Northeast States Work to Raise Gasoline Prices

By Marlo Lewis

Yesterday’s Greenwire (subscription required) reports that 11 Northeast and Mid-Atlantic states are working on a plan, modeled on California’s Low Carbon Fuel Standard (LCFS) program, to cut the carbon intensitity (CI) of motor fuels by 5%-15% over the next 15 years. The Northeast States for Coordinated Air Use Management (NESCAUM), the association of Northeast air regulatory agencies, could release the framework for the plan “as early as this month,” writes Greenwire reporter Jason Plautz.

Plautz links to a NESCAUM-authored discussion draft for “stakeholders.” After a short introductory paragraph, the document states in bold italics: “This document is not intended for distribution beyond the participating agencies and should not be cited or quoted.” Hey, I just did – so sue me!

The document never mentions the potential impact of the LCFS on fuel prices. But what else did you expect? In the “trust us, we know what’s best for the planet” world of carbon politics, affordable energy is despised, not prized.

Mandated reductions in motor fuel CI are bound to increase fuel prices. To comply with an LCFS, blenders must either modify the mix of the fuels they sell, modify their production processes, or both. If lower-carbon fuels were cheaper than gasoline, government wouldn’t need to mandate their sale, because consumers would demand them, and competition would drive energy companies to supply them. Alternative fuels must be mandated precisely because they are more expensive to produce than gasoline, reduce auto fuel economy, or face market barriers such as the massive investments required to build natural gas fueling infrastructure.

As a regional standard, the proposed LCFS would create another category of “boutique” fuels – fuel blends that vary by state and region based on regulatory specifications. Reformulating gasoline or diesel fuel to comply with such specifications increases production costs, some of which get passed on to consumers. Boutique fuels also have smaller economies of scale than standard blends. As the American Trucking Assocations says of California’s boutique diesel fuel:

California was the first state in the nation to mandate a boutique diesel fuel. Although California diesel costs only 4-5 cents extra to refine, the fuel typically sells for a 14 cent premium compared to neighboring states. This price differential is the result of higher distribution costs and reduced competition, as only a handful of refineries produce California’s boutique diesel fuel.

So would nationalizing California’s or NESCAUM’s LCFS fix the problem? Only if U.S. refineries could actually make upwards of 135 billion gallons annually of affordable low-carbon fuel. A June 2010 Charles River Associates (CRA) report analyzed the economic repercussions of a national LCFS requiring a 10% reduction in motor fuel CI from 2015 to 2025. The problem, argues CRA, is that achieving a 10% overall reduction in U.S. motor fuel CI is “beyond the reach of foreseeable technology.” Unable to comply, blenders would sell less fuel. The drop in fuel supply would drive up fuel prices by 30% to 80%, which in turn would have severe negative impacts on GDP, household purchasing power, and job creation.

Who would benefit from a Northeast LCFS? Why, the bureaucrats who design and run the program, of course. NESCAUM’s discussion draft contemplates the creation of a new “regional organization” to administer the LCFS. The program would also effectively raise taxes via “surcharges” on the sale of low-carbon credits, “alternative compliance payments,” and “transaction fees.”

So more pain at the pump, more bureaucracy, and more boodle for the “participating agencies.” Any resemblance to cap-and-trade programs living or dead is not coincidental.

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