Coming in 2015: A gas price increase consumers may or may not notice

Drivers across the San Joaquin Valley are enjoying an ongoing drop in the cost of gasoline, with fuel prices hitting levels not seen since 2009. In a few weeks, however, the price will go up – guaranteed.

It’s all part of California’s effort to combat global climate change.

The question for drivers here and across the state is how much more they will pay at the pump, not just next month, but over the next five years. And, given the almost daily volatility of gas prices, whether they will notice when they fill up.

On Jan. 1, transportation fuels will come under California’s cap-and-trade program. Within days of the new year – and not more than a week after welcoming 2015 – fuel prices will jump as gasoline and diesel wholesalers pass along their increased costs associated with the program.

The state Legislative Analyst’s Office said in a report earlier this year that the impact on gas prices could be 13 to 20 cents per gallon, or possibly as high as 50 cents. Critics say it might go as high as 76 cents per gallon. But the LAO’s time frame is long term, with the 13- to 20-cent increase not coming until 2020.

Severin Borenstein, an economist and co-director of the Energy Institute at the University of California at Berkeley Haas School of Business, said the initial increase should be about 10 cents a gallon, with a best guess increase of about 14 cents in today’s dollars by 2020. Adjusted for inflation, he said the real increase should be within the range estimated by the LAO.

“It’s not going to be nothing, but it’s not going to be a catastrophe,” said Borenstein, a supporter of the cap-and-trade program.

Under that scenario, Borenstein and others who back the cap-and-trade program wonder whether consumers will even notice the bump because the price of a gallon can swing by several pennies – up or down – each day. If the price of gas continues to decline – AAA said last week that gas is 69 cents per gallon lower nationally than it was at this time last year, and prices had fallen for more than 80 days in a row – the bump associated with the state’s cap-and-trade may not even be noticed by consumers, though the price gap between California and other states, now about 30 cents per gallon on average, would grow even wider.

Still, there is the possibility of larger increases in the long term, Borenstein said. This would happen if the state experienced strong economic growth over a sustained period, which could result in an increase in greenhouse gas production. Higher gas-price increases also could result if prices drop precipitously and stay there, which likely would lead to an increase in gas consumption. Either could drive up the price of “allowances” that gas wholesalers must purchase to offset the pollution caused by each gallon of gas they sell.

Borenstein, however, doesn’t think either possibility will become reality – even with the current price drop.

Critics try to delay

Critics of the cap-and-trade program, however, say even modest gas-price hikes could hurt consumers, especially the working poor who live in areas that have poor public transportation systems, and even middle-class drivers who commute to Bay Area jobs because they can’t afford housing there.

In addition, some school districts say student services would have to be reduced to pay for the increased fuel costs, primarily for bus transportation.

The San Joaquin Valley’s agriculture industry says the price increase will put them at a competitive disadvantage with other states and nations because, to stay competitive, they won’t be able to pass on fuel-cost increases to consumers. And small businesses with narrow profit margins say even minor fuel-cost increases could drive them out of business.

Assemblyman Henry T. Perea, a Fresno Democrat, responded to those concerns by pushing a three-year delay in adding transportation fuels under the cap-and-trade program. It failed. Fresno Republican Jim Patterson in the Assembly and Hanford Republican Andy Vidak in the state Senate have introduced legislation to kill the plan completely, a push that likely will go nowhere in the Democratic-dominated state Legislature.

A report commissioned by the Western States Petroleum Association, which opposes adding transportation fuels to the cap-and-trade program, also says that while it is working well in some areas, there are some chances of a price spike in the allowances companies buy to cover their carbon emissions. One such chance is next November when companies in the cap-and-trade program will adjust allowances they purchased to cover carbon emissions from 2013 and 2014.

Still, Borenstein has been critical of the very high-end cost-increase predictions, saying the oil industry and other cap-and-trade critics used outdated and inaccurate information to reach their conclusions that the increase could reach 76 cents per gallon.

He is equally critical of the state Air Resources Board, which oversees implementation of the cap-and-trade program, as well as other supporters who have said the gasoline wholesalers could just eat the cost increases and don’t have to pass them along to consumers. Every economic analysis he has seen, Borenstein said, says the cost increase will be passed on to consumers.

Even the Union of Concerned Scientists, an organization that supports the state’s cap-and-trade program, says consumers will pay more.

“This is a regulation; this is the law,” said Adrienne Alvord, the Union of Concerned Scientists’ California and Western states director. “It is going to cost the oil companies something to meet this regulation, and they will pass it through to the consumers.”

