Clean Fuels Program.

The Department of Ecology (Ecology) implements a Clean Fuels Program (CFP) limiting the greenhouse gas (GHG) emissions attributable to each unit of transportation fuel (carbon intensity) to between 45 and 55 percent below 2017 levels by January 1, 2038.  Ecology's CFP rules establish a process for assigning levels of GHG emissions attributable to transportation fuels based on a lifecycle analysis that considers emissions from the production, storage, transportation, and combustion of the fuels, and associated changes in land use.  Ecology's CFP rules establish registration and reporting requirements for producers and importers of transportation fuels, including processes for assigning and verifying bankable, tradeable credits for the transportation fuels with carbon intensities lower than the carbon intensity standard.  A regulated entity that produces deficit-generating fuels above the carbon intensity standard must retire credits in an amount equal to its compliance obligation, which is based on the number of deficits generated by the regulated entity.  The CFP rules establish methods for determining the carbon intensity of electricity supplied by electric utilities participating in the CFP based on the mix of generating resources used by each electric utility, and mechanisms that allow for the certification of electricity that has a carbon intensity of zero.  Under rules adopted by Ecology to implement the CFP, the carbon intensity of solar, wind, hydropower, and ocean power renewable electricity are zero, but the renewable electricity generated from biomass, biogas, biodiesel, geothermal, and hydrogen has a carbon intensity based on a fuel pathway application filed with Ecology.

Certain specified fuels, including transportation fuel used for the propulsion of aircraft, are exempt from CFP carbon intensity reduction requirements, but are eligible to generate credits when such fuels have a carbon intensity less than the carbon intensity standards established for gasoline or diesel.  Ecology is required, in its CFP rules, to allow one or more carbon intensity pathways for alternative jet fuel (AJF), which is defined as a fuel that can be blended and used with conventional petroleum jet fuels without the need to modify aircraft engines and existing fuel distribution infrastructure, and that has a lower carbon intensity than the applicable annual carbon intensity standard under CFP rules adopted by Ecology.

The Business and Occupation Tax and the Public Utilities Tax.

Washington's major business tax is the business and occupation (B&O) tax.  The B&O tax is imposed on the gross receipts of business activities conducted within the state, without any deduction for the costs of doing business.  A taxpayer may have more than one B&O tax rate, depending on the types of activities conducted.  Several preferential rates also apply to specific business activities.

The gross income derived from the operation of publicly and privately owned utilities is subject to the public utility tax (PUT).  The tax is imposed in lieu of the B&O tax and is applied only on sales to consumers.  Other income of the utility, such as the retail sale of tangible personal property, is subject to the B&O tax.

Tax Preferences for Alternative Jet Fuel.

The manufacturing and wholesaling of AJF is subject to a preferential B&O tax rate of 0.275 percent.  The preferential tax rate begins after the Department of Revenue receives notification from Ecology that there are one or more facilities operating in the state with a cumulative production capacity of at least 20 million gallons of AJF per year.  The preferential tax rate lasts for 10 years.

The following tax credits apply to the manufacture, sale, purchase, and use of AJF:

• A B&O credit is available for certain persons that manufacture AJF.  Eligibility for the credit for sales of AJF is limited to businesses that produce AJF located in a county with a population of less than 650,000, or a business's designated AJF blender located in Washington.
• A B&O credit is also available to certain persons that use AJF.  Credits may be earned only on purchases of AJF for flights departing in Washington.
• A credit is allowed against the PUT otherwise due for persons engaged in the use of AJF.

For all three of these tax credits, the amount of the credit is $1 per gallon of AJF that has at least 50 percent less carbon dioxide equivalent emissions than conventional jet fuel.  The credit amount increases by $0.02 for each additional 1 percent reduction in carbon dioxide equivalent emissions beyond 50 percent.  The credit may not exceed $2 per gallon of AJF.  All three of these tax credits may not be claimed until Ecology verifies that there are one or more facilities operating in the state with a cumulative production capacity of at least 20 million gallons of AJF per year.

The following tax policies for AJF take effect no later than July 1, 2031, regardless of whether there are one or more facilities operating in the state with a cumulative production capacity of at least 20 million gallons of AJF per year:

• the preferential B&O tax rate of 0.275 percent for AJF;
• the B&O credit for the manufacture of AJF;
• the B&O credit for the use of AJF; and
• the PUT tax credit for the use of AJF.

Under the CFP, Ecology must apply a carbon intensity for electricity that is supplied to an AJF manufacturing facility as follows:

• the carbon intensity of the electricity is calculated consistent with the Ecology rules that specify that the carbon intensity of solar, wind, hydropower, and ocean power renewable electricity are zero, and that the renewable electricity generated from biomass, biogas, biodiesel, geothermal, and hydrogen has a carbon intensity based on a fuel pathway application filed with Ecology;
• the carbon intensity is as provided for the electricity supplied in the rate schedule, tariff, power purchase agreement, or utility-specific contract according to a reported fuel mix; and
• the specific carbon intensity is applicable to all production processes of the alternative jet manufacturing facility.

This carbon intensity must apply for program years 2026 through 2037, and after 2037 for all electricity compliant with the Clean Energy Transformation Act.  The carbon intensity applies regardless of:

• when an electricity product, power purchase agreement, rate schedule or tariff was negotiated or contracted for;
• the date the renewable energy generating facility began operating; and
• the utility’s main utility-specific carbon intensity of electricity.

These requirements on the carbon intensity of electricity supersede Ecology’s existing rules applicable to the carbon intensity of electricity supplied to AJF manufacturing facilities.  Ecology must update their CFP rules at the next otherwise planned rule update.