California’s climate policies help, not hurt, consumers

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OPINION – California’s gas prices have risen by over a dollar since the start of Trump’s war in Iran, with one-fifth of the world’s oil supply blocked at the Strait of Hormuz. Meanwhile, the oil industry has called for the state to substantially weaken and possibly delay climate regulations, notably the state’s backbone climate policy, cap-and-invest.

The state’s cap-and-invest program has little impact on gas prices, contributing only $0.24 per gallon–a quarter of the price spike from Trump’s war. Weakening the program would also be short sighted and counterproductive as the program does exactly what this moment requires: making the California economy less susceptible to global oil markets.

Cap-and-trade sends a price signal that encourages households to rely less on oil. A recent UC Davis study finds that the current cap-and-trade price signal increases California’s EV sales by 8%. More EVs mean less oil dependence and less pain for California households when gas prices are high. Indeed, California has the highest per capita EV adoption in the U.S. with over two million EVs sold to date, creating a significant population of drivers who are much less affected by price surges at the pump.

Revenue from the cap-and-invest over the last decade has also provided more than $16 billion in state funding for public transit, further protecting Californian households from global oil price spikes. And the benefits of this revenue is not limited to public transportation. Another $15 billion from cap-and-invest has gone to programs for affordable housing, wildfire risk reduction, and local air pollution reduction. And $10.9 billion in revenue has been delivered as twice-annual “climate credits” that have reduced the average Californian’s utility bills by over  $100 each year. In short, cap-and-invest is one of California’s major tools for weathering global oil price spikes, improving air quality, and managing wildfire risk.

Additionally, it is unlikely that weakening cap-and-invest would lower gas prices at all. California’s oil refining industry is highly concentrated: five companies control 98% of the state’s refining capacity. Such concentration breeds market power and possible price collusion that may keep gasoline prices high even with weakened climate policies. California has a history of gasoline prices not falling when they should: the gas price spike following the 2015 Torrance refinery fire continues to elevate California gas prices by $0.41 per gallon today–often referred to as the “mystery gas tax surcharge.”

Instead, California should increase competition in gasoline refining and distribution such that competitive pressures drive down prices. These policies can bring near-term price relief. For example, relaxing import permits to enable more crude oil from the Gulf Coast would allow California to buy cheaper crude. Other near-term policies include temporarily waiving requirements for California’s particular grade of gasoline and enforcing against anti-competitive behavior from refineries and distributors. Longer term, California can build more oil and gas import capacity and inland pipelines from the rest of the country.

From the 1970s OPEC crisis to today’s Trump war in Iran, California has long been hit by global oil market turmoil. Past energy crises led to lasting energy conservation and decarbonization policies. This moment should be no different. Rather than turning to short-sighted measures to suspend California’s climate policies in response to Trump’s war, California should double down on these policies, recognizing that it is precisely these policies that break the state’s global oil dependence. The goal should not be to lower gas prices by any means, but rather for gas prices to no longer matter for Californian households. That is exactly what California’s climate programs like cap-and-invest are designed to do.

Kyle Meng is an Associate Professor of Economics at UC Santa Barbara, and a former Senior Economist on the White House Council of Economic Advisers during the Biden administration.