Can market-based climate policy deliver environmental justice outcomes?
A look “under-the-hood” in the U.S. State of Washington
A long debate played out in Washington State in 2021 regarding a greenhouse gas (GHG) emissions cap-and-trade program similar to California’s. The debate centered around the structure of the carbon pricing policy, whether it would support environmental justice (EJ), and how it would address environmental disparities. The outcome of this debate was the passage of Senate Bill (SB) 5126, which establishes a “cap-and-trade” carbon pricing policy but rebranded the policy to “cap-and-invest”. This nomenclature change reflected an agreement to dedicate the revenue generated by emissions allowance auctions to climate and transportation projects. Program revenue will also fund projects to improve environmental justice outcomes in the state. In May 2021, cap-and-invest became state law as part of the Climate Commitment Act signed by Governor Inslee.
A year of regulatory rulemaking by the Washington Department of Ecology followed, leading to the first auction of allowances this month (February 2023). Investments through the program will support a host of projects to diminish the disproportionate and unjust impacts overburdened and vulnerable communities face as a result of fossil fuel combustion. Some of these impacts include increased rates of asthma, respiratory disease, emphysema, and premature death, which result from poor air quality. The program explicitly targets the reduction of poor local air quality to accomplish EJ outcomes (e.g., the reduction of these health issues) for overburdened communities. However, a big question on the precipice of the first auction is – will the program accomplish its goals to reduce GHG emissions, address air pollution, and achieve environmentally just outcomes?
This blog explores the program’s approach of targeting both the cause of climate change and air pollution and the effects of fossil fuel combustion by prioritizing EJ outcomes. It remains to be seen if the program will be successful. If so, it could provide a blueprint for other market-based climate policies to emulate.
Let’s look in more detail at the Washington State cap-and-invest legislation.
Policy highlights to target the cause of climate change and air pollution:
- The cap-and-invest legislation will impact “regulated entities” (i.e., largescale emitting facilities >25,000 metric tonnes (mt) of carbon dioxide or equivalent GHGs (CO2e) per year) within Washington State, including electricity importers if the power they import results in >25,000 mt CO2e emissions.
- The “cap” limits the amount of GHG emissions by all regulated entities in a given year, declining over time to reach 5 million mt CO2e statewide (a 95% reduction from 1990 levels) by 2050.
- To comply, regulated facilities and entities must submit emission allowances equal to their measured and reported emissions. Failure to do so results in enforcement penalties.
- Regulated facilities and entities can purchase allowances either through the quarterly auctions hosted by the Department of Ecology or from the secondary market.
- Carbon offset credits may be used to achieve compliance, in place of allowances, for up to 8% of a regulated facility or entity’s emissions (5% of used credits may originate from any eligible projects plus an additional 3% from credits generated on tribal lands) in the first compliance period (2023-2026) and up to 6% (4% of used credits may originate from any eligible projects plus an additional 2% from credits generated on tribal lands) in the second compliance period (2027-2030).
- The legislation also includes the Clean Fuel Standard to reduce transportation-related emissions.
Policy highlights to target the effects of fossil fuel combustion and prioritize EJ outcomes:
- Funding that benefits overburdened communities must constitute at least 35% of total investments and funding that benefits tribal nations must constitute at least 10% of total investments.
- Development of an improved statewide air-quality monitoring system, identification of overburdened communities, and ongoing tracking of air pollutants.
- Major sources of air pollutants (e.g., individual power-generating facilities) that impact overburdened communities will be targeted to reduce the pollution they emit. These local air quality requirements must achieve either National Ambient Air Quality Standards (designated by the US EPA) or air quality that is comparable to nearby communities that are not exposed to harmful levels of pollution – whichever is stricter and therefore results in better air quality for overburdened communities.
- The EJ Council, established through the Healthy Environment for All Act (HEAL Act) makes recommendations for program investments to prioritize EJ outcomes for overburdened populations.
