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How fighting climate change will raise California gas prices even higher

Last year the California Legislature raised gasoline taxes by 12 cents a gallon, and conservatives were so outraged they launched an effort to repeal it at the ballot box. Proposition 6 comes up for a vote in November.

Now, with considerably less fanfare, the state’s air-pollution agency has enacted a regulation that will raise gas prices as much as 36 cents a gallon by 2030, and diesel by 44 cents, according to the agency’s staff. Californians already pay an average $3.73 a gallon for gas, or 85 cents above the national average.

The projected increases are part of the latest effort by the California Air Resources Board to fight climate change. The board last week voted to strengthen the state’s “low carbon fuel standard,” a fairly obscure regulation that requires oil refiners and makers of other fuels to reduce the “carbon intensity” of their products, including the greenhouse gases generated during production and distribution of the fuels.

As it is, the seven-year-old regulation costs California motorists an estimated 12 cents a gallon at the pump, according to Irvine energy consultant Stillwater Associates. The oil industry, which has been fighting the Air Resources Board over the rule for years, said the latest decision makes a bad regulation even worse.

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“The cost of this program, given these increases, is definitely impactful on consumers,” said Catherine Reheis-Boyd, president of the Western States Petroleum Association. “It really is a hidden gas tax that takes more out of the pockets of consumers.”

Reheis-Boyd said oil companies support efforts to curb greenhouse gases but “you don’t want to bring unnecessary economic harm to your state.”

Officials with the Air Resources Board defend the low carbon regulation as an effective weapon that’s eliminated 35 million tons of carbon from the atmosphere since its inception.

Last week’s decision “will take California’s climate fight up another notch,” board Chairwoman Mary Nichols said in a prepared statement.

The fuel standard isn’t as well known as California’s “cap-and-trade” program, which forces food processors, cement makers and other industrial firms to reduce carbon emissions. Cap-and-trade requires fuel wholesalers to reduce emissions as well, and the costs of compliance are raising by gas prices by an estimated 10 to 12 cents a gallon. That’s in addition to the higher costs caused by the low carbon fuel standard.

The low carbon rule goes beyond the cap-and-trade mechanism. Not only does it measure fuels’ carbon content, it also takes into account the emissions generated when those fuels are manufactured and distributed – from the carbon spewed into the air by refineries to the emissions from rail cars that haul Midwest corn to California as feedstock to produce the fuel additive ethanol.

Fuel manufacturers who can’t meet the standard must buy credits from clean-fuel manufacturers whose products, such as ethanol, surpass the standard. Electric utilities can generate credits, too, when their infrastructure is used to charge electric cars.

When fuel manufacturers buy credits, the costs they incur are passed on to motorists in the form of higher gas and diesel prices. The carbon standard gets a little stricter each year, and the cost of credits has risen. That’s putting more upward pressure on fuel prices – a trend that will continue in the next decade with the newly revised standards.

The old regulation required fuel makers to lower their “carbon intensity” by 10 percent in 2020, as compared to 2010 levels. The new regulation will require them to gradually reduce carbon intensities by 20 percent by 2030, also compared to the 2010 baseline.

Dave Hackett, president of the Stillwater firm, said California is finding it’s tougher to reduce the “carbon intensity” than originally believed. The new regulation actually takes a step back in one sense; the new target for 2020 is just a 7.5 percent reduction in carbon instead of the original 10 percent, and then inches up each year to a 20 percent target in 2030.

Hackett said achieving a 20 percent reduction won’t be easy. “Getting past 10 percent is going to be an interesting struggle,” he said.

Recognizing the difficulty in reducing carbon from the transportation sector, the new regulation will increase the rebates for motorists to buy carbon-free electric vehicles by augmenting incentive programs run by SMUD, PG&E and many of the state’s other electric utilities. The utilities are participants in the low-carbon program and generate credits when their infrastructure is used to charge electric cars’ batteries. They then sell those credits to oil companies and other fuel makers struggling to comply with the rules, generating cash for the car-buying incentives.

The incentives could go as high as $2,000 per vehicle but the numbers haven’t been finalized yet, said Air Resources Board spokesman David Clegern.

“We want to accelerate the sale of cars that replace gasoline with electricity,” Steven Douglas, of the Alliance of Automobile Manufacturers, told the Air Resources Board last week.

Out-of-state fuel makers have been challenging the regulation in court for years, arguing that the rules penalize those shipping fuel and raw materials a long distance to California. That violates the U.S. Constitution, which forbids states from limiting interstate commerce, they argue. The courts ruled in favor of the California regulation in 2013 but a new challenge is pending in the 9th Circuit U.S. Court of Appeals.