FAQ: Is California's fight against climate change likely to boost gas prices?

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Gas prices have steadily dropped since early summer, but just a day into 2015, they’re ticking up slightly. The explanation may lie in a new law taking effect this year.

This year makers and distributors of gasoline must come under California’s “cap and trade” program to limit greenhouse gas pollution, and those companies are calling compliance with the law a “hidden gas tax.” Let’s look at what’s really going on.

What is “cap and trade” and what does it have to do with gasoline?

A law called AB 32 requires California to cut greenhouse gas emissions to 1990 levels by 2020 as in an effort to fight man-made climate change.

A keystone of that law is a "cap and trade” system. The idea behind it is that major polluters must obtain allowances to spew climate-changing gases into the atmosphere. Over time, the number of those allowances will drop, and companies must either reduce their emissions or buy allowances from other companies that don't need them. 

In limited circumstances, polluters can purchase “offsets” to reduce greenhouse gases somewhere else other than their operations.

The state's cap and trade is now a couple of years old. Transportation fuel makers lobbied to defer their participation in the system, so when it began, the market included manufacturers, cement plants, and other stationary sources of pollution, as well as electricity providers and importers. It’s been almost 9 years since the law passed. Now, the time for those companies to take part is here. 

What do the fuel providers think of this plan?

They're not crazy about it. They have mounted a campaign to brand the new law as a “hidden gas tax.”

In October, details of how fuel providers have fought this plan were revealed through a leaked PowerPoint deck.  It described what some have called “astroturfing” - a practice which oil industry groups have funded what appear to be grassroots groups fighting AB-32. 

These groups have paid for print, radio and television ads describing the provision now taking effect at a hidden gas tax.

"Hidden Gas Tax" ad from the California Drivers Alliance

The Western States Petroleum Association has maintained that it supports, generally, California’s goal of reducing greenhouse gas emissions. The group says that its problems are with regulations implementing the law not the law itself. 

Are my gas prices going to go up?

Pretty much yes. AB 32 requires California to change its behavior related to emitting greenhouse gases, and those changes will cost money. Fuel providers are likely to pass their costs on to consumers. Supporters and opponents of the law are on the record saying that gas prices will go up.

The state Legislative Analyst’s Office concluded last summer that it’s likely that within 5 years, gas prices will rise 13 to 20 cents, though the LAO offered a high-end price tag of over 50 cents. 

Severin Borenstein, a professor in UC Berkeley’s Haas School of Business, has predicted that the “near-term” increase will be 9 or 10 cents a gallon. Borenstein and colleagues from Berkeley and Stanford concluded in a study, funded in part by the state, that the price of carbon pollution allowances will rise slowly, and slightly at first. That cost, he says, will be passed on to consumers. 

The Western States Petroleum Association, a trade group representing the oil industry, says that gas prices could rise as little as 4 percent and as much as 19 percent, which, assuming $4/gallon for the price of gas, means a price impact of 16 cents to 76 cents. Those numbers are based on a 5-year-old study released by the California Air Resources Board -- an analysis done before cap-and-trade actually took effect.

Is that the whole story, that environmental laws are going to cost me money?

Not if you believe the state and environmental advocates. The Natural Resources Defense Council's Alex Jackson argues that AB 32 will reduce overall consumer fuel costs and will save households on average $380 this year, and as much as $850 a year by 2020. They're basing that on the idea that more fuel efficient cars will need fewer fill-ups.

How much money does the state take in from the “cap and trade” allowances, and where does it go?

At current prices, California takes in about $1.7 billion a year selling allowances to polluters participating in the “cap and trade” market.

Cap and trade proceeds are divided among several state programs. In last year's budget, that included high-speed rail, clean energy incentives, affordable housing and sustainable communities, energy efficiency, fire prevention and urban forestry, and some drought response measures.   

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