- EJ review is conducted every two years to ensure community input and progress is being made toward the legislation’s EJ objectives.
- The legislation integrates with the HEAL Act “to create a coordinated and collaborative approach to environmental justice” across the state.
Environmental Justice and Emission Markets
The Washington State cap-and-invest program’s regulated entities include facilities that combust fuel (e.g., electric power generators, factories), upstream fuel suppliers where there are numerous end users (e.g., gasoline and other transportation fuels), and electricity importers. The objective of the program is to incentivize reductions in fossil fuel combustion and thereby the associated GHG emissions and harmful co-pollutants such as nitrogen oxides (NOx), fine particulate matter (PM10 and PM2.5), carbon monoxide (CO), and mercury (Hg).
During the debate over the Climate Commitment Act, EJ groups and frontline community-led organizations like Got Green, Front and Centered, and Puget Sound Sage released statements opposing the kinds of market-based policies represented by emissions cap-and-trade. From their statements – released at the initial stage of the policy debate – it is clear these groups deeply distrusted the ability of emission markets to reduce emissions and/or benefit frontline and overburdened communities. These organizations advocated for policies that would support communities experiencing climate change’s damages (e.g., increased fire, drought, storm severity) and remediation for communities disproportionately harmed by the pollution resulting from current fossil fuel infrastructure.
Before looking at how their organizing pressure influenced the bill, let’s examine cap-and-trade’s ability to reduce emissions and whether such reductions benefitted overburdened communities. The peer-reviewed studies on this topic find that the cap-and-trade policies implemented in other jurisdictions have effectively reduced emissions (Ellerman (2006), Ellerman and Joskow (2008), Chen et al (2018), Schmalensee and Stavins (2019), Hernandez-Cortes and Meng (2021), Huang and Ma (2022), and World Bank (2022). But cap-and-trade’s record on benefiting the communities being harmed by fossil fuel infrastructure is another question with a less clear answer.
Specifically, other cap-and-trade programs in California and the Regional Greenhouse Gas Initiative (RGGI) in the north-east of the United States were intended to cost-effectively reduce GHG emissions, but it was not an explicit regulatory objective of these programs to address the disproportionate impacts of co-pollutants. And research by Cushing et al. (2018) and Food and Water Watch (2019) later concluded that the California and RGGI programs were associated with a statistical increase in co-pollutant emissions from facilities located in disproportionately black and brown communities. Cushing et al. (2018) reported that “[n]eighborhoods that experienced increases in annual average GHG and co-pollutant emissions from regulated facilities…had higher proportions of people of color and poor, less educated, and linguistically isolated residents, compared to neighborhoods that experienced decreases in GHG [emissions].” Food and Water Watch (2019) found similar results within RGGI communities and posited that “pollution trading schemes like RGGI compound the toxic burdens on disadvantaged communities.” In contrast, more recent research by Hernandez-Cortes and Meng (2021) evaluated five years of California cap-and-trade program operational data (the two previous studies evaluated only the initial three years of the two programs’ data) and noted that the program did reduce pollution for disadvantaged communities. The authors, however, noted that “while the [cap-and-trade] program has led EJ gaps to narrow since 2012, it has not eliminated them.”
In sum, the research literature is not definitive in revealing pollution reduction or improved health outcomes for overburdened communities. Further research is needed. It does appear that the positive impacts for frontline communities have been gradual and not significant enough to address the pollution disparities faced by these communities. EJ advocates highlighted this shortcoming of California and the RGGI cap-and-trade policies as a caution for Washington State.
Is Washington’s Cap-and-invest different?
The Washington State Climate Commitment Act does respond to the EJ groups’ criticism and learns from the examples of the other cap-and-trade programs. From the outset, it appears the Washington State policy will target assistance to the communities experiencing disproportionately high fossil fuel pollution and climate change threats as an added objective in tandem with overall GHG emission reductions. A few relevant provisions in the bill’s language are explored in this section (click here to view the legislation that is now state law and here to view the complete rule text).
