More than a year before Democrats in Congress approved a massive climate law last year, Washington state enacted the nation’s second cap-and-trade program that will provide billions of dollars for carbon reduction and environmental justice projects.

The funding is something climate activists have been seeking for years – if not decades – and state leaders and national experts say the state and federal efforts are largely complementary. But the unprecedented sums could also test the state’s capacity to administer the slew of new and newly flush programs.

“Can we use all this money? There’s so much money now,” said Becky Kelley, a climate policy adviser to Washington Gov. Jay Inslee, a Democrat. “The answer is yes. There are a whole lot of new resources, but we can put all of them and more to use.”

The Washington law, enacted in May 2021, created a market for carbon emissions from the state’s largest polluters. Through what the state calls its cap-and-invest program, it holds four auctions a year, where companies regulated under the program can buy allowances for carbon emissions. The state then uses the money from those sales for several climate and environmental justice initiatives. 

The first quarterly auction for carbon emission allowances brought in $300 million for the state. Lawmakers projected the fund would provide more than $2 billion over the next two years. The next auction is scheduled for May 31. 

The federal climate law, which President Joe Biden signed last summer, could bring in an additional $18 billion for the state by the end of the decade, Kelley said, citing an analysis from Rocky Mountain Institute, a nonpartisan group that advocates for transitioning away from fossil fuels. 

The federal climate law, dubbed the Inflation Reduction Act despite analyses it would have a negligible impact on inflation, includes dozens of grant programs available to states, including the $27 billion Greenhouse Gas Reduction Fund and a $5 billion Climate Pollution Reduction Grants program.

Easy compatibility 

In Washington, and other states that had been more aggressive on climate policy and spending before the unprecedented federal funding became a reality, the federal influx is easily compatible with existing state-level programs, said Casey Katims, the executive director of the U.S. Climate Alliance, a coalition of 24 governors who have committed to certain climate goals.

“A lot of these funds can be blended and braided and stacked to strengthen the work across each of the different programs,” Katims said. “Our states are leading on efforts to bring all of these resources to bear to decarbonize our economy across sectors.”

Joshua Basseches, a public policy and environmental studies professor at Tulane University who focuses on state-level climate policy, said the federal law could only build on state climate efforts.

“It’s hard to imagine a state adopting a policy that could undermine the Inflation Reduction Act,” he said.

Carrot and sticks

The bulk of the federal funding, about $260 billion, is in tax credits to help businesses and consumers buy electric vehicles, make their homes and buildings more energy efficient and take other steps to decarbonize. 

That works well with Washington’s market-based system, which imposes a cost on carbon emissions, said former state Sen. Reuven Carlyle, a Seattle Democrat who was a lead sponsor of the law.

The state program is meant to alter the cost-benefit analysis for businesses regulated by the law that may be considering taking steps toward reducing their carbon output.

If the state program is a proverbial stick that makes carbon emissions costlier, the federal law, with its bevy of tax credits, is “a fully carrot-oriented policy” that makes decarbonizing cheaper, Carlyle said in an interview.

“It builds on our state policy framework,” Carlyle said of the federal climate law. “You could not have a better nexus of value between the state and the federal climate policy direction now.”

Rather than pay for allowances to emit carbon, regulated companies may decide instead to bear the cost of electrifying their vehicle fleet, switching to solar power, purchasing a new boiler system or taking other measures, Carlyle said. The federal tax credits reduce those costs.

“If you’re a company that is subject to the cap-and-invest program, you have to buy these allowances, which puts a cost on you,” Basseches said. “You have to pay a penalty for polluting. Whereas the Inflation Reduction Act creates these enormous incentives.”

The funding available through the federal law also amplifies state efforts, Kelley said.

In Washington, the state is projecting it will receive $85 million from the federal law and plans to spend $75 million from its cap-and-invest program on rebates to retrofit homes to be more energy efficient.

“So in combination, we reach more people,” Kelley said. “If it was only the federal dollars, you get $85 million worth. When you add [state funding], you nearly double that.”

Capacity to do all the work

But applying for billions in federal grants, determining what those funds can be used for and then making specific funding decisions takes a lot of work for state agencies. 

In Washington, those demands come at a time when state officials will already be stretching to implement the state’s climate funds.

“That’s a good question to be asking,” Basseches said. “Do states, and does Washington, have the resources it needs – and it really comes down to the state budget and the size of the agencies, how many staff are in these agencies? Does it have the capacity to do both?”

Basseches said he expected Washington state, which has a longtime focus on climate, would be better equipped than most.

But state officials there said administrative capacity would still be a challenge.

“There is a capacity limit, in terms of delivery of programs on the part of state agencies,” Washington House Transportation Committee Chairman Jake Fey, a Democrat, said. “It’s just a lot to ask of them. And of course, the Legislature, we’re already always urgent about seeing the money gets spent, put into action, so the capacity issue is real.”

Agency directors have complained that other agencies have “poached” workers from each other, Fey said.

The state should consider private sector contractors to help set up programs and get money flowing, he said.

“I think that is a tremendous challenge,” Kelley said about the state’s capacity to start up different programs and wisely prioritize funding.

State officials are still determining what their capacity needs are, she added.

The federal spending law does include some planning grants and other resources to help states make the best use of federal dollars, Katims said.

Climate Alliance governors are aware of the issue, he added.

“States understand that we need to be investing in strengthening capacity to be able to maximize these laws,” Katims said. “There’s a recognition that we need to coordinate across levels of government to deepen those relationships.”