A Project of The Annenberg Public Policy Center

77-Cent Increase Per Gallon of Gas?


Q: Will the House cap-and-trade bill raise the cost of a gallon of gasoline by 77 cents?

A: That extreme estimate comes from the oil and gas industry’s lobby. Nonpartisan government experts project a lower increase, most likely between 12 and 67 cents per gallon in 2020.

FULL QUESTION

At a Valero gas station, I saw a poster claiming that cap-and-trade legislation would raise the cost of a gallon of gasoline by 77 cents. I have a hard time believing this, but www.voicesforenergy.com is claiming it to be true. Can you check the validity of this claim, please?

FULL ANSWER

The Valero Energy Corporation’s advertising campaign against the American Clean Energy and Security Act is based on an estimate from the American Petroleum Institute. API, the national trade association for the oil and gas industry, says that the House-passed legislation would increase the price of gasoline by 77 cents per gallon beginning in 2019.

The API says its projections rest on calculations by the nonpartisan Congressional Budget Office, but that’s misleading. CBO says the 77-cent figure is "a misrepresentation of our work." Furthermore, API assumes that a key cost-saving feature of the bill would be entirely ineffective, an assumption that CBO calls "extreme."

Official estimates are much lower. The CBO said that the price increase in 2019 would be only 23 cents per gallon, assuming that the cost-saving features of the law work they way they are supposed to. And the Energy Information Administration (the independent statistical agency within the Department of Energy) issued a more detailed analysis giving estimates for a number of different possible outcomes. It said there’s a high degree of uncertainty about how the cap-and-trade bill would work out in practice, but that the "more likely" outcomes ranged from a "more optimistic" increase of 12 cents per gallon to a "more pessimistic" projection of 67 cents. That would be in the year 2020, one year later than the CBO and API figures.

(Note: See Table ES-1, page xi. EIA figures average gasoline prices will rise to $3.62 per gallon in 2020 under a "business as usual" assumption, with no cap-and-trade legislation. The legislation would push prices up even further, to $3.74 under the best case scenario, or $4.29 under the worst.)

Iffy "Offsets"

EIA declined to say which of the possible outcomes it studied is more likely to happen. One of the biggest uncertainties is how much oil companies (and others regulated by the bill) would be able to reduce the costs of cutting carbon emissions by using so-called "offsets." These would allow regulated companies to meet their emissions targets by paying others to reduce greenhouse gases, by doing such things as planting trees, building wind farms or capturing methane from the decomposing waste of farm animals or landfills.

In theory, such actions would “offset” the need to reduce the burning of fossil fuels, and would be a less expensive way to accomplish the larger goal of cutting carbon emissions. Other offsets could include reduced use of nitrogen fertilizers, or other altered agricultural practices. They could take place either in this country or in other nations, if proper arrangements could be worked out.

In its June 5 cost analysis, CBO figured that the use of both domestic and international offsets could cut overall costs of the program by 70 percent. API’s 77-cent estimate, however, assumed no such savings would take place. CBO then called the API assumption "extreme" and said that, assuming offsets work as envisioned, the rise in gasoline prices could be just 23 cents.

But what works in theory doesn’t always work in the real world. The petroleum institute told us that it considers the use of offsets to be "highly questionable," and the Energy Information Administration agrees that "their actual use is an open question."

EIA, August 2009: Beyond the usual uncertainties related to the technical, economic, and market supply of offsets, the future use of offsets . . . also depends both on regulatory decisions that are yet to be made by the EPA, on the timing and scope of negotiations on international agreements or arrangements between the United States and countries where offset opportunities may exist, and on emissions reduction commitments made by other countries. . . . For some major entities covered by the cap-and-trade program, decisions regarding the use of offsets could potentially be affected by regulation at the State level. Given the many technical factors and implementation decisions involved, it is hardly surprising that analysts’ estimates of international offset use span an extremely wide range.

And even CBO says savings estimates from offsets are iffy. In an August 3 issue brief, it said that "estimates of the savings that would result from including offsets in a cap-and-trade program are imprecise and depend importantly on policy design."

CBO noted a number of technical and practical difficulties to be overcome for offsets to work as intended:

CBO, Aug 3: For example, although it might be relatively easy to measure the amount of methane captured in the United States from using special processes to treat animal waste, it might be quite difficult to measure the amount of carbon removed from the atmosphere because of efforts to plant trees or avoid deforestation in developing countries.

One thing is clear, though. Estimates from API, CBO and EIA all point to a future increase in gasoline prices under the bill. As we’ve noted, gasoline prices are predicted to rise substantially with or without a cap-and-trade law. The question is, how much more would the legislation add? The added increase won’t be as much as API claims if offsets are fully or even partially effective, according to both CBO and EIA.

— D’Angelo Gore

Sources

U.S. House. "H.R. 2454, The American Clean Energy and Security Act of 2009." (as passed by the House 26 Jun 2009.)

U.S. House Committee on Energy and Commerce. "The American Clean Energy and Security Act, H.R. 2454." Summary. Jul 2009.

Hendricks, David. "Valero asks customers to call reps." San Antonio News-Express. 1 Sep 2009.

Congressional Budget Office. "The Impact of Cap-and-Trade Proposals on Fuel Prices." CBO Director’s Blog. 26 Jun 2009, accessed 16 Sep 2009.

Congressional Budget Office. "Cost Estimate: H.R. 2454, American Clean Energy and Security Act of 2009." 5 Jun 2009.

Congressional Budget Office. "The Use of Offsets to Reduce Greenhouse Gases." Economic and Budget Issue Brief. 3 Aug 2009.

Energy Information Administration. "Energy Market and Economic Impacts of H.R. 2454, the American Clean Energy and Security Act of 2009." Aug 2009.

Jones, Russel. American Petroleum Institute. E-mail sent to FactCheck.org. 10 Sep 2009.