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Higher gas prices or a path toward a better future? Here's what you … – The Spokesman Review


OLYMPIA – A new year often brings new laws set to go into effect, and this year brings two of the most controversial: a clean fuels standard and a cap-and-trade program.

Both programs passed the Legislature in 2021. They’re aimed at reducing greenhouse gas emissions statewide in an effort to tackle climate change but have resulted in criticism in their effects on prices once they are implemented.

Some have said that gas prices could see upwards of 50-cent-per-gallon increases next year while climate advocates have said a small increase in gas prices is nothing compared to the effect the laws will have on our changing environment.

The reality: don’t expect the average price of gas to go up on Jan. 2 simply because of these policies.

Some price increase could happen further down the line, but experts still aren’t sure what that number might be.

Here’s what you should know:

Clean fuel standard

Washington’s clean fuel standard follows similar programs in California, Oregon and British Columbia. The program requires fuel suppliers to gradually reduce the amount of carbon emissions in their transportation fuels to 20% below 2017 levels over the next 15 years.

The idea is that fuels used in cars, trucks, boats, trains and aircraft would get progressively cleaner overtime.

To achieve that, the plan incentivizes the creation of alternative fuels in the state and penalizes producers of fuels that don’t meet the standard. Alternative fuels include ethanol; biofuels made from things like agricultural residue or waste; renewable diesel made from things like vegetable oil or food processing waste; electricity or hydrogen, among others.

The program is set to cut statewide greenhouse gas emissions by 4.3 million metric tons a year by 2038, according to the Department of Ecology. In 2018, the state emitted a total of 99.6 million metric tons.

The clean fuels standard will work with the cap-and-trade program to reduce the state’s overall emissions to only 5 million metric tons by 2050, according to state estimates.

Beginning Jan. 1, companies participating in the program can begin registering with the Department of Ecology. A cost-benefit analysis of the program done by the Berkeley Research Group estimated there would be 242 companies required to participate in the program. Required participants are companies that produce and import conventional gasoline and diesel products, such as Marathon or Valero.

There is also an option for companies to voluntarily participate in the program. Companies like electric utilities, lower-carbon aviation fuel suppliers and clean fuel suppliers likely will voluntarily participate.

Each year, the Department of Ecology will set a carbon intensity standard that fuel producers must meet.

Any fuel that is used for transportation purposes gets reported to the department, which will then issue credits or deficits. If a company’s fuel is above the carbon emissions standard set by the department that year, they will get a deficit. If it’s below the standard, they will get a credit.

Companies are required to begin reporting their fuel by the end of the first quarter of the year, and deficits and credits likely will be awarded shortly after, said Joel Creswell, who oversees the clean fuels standard at Ecology.

Companies must end up with at least enough credits to offset the deficits to comply. If companies have any extra credits, they can sell them to companies that are short of credits.

For example, a producer of transportation fuels first option to meet the cap set by Ecology would be to clean up their fuel production each year by producing biofuels or blending biofuels into their fuels, so their emissions are lower.

If they cannot change their fuels to meet the standard during any given year, they will get a deficit. Because companies must have an equal number of deficits and credits each year to comply with the program, they can purchase credits from other companies in the market that are producing cleaner fuels.

Companies who have credits to trade or sell are often those who are producing alternative fuels, such as renewable diesel, electricity or hydrogen.

In Oregon, where a similar program has been in effect since 2016, program manager Cory-Ann Wind said the market has generated more credits than deficits every year. Oregon has about 250 companies that participate, Wind said.

In California, 110 million credits have been issued through the program since beginning in 2011, said Colin Murphy, co-director at the University of California Davis Low Carbon Fuel Policy Research Initiative. One credit represents a ton of emissions below the target each year.

The goal of the program is to incentivize fuel companies to begin using alternative fuels now, in an effort to help transition the transportation sector to cleaner fuels and eventually, fully electric in the future, Murphy said.

During the rule-making process of the program earlier this year, a number of climate advocates and renewable fuel and electricity producers wrote to the Department of Ecology expressing their support for the program while some Washington residents expressed concerns that costs will go up for them.

Utilities across the state, including Avista, who will likely receive credits in the program as electricity producers, wrote a joint letter to the Department of Ecology. The letter said the companies support the program and are committed to doing their part to accelerate transportation decarbonization. Utility companies are “essential” to the function of the program and to reducing greenhouse gas emissions, the letter read.

Valero, which produces both traditional and renewable fuels, encouraged the Department of Ecology to have proper funding and staff for the program as a lack of either could disincentivize renewable fuel producers from wanting to take part. The company also recommended increasing flexibility for calculating carbon intensity and renewing credits and more transparency in the process.

