Oregon is on track to become the second U.S. state to pass an economywide cap-and-trade system to regulate greenhouse gas emissions. But while emulating the first such program (in California), Oregon also hopes to avoid repeating its mistakes.

Oregon's plan, like California's, would set a cap on greenhouse gas emissions that would come down over time. It would also create a market for companies to buy and trade a limited number of pollution permits. Ultimately, it aims to reduce emissions to 80% below 1990 levels by 2050.

But the bill to create the program is so contentious, it is opposed by both industry and some environmental justice advocates, who have broken ranks with environmental supporters to speak out against it.

While industry groups argue that cap-and-trade will drive up energy costs and put their businesses at risk, opponents with environmental justice groups say too many industry-backed loopholes make cap-and-trade ineffective.

Balancing risks and benefits

Oregon lawmakers have spent years debating how to design a cap-and-trade system that balances the risks of hurting the economy with the benefits of reducing emissions.

"Science has told us we have a very short window to really start to transition the way we have generated energy writ large," says Oregon state Rep. Karin Power, a co-author of the bill. "We literally can't move fast enough."

Power says higher prices for fossil fuels under cap-and-trade will help steer the economy toward cleaner energy.

Her bill would require the state's largest polluters to buy permits to cover their greenhouse gas emissions. It would invest the money earned from those permits into energy conservation and renewable energy, like solar and wind, to spur more emission reductions.

The program would cover about 80% of the state's reported greenhouse gas emissions, including those coming from gasoline and diesel, natural gas and electric power plants.

To reduce economic harm, the bill offers free pollution permits, or allowances, to industries that run a higher risk of going out of business or leaving the state because of the added costs of a cap-and-trade system. Lawmakers have also created a rebate system to offset natural gas price hikes and added another bill that directs revenue to low-income households to help with higher fuel prices.

"We've been looking for ways to smooth out the program for people on fixed incomes, or low-income people in Oregon, while still acknowledging that we need to do our part to reduce emissions," Power says.

Learning from California

Oregon has the benefit of learning from California's cap-and-trade program. But that's where things get complicated.

Severin Borenstein, an energy market expert at the University of California, Berkeley, says before the 2008 recession, California set its emissions cap too high, thinking the economy would grow faster than it did.

That has created a problem where there are more than enough pollution permits to go around, so it's cheap and easy for companies to stay under the cap without actually reducing their emissions.

"I definitely think Oregon should be doing something different than California has done," Borenstein says. "Right now, if you ask what is the current cap-and-trade market doing to reduce carbon emissions, I think the answer is not very much."

Lawmaker Power says there's debate over whether California set its cap too high, though she acknowledges general agreement that carbon prices have been too low to spur emission reductions. She is hoping Oregon can avoid that problem.

Borenstein says other cap-and-trade programs — in Europe and in Eastern U.S. states involved in the program known as the Regional Greenhouse Gas Initiative — have also set emissions caps high enough that they haven't had much impact on emissions.

"The problem is wherever you set the cap, it's very, very hard to predict what the business-as-usual emissions of your economy are going to be five or 10 years from now," he says.

One of his key recommendations is to set minimum and maximum prices for pollution permits to prevent the program from having too little — or too much — impact on energy prices and emissions.

Power says Oregon's plan does that, and also uses past years of greenhouse gas reporting to develop "a more realistic and stable perspective on what emissions are and where they should be."

Environmental justice groups splinter

Khan Pham with the Oregon environmental justice group OPAL is part of a coalition of groups around the world that are speaking out against Oregon's bill and carbon pricing schemes more broadly.

Pham says emissions from some oil refineries have increased under California's program, because cap-and-trade allows that as long as a company pays for extra pollution permits.

"It's really pay-to-pollute, and we need to stop polluters from polluting," Pham says. "It's had a disproportionate impact on low-income communities and communities of color."

One study found 52% of California's regulated companies increased their annual greenhouse gas emissions and that many of them are located near disadvantaged communities.

Pham says other kinds of regulations, such as requirements for low-carbon transportation fuel and more renewable sources of electricity, are working better than cap-and-trade to reduce emissions in California. Oregon also has those additional requirements, and Pham says she would like to see more direct regulations like those.

She also points to new research that finds California may have counted up to 80 million tons of carbon dioxide reductions through its forest carbon offset program that didn't actually happen.

Under the cap-and-trade programs in both Oregon and California, companies can buy carbon offsets to cover up to 8% of their emissions. The offsets can come from projects that manage forestland to store more carbon by not cutting down trees. But those carbon savings are difficult to validate and can be undermined by more logging elsewhere.

"I think cap-and-trade encourages accounting schemes that can make it seem like there's emissions reductions," Pham says. "Our concern is that this prevents us from finding the real solutions, because it gives people the impression that we're actually doing something to address climate change."

Confident about better results

Shilpa Joshi with Renew Oregonsays OPAL is "an anomaly and an outlier" in Oregon and that dozens of other environmental groups — including ones that represent farmworkers, Native American tribes, low-income Latino communities, and vulnerable populations — adamantly support Oregon's cap-and-trade plan.

Those groups have worked to ensure the bill will reduce pollution and invest in the communities most impacted by climate change, she says, and they agree that cap-and-trade — while not the only policy needed to address climate change — is the best way to get both emission reductions and the revenue to fund a cleaner economy.

"We need to get off fossil fuels as fast as possible," Joshi says. "It makes sense to go to the top of the food chain and regulate those polluters and use the funds to invest in clean energy across the state."

Oregon Gov. Kate Brown says state regulators plan to have tighter controls to prevent any miscalculation of carbon offsets and emission reductions.

"We're really working on creating a unique approach to Oregon that will prevent gaming of the system," Brown says.

Oregon's bill is 10 times longer and far more detailed than what California passed in 2006, and it sets some pollution permits aside as a cushion, so the state can shift course if needed.

Brown says it could be the national model.

"Oregon is a small state," she says. "And if we can do it, that means states like Minnesota and Connecticut and Kansas can do this, and do this in a way that will ensure their economies thrive, and make sure we're reducing greenhouse gas emissions."

That is, if Oregon's cap-and-trade plan works better than California's.

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