Business & Real Estate

Industry groups stir opposition to a cap-and-trade expansion they say will lead to higher gas prices

In a conference call with oil industry analysts in late 2012, Mike Wirth, a Chevron Corp. executive, took stock of California’s greenhouse gas reduction policies and warned that the state’s plan to expand its controversial cap-and-trade program to vehicle fuels in 2015 would result in higher prices at the pump.

“If you get fuels under the cap and trade, which is anticipated out towards the middle of this decade, the costs explode and that is where you go from cost in the hundreds of millions of dollars a year to costs in the billions of dollars a year,” Wirth said, according to a Thomson Reuters transcript of the call.

Chevron would not absorb the expense, Wirth said, and would pass the cost “into the price of the product.”

Chevron’s concerns were expressed by other oil companies at the time, part of a years-old debate between business interests and environmentalists over cap and trade. The carbon market is the centerpiece of Assembly Bill 32, the landmark greenhouse gas reduction legislation passed in 2006.

But now, with the heightened sensitivity of an election year and the expansion of the carbon program looming, critics are redoubling their opposition. The California Independent Oil Marketers Association, an industry group, has organized Fed Up at the Pump, which describes itself as a “grass-roots coalition of consumers, businesses and advocates.” Neel Kashkari, the Republican candidate for governor, is criticizing Gov. Jerry Brown for what he calls a “hidden” tax on gas, and 40 state lawmakers, including 16 Assembly Democrats, have formally urged the Brown administration to back off the regulation.

The Western States Petroleum Association, which represents oil interests influential at the Capitol, has said it could cost oil companies 12 cents or more a gallon to buy carbon credits for the fuel they sell in California each year.

“If this goes through as planned, in places like the Valley and other communities where money’s tight, another 15 cents a gallon?” said Henry Perea, the Fresno assemblyman who wrote a letter signed by 16 Democrats this month to Mary Nichols, chairwoman of the California Air Resources Board. “There’s not a lot of public transportation in Fresno. ... We drive, we rely on our cars here, and for gas to go up another 15 cents a gallon is a major hit.”

The Brown administration expects to generate about $550 million in proceeds from cap-and-trade auctions in the upcoming budget year, with funds directed to high-speed rail and other transportation projects, affordable housing and programs designed to reduce emissions. Of the Democrats who signed the letter urging Brown to hold off on the regulation, all but one, Rudy Salas of Bakersfield, voted in favor of the cap-and-trade spending plan in budget-related legislation this month.

“It sounds like in an election year everyone is looking for some political cover on tough issues,” said Robin Swanson, a Democratic political consultant. “If gas prices go up in the summer, no one wants to be held accountable for that; no one wants to be left holding that bag.”

Patrick DeHaan, senior petroleum analyst for price tracker, estimated the expansion of California’s cap-and-trade program could result in a 10- to 20-cent-per-gallon increase in fuel prices.

“The producers are going to say that prices are going to go soaring, and the environmentalists say, “Oh, its no big deal,’” DeHaan said. “I think the truth lies somewhere in the middle. ... It’s not the doom and gloom that the oil lobby would have you believe, and it’s not nothing, like the environmentalists would have you believe. It certainly will be felt by motorists.”

Brown, a third-term Democrat, is unwavering. Under the existing cap-and-trade program, big industrial polluters have been required to reduce emissions or buy allowances since 2012, and Stanley Young, a spokesman for the Air Resources Board, said many companies coming under the cap in January have bought allowances ahead of time. He declined to say how much any oil supplier has already purchased, but he said “many of these fuel suppliers have been purchasing this, which means that they have been spending money.” He suggested the cost of compliance has already been incorporated into the price of fuel.

The ARB itself estimated in 2010 that gas prices could increase 4 percent to 19 percent by 2020 as a result of cap and trade, but ARB officials said that estimate is outdated, and Young said “we don’t believe there will be any discernible increase in pricing” next year. He said the total cost of fuel for Californians is expected to decrease in the long run as cars become more fuel efficient and as public transportation and alternative energy options improve.

The average price of a gallon of regular gasoline in California was $4.13 on Sunday, third highest in the nation behind Alaska and Hawaii, according to AAA. Prices can fluctuate for any number of reasons in a global market, from seasonal changes in demand to refinery outages and political upheaval in oil-producing countries. But the cost of fuel is a perennial issue in presidential campaigns, and if critics can yoke the decisions of incumbent politicians to higher prices in California, the issue could become problematic for candidates holding state offices, as well.

“It definitely does seem to be a sound bite, and it is an advantageous one to use during an election cycle,” said Timothy O’Connor, an attorney with the Environmental Defense Fund. “That is something we’ve seen time and time again.”

O’Connor said critics of stricter regulations ignore the economic benefits of programs funded by cap and trade, and he said concerns about fuel prices are shortsighted.

“What I’m noticing is that although these elected officials are concerned about the AB 32 fuel policies, the rhetoric of the hidden gas tax is not also paired with any recognition of the design of the program that provides investments and benefits in their communities,” O’Connor said.

Transportation fuels make up about 40 percent of statewide emissions, and state Sen. Fran Pavley, D-Agoura Hills, said “all the major polluters have to do their fair share” for the environment.

“I think the oil refineries have decided they’d rather fight this than do what we know they can do to reduce greenhouse gas emissions,” said Pavley, the author of AB 32, which requires California to reduce emissions to 1990 levels by 2020. “This isn’t the first time we’ve had a push back from them.”

Four years ago, oil companies backed a proposition to suspend AB 32. Voters overwhelmingly rejected it.

This year, the effort by the oil industry appears at least partly designed to inoculate itself from public frustration if prices do go up.

“We’re organizing a coalition effort, but frankly it’s in our own self-interest, because when prices go up unexpectedly, the public blames us, so we felt we needed to get out there and be a little more proactive,” said Jay McKeeman, a vice president at the California Independent Oil Marketers Association.

He said the group is in the midst of a three-month marketing campaign in the Central Valley. He declined to say how much the association was spending.

“I think we all just kind of realized that there was going to be no quarter given by CARB,” he said. “At this late date, we don’t see out of the administration that there’s going to be an adjustment for this, so we’ve got to take it to the streets.”

Assemblywoman Kristin Olsen, one of the Republican lawmakers most vocally opposed to the regulation’s expansion to transportation fuels, said any price increase on gas is “going to have a really harsh impact” in Central Valley cities still bruised by the recession.

The Riverbank lawmaker said she is “optimistic that we have an opportunity to do something different, or at least delay implementation.”

Brown’s political spokesman referred questions about the regulation’s expansion to administration officials, who said they are preparing to go forward. Heavily favored to win re-election, Brown has ignored Kashkari’s effort to tie concerns about gas price increases to the cap-and-trade program’s inclusion of money for high-speed rail. The rail project is a priority of Brown’s, but its popularity has fallen off, and Kashkari calls its cap-and-trade funding source a “regressive tax” on residents who cannot afford it.

Still, Brown has demonstrated sensitivity to the pressure of gas prices before.

In 2012, Brown called on state regulators to allow the early sale of the less expensive winter-blend gasoline, which he said could bring down prices spiking after a series of in-state refinery problems. The move came about a month before that year’s elections, which included Proposition 30, Brown’s tax initiative.

“In light of the tight gasoline supplies and resulting price spikes, we should not wait until the end of the month to start production of our winter-blend gasoline,” Brown said in a letter to the Air Resources Board at the time. “Allowing refiners to make an early transition to winter-blend gasoline could quickly increase fuel supply and provide a much needed safety valve with negligible air quality impacts.”

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