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California Carbon Tax Would Be First at the Gas Pump

California would be the first U.S. state to impose a “carbon tax” directly on motorists at the fuel pump under a plan by a leading Democratic lawmaker to ease greenhouse-gas pollution.

Senate President Pro Tem Darrell Steinberg wants to shift responsibility for emissions on gasoline sold by companies such as Chevron Corp. (CVX), a cost that would otherwise be passed on to consumers in fuel prices. Instead, Steinberg wants to directly tax motorists 15 cents a gallon, rising to 24 cents in 2020.

California was the nation’s first state to set a limit for most carbon emissions, with regulations that aim to achieve a reduction of about 15 percent by 2020. The state auctions a limited number of pollution permits that industries can use to help meet the limit under a system called cap-and-trade.

“Under either a carbon tax or a cap-and-trade applied to fuel, consumers will undoubtedly pay more at the pump,” Steinberg told the Sacramento Press Club on Feb. 20. “Higher prices discourage demand. If carbon pricing doesn’t sting, we won’t change our habits.”

The proposal comes amid debate in Congress and in U.S. statehouses on whether the government should regulate greenhouse gas emissions to slow climate change and whether such controls harm companies and hamper the U.S. economy. California, the most populous state, developed the cap-and-trade program as part of its 2006 global warming law.

Californians now pay 39.5 cents a gallon in excise tax, a sum that will fall to 36 cents as of July 1, according to the Board of Equalization, the state’s tax collector. Motorists also pay 2.25 cents a gallon in statewide sales tax. California’s average regular gasoline price was $3.80 on Feb. 25, second highest in the U.S. after Hawaii, according to AAA.com.

Tax Credit

Two-thirds of the revenue raised under Steinberg’s plan, estimated at $3.6 billion in the first year, would finance an earned-income tax credit for families making less than $75,000 a year. The rest would help pay for public transit.

Three other states -- Oregon, Washington and Massachusetts -- have considered similar proposals, though none enacted a levy. Passage in California is uncertain even though Democrats hold a two-thirds majority in both of the state’s legislative chambers, enough to raise taxes. Steinberg is leaving office this year because term limits prevent him from running again.

The plan is opposed by the Environmental Defense Fund and by some Democrats who say it would water-down California’s landmark greenhouse gas reduction law known as AB 32 enacted in 2006 by then-Governor Arnold Schwarzenegger, a Republican. Current Governor Jerry Brown, a Democrat who won a tax increase in 2012, has said he isn’t interested in another one this year.

‘Not Fair’

“The cap is the linchpin of AB 32, and exempting oil companies is a nonstarter,” Senator Fran Pavley, the Ventura County Democrat who wrote the legislation, said by e-mail. “It’s not fair to force drivers to pay and let oil companies off the hook.”

California’s toughest-in-the-U.S. greenhouse gas law limits emissions from power generators, oil refineries and other industrial plants, and lowers that cap gradually to reduce emissions to 1990 levels by 2020. The system will expand to other industries and eventually cover 85 percent of the greenhouse gases released in the state.

Under the legislation’s cap-and-trade program, industries that can’t make the required reductions can buy allowances allocated and auctioned by the state and a limited number of offset credits generated from projects that reduce emissions.

The law requires the state to spend the proceeds from the cap-and-trade auctions on programs aimed at reducing greenhouse-gas emissions. The state raised $532 million through November 2013 from five auctions, according to the independent Legislative Analyst’s Office.

Allowance Purchases

The provisions of AB 32 have been phased in slowly. Beginning next January, fuel suppliers such as Chevron and Exxon Mobil Corp (XOM) will be required to purchase carbon allowances from the state for every gallon of gasoline and diesel they sell in California.

At current carbon allowance prices, that requirement would add 12 cents a gallon to the cost of gasoline, according to the Western States Petroleum Association, a trade group that includes Chevron, Exxon, BP Plc (BP/), Valero Energy Corp (VLO) and others.

The association hasn’t taken a position on Steinberg’s bill, it said in a statement.

To contact the reporter on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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