Climate Regulations Raise Gas Prices

A new study put out by the Western States Petroleum Association concludes that California’s statewide cap-and-trade plan, known as AB32, would raise gasoline prices and shut down refineries. The study, performed by the Boston Consulting Group, affirms basic economics by realizing that government regulations will raise the cost of business and necessarily impact retail prices and jobs. This is a welcome dose of common sense in a sea of rhetoric arguing that climate change regulations will reduce greenhouse gas emissions and help the economy at the same time, a claim that is simple nonsense.

An article in the SFGate summarizes the report’s main findings:

California regulations designed to fight global warming could force half of the state’s refineries to close, trigger fuel shortages and add $2.70 per gallon to the cost of gasoline…

The study…argues that California’s upcoming cap-and-trade system to cut carbon dioxide emissions could wreak havoc with fuel supplies as early as 2015. So could the state’s low carbon fuel standard, a policy requiring refiners to lower the carbon intensity of the fuel they sell in California.

…[A]s many as seven California refineries would no longer be profitable, said Brad VanTassel, senior partner of the Boston Consulting Group.

Should they close, the state could lose between 28,000 and 51,000 jobs, with the losses occurring not just at the refineries but at businesses frequented by refinery workers. California also could lose $3.1 billion to $3.4 billion in tax revenue.

Although different approaches would yield different numerical estimates, the basic logic of the study is quite straightforward: By forcing refineries to produce a different type of gasoline for California motorists from what the market would naturally provide, the regulations embedded in AB32 raise refinery costs. This will make it less profitable to stay in the industry, leading refiners to either scale back operations or even (in the extreme) to shut down altogether and leave the California market. The reduced supply of refined gasoline, in turn, leads to higher pump prices for California motorists.

These points shouldn’t be controversial. Even many environmental economists, who endorse cap-and-trade programs as a way to mitigate climate change, acknowledge that there is a tradeoff involved. They recognize the obvious point that when the government levies more regulations on business, the economy suffers.

Even though these observations are intuitive, many proponents of AB32 and other government intervention into the energy sector try to have their cake and eat it too. They claim that a low-carbon fuel standard, and strict limits on the total emissions of greenhouse gases (i.e. cap-and-trade), will force businesses to invest in new technologies and thereby create “green jobs.”

Yet this logic is absurd. If it were really profitable and “good for the economy” to make such investments, it wouldn’t take government coercion. Indeed, if the logic of these arguments were actually correct, then the government wouldn’t need to restrict itself to climate change regulations. It could, for example, mandate that businesses every month put on a different color coat of paint over their buildings. Then we could create thousands of jobs for the painters and the firms that supply them, which we could call red, blue, purple, and orange jobs.

The new Boston Consulting Group’s study on AB32 affirms the obvious: More government regulations on business will lead to higher prices and job destruction. Citizens need to be aware of the tradeoffs when considering government interventions in energy markets.