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. 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.
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 PUT 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. Alternative jet fuels must be certified using CFP methodologies for carbon intensity to have lower lifecycle GHG emissions compared to conventional petroleum jet fuel and be capable of being blended and used with conventional petroleum jet fuels without the need to modify aircraft engines or existing fuel distribution infrastructure. 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:
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 2 cents 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.
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 following tax policies for AJF take effect July 1, 2031:
Each of these tax policies ends on June 30, 2046.
The eligibility for, and the amount of, the PUT and B&O tax credits are specified to be based on the AJF's lifecycle carbon dioxide equivalent emissions, rather than the fuels' carbon dioxide equivalent emissions. For a producer of AJF that elects to participate in the CFP, the carbon intensity of the AJF must be calculated using the CFP's methods. For an AJF producer electing not to participate in the CFP, the carbon intensity is determined using the following methods:
The carbon intensity is applicable to the electricity used for all production processes of the AFJ manufacturing facility.
Compared to the original bill, Substitute House Bill 2322:
(In support) A proof-of-concept AJF facility in Moses Lake has been substantially completed and will begin production in a few weeks. It is an innovative facility that will stimulate forward-looking investment and will bring high-quality jobs. However, there is a need to tweak the incentives to justify expanding the plant to commercial scale and bring in a billion-dollar investment. Washington was chosen for the first proof of concept for zero-carbon power and the sustainable aviation fuel incentive. This bill addresses several policy and regulatory issues that could create uncertainty by establishing a date-certain for tax incentives and correcting a problem with CFP's scoring system for electricity used in AJF.
(Opposed) None.
(Other) The Department of Ecology supports decarbonization of the aviation sector. This bill weakens the CFP to incentivize new renewable electricity generation used in AJF and should encourage new clean sources of power to be used in AJF. Producers of AJF are in agreement that the change proposed to the CFP calculation for AJF production is needed. However, the proposed new trigger date for the AJF incentive in the bill could undercut the commercial-scale investments planned for AJF, if they cause the AJF incentive to expire earlier than current law otherwise provides. Facilities for AJF involve large capital investments and long timelines to build out, and the facilities thus need to receive a full 10 years of incentive. One of the state's refineries is precluded from benefiting from the AJF tax incentive because it is located in a county that is more populated than the current incentive criteria allows for. This facility wants to make investments in sustainable aviation fuel production, and would like to change the geographic limitations to allow facilities in Pierce County to benefit from the program too.
(In support) Representative Tom Dent, prime sponsor; Derek Phelps, Twelve Benefit Corp; and Don Myers, Deputy Mayor and Council Member, City of Moses Lake.
The Finance Committee did not make any changes to the bill.
(In support) By providing a specific date for the tax preferences to begin, the businesses get certainty about when the trigger will hit. Alternative jet fuel is initially expensive to produce but will eventually become more affordable. This program will make the aviation sector comparable with other transportation sectors in the utilization of alternative fuel sources.
(Opposed) This bill does nothing to address the negative impacts of jet fuel and aviation travel on people and the environment. It merely subsidizes the addition of a new type of fuel. The Legislature should be focused on banning short-hop flights, increasing rail travel options, and transitioning our transportation options to renewable fuels.
(Other) Based on the current restrictions on the program as to location and activities, only one of the state's refineries would be ineligible for this program. It is not fair, and we would encourage addressing this by either adding a definition of "blender" or changing the geographic requirements to include Pierce County.