gas distribution business may claim a 100 percent credit against the carbon pollution tax for clean energy investments approved by Commerce or the Utilities and Transportation Commission (UTC) as part of a clean energy investment program.

Reporting. Commerce, with support from DOR, must annually report to the Governor and Legislature by October 31, 2020, through 2030, and biennially thereafter. The report must contain:

total carbon pollution tax collected during the reporting period;
estimated costs incurred by DOR, Commerce, Ecology, and the Washington State University Extension Energy Program (WSU Energy Program), associated with administration of the carbon tax, shown as a dollar amount and percentage of the revenues collected;
estimated overall net revenue gain or loss calculated by comparing total revenue with administration costs in dollar amounts and as a percentage of carbon tax revenues collected;
a summary of the investments made through Commerce's administration of the Energy Transformation Account; and
a summary by Commerce of the utilities' progress implementing their plans under the Clean Energy Investment Program.

Rules and Technical Assistance. DOR, Ecology, and Commerce may adopt rules to administer the tax. Commerce, Ecology, and the WSU Energy Program must provide technical assistance to DOR as necessary to effectively implement the carbon tax.

State Preemption. No local government in the state may impose any comparable carbon tax or charge on the sale or use of fossil fuels or the retail sale or consumption of electricity generated through the combustion of fossil fuels.

Revenue Allocation. A Carbon Pollution Reduction Account (Account) is created in the State Treasury. All revenues generated from the carbon tax, and any other revenues directed by the Legislature, are deposited into the Account. First, funds must be appropriated to DOR for administrating the carbon tax, and then the remainder is distributed as follows:

50 percent to the Energy Transformation Account;
35 percent to the Water and Natural Resource Resilience Account; and
15 percent to the Transition Assistance Account.

Energy Transformation Account. The Energy Transformation Account is created in the state treasury and, subject to appropriation. Commerce must use funds in the account for projects and programs that reduce GHG directly connected to energy use in Washington. Priority must be given to projects and activities that benefit low-income communities, communities of color, and communities of indigenous peoples. Public entities and private entities are eligible to receive funds from the Energy Transformation Account.

Categories of eligible projects include:

Industrial energy efficiency, including projects that increase energy efficiency or reduce the GHG emissions at manufacturing facilities, such as projects to implement combined heat and power, district energy, or on-site renewables; upgrade existing equipment for efficiency and switch to less carbon-intensive fuel sources; or to reduce process emissions.
Clean transportation, including projects and programs that exceed workplace targets for commute trip reduction, accelerate uptake of renewable fuels and electrification in transit and vehicle fleets, promote advanced-technology transportation networks, create electric vehicle (EV) charging or hydrogen refueling infrastructure, implement biomethane or other biofuels for transportation, and increase equitable transit-oriented development.
Energy efficiency and electrification for existing buildings, including projects that seek to improve energy efficiency and utilize demand-side management of electricity.
Agricultural and working lands emissions, such as projects and programs to achieve energy efficiency and emission reductions in the agricultural sector including fertilizer management, soil management, bioenergy, and biogas.
Other technologies, such as proposals that diversify opportunities such as addressing peak loads, educating consumers, developing new low carbon fuels, or incentivizing consumers to choose low carbon alternatives.

Funding recipients for projects must submit a progress report to Commerce with required information, including a summary of the investment made and verification of the avoided GHG emissions from a qualified third party. The third party must report on whether a project was built or implemented according to the approved funding contract, a verification plan detailing the methods of evaluating the project, a review of the recipient's accounting of current and projected emissions reductions, site visits by verifiers, and additional data Commerce identifies to evaluate the project for emissions reductions.

Commerce must design project funding contracts, monitor project implementation, track contract performance, and identify qualified third party verifiers. Commerce may also suspend or terminate funding when projects do not achieve projected reductions as provided in the funding agreement or require a return of grant funding in cases of gross misuse of funds. To administer the projects and programs, funds may be appropriated to Commerce from the Energy Transformation Account and Commerce may adopt rules.

Commerce must develop an implementation plan for the investment of the Energy Transformation Account by June 30, 2019. The planning and preparation must include:

analysis, to be implemented in partnership with the WSU Energy Program, to determine overall carbon pollution abatement opportunities in Washington. By March 1, 2021, and every two years thereafter, the WSU Energy Program must update the recommended amounts per metric ton of emissions reductions;
robust monitoring and evaluation systems to ensure the effects and cost-effectiveness of grants are used to strengthen the grant-making process; and
assessment and development of efficient and transparent grant-making strategies to ensure program objectives are met and taxpayer interests are protected; and
outreach and education to engage eligible recipients for grant funding.

