Do Washington State Residents Know Why Their Gasoline Prices Are So High Now?

Roger Caiazza

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 asks whether residents have connected that program to the cost increase.

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 the New York State Energy Research & Development Authority (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.”  Many readers of this blog are 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.

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 would appreciate any feedback from Washington residents about the cost impacts of this cap-and-invest program policy.

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Roger Caiazza blogs on New York energy and environmental issues at Pragmatic Environmentalist of New York.  He blogs about the RGGI program because he has been involved with it since its inception and nobody else apparently wants to review it.   This represents his opinion and not the opinion of any of his previous employers or any other company with which he has been associated.