Critically, the State government must establish an air monitoring network to identify communities overburdened by air pollution, improve air pollution monitoring statewide, and track efforts to improve air quality.
Washington State’s program allows for stricter local air quality requirements to be implemented when individual facilities cause harm to overburdened communities. Meeting the local air quality requirements may directly place limits on the co-pollutants (and thereby the GHG emissions as well) from facilities or be mediated through other air quality improvement efforts authorized by local air quality authorities. Another similar measure in the policy states that the Department of Ecology can prevent a facility from using offset credits to achieve regulatory compliance. This would eliminate one of the three options (i.e., allowances, offset credits, or emission reductions) for achieving compliance and may increase the likelihood that the company would reduce its emissions and co-pollutants to achieve improved air quality. In Cushing et al. (2018), they recommend: “[t]he incorporation of additional policy and regulatory elements that incentivize more local emission reductions in disadvantaged communities could enhance the local air quality and environmental equity benefits of California’s climate change mitigation efforts.” The Washington State provisions take this step and go beyond incentives by developing enforceable mechanisms to ensure reductions in local air pollution for overburdened communities.
The Washington State program also reflects an awareness that it matters where emission reductions, project investments, and GHG offset projects occur. Provisions include a requirement that at least 35% of total investments made using the programs’ allowance auction revenue must directly benefit populations disproportionately vulnerable to the impacts of climate change. An additional minimum expenditure of 10% of revenue is specifically to support tribal nations. Furthermore, most offset projects developed through the program must take place within Washington State. In the first compliance period “at least 50% of a covered entity’s compliance obligation satisfied by offset credits must be sourced from offset projects that provide direct environmental benefits in the state.” And in the second compliance period, this portion is raised to 75%.
Another significant step the cap-and-invest program takes is to integrate the EJ Council established through the Heal Act into its functioning. The EJ Council will be a 14-member body appointed by the governor and must include youth representatives, tribal community members, EJ practitioners or academics, business owners, and building and construction union representatives. The EJ Council will identify air pollution disparities, oversee biennial EJ reviews to ensure a reduction in pollutants (CO, lead, NO2, ozone, PM, and SO2) is an outcome of the cap-and-invest policy, and make recommendations to develop and implement the program, allocate program revenue, and establish programs and projects to accomplish EJ goals. The EJ Council will be in a position to shape regulatory proceedings and significantly influence the program.
Policymakers included each of these provisions to address one of the principal criticisms of California’s cap-and-trade program which helped alleviate criticism from EJ advocates, thereby clearing a path for the bill to become law. The policy is now set to improve outcomes for communities facing disproportionate fossil fuel pollution and climate change threats as the state works toward its 2050 emission reduction goal, but will it?
Will the Washington State cap-and-invest program lead to EJ outcomes?
Examining the peer-reviewed literature again, market-based solutions to climate change are not generally regarded as tools for achieving EJ outcomes. As Hernandez-Cortes and Meng (2021) write, “Market-based policies are intended for allocative efficiency and not distributional objectives, per se.” They call for EJ initiatives to be addressed through separate policies from market-based mechanisms but acknowledge the two objectives “should be considered in tandem”. This recommendation reflects the reality that market-based policies accomplish objectives on aggregate within their defined boundaries but are not designed to realize specific objectives for targeted populations within those boundaries.
In the case of Washington, cap-and-trade is paired with EJ investment to accomplish allocative efficiency (carbon pricing through cap-and-invest) and distributional objectives (improved air quality for overburdened populations). Cap-and-invest will reduce emissions making use of the market to accomplish this more cost-effectively, but it is qualified by the EJ provisions that call for more stringent requirements when needed to ensure equitable air quality improvements. This policy solution is challenging the recommendation of Hernandez-Cortes and Meng (2021) that “market-based environmental policies should not be used explicitly to address environmental justice concerns… [and] environmental justice problems need environmental justice policies.” Further challenging this recommendation, the policy in Washington deploys a single funding stream to link carbon pricing and EJ outcomes together. However, by integrating cap-and-invest with the HEAL Act, a policy solely aimed at accomplishing EJ, Washington policymakers reflect an awareness of the research of Hernandez-Cortes and Meng. Further, cap-and-invest includes significant non-market policy elements and ostensibly the funding connection will not undermine the program’s EJ objectives.