Water and Natural Resource Resilience Account. The Water and Natural Resource Resilience Account is created in the state treasury and subject to appropriation. In consultation with the Department of Fish and Wildlife, WSDOT, and the Recreation and Conservation Office, Ecology may use the funds for eligible projects and activities that must consider future climate impacts in their planning, siting, design, and implementation. These projects and activities must include:

reducing storm water pollution from existing infrastructure and development;
reducing the risk of flooding, protecting against damage caused by floods, and protecting or restoring naturally functioning areas where floods occur;
improving availability and reliability of water supplies for instream and out-of-stream uses; and
constructing fish barrier correction projects, with priority given for WSDOT projects required by court orders. Once available funding exceeds what is necessary to meet the court-ordered timeline, awards may be made for state and local roadways projects based on the recommendations of the Fish Passage Barrier Removal Board.

The Department of Natural Resources (DNR) may use this account to improve forest and natural lands health and resilience, reduce wildfire risk, and prepare for and suppress wildland fires. DNR may undertake or provide grants for projects and activities that improve forest health, which includes thinning or prescribed fire, with priority for projects that are:

proposed pursuant to a forest collaborative planning process establishing ecological and public safety goals; and
consistent with the forest health treatment and assessment framework adopted by the Legislature in 2017.

Additionally, DNR may support agency activities or provide grants for wildland fire prevention and suppression, and projects that help communities reduce their risk and improve their ability to adapt to wildland fires.

By January 1, 2019, Ecology must establish an advisory committee with specific representatives to help identify, evaluate, and prioritize infrastructure needs and projects that will increase the resilience of Washington's natural resources to expected impacts of climate change. To administer the projects and programs, funds may be appropriated to Ecology from the Water and Natural Resource Resilience Account.

Within the first 12 months after the carbon tax is implemented, Ecology must develop an implementation plan for the investment of the Water and Natural Resources Resilience Account. The plan must include:

priority issues for adaptation and resilience investments;
clear objectives and metrics to evaluate the impact and effectiveness of investments;
guidance to evaluate the rigor, potential impact, and readiness of submitted applications;
strategies for assessment and development of making grants to maximize cost-effectiveness of the program; and
outreach and education to engage potential recipients for funding.

Ecology must work with the Climate Impacts Group at the University of Washington to provide an assessment of the state's resilience to climate change impacts and remaining major vulnerabilities, and recommendations for additional projects and activities by October 1, 2022, and every four years thereafter.

Transition Assistance Account. The Transition Assistance Account is created in the state treasury and, subject to appropriation. Commerce must use the funds for three purposes. First, Commerce must provide assistance to vulnerable communities and households to provide for an equitable transformation to a clean energy economy. Assistance may include support for low-income energy assistance, low-income weatherization, public health programs, rural economic development, low-carbon innovation and entrepreneurship, affordable transportation and housing options and services, and community services and infrastructure needed to increase resilience to climate impacts and environmental pollution.

Second, Commerce must use the funds to assist workers in fossil fuel industries affected by the transition to a cleaner energy economy, including wage replacement benefits, training and education subsidies, job placement support, and relocation assistance. Commerce must administer funds through existing assistance programs and work with the Employment Security Department (ESD) to identify the best use of funding.

Third, the State Board for Community and Technical Colleges (State Board) must use funds to establish three separate Clean Energy Centers for Excellence in the state community and technical college system:

Renewable energy integration and generation development;
Smart grid technology and the next generation of hydropower resources development; and
Renewable forest products promotion and research to improve forest health and reduce fire risk.

Commerce must establish a citizen advisory group with specific stakeholders to provide input on the use of the Transition Assistance Account funds. To administer the projects and programs, funds may be appropriated to Commerce from the account and Commerce may adopt rules.

Within the first 12 months after the carbon tax is implemented, Commerce must work with ESD, the Department of Health, and other agencies to establish an implementation plan for the Transition Assistance Account. This plan must identify disproportionately impacted communities, provide guidance to evaluate wage and benefit value for affected workers, and propose outreach and education to engage eligible recipients for funding support.

