Fuel, energy prices raise the pressure as California officials take next steps on climate

As California regulators prepare for a massive update of the state’s signature climate program, they face mounting pushback from lawmakers and oil industry groups who warn it could drive up already-high energy costs.

Lawmakers voted last year to reauthorize the cap-and-invest program — formerly known as cap-and-trade — through 2045. The program progressively lowers the amount of greenhouse gas emissions allowed in the state, and lets emitters buy and sell unused pollution credits, or allowances. It is key to California’s climate strategy and generates billions in revenue for the state each year.

Although the program was always designed to ratchet down on emitters, some legislators who supported the extension say the draft unveiled by the California Air Resources Board could hit consumers and the energy sector hard at the wrong time.

Among the proposed updates, the plan would tighten the cap on carbon dioxide emissions by 118 million tons by 2030. It would also adjust the state’s system of free allowances, which have historically been given to oil refineries and other industrial facilities in the hope of keeping them in California. It would shift more of those free allowances from natural gas utilities to electric utilities.

A wave of public comments from lawmakers, oil companies, environmental advocates and consumers flooded the state Air Resources Board in advance of this week’s deadline, and the agency will have until May to revise the plan and put it to a final vote.

Among the most notable critics are Democratic lawmakers who voted to extend the program last year. Some are concerned the plan would raise costs for refineries, driving more of them out of California and leaving the state more dependent on imported refined fuels. Others are worried the plan doesn’t do enough to address high electricity costs.

In a letter to the state Air Resources Board, a coalition of 15 Democratic Assembly members, including Majority Leader Cecilia Aguiar-Curry (D-Winters), warned that the plan moves too fast for emitters to keep up, which they said will destabilize California’s complex network of fuel, gas and energy resources and push more refiners to leave the state. Phillips 66 and Valero have already announced plans to shutter major refineries in Los Angeles and Benicia.

“This proposed regulatory update would further burden an already struggling energy market across multiple sectors and compound stress on the very infrastructure that has punished California consumers with the highest energy prices in the nation,” the lawmakers wrote.

Oil industry groups raised similar concerns. The Western States Petroleum Assn. which represents refiners, warned that their costs could rise $1.5 billion annually by 2035.

Chevron executive Andy Walz said the added costs could translate to roughly $1.70 more per gallon of gasoline by that year.

“Affordability is a top concern for California residents and Chevron, and these proposed amendments would only exacerbate the high cost of living in the state,” Walz said.

But how much regulations contribute to gasoline costs in California is disputed. Officials with the state Air Resources Board said the proposal largely maintains the status quo for refineries. It includes “flexibilities that support doing business in California and help ensure liquid fuel supply remains reliable, affordable, and resilient throughout the transition to carbon neutrality,” spokeswoman Lindsay Buckley said in an email.

The updated program would also deliver $180.7 billion in statewide benefits, including $123 billion in avoided health costs thanks to cleaner air, and up to $485 billion in global savings due to avoided climate damage, Buckley said.

“The cap-and-invest program is the most cost-effective way for California to achieve its statutorily mandated climate goals,” she said.

At the same time, some lawmakers and advocates say the proposal disproportionately burdens the electricity sector at a moment when utility bills are soaring.

Assemblywoman Jacqui Irwin (D-Thousand Oaks), who wrote legislation extending the program last year, led a separate letter from more than two dozen Democratic lawmakers urging the air officials to speed up free allowances for electric utility companies in order to “meaningfully address electricity affordability in the near-term.”

They were also concerned the plan would result in lower climate credits for consumers — twice-yearly rebates that appear directly on people’s electric bills.

Policy analysts agreed the current plan burdens electric utilities, which could translate into higher bills.

Still, the proposal is a “strong starting point” that can be fine-tuned to better balance emissions cuts with affordability, said Clayton Munnings, executive director of Clean and Prosperous California, an environmental economics nonprofit focused on the cap-and-invest program.

The California Air Resources Board “had a very strong first start, but I think there’s a clear pattern in stakeholder feedback,” he said. “The intent here was to lower utility bills, and we should make good on that promise.”

On the fuel side, Munnings said the program was designed with refineries in mind, and regulators still have plenty of tools to address their concerns if needed. What’s more, he said the carbon market largely shrugged at the proposed removal of 118 million credits, and the cost of releasing one ton of carbon pollution went down — indicating that even tighter reductions could be warranted.

Indeed, an analysis by the nonprofit Environmental Defense Fund and the modeling firm Greenline Insights found that the state Air Resources Board could remove as many as 180 million allowances from the market and still preserve household affordability benefits.

Ensuring the program delivers on its promised emission cuts is crucial, said the Environmental Defense Fund’s California state director Katelyn Roedner Sutter. The state is not on track to meet its targets, including a 40% reduction in greenhouse gas emissions by 2030 and at least 85% by 2045.

“Cap-and-invest is so important because it helps reduce emissions, it generates desperately needed revenue, and it is the most cost-effective approach to reducing greenhouse gas pollution that we have,” she said.

The debate is unfolding as global oil prices soar amid the U.S.-Israeli war on Iran, which has disrupted shipping and production in the Middle East. Crude prices briefly surged beyond $119 a barrel this week.

National gasoline prices averaged $3.60 a gallon Thursday, according to AAA, up from $2.94 one month ago. In California, gas averaged $5.37 a gallon, up from $4.55 a month ago.

But according to the California Energy Commission, only about 6% of the price of retail gasoline in the state is attributable to the cap-and-invest program, while nearly 37% comes from the cost of crude oil.

That’s precisely why the state should stay the course, Roedner Sutter said.

“The best thing California can do is lean on its cost-effective climate policy, which is cap-and-invest, and continue moving the state away from dependence on fossil fuels,” she said. “In the long run, that is what is going to protect Californians most — not being dependent on this volatile industry.”

The state Air Resources Board is expected to revise the proposal in the coming weeks before bringing it to a vote in May.