Extras on Excise: Will Part of California’s Cap-and-Trade Program Become a Backdoor Gas Tax?


Several years ago, the California Legislature approved a cap-and-trade program aimed at cutting greenhouse gas emissions to 1990 levels by 2020. It already applies to some industries, but in January, the program will apply to transportation fuel suppliers for the first time. The Golden State’s implementation of cap-and-trade could very well be a test case for other states as well as the federal government.

Increases in transportation fuel prices are generally unpopular. At the federal level, legislators are trying to figure out how to generate long-term funding for the Highway Trust Fund because the flat gas tax, which has not been increased since 1993, has failed to raise enough revenue. Many states are dealing with similar issues. But could an increase in transportation fuel costs in California related to the cap-and-trade program be considered a gas tax increase, as some are calling it?  

Unlike a straightforward gas tax increase in which the rate would be stated outright or would be predictable based on a statutory formula, the increased costs of the cap-and-trade program are uncertain and are not directly imposed on consumers by the state. Suppliers are the ones who will pay the direct costs of the program, but they are expected to pass at least some of the costs along to drivers at the pump.  

Generally, in cap-and-trade programs, a government sets a limit on the emissions that an entity can release (the cap), and if an entity exceeds its permitted total, it can buy another entity’s unused emissions permits to make up the difference (the trade). The overall goal is to reduce emissions cost effectively. 

Estimates of how much the cap-and-trade program will cost drivers are varied—California’s Legislative Analyst’s Office estimated in a letter to a state legislator in early August that, by 2020, the gas price increase is likely to be $0.13 to $0.20, but it could potentially be more than $0.50 per gallon. “The actual price increase will depend on a wide variety of economic, technological, and regulatory factors that are difficult to predict,” the letter stated.

Whatever price increase consumers pay would not be imposed on them by the state directly, but instead would be indirectly passed on to them via the transportation fuel suppliers. But that has not stopped legislators from trying to find ways to stop or delay the program. For example, several legislators sponsored A.B. 69, which would have delayed the application of the cap-and-trade program to transportation fuels until 2018, among other provisions. The California Senate Pro Tempore blocked the bill at the end of August though, stating in a letter that the measure was introduced too late in the session and that people must wean themselves off fossil fuels and invest in cleaner transportation alternatives, according to Bloomberg BNA’s Daily Environment Report. He had recently proposed but later abandoned a carbon tax on fuels as an alternative to including them in the cap-and-trade program.

Those opposing the transportation fuels cap-and-trade program would have an uphill battle arguing that the costs of the program are a tax. In a recent unsuccessful challenge to the part of the cap-and-trade program already in place, a California court determined that the auction fees for greenhouse gas emission allowances are regulatory fees and not taxes—even though the charges at issue in the case did not fit squarely within any of the traditional fee classifications (such as special assessments and business charges, development fees, user fees and regulatory fees). The case is on appeal. 

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Where should the line be between taxes and fees?

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