Another transportation fuel producer, Marathon, wrote the department about its transition to lower carbon fuels, citing its ongoing conversion of two fuel production facilities in North Dakota and California into renewable fuel production facilities, a type of fuel that could provide credits in Washington’s program. It also recommended the department offer credits for refinery projects, such as electrification of machinery.

Cap-and-trade

Washington’s cap-and-trade program follows a similar model in California.

The Department of Ecology will set a cap on emissions every year that the state’s largest polluters have to meet. Those that cannot meet the cap can purchase allowances from the state.

The program, along with others like the clean fuel standard, will help Washington reach its greenhouse gas emission reduction goals set in state law. Overall greenhouse gas emissions should be 45% below 1990 levels by 2030, 70% below by 2040 and 95% below by 2050.

About 75% of the state’s total greenhouse gas emissions are included in the program. That includes things like gasoline and diesel, natural gas, electricity and facilities that emit more than 25,000 metric tons of carbon dioxide.

Those exempt from the program include facilities that emit less than 25,000 metric tons of carbon dioxide, agricultural operations, aviation fuels and most marine fuels.

The Department of Ecology won’t have an exact estimate of the number of companies that will take part in the program until they begin registering next year, but they estimate it’s about 100 companies, said Claire Boyte-White, a Department of Ecology spokesperson.

Those companies are the state’s largest polluters, such as fuel producers, refineries or power plants, not individual small businesses, such as a gas station and its convenience store.

In February, companies involved in the program will take part in the first auction where they can buy or sell allowances as they need, though companies don’t have to take part if they don’t want to, Boyte-White said. The department will hold four auctions each year.

Companies that cannot meet the emissions cap set next year will need to use the auction to purchase allowances to comply with the program.

If companies have allowances but do not need them to comply, they can sell them or trade them to other companies that may need them.

Earlier this month, the Department of Ecology set prices for the allowances between $22 and $81, though the exact price will depend on demand for the allowances in February’s auction. Everyone will end up paying the same price.

During the auction, all companies place bids on how much they want to pay for an allowance. Once all companies bids are accounted for, the lowest bidding price will be the price that everyone pays for the allowances, program manager Luke Martland said.

Earlier this year, the Department of Ecology gave more than 40 companies in Washington free allowances to use in the cap-and-trade program. As designated by the Legislature, the companies are industries that release large amounts of greenhouse gas emissions but face competition from other states that might cause them to leave Washington for other areas with fewer environmental regulations.

Examples are most manufacturing, including of metals, paper, wood, and chemicals, petroleum refining and asphalt paving.

The designation has led to some controversy among those required to take part in the program, including a natural gas power plant that is suing the state, according to the Seattle Times. Chicago-based Invenergy will be required to take part in the program but said other natural gas power plants are receiving free allowances, which could give them a competitive advantage, according to the lawsuit.

Though the exact revenue is unknown, purchasing of allowances likely will raise billions of dollars for the state, which must use the revenue on programs that fight climate change and help those who are more likely to be affected by it, such as low-income people and people of color.

Lawmakers already have outlined how some of that money will be used in last year’s transportation package. Another portion of it likely will be allocated in the upcoming budget. Gov. Jay Inslee has proposed a number of projects that use an additional $1.7 billion from the program, including grants to organizations whose workers are affected by wildfire smoke or drought, supporting tribes relocating to areas with less climate risk and reducing emissions in more difficult sectors like aviation.

During the rule-making process earlier this year, climate and environmental groups expressed their support for the program with some concerns about language and implementation while a number of other groups and residents expressed concern with the programs effect on gas prices.

A number of organizations, including the International Emissions Trading Association and utility companies, pushed for Washington’s program to link directly with similar programs in California and Quebec, making implementation and carbon pricing more uniform.

The Washington Trucking Associations wrote a letter to the Department of Ecology with concerns for rising gas prices and too few options for electrifying the trucking fleet.

“While we feel the urgency to continue down the path to decarbonize the trucking industry, we feel a delay to implement impacts to gas and diesel users is a prudent path given today’s conditions,” president and CEO Sheri Call wrote in July.

The Association of Washington Businesses leaders wrote that they were particularly concerned about the price impacts of the programs, especially given supply chain issues, inflation and rising utility rates. The group said a number of the small businesses they represent, though not regulated by the cap-and-trade program, likely will see effects on Washington’s normally low costs to starting a business.

“This competitive advantage is being eroded while those other higher costs are not going down either. This pressure makes it difficult for existing small businesses to continue and much more difficult for entrepreneurs to start one,” according to the July letter.