Despite conflicts with the conclusions of Hernandez-Cortes and Meng (2021), the policy presents a novel approach to harnessing a market-based policy for the benefit of EJ. Ultimately, as the policy enters its first auction, it appears that cap-and-invest will result in better EJ outcomes than past cap-and-trade efforts. Washington State has potentially developed an elegant and best-in-class program for future climate policy to build upon, but at the very least it presents a valuable test case to further refine policy recommendations for carbon pricing and EJ.
Cover photo credit: Washington Department of Ecology, https://ecology.wa.gov/Air-Climate/Climate-Commitment-Act.
 Within the Climate Commitment Act, the definition of an “overburdened community” is “a geographic area where vulnerable populations face combined, multiple environmental harms, pollutants or contaminants through multiple pathways, which may result in significant disparate adverse health outcomes of effects.”
 Note that some emission sources and categories are excluded by the regulation.
 The regulation states that “A covered or opt-in entity shall transfer a number of compliance instruments equal to the entity’s covered emissions by November 1st of each calendar year in which a covered or opt–in entity has a compliance obligation.”
 A frontline community is one that faces disproportionate risk from climate-threats. The groups identified advocate for EJ and are comprised of and led by frontline community members.
 RGGI is a cap-and-trade system regulating power generating facilities in 9 states along the north-eastern coast of the United States (with the addition of North Carolina, New Jersey, and Pennsylvania in progress).
 However, the co-benefits of local air pollution reduction expected from cap-and-trade directed GHG emission reductions was certainly part of the political rationale for implementing these cap-and-trade programs (see National Resource Defense Council).
 “EJ gaps” meaning environmental justice gaps are identified in Hernandez-Cortes and Meng (2021) as measured disparities in air pollution between zip code areas determined to be disadvantaged or non-disadvantaged.
 The bill that is passed by the legislature becomes the law of the land, while the implementing agency (in this case the Department of Ecology) is granted authority to develop the “program rule” also often referred to as “the regulation”. The program rule is not as specific as the law leaving flexibility for the Department of Ecology to implement and enforce the law in the way it deems most effective, but not specifying requirements relating to pieces of the law they may feel would be challenging to enforce.
 Department of Ecology, 2022. Fact sheet: Improving Washington’s Air Quality for All. https://www.washingtonnature.org/fieldnotes/2022/9/28/help-improve-local-air-quality-with-washingtons-climate-commitment-act-speak-up-environmental-justice-ecology-public-comment#:~:text=Passed%20by%20the%20Legislature%20and,in%20communities%20that%20bear%20outsized
 Although we will have to see how effectively this can be implemented given the challenges of identifying the point sources of pollution and firmly assigning blame to individual facilities.
 The regulatory language states that if a facility will “contribute substantively to cumulative air pollution burden in an overburdened community identified by [The Department of E]cology, in consultation with the environmental justice council” the Department of Ecology may prevent the use of offset credits. https://ecology.wa.gov/Asset-Collections/Doc-Assets/Rulemaking/AQ/WAC173-446_-21-06/Adopted-rule-language-WAC-173-446-9-29-22
 It is also possible that instead of emission reductions the company could purchase allowances to achieve compliance. In this case, there would be no benefit to local air pollution.
SB 5126 (2021-22) Final Bill Report: https://lawfilesext.leg.wa.gov/biennium/2021-22/Pdf/Bill%20Reports/Senate/5126-S2.E%20SBR%20FBR%2021.pdf?q=20230119143302