The Impact of Cap-and-Trade Proposals on Fuel Prices

June 26, 2009

Regarding the proposed cap-and-trade program being considered by the House of Representatives, a number of people have inquired as to whether it is correct to say, as is currently being circulated, that "the Congressional Budget Office estimates that cost impacts could be as much as $.77 per gallon for gasoline, $.83 per gallon for jet fuel, and $.88 per gallon for diesel fuel, all ultimately borne by the consumer."

CBO's cost estimate for the legislation did not include an estimate of increases in the price of particular products, such as gasoline or diesel fuel. The numbers being circulated were produced by the American Petroleum Insititute (API). CBO analysts have been in contact with the API analyst that produced them to understand how they constructed those numbers.

According to API, it produced those numbers by assuming that there would be no offsets available (see note below), an assumption that we did not make when estimating the cost of the bill. For the purposes of sensitivity analysis, CBO 's estimate of an earlier version of the bill (H.R. 2454) reported how the allowance prices would have changed under a variety of different assumptions, including the elimination of offsets as well as changes in other parameters. Accordingly, CBO indicated that the availability of offsets had a significant effect on the allowance price, reducing it by 70 percent. Taking the inverse of that reduction, API concluded that, without offsets, our allowance price would have been over three times higher.

API translated allowance prices into the prices of particular products, such as gasoline, using emission coefficients from EPA. Given those emission coefficients, the $16 and $26 allowance prices that CBO predicted for 2012 and 2019 , respectively, would imply gasoline price increases of $0.14 and $0.23, respectively. But, under the extreme assumption of no offsets (and correspondingly higher allowance prices of $53 and $87 in 2012 and 2019, respectively), API calculated gasoline price increases of $0.47 in 2012 and $0.77 in 2019.

Because the bill provides for the use of both international and domestic offsets and CBO concluded that firms would be able to make use of such offsets when complying with the provisions of the bill (taking into account available information on both the supply of those offsets and competing demands for them), it is a misrepresentation of our work to say that the $0.77 per gallon for gasoline, $0.83 per gallon for jet fuel, and $0.88 per gallon for diesel fuel are consistent with our cost estimate for the legislation.

NOTE: API states that it is assuming no international offsets, but the numbers that it presents actually correspond to the case with neither domestic nor international offsets. There was a typo in the initial release of our cost estimate that could have caused confusion about this, but soon after that release the typo was corrected on the web version of the cost estimate.