Politics & Government

California motorists to begin shouldering costs of carbon auction

Vehicles back up on westbound Highway 50 as they make their way through the Fix 50 project earlier this year.
Vehicles back up on westbound Highway 50 as they make their way through the Fix 50 project earlier this year. rpench@sacbee.com

Motorists are about to get drafted into California’s war on climate change.

Starting Jan. 1, gas and diesel fuel will be subject to California’s cap-and-trade market, a 2-year-old regulatory mechanism that puts a price on carbon spewed into the atmosphere.

The result will be higher gasoline and diesel prices, and probably more controversy for a state program that’s already been attacked in the courts by the business community.

With fuel the cheapest it’s been in years, state officials say the price increase won’t clobber consumers. The increase is likely to be less than 10 cents a gallon, said Mary Nichols, chairwoman of the California Air Resources Board, which runs the carbon program. Given the typical volatility of gas prices, Nichols said most consumers will probably barely notice the difference.

“The amount is small,” she said. “It does get hidden in the noise, in the other changes that are constantly taking place in the pricing of gasoline.”

Some academic experts have echoed Nichols’ projections. But oil-industry advocates, who have been campaigning for months against the move, say the effect could be more significant.

The Western States Petroleum Association, or WSPA, the leading industry trade group in California, has posted on its website a prediction that prices could rise 16 to 76 cents a gallon. The WSPA prediction is based in part on a 4-year-old analysis of carbon prices by the Air Resources Board.

WSPA spokesman Tupper Hull acknowledged in an interview that the petroleum group’s prices estimate might be high, saying “I don’t dispute” predictions of more modest increases.

Regardless of the magnitude of the increase, WSPA is actively fighting a regulation that it says will harm consumers. A group organized by WSPA, the California Drivers Alliance, delivered petitions with 115,000 signatures to an Air Resources Board meeting in Southern California last month. The petitions demanded a halt to “the hidden gas tax,” as critics have labeled it.

Motorists “are going to participate in California’s grand experiment in controlling climate change,” Hull said. “We believe it’s important for consumers to be aware and to understand.”

Until now, the responsibility for fighting global warming in California has fallen on several hundred cement manufacturers, food processors and other large industrial firms. Under the program, which is the centerpiece of the state’s landmark 2006 climate change law, the big companies essentially have to pay for the right to emit greenhouse gases. They must purchase carbon allowances, either at quarterly state-run auctions or on the open market.

It’s designed as a market-based approach that gives companies flexibility for complying with the regulation. Most of the emissions allowances are given out for free, and if their emissions exceed the cap, companies can buy more credits or find ways to reduce their carbon footprint. The total amount of carbon that can be emitted in the state – the “cap” – declines slightly each year.

Oil refiners are already covered by the cap, but only for the greenhouse gases emitted from their smokestacks. The impact on fuel prices has been modest, maybe a penny a gallon, said UC Berkeley energy economist Severin Borenstein.

The change that’s coming Jan. 1 will broaden the oil industry’s participation. For the first time, the carbon coming out of car and truck tailpipes will be covered.

Motorists won’t be responsible for buying carbon-emissions credits. Instead, fuel wholesalers will have to purchase the credits in an amount based on the volume of fuel they deliver to service stations. The Air Resources Board will make more carbon credits available at its auctions to accommodate the increased demand.

The expectation is that the cost of carbon will be passed along to drivers. The impact on pump prices will be a function of the carbon content in a gallon of fuel, and the market price of emissions credits – currently a little more than $12 a ton. Based on that, Borenstein said, fuel prices could increase 9 to 10 cents a gallon on New Year’s Day or within a few days after. His estimate is in line with Nichols’ projections at the Air Resources Board.

The oil industry and some business groups pushed for legislation this year that would have canceled or postponed the inclusion of gas and diesel in the carbon program. Despite support from some Democratic lawmakers, the legislation failed in the face of opposition from the Air Resources Board and Gov. Jerry Brown.

David Clegern, an Air Resources Board spokesman, said California’s climate change initiative has to include tailpipe emissions. They account for nearly 40 percent of all greenhouse gas emissions, he said.

“The cost of the carbon allowance has to get passed through. That’s the whole point. The consumer feels the impact,” said Jon Costantino, a senior adviser on carbon markets at the Manatt law firm in Sacramento and a former staffer at the Air Resources Board, where he managed climate change planning.

Supporters of the state’s plan say the burden on motorists won’t be excessive. At an extra dime a gallon, the average family will pay an additional $12 a month for fuel, Borenstein said. Put another way, a 10-cent increase would be just a fraction of the 33-cent drop in average pump prices in California over the past month.

But critics say any price increase will be felt, especially among moderate- to low-income Californians.

“Everybody who buys gasoline is going to be taxed for the cap-and-trade tax,” said Lee Jamieson of Jaco Oil Co., a Bakersfield wholesaler that has been purchasing carbon credits in advance of Jan. 1.

Jamieson, whose company also operates a Central Valley convenience store chain called Fastrip, isn’t happy about the regulation. He said motorists are quick to point fingers at the industry when gas prices go up.

“Don’t blame us; we didn’t do it,” he said. “The Legislature did it.”

Cap and trade is already a sore point with many in the business community. Since the state-run carbon auctions began in late 2012, companies have spent $2.27 billion on emissions allowances. The California Chamber of Commerce has called the expense a drag on the economy. The chamber and the conservative Pacific Legal Foundation have sued to block the auctions, arguing they amount to an unconstitutional tax, but so far have had no success.

Oil groups say bringing motor fuels into the equation will bring even more harm to the economy. The industry-supported California Drivers Alliance released a study in September saying an increase in fuel prices of 10 to 12 cents a gallon would cost the state’s economy $2.94 billion and eliminate 18,000 jobs “as households across the state cut back their spending to afford higher priced gas.”

The economic pain would grow if price hikes at the pump are higher, according to the study, produced by Davis consulting firm Encina Advisors LLC.

WSPA says that’s a distinct possibility. If the price of carbon shoots up to $75 a ton, the price of gasoline could jump as high as 76 cents, according to the oil producers’ association. That prediction is based in part on a 2010 analysis by the Air Resources Board.

The Air Resources Board, however, said fears of a massive price increase are overblown and typical of how the petroleum industry reacts to new regulations.

“When we took the lead out of gasoline, when we took the sulfur out of diesel … there were always, I will call them, either predictions or threats by the oil companies that the price at the pump would go up and people would be hurt,” Nichols said. “Gasoline is cheap relative to other things you can buy and relative to overall inflation in the economy.”

Call The Bee’s Dale Kasler, (916) 321-1066. Follow him on Twitter @dakasler.

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