Gas jumps 75 cents with California carbon tax!

Energy groups warned of apocalyptic spikes in the price of gasoline in California when new cap-and-trade rules took effect on New Years Day 2015. These groups representing the interests of the oil industry ran ads on Facebook, YouTube and television; talked to every journalist who would listen; and bought influence from politicians such as Democratic Assemblymember Henry Perea of Fresno in their futile attempts to roll back portions of AB 32, the “Global Warming Solutions Act of 2006.”

The new “carbon tax” for California transportation fuels took effect on January 1, 2015. The actual net change in the price of gas was a couple of pennies per gallon. Most consumers responded with a yawn and a shrug.

Gas price charts December 2014 / January 2015

The chart above shows the California average price per gallon in blue, USA average in green, and the price per barrel of crude oil in yellow. I also picked Bakersfield just because and was surprised to see gas dropped by over a nickel the day after the new year.

AB 32 seeks to reduce California’s greenhouse gas emissions to 1990 levels by the year 2020. The California Air Resources Board (ARB) is tasked with implementation and enforcement. Each year, ARB divvies out (mostly free) credits for 400 million metric tons of carbon emissions. The industrial users of these credits can then either consume these credits, or trade them on the open market. They can also buy additional credits from ARB in a quarterly auction. The proceeds from these auctions go to implement other portions of AB 32. 25% of fiscal 2015 proceeds, for example, have been allocated to the California High Speed Rail project.

Over time, ARB ratchets the available credits down by a percent or two each year. AB 32 supporters hope this provides an economic incentive and time for the state to reduce greenhouse gas emissions by encouraging better energy efficiency and development of renewables.

The big challenge for refineries producing transportation fuels should be obvious. With gas prices we haven’t seen 2008, demand will rise. A carbon tax limits the profit going to energy providers by diverting some revenue to the public. This means potentially less research and development expense and in dividends paid out to institutional investors, retirement funds, and other shareholders.

With emissions allowances dropping in quantity over time, California fuel producers cannot sell more fuel without incurring more expense. Fuel prices will rise over time, even with increasing supply. That’s kind of the point of cap-and-trade — limited availability and higher fuel prices will spur development of renewables and encourage other, more efficient forms of transportation. Those who lack imagination fear this can’t happen without wrecking the economy. Some of us are a little more hopeful.

We’re only five years away from AB 32’s target year. In his fourth and final inauguration speech today, California Governor Jerry Brown said he plans to push more on climate change during his last term in office, specifically targeting a 50% decrease in transportation petroleum use. I wish him and the state of California good luck.

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