Recent reports note that gasoline prices in the State of Washington are now higher than California. This is also the first year of Washington’s cap-and-invest program a “comprehensive, market-based program to reduce carbon pollution and achieve the greenhouse gas limits” set in the Climate Commitment Act. This post shows that there is an obvious link between Washington’s new cap and trade program and gasoline prices.
I have been following the Climate Leadership & Community Protection Act (Climate Act) since it was first proposed. I submitted comments on the Climate Act implementation plan and have written over 300 articles about New York’s net-zero transition. I have extensive experience with air pollution control theory, implementation, and evaluation having worked on every cap-and-trade program affecting electric generating facilities in New York including the Acid Rain Program, RGGI, and several Nitrogen Oxide programs since the inception of those programs. I follow and write about the RGGI cap and invest CO2 pollution control program so my background is particularly suited for this proposal. I have devoted a lot of time to the Climate Act because I believe the ambitions for a zero-emissions economy embodied in the Climate Act outstrip available renewable technology such that the net-zero transition will do more harm than good. The opinions expressed in this post do not reflect the position of any of my previous employers or any other company I have been associated with, these comments are mine alone.
Climate Act Background
The Climate Act established a New York “Net Zero” target (85% reduction and 15% offset of emissions) by 2050 and an interim 2030 target of a 40% reduction by 2030. The Climate Action Council is responsible for preparing the Scoping Plan that outlines how to “achieve the State’s bold clean energy and climate agenda.” In brief, that plan is to electrify everything possible and power the electric grid with zero-emissions generating resources by 2040. The Integration Analysis prepared by the New York State Energy Research and Development Authority (NYSERDA) and its consultants quantifies the impact of the electrification strategies. That material was used to write a Draft Scoping Plan. After a year-long review the Scoping Plan recommendations were finalized at the end of 2022. In 2023 the Scoping Plan recommendations are supposed to be implemented through regulation and legislation.
The New York Cap and Invest program is one of the Scoping Plan recommendations. The New York State Department of Environmental Conservation (DEC) and New York State Energy Research and Development Authority (NYSERDA) are hosting webinars designed “to inform the public and encourage written feedback during the initial phase of outreach” for New York’s proposed cap and invest program.
DEC and NYSERDA have developed an official website for cap and invest. It states:
An economywide Cap-and-Invest Program will establish a declining cap on greenhouse gas emissions, limit potential costs to New Yorkers, invest proceeds in programs that drive emission reductions in an equitable manner, and maintain the competitiveness of New York businesses and industries. Cap-and-Invest will ensure the state meets the greenhouse gas emission reduction requirements set forth in the Climate Leadership and Community Protection Act (Climate Act).
I have written other articles that provide background on the New York Cap-and-Invest program (NYCI). I recently posted a Commentary overview for the New York Cap & Invest (NYCI) program that was written for a non-technical audience. In late March I summarized my previous articles on the New York cap and invest proposal in a post designed to brief politicians about the proposal if you want more technical information. There also is a page that describes all my carbon pricing initiatives articles that includes a section listing articles about the New York Cap and Invest (NYCI) proceeding.
Washington Climate Commitment Act
Although a bit late to the party for addressing the threat of climate change, Washington’s Climate Commitment Act appears to be even more aspirational than California and New York. The Washington Department of Ecology (“Ecology”) web page explains:
The Climate Commitment Act (CCA) caps and reduces greenhouse gas (GHG) emissions from Washington’s largest emitting sources and industries, allowing businesses to find the most efficient path to lower carbon emissions. This powerful program works alongside other critical climate policies to help Washington achieve its commitment to reducing GHG emissions by 95% by 2050.
The state plans in Washington, California, and New York all aim for net-zero emissions where greenhouse gas (GHG) emissions are equal to the amount of GHG that are removed. Washington’s emission reduction target is 95% by 2050. California is shooting for 85% by 2045 while New York’s target is 85% by 2050. In addition to the target levels and dates there are differences in what GHG emissions are included, how the mass quantities are calculated, and which sectors of the economy must comply. Nonetheless, I am sure a case can be made that Washington is the most aspirational.
A key component of the strategy of all three states is an emissions market program variation called cap-and-invest. According to NYSERDA the permits to emit a ton of pollution (the allowance) are distributed freely in a cap and trade program but in a cap-and-invest program the allowances are sold at auction and the proceeds are invested to enable the reductions required. A more cynical description of the difference would say that cap and trade programs are market-based systems that encourage the free market to find the least cost approach to meet the limits while cap-and-invest programs are disguised carbon taxes.
Cap-and-invest Analytics
My primary interest at the moment is the New York State cap-and-invest program initiative. As part of the stakeholder outreach process, on June 20, 2023 a webinar (presentation slide deck and session recording) on the program’s analysis inputs and methods that will “assess potential market outcomes and impact from the proposed New York Cap-and-Invest (NYCI) program”. What caught my attention was a comment that the McKinsey Vivid Economics team would model the cap-and-invest auction and that they had done similar analytic projects for the State of Washington (Video at 13:42).
According to a Ecology web site the Vivid Economics report shows “new climate change initiatives deliver significant benefits at minimal costs.” I have never been impressed with most economic analyses of emissions trading program. John von Neumann famously said “With four parameters I can fit an elephant, and with five I can make him wiggle his trunk.” I am skeptical about the value of global climate models because so many parameters are needed to simulate different physical processes in the atmosphere but at least there are physical relationships involved. Analytical models of cap-and-invest programs parameterize just about everything including human behavior. I have no confidence in their results. During the webinar I asked whether the Vivid Economics model had been verified. Not surprisingly there was no answer.
