Legislative Counsel Says Revenues From Cap and Trade Could Be Limited and Constrained By Previous Laws

House Bill 2020 would dramatically reduce Oregon's carbon emissions, but proceeds not be freely available for rate relief and energy efficiency projects.

A new opinion from Oregon Legislative Counsel Dexter Johnson may complicate the implementation of House Bill 2020, the ambitious cap-and-trade bill Democrats hope will dramatically reduce carbon emissions.

The May 15 opinion responds to questions posed by state Rep. Christine Drazan (R-Canby) about ways that, if passed, HB 2020 could intersect with existing Oregon laws.

Although HB 2020 is 98 pages of dense legalese, the basic mechanism of carbon reduction is straightforward. By increasing the price of fossil fuels—primarily oil products and natural gas, in Oregon—the state can reduce consumption and, thus, emissions to at least 45 percent below 1990 emission levels by 2035; and at least 80 percent below 1990 emission levels by 2050.

Critics have raised questions about the impact of high gasoline and natural gas prices on consumers that would result from passage.

The Northwest Gas Association, a consumers' group, says for instance that HB 2020 would raise residential natural gas prices by 12 percent in 2021 and increase them steadily to 40 percent above current prices by 2035. (Costs to business would increase slightly more.)

That's not surprising: the most effective way to convince consumers to reduce consumption and switch to other energy sources is to jack up prices.

Proponents of HB 2020, led by chief sponsor Michael Dembrow (D-Portland) have said they would use some of the revenue raised by taxing fossil fuels to subsidize low-income ratepayers—reducing the impact of higher fuel costs—and to invest in energy efficiency and alternative energy sources.

But would existing law actually allow that, Drazan asked?

First, the legislative counsel told her, although HB 2020 is not explicitly called a tax, it functions as a tax.

Although the opinion does not address the significance of that point, the issue is that in Oregon, new taxes require a three-fifths majority approval from both chambers for passage. The opinion is silent on the super-majority question.

Second, Johnson said, there are significant constraints on how the tax revenues can be used. Tax revenues from motor fuels, including gasoline, diesel fuel and compressed natural gas, must go into the state highway trust fund and so probably couldn't be used to subsidize low-income Oregonians or pay for energy efficiency or alternative energy.

Third, the Oregon Constitution requires that some portion of the tax revenue from natural gas used for heating must be dedicated to the Common School Fund, i.e. it could not be used for rate relief or energy projects.

"HB 2020 spends millions, but certain natural gas taxes are constitutionally protected," Drazan said in a statement. "This money belongs in our classrooms."

Fourth, a 1980 ballot measure limits that the tax rate on some of the natural gas used in Oregon to a maximum tax of six percent.

The legal language defining whether that maximum rate refers to natural gas produced in Oregon (a tiny percentage of total consumption) or all natural gas consumed in the state is, in the legislative counsel's opinion, "highly ambiguous."

Oregon courts have never examined the question, the legislative counsel says, and the Oregon Department of Justice has issued conflicting opinions on the matter.

In sum, the legislative counsel concluded, should HB 2020 pass, the state may  have less flexibility on how it spends the resulting tax revenue than proponents would like—and their ability to tax natural gas may be limited, meaning there may be less revenue than anticipated.

Complicating matters further, the legislative counsel's opinion is just that, a non-binding opinion.

Dembrow says he believes that HB 2020 would not in fact require a three-fifths vote.

He says a 2017 legislative counsel opinion regarding an earlier version of the legislation said it would not, because the revenue-raising mechanism consists of auctioning credits, rather than levying a more conventional tax.

As to how restricted the use of the new tax money would be, Dembrow says his guidance from legislative counsel is that money could be used for credits and refunds for low-income Oregonians.

The questions about natural gas can be taxed and how revenues are allocated tot the Common School Fund, Dembrow says, like the question of whether HB 2020 is a tax and money raised may be used, may need to be clarified by the Oregon Supreme Court.

He and other proponents of carbon reduction are well aware of such ambiguity and included in HB 2020 a mechanism for an expedited review by the Oregon Supreme Court to sort them out.

If passed, HB 2020 would not go into effect until 2021 in any case, which gives the state time to resolve uncertainties.

Dembrow says he's confident that regardless of how the court may rule, there are sufficient alternatives for rate relief and investments that would comply with constitutional requirements for the Highway Fund and the Common School Fund.

"We've come up with a program that balances a variety of needs and concerns," Dembrow says. "This [the new counsel opinion] feels like a last-ditch effort to try to derail the effort."

HB 2020 is scheduled for a June 5 work session in the Joint Ways and Means Subcommittee on Natural Resources.

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