Clean Energy Investment Program (Investment Program). Each electric utility or natural gas business may claim a credit of up to 100 percent against the carbon tax imposed in the same calendar year, beginning July 1, 2019.

To be eligible for the credit under the Investment Program, an electric or gas utility must receive approval of a clean energy investment plan (investment plan) and execute an agreement with Commerce or the UTC authorizing it to reinvest an equivalent amount of carbon tax revenues collected from customers during that year, the preceding year, or any of the three subsequent years. Each electric and gas utility claiming a credit must establish a separate Clean Energy Investment Account (Investment Account) for the investment funds, and may not earn a rate of return on these investment funds.

Beginning July 1, 2020, an electric or gas utility seeking a credit under the Investment Program, must submit an investment plan that must includes:

programs for investments or expenditures that are incremental to investment or expenditures a utility would have pursued without an investment plan and that either reduce or offset carbon dioxide emissions of the utility or advance market transformation, educate consumers, develop new low carbon fuels, and increase participation in programs that enable customers to choose low carbon alternatives;
a demonstration that the portfolio of funded activities can reasonably be expected to achieve GHG emissions reductions;
an estimate of the metric tons of emissions reduction and the cost per metric ton of emissions reduction for the portfolio of projects in the investment plan;
a demonstration that expenditures in the investment plan will be additional, not to exceed an average cost per metric ton of GHG abated at 300 percent of the carbon tax rate or to be determined by Commerce or the UTC; and
a customer education and outreach program to promote widespread participation.

Additionally, an electric or gas utility must submit a summary of public input received during the development of the investment plan through public processes and a schedule for independent evaluation of activities financed though the investment plan, including verification of carbon emissions reductions.

At least 20 percent of the investment funds must be additional funding dedicated for low-income energy assistance. The investment plans may only include the following types of investments or expenditures:

additional conservation in excess of other obligations required by the state or the UTC;
market transformation for energy efficiency products;
eligible renewable energy resources in excess of state requirements;
low-income weatherization;
infrastructure to support electrification of the transportation sector, including equipment for transmission and distribution, and incentives for car dealers to sell EVs, property owners to install charging equipment, and for electrification of vehicle fleets;
clean distributed energy resources and grid modernization to facilitate distributed resources and improve resiliency;
research and development to promote energy conservation or zero-emission energy resources;
investment in renewable natural gas production;
self-directed investments for large industrial gas and electrical customers to support conservation, new renewable energy resources, behind-the-meter technology; infrastructure to support EVs and heating loads, or renewable natural gas production;
reasonable administration costs of the Investment Program; and
debt financing for investor-owned-utilities for the portion of capital projects identified in the investment plan if the UTC determines that such treatment would reduce the overall cost of the project to customers.

An electric or gas utility must submit and receive approval of an updated investment plan every three years to maintain eligibility for the tax credit and to continue to retain authority to expend investment funds. Additionally, a utility must submit an annual report to Commerce or the UTC that includes the status of projects approved; an accounting of GHG emissions and reductions achieved and the cost per metric ton of emissions reductions; and updated estimates of future GHG emissions reductions and the cost per metric ton. Annually, Commerce must provide DOR with a report summarizing who is entitled to the credit, over what timeline, and any additional information DOR needs to administer the credit.

Commerce and the UTC must create a Technical Advisory Committee (Committee) to provide advice or review Commerce and UTC's standards and guidelines to evaluate quantify, and verify GHG emissions reductions proposed by investment plans. The Committee duties include: advising on standard protocols for verification and evaluation of GHG emissions reductions from utility investments, recommending common planning assumptions for investment plans, and advising on a standard reporting format for all investment funds.

Commerce must adopt rules for consumer-owned utilities and the UTC must adopt rules for the investor-owned utilities concerning the process, timelines, report, and documentation to implement the Investment Program, as well as requirements for review, approval, and independent monitoring and evaluation of investment plans by July 1, 2019. To the extent practical, Commerce and the UTC must adopt similar rules to ensure a coordinated and consistent implementation of the Investment Program.

Decarbonization Planning. Commerce must develop a statewide plan for how Washington would achieve mid-century net GHG emissions reductions of 80 percent or greater within two years of the effective date of this act. Commerce must convene and staff a Decarbonization Advisory Committee to provide recommendations on the scope and content of the statewide plan. The committee must have representatives from local and state government, businesses, public interest organizations, the energy industry, and the public. Commerce may establish technical committees and contract for technical analysis as needed.