Cap and trade expands to cover gasoline, diesel, but slumping pump prices hide impact

By Anne C. Mulkern, Debra Kahn | 01/06/2015 07:59 AM EST

California’s landmark cap-and-trade program to limit carbon emissions just got bigger. Effective Jan. 1 it expanded to wrap in gasoline and diesel, a move oil companies have warned would trigger higher pump prices.

Correction appended.

California’s landmark cap-and-trade program to limit carbon emissions just got bigger. Effective Jan. 1 it expanded to wrap in gasoline and diesel, a move oil companies have warned would trigger higher pump prices.

Fuel distributors now must buy and submit permits covering greenhouse gas pollution tied to the fuels they sell. For the entire Golden State, that means 17 billion gallons annually. Oil-related businesses and their allies for the past year sought to stop the move, but failed to persuade the Legislature or Gov. Jerry Brown (D) to intervene.


Meanwhile, gas prices — the cornerstone of the debate — have tumbled.

Even as motor fuels fell under cap and trade’s mandates, gas prices on a statewide basis edged down. The average price yesterday was $2.65 per gallon, compared with $2.66 per gallon a week earlier, based on AAA’s Daily Fuel Gauge Report. The federal Energy Information Administration listed the price at $2.66 per gallon for all areas of the West Coast with reformulated gasoline. That was down from $2.67 last week. EIA does not release figures for just California.

Crude oil prices also fell yesterday. Brent crude closed at $53.11 per barrel, the lowest price since 2009. That will result in lower gas prices over the next six to eight weeks, said Tim Hess, an EIA analyst. Every $10-per-barrel drop in crude typically leads to a 24-cent-per-gallon decline in the price of gas, Hess said.

"The fact that oil prices are so low right now makes all this a much less big deal," Lucas Davis, an associate professor at the University of California, Berkeley’s Haas School of Business, said about cap and trade. "If anything, people are going to be spending less this year on gasoline and diesel."

Oil distributors argue that the lower prices might be a temporary respite. A state analysis last summer said that cap and trade would increase pump prices 10 to 12 cents per gallon, based on the current auction allowance price of $12 per carbon ton.

"My sense is that this is going to creep up over the next month as invoices are passed through," said Jay McKeeman, vice president of government relations and communications at the California Independent Oil Marketers Association (CIOMA). He conceded, however, that "if crude prices are going down and they continue to drop pretty rapidly, it kind of negates things out in terms of pricing."

"Pricing’s a black box," McKeeman added. "You’re never sure what components each individual supplier is putting in. Our simple message is this is a cost that is ultimately going to affect the price of fuel in California. People just need to be aware."

Dave Hackett, a member of a Petroleum Market Advisory Committee that California created last year to look at gas price fluctuations, said that California’s retail market is competitive enough that gas station owners might not pass through cap-and-trade costs, particularly in the current climate. Falling gasoline prices mean higher profit margins for retailers, he said, because the retail price generally moves more slowly than the wholesale price on the way down.

"If costs went up by a dime, I don’t know they’d pass on those costs right away," said Hackett, who also is president of oil industry advisory firm Stillwater Associates. He added that retailers likely would say, "I’m making plenty of dough. I’m not going to go up a dime; I’m just going to go up 5 cents."

Brown wants drop in fuel use

Cap and trade’s expansion to include motor fuels takes place as Brown made clear that he supports further action to address climate change. The governor yesterday in his inaugural address said that he wants the state to cut petroleum use in half by 2030. He said that and other steps are needed to prevent catastrophic warming (E&ENews PM, Jan. 5).

"Taking significant amounts of carbon out of our economy without harming its vibrancy is exactly the sort of challenge at which California excels," Brown said. "This is exciting, it is bold, and it is absolutely necessary if we are to have any chance of stopping potentially catastrophic changes to our climate system."

Catherine Reheis-Boyd, president of oil trade group Western States Petroleum Association responded on Twitter that according to California Energy Commission data, "96% of CA transportation fuel [is] derived from petroleum. Reducing 50% will require great deal of involvement from all Californians."