Effect on gas prices

Since the two policies were passed last year, critics have continued to express concerns that they will result in high gas prices.

The Washington Policy Center, a conservative think tank, has been reporting the new policies will add up to 46 cents a gallon to the cost of gas.

Although it’s still hard to say exactly what the impacts might be long-term, experts disagree on that math.

Murphy said it’s highly doubtful that the clean fuels program would result in an increase near 50-cents-a-gallon within the first few years. He added it would be “shocking” if the program accounted for a 50-cent increase even in its 10th year.

Creswell called the 50-cent estimates “misinformation.”

“It doesn’t track with other data we’ve implemented,” he said, though he acknowledged that any estimate at this point is just a best guess.

An independent cost analysis commissioned by the Department of Ecology found only marginal increases in gas prices as a result of the clean fuel standard over the next few years.

The report showed that the policy was economically feasible, Creswell said.

In Oregon, the clean fuels standard added about 5 cents per gallon for gasoline and just under 6 cents per gallon for diesel in 2021, according to the Oregon Department of Environmental Quality.

With the kinds of volatility and swings that gas prices have seen in recent years for other reasons, such as the COVID-19 pandemic or the war in Ukraine, Wind said they are happy with the limited impact.

A cap-and-trade program may add to the price of a gallon of gas, but such a large number immediately probably won’t happen, experts say.

California gas prices are often higher than the rest of the country for a number of reasons, said James Bushnell, economics professor at the University of California Davis. Those include the specific gasoline blend California uses as well as other state taxes.

Under current regulations, Bushnell estimates the cap-and-trade program adds about 15 to 20 cents per gallon to gasoline in California in addition to the 5 cents per gallon from the low carbon fuel standard.

But the managers of the program in Washington haven’t estimated that will happen in Washington immediately.

Gas stations won’t have to purchase allowances, Boyte-White said. It’s the fuel supplier who sells the fuel to those gas stations, which is much further up the chain.

“There’s a cost of compliance to businesses,” she said, “but they retain total operational control over everything they do.”

An internal analysis by Ecology economists found that the estimated effect of this program likely will hover around 1% of the baseline cost for a gallon of gas through the next decade, Boyte-White said.

Having both a clean fuels standard and a cap-and-trade program could actually work together to have less of an impact on gas prices, Murphy said.

For example, if fuel companies transition to cleaner fuels because of the clean fuels program, they likely will emit less greenhouse gases, meaning they won’t have to buy as many allowances through the cap-and-trade program.

Effects on emissions

The goal of both programs is to reduce emissions and transition the state toward carbon neutrality, and in states with these programs already in effect, they seem to be working.

In the six years since Oregon’s clean fuels went into effect, the use of lower carbon fuels and electric vehicles has gone up, especially as alternative fuels and electricity become more available everywhere, Wind said.

In California, the program has been successful, having doubled the amount of fuel that comes from non-petroleum sources since the program started in 2011, Murphy said.

As the clean fuels standard is implemented over the next few years, Creswell said he expects a lot more biodiesel and alternative fuels being sold in Washington as well as more electric vehicle adoption.

In California, the cap-and-trade program has had mixed success and mixed support.

Carbon emissions are much lower than the goals set in the cap-and-trade legislation, likely for a number of reasons other than the cap-and-trade program, Bushnell said. That leads some people to think the program targets aren’t strict enough.

Higher-than-expected emissions reductions also leads to a number of allowances going unused by companies because most already are meeting the cap set each year. At the start of California’s implementation, that meant it wasn’t generating as much revenue for the state as it had hoped, Bushnell said.

Overall, there are a lot of things that can cause huge swings in carbon emissions, Bushnell said, so it’s often quite easy to remain under a cap that’s not set too high.

“We got a lot of emissions reductions that were unanticipated,” he said. “You just have to revisit then what an appropriate target is going forward.”

California likely will update its program in the coming years.

As the clean fuels program and the cap-and-trade program begin to lower greenhouse gas emissions across Washington, Creswell said air quality will improve, especially for those closest to highways, who are often people of color who have lower incomes.

“Those improvements are going to be felt most by the people who are most impacted by that transportation air pollution right now,” he said. “The air will get cleaner. The roads will be less noisy. People’s quality of life will improve.”

Still, both programs will take time to implement.

It is absolutely a “turning the Titanic situation,” Murphy said, and there’s no way to change everything overnight. The programs are meant to gradually take effect and increase pressure to lower emissions, he added.

“You’re not going to see a radically different world on Jan. 2, 2023 than you did before,” Murphy said.



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