Alaska’s push toward a carbon emissions program could be a credit positive

Alaska is crafting regulations for a law that would reduce carbon emissions by selling credits to preserve the state’s forested land to help lessen the impact of air pollution.

The state’s so called tree bill, Senate Bill 48, and its companion bill, House Bill 49, were signed into law in May.

When Gov. Mike Dunleavy introduced the state’s carbon offset legislation in January, he said the aim was to create a revenue stream to help ease the state’s revenue volatility and dependence on natural resources. Dunleavy touted the idea in his State of the State address as a potential source of billions of dollars of future dollars.

The governor referred to his carbon package as the “cornerstone of a long-term fiscal solution” that would complement revenue from oil and gas and the Alaska Permanent Fund, a state-owned investment fund created in 1976 to smooth out the ups and downs from its dependence on oil.

If the state succeeds, it could be a credit positive for the state’s bonds, according to Kroll Bond Rating Agency analysts.

“In our view Alaska’s ability to implement and ultimately monetize carbon offset and CCUS [carbon capture utilization and storage] programs would be favorable to the state’s underlying credit quality, because they could aid in revenue growth and diversification while at the same time providing sustainability,” said Michael Taylor, a senior director with KBRA.

Several states have passed cap-and-trade laws that help their bottom line. California is among them.

“Cap-and-trade systems limit the total amount of carbon that can be emitted (cap) and allow the market to determine the price where the demand to emit matches the supply of allowances (trade),” according to a PIMCO investment report on the sector. “In essence, cap-and-trade programs use market forces to put a price on carbon, and this price on carbon creates a cost for companies and incentivizes them to reduce emissions.”

With a budget shortfall this year, California lawmakers scrambled to tap the state’s cap-and-trade program and other non-general fund sources to sustain ongoing programs. They added money back into the budget for zero-emission infrastructure as part of an agreement in the final hours before the July 1 budget signing.

Alaska’s new program is not technically cap-and-trade, Taylor said, because Alaska’s aim is to sell into existing markets, not create their own.

“Senate Bill 48 is a carbon offset program, it doesn’t impose cap and trade,” Taylor said. “It creates statutory leverage to create credits they can sell into existing markets.”

Unlike a traditional cap-and-trade program the bills do not place restrictions on corporate emissions or create cap-and-trade rules for Alaska businesses, nor does the law lock up land, said Commissioner John Boyle, who heads the Alaska Department of Natural Resources.

The law would provide a new source of revenue for the state’s Permanent Fund and incentivize active forest management and rebuilding of timber stock, Boyle said during an online presentation to Commonwealth North last week.

The CCUS proposal would capture CO2 from fossil or biomass-fueled power stations, industrial facilities or directly from the air. It would then transport that Co2 by ship or pipeline from the capture source to the storage facility. It would then permanently store Co2 underground in geological formations, onshore or offshore.

The carbon-offset credits bill would allow leases of up to 55 years with payments made to the state by businesses and other entities seeking to preserve tracts of land for trees and other plants to absorb dioxide.

The state’s economy is reliant on its natural resource base, particularly oil and natural gas extraction and “the energy sector has proven highly significant to both economic activity and revenue generation,” according to KBRA’s inaugural rating report on the state released last week.

The state experienced large structural deficits in fiscal years 2014 through 2021 due to falling oil prices and production, but was still able to maintain what S&P analysts said in a January report, they viewed as large reserves. S&P analysts calculated the rise in oil prices produced a sizable operating surplus equal to what they calculated was 16% of expenditures in fiscal 2022. That would have resulted in a large operating surplus, if not for a substantial increase in the permanent dividend, S&P analysts said.

The state’s finances “are characterized by a high level of reliance on historically volatile petroleum-related revenues and large accumulated reserves that smooth the level of resources available for operations year to year,” according to KBRA.

Since 1976, the state constitution has directed at least 25% of all revenues from natural resources into the State’s Permanent Fund, which had an estimated $78.8 billion balance as of the end of fiscal 2023. The state has tapped the fund to cover general fund expenses previously, but in recent years has drawn from its less restricted investment earnings reserve account.

 “In KBRA’s view, the state’s prudent financial management will remain critical to countering its inherent vulnerability to both environmental risks and volatility in the energy sector,” according to the report.

KBRA released two rating reports on the state this week, the rating agency’s inaugural review of its credits. Kroll assigned a stable outlook to the GOs and its AA-minus rating and stable outlook to the Alaska Municipal Bond Bank Authority’s GOs on June 20.

The state has Aa3, A-plus and AA-minus GO ratings from Moody’s Investors Service, Fitch Ratings and S&P Global Ratings, respectively.

Fitch revised the state’s outlook to stable from negative in April 2022 on as energy prices surged allowing the state to replenish reserves.