Four oil companies, including Valero Energy Corp. and Tesoro Corp., have stated that they intend to include the cost of cap-and-trade allowances in invoices they give to distributors, McKeeman said. Those companies in turn sell gas to stations. The exception is oil companies that deliver directly to stations under their brand.

Fuel distributors will need to submit allowances for carbon emissions linked to their sales by November of 2016. They’ve been able to buy permits since cap-and-trade auctions started in November 2012.

CIOMA is no longer lobbying for legislation to keep fuels out of cap and trade, McKeeman said, having lost a quest to get a bill passed last year. He said the new push will be on information. CIOMA has signed an agreement with the Oil Price Information Service, or OPIS, to provide daily updates on how carbon fees affect gas prices in California.

"Sometimes you win. Sometimes you lose. Sometimes you just educate people," McKeeman said.

Davis, the University of California professor, argued that for fuel use to drop, taxes on gasoline and other fuels need to rise more than 10 cents. They should be about 30 cents per gallon, he said, to account for the environmental damage caused by the burning of oil products. Carbon pollution from transportation accounts for 38 percent of the state’s greenhouse gas pollution. Cap and trade isn’t technically considered a tax, though oil industry opponents of including fuels under the program and others have called it a "carbon tax."

"People would drive less, and they would drive smaller cars," Davis said. Hiking taxes by that much would reduce traffic congestion, carbon emissions and accidents, he added. He rejected that it would hurt the economy.

The taxes would be needed revenue, Davis said. They could be used to fund road and bridge repairs, or to offset taxes on income. By law, revenue from cap and trade cannot be used for roads and bridges.

While raising gas taxes traditionally has been viewed as a political third rail, he said, "views change over time. I think things are going to come around on this, particularly when it’s paired with need for revenue."

Investigating higher prices

The state’s new Petroleum Market Advisory Committee has had one meeting so far. It is composed of longtime energy market economists, an oil industry consultant and an antitrust expert in the California attorney general’s office.

Professor James Sweeney, the committee chairman, an economist who directs Stanford University’s Precourt Energy Efficiency Center, said the group would examine state and proprietary data on wholesale and retail prices from before and after cap and trade takes effect. He has estimated that retail prices should rise about 9 to 10 cents per gallon.

Any price increase related to cap and trade would likely be introduced by the refiners into the price that gas stations pay, Sweeney said. "That’s where I think you’d see it," he said.

Sweeney said he is confident that any price changes would be apparent. "There’s been a long period of being able to watch the retail price dynamics, and so we have some expectation of what we should see," he said. "It’s early in the game, and you have a committee of five people who are very professional who I think will be able to look very objectively at what’s going on and call a spade a spade if we see one."

That said, Sweeney said he couldn’t recall any previous instance of collusion or other nefarious intent by oil companies to raise prices in California.

"In major cities and major urban areas … I can’t think of any [instance] offhand where there’s prices that are very different from what you can explain by those competitive forces," he said. "Every time we’ve had a price jump, or almost every time, the attorney general’s office has investigated this in California. I note that they’ve never come out with any indictment or anything that argued that there was any gaming going on."

In addition to cap and trade, he noted, several other significant trends and policies may be having an effect on gasoline prices.

The state’s low-carbon fuel standard, in place since 2009, requires fuel producers and importers to reduce the carbon content of their offerings by 10 percent by 2020 or to buy credits in a state-created market (ClimateWire, Jan. 5). Like cap and trade, that policy would be expected to raise prices as producers either resort to more-expensive fuels or buy credits, which have been selling for about $26 per ton.

On the other side, California’s vehicle efficiency standards, in place since 2009, as well, have reduced demand for fuels.

"It’s important to recognize there’s three regulatory interventions in the gasoline markets that are important for the state," Sweeney said. "As a committee, we can’t ignore those. But the cap and trade had the potential for leading to a discontinuity, and you had all the rhetoric about expecting a discontinuity."

Correction: An earlier version of this story misstated the amount of fuel motorists use in California.