The Ecology web site report specifically addressed gasoline price projections based on economic modeling:
Economic report shows little impact on gas prices
Washington’s new Clean Fuel Standard will mean less than a 1-cent per gallon difference in the price consumers pay at the gas pump in 2023, according to estimates in a third-party economic analysis. Prices could rise up to 2-cents in 2024, and 4-cents in 2025, the report shows.
Ecology commissioned Berkeley Research Group to evaluate the Clean Fuel Standard’s impact on the retail cost of gas and diesel fuels, and the electricity for electric vehicles. Berkeley is an independent, globally-recognized consultant with a long track record of providing high-quality reports across a wide range of markets and industries.
Research shows regulations like the Clean Fuel Standard play a minor role in gas prices compared to the shifts in the U.S. economy and disruptions to crude oil supply and demand caused by global events, such as the pandemic and Russia’s invasion of Ukraine.
Legislators passed the Clean Fuel Standard in 2021. It will take effect in 2023. It requires fuel suppliers to gradually reduce the “carbon intensity” of transportation fuels 20% by 2038, enough to cut Washington’s statewide greenhouse gas emissions by 4.3 million metric tons per year. Transportation is the largest source of greenhouse gas emissions in Washington, accounting for 45% of total emissions.
The analysis shows price impacts vary over the next 12 years, and then drop to nearly zero as the number of electric cars increase and there’s a shift to cleaner energy.
Read the report on the Clean Fuel Standard webpage.
Washington Gasoline Prices
What actually happened? “The average cost of regular gasoline in Washington state has jumped by 32 cents over the past month to $4.93 a gallon, according to AAA” according to an article, California is no longer America’s most expensive state for gas. Another article says that some experts connected the dots to the new legislation.
Clearly the reasons for gasoline price volatility are always complicated. Another article explains:
What is causing the spike is a matter of intense debate. Some point to the state’s new “cap and invest” emissions program, which was implemented in January. The program sets a limit — or cap — on overall carbon emissions in the state and requires businesses (including fuel suppliers) to obtain allowances equal to their covered greenhouse gas emissions. These allowances can be obtained through quarterly auctions hosted by the Washington State Department of Ecology. They can also be bought and sold on a secondary market, similar to a stock or bond.
According to Todd Myers with the Washington Policy Center, this program means drivers will pay more at the pump. “The way fuel suppliers in California and Washington have done it is that they have simply, rather than try to speculate what the future prices will be, incorporated the cost of the allowances immediately into gas prices,” Myers told KIRO Newsradio. “So, what you see is, the gas price almost immediately reflects what those prices are.”
But Luke Martland, Climate Commitment Act Implementation Manager with the state Department of Ecology, claimed it’s not that simple. “What determines what we pay at the pump in Washington is supply and demand: The war in Ukraine, what Saudi Arabia may do, how much profit oil companies take from the sales. It’s a whole bunch of factors — and cap and invest might be one of those factors. But to say there’s a direct connection is simply not accurate.”
Patrick DeHaan, Head of Petroleum Analysis for GasBuddy, said the link between the cap-and-trade program and gas price increases is clear.
In my opinion, the key point is that the cost of Washington gasoline has risen more relative to the price increases elsewhere so that now Washington has the highest prices in the nation. The first two auctions for the Washington cap-and-invest program sold 14,770,222 allowances and raised $780,829,117 averaging $52.87 per allowance. According to the US Energy Information Administration 17.86 lbs of CO2 are emitted per gallon of finished motor gasoline which means that 112 gallons burned equals one ton. That works out to $0.47 a gallon needed to cover the cost of allowances necessary to purchase the allowances and that is a unique Washington cost adder. I agree with DeHaan – the link is clear.
Ramifications
There is a clear link between the pass-through cost that gasoline suppliers must pay and the fact that Washington State gasoline prices have increased more than other states. One of the reasons for my obsession following similar policies in New York is that observed significant cost increases with little real benefits should engender a political response. If it can be shown that there are real and significant costs as opposed to the “no real impact” claims made by net-zero proponents the politicians who supported these policies should be held accountable. The question is whether the residents of Washington have figured out that their gasoline prices are so high because of the politicians who promulgated this policy.
I cannot over-emphasize my belief that similar cost increases are coming to New York as a result of the NYCI proposal. Although the Hochul Administration professes the desire to make the program affordable the inescapable fact is that there have been significant cost increases where ever a jurisdiction has tried to eliminate GHG emissions. In addition, there is a complicating consideration inasmuch as higher costs are necessary/ The New York Independent System Operator has stated that the Climate Leadership & Community Protection Act (Climate Act) net-zero transition is “driving the need for unprecedented levels of investment in new generation to achieve decarbonization and maintain system reliability”. The analytical modeling must consider the balance between affordability and investing in Disadvantaged Communities principles against the investments needed. If the investments are insufficient then the energy system will fail to meet the cap limits. The modeling also must address the feasibility of the transition schedule that considers permitting delays, supply chain issues and trained labor constraints. Even if the money is available, it may not be possible to build it fast enough to meet the arbitrary Climate Act schedule and the modeling must reflect that possibility.
I conclude that in order to generate the revenues necessary to meet the Climate Act emission reduction targets that significantly higher energy prices will be required just like we are observing in Washington. When those cost increases become evident I hope that the politicians who supported the Climate Act are held accountable for the costs and limited benefits.
Pragmatic Environmentalist of New York 