It won’t just hit cars, either. It covers all transportation fuels, which means gas and diesel. That means, for instance, that diesel trucks delivering goods to distribution centers or to restaurants, retail stores and other businesses also will pay more. Overall, Borenstein used a state Board of Equalization estimate that residents burn about 1.24 gallons of gas and diesel each day per person. Based on that, he estimates the increased cost will be about $15 per month for a typical family of four.

In addition to transportation fuels, natural gas that consumers use to heat homes or cook food will be added to the cap-and-trade program Jan. 1, but Borenstein said it probably won’t raise bills because utilities are being given free allowances by the state to cover nearly all their liability from the change. Utilities are in turn using those free allowances to avoid passing along the cost to customers, he said.

A mystery to many

Despite all the attention paid to the cap-and-trade program by economists and businesses that must adhere to it, the program’s details remain a mystery to many.

Cap-and-trade is just one part of AB 32, California’s ambitious plan to reduce greenhouse gas emissions to 1990 levels by 2020. Businesses that emit more than 25,000 metric tons of carbon dioxide a year have to get allowances from the state Air Resources Board for each ton of CO2 emissions. These are large industries such as refineries, as well as electricity suppliers.

The first allowance auction took place in November 2012 and the large pollution industries came under cap-and-trade starting Jan. 1, 2013. At that time, California capped the amount of greenhouse gases emitted in the state, a cap that will be reduced each year until 2020.

Starting Jan. 1, transportation fuels are being added to the program, which means wholesale gasoline and diesel distributors such as Chevron, Valero and others, as well as smaller out-of-state fuel importers, must get allowances for each gallon of gas they sell. As they come on board, the allowances market already has been operating for two years.

Borenstein said some consultants predicted the initial price for an allowance could be as high as $68 per ton. But at the first auction the price settled in at $16 per ton, and it gradually has fallen from there to about $12 per ton, which is near the minimum price floor set by the air board. Borenstein said the price has remained low and stable, on the primary market, which are the allowances auctioned by the state, and on the secondary market, in which third parties buy and sell allowances.

The state will reap about $1.7 billion annually from the allowance auctions for transportation fuels, money that is slated for subsidies for buying low-emission vehicles and helping low-income households afford energy, among other things. In addition, state legislators agreed this fall to allocate 25 percent of the annual cap-and-trade money to the planned high-speed rail project.

The state has put safeguards in place to prevent any market manipulation. For instance, there are purchase limits on the allowances, which would stop any attempt to corner the market.

Based on that, Borenstein has done a simple math calculation to predict the 10-cents-per-gallon price increase next month. Every car on the road puts out the same amount of carbon dioxide per gallon of gas burned, which is about 0.008 tons. If that is multiplied by $12, the approximate cost of an allowance at the moment, the sum comes out to about 10 cents. For diesel, the likely increase is about 11 cents.

Each year heading up to 2020, the minimum price for an allowance will be increased by the state, but Borenstein said the market’s stability, and the cost of an allowance being near that minimum, show that the cost increases will be small, and likely to come annually. The increase in the minimum price for an allowance will change each Jan. 1. After the initial 10-cent increase, Borenstein thinks any additional increases will be only a few pennies.

“It’s not a certainty,” Borenstein said of the small, gradual increases, “but it is very likely.”

Limits on driving?

Others are not so sure, mainly because there are a finite amount of allowances on the market. If the market has volatility and limited supply of allowances, these critics say, it could not only drive up the price of the allowances – and, thus, a gallon of gas – but could set a cap on how much people can drive.

Whatever the increase, it might be hard for drivers to know whether a price increase is being driven by market forces or the cap-and-trade program. On average, Borenstein said, a gallon of gas costs about 30 cents more in California than other states. He expects that differential to jump to 40 cents a gallon next month, based on his estimate of how much putting transportation fuels under the cap-and-trade program will add to a gallon of gas.

Alvord, with the Union of Concerned Scientists, said the goal of AB 32 is to reduce the amount of greenhouse gases. Adding transportation fuels, she said, is supposed to push drivers to change their habits, either by driving less, being more efficient when they do drive or driving cars that get more miles per gallon.

Borenstein even had three minor suggestions to cover the initial gas cost increase in a blog he wrote. One was to drive 70 mph on the freeway rather than 72. Another was to buy a car that gets 31 miles per gallon rather than one that gets 30. Finally, keep tires properly inflated. The examples were to show little changes drivers could make to save the additional gas cost.

Critics see the coming change as a plunge into the great unknown. This year, the state capped allowed emissions for the industries in the program at 160 million metric tons. Next year, it will be 395 million metric tons, with the growth largely because of the addition of transportation fuels to the program. In 2020, the cap on emissions will be 334 million metric tons.

This story was originally published December 25, 2014 at 7:40 PM with the headline "Coming in 2015: A gas price increase consumers may or may not notice."