The bad news and less bad news on new CO2 tax

PHOTO: iStockphoto.com/Sakorn Sukkasemsakorn

The cost of Washington’s new CO2 tax

The bad news and the less bad news

Todd Myers

There is a great deal of uncertainty about what Washington’s new carbon dioxide tax will cost, but there is an early indication the cost will be, while still expensive, less than feared. Washington’s new tax on carbon dioxide emissions took effect Jan. 1. Companies that distribute carbon dioxide-emitting fuel sources, like gasoline or natural gas, must purchase permits to cover the emissions from those fuels. Since there are a limited number of permits, the price is determined by an auction. The first auction for permits doesn’t occur until late February. Since the impact on the cost of energy — gasoline, diesel, natural gas — is determined by the cost of the permits, we won’t know how much the tax is until that auction occurs.

The Department of Ecology recently set a minimum price for permits of $22.20 per metric ton of carbon dioxide and a maximum price of $81.47. That translates to between 18 cents per gallon and 72 cents per gallon.

The Department of Ecology’s own estimate is the permit price would average $58.31 per metric ton of carbon dioxide.

We do, however, have an early estimate of what the prices could be. The Nodal Exchange held an auction for futures on the Washington carbon dioxide market for about 25,000 metric tons of carbon dioxide, which is a small percentage of the permits expected to be sold in February. The permits sold for $35 per metric ton, lower than the estimate from the Department of Ecology, but still about 28 cents per gallon of gasoline and 34 cents per gallon of diesel.

These calculations are based on two basic facts. First, each gallon of gasoline emits about 19 pounds of carbon 47

dioxide, which is about 0.9% of a metric ton. Multiplying the price per metric ton by 0.9% yields the cost per gallon. Second, we assume the tax will be passed on to consumers. This is the experience in California and in Washington state with gas tax increases.

Importantly, the Department of Ecology’s own analysis of another carbon dioxide regulation — the low-carbon fuel standard — also assumes the cost of compliance will be passed on directly to consumers.

Contrary to that experience from carbon dioxide taxes elsewhere and Ecology’s own low-carbon fuel standard analysis, Ecology claims the new carbon dioxide tax will only increase gas prices by about 5 cents per gallon. Ecology came to this conclusion by running the total cost of the carbon dioxide tax though a macroeconomic model that estimated the impact on fuel prices would be between 0.67% and 1.9%. I asked Ecology to explain how they came to this conclusion or to connect me with the company who did the modeling, and they responded only that “Our contract with Vivid (who did the analysis) is now concluded.” So, how they came to that conclusion is not clear.

They also claimed that the “most likely” scenario had a lower price of $41 per metric ton. That scenario, however, assumes Washington’s market is tied in with California’s. Currently, we are not connected to California’s market, and, in a recent hearing, Ecology indicated that while it intends to begin negotiations with California, that has not yet occurred, and any agreement would take time. In other words, Ecology’s “most likely” scenario is entirely theoretical and seems unlikely to occur until later in 2023 at the earliest.

If Ecology believes the cost of carbon dioxide permits will be low, it could ask the Legislature to move the maximum price from $81 per metric ton down to $40 per metric ton — or lower — in 2023 to prevent price shocks. The calculation to set the maximum price is written into regulation, but Ecology staff frequently ask legislators to make changes to the law and certainly could do so here. Leaving the price cap at such a high level indicates Ecology staff believe prices might indeed go higher than they let on.

The bottom line is that there is a great deal of uncertainty. But I am certain that the increased cost at the pump will be more than 5 cents per gallon.

In 2022, Washington’s regular gas prices averaged about 62 cents more per gallon than the national average, according to the U.S. Energy Information Administration. I am willing to bet that the gap between Washington’s average price and the national price will be 82 cents per gallon next year.

If Ecology staff, legislators or others think the impact of the carbon dioxide tax will be small, they should leap at the opportunity to bet on the numbers. I offer my standard bet of $50 to charity. I’ll accept the first two bets.

Either way, the speculation will soon be over, and the impact on prices will begin to appear in 2023. ■

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Todd Myers is the director of the Center for the Environment at Washington Policy Center. He is one of the nation’s leading experts on free-market environmental policy. Todd is an author and researcher. He formerly served on the executive team at the Washington State Department of Natural Resources.