In 2008, Sightline researchers are working with the Western Climate Initiative to help figure out the most efficient, fair, and effective regional market-based system for dramatically reducing climate emissions for the Northwest.

A key question is how to include transportation, which is the biggest source of fossil fuel emissions in WCI states. Here’s our take.

Why should transportation fuels be included in a WCI  economy-wide cap?

About half of all fossil fuel emissions in the WCI states come from transportation. In contrast, electricity generation represents roughly one quarter of fossil fuel CO2 in the region—only about half of the emissions from the transportation sector.

Though current targets are more modest, if the WCI region is to reduce its emissions by 80 percent by 2050, it will have to start dealing with transportation as soon as possible.

Is it complicated to cap transportation fuels?

It’s actually fairly straightforward to include transportation fuels in an economy-wide cap. As with all aspects of cap & trade, the politics may be tricky. But technically, covering transportation fuels may be simpler than electricity—and certainly simpler than load-based regulation of the electricity sector.

How would it work?

The fuel supply chain has several “choke points,” well upstream from consumers and filling stations. At a chosen choke point, fuel handlers—either purchasers or sellers—would be required to track fuel volumes, and obtain emissions permits for the carbon that will be released when those fuels are burned.

What “choke points” would work for transportation fuels? There are two possibilities: (1) petroleum refiners & importers; and (2) the “terminal rack.”

(1) A cap that applies to oil refiners & importers offers at least one major advantage, as it would cover virtually all CO2 emissions from oil, not just transportation fuels. However, accounting for exempt product streams (e.g., lubricants, asphalt, exports), as well as apportioning auction revenue among states, may create technical and political complications.

(2) The “terminal rack” is the facility where fuel from a refinery or pipeline is delivered to trucks, trailers or rail cars. Currently, the IRS and many states collect gasoline and diesel taxes at the terminal rack, since virtually all highway fuels flow through the rack, and sales volumes are carefully measured by buyers and/or sellers. A “cap at the rack” system can piggyback on the state-level tax systems—systems that already accurately account for imports and exports, and that have careful auditing controls for fuel volumes.

How would cap and trade for transportation fuels reduce emissions?

Fuel handlers will pass on most of the market value of emissions allowances as higher prices for consumers. And the economic literature is quite clear about this: increases in fuel price create incentives for conservation. These incentives work on many levels: sales of fuel-efficient vehicles get a boost; families with two vehicles use the more efficient one more frequently; some drivers cut back on discretionary trips, or chain some trips together; and lower-carbon fuels may become price-competitive with petroleum.

Ultimately, higher fuel prices help encourage more efficient land use patterns, as demand grows for housing that’s near stores, services, and jobs. Likewise, higher prices can encourage investment in infrastructure to support lower-carbon travel alternatives, from streetcars to sidewalks.

These adjustments may be gradual and subtle, but they will be real, and their effects will compound over time.

What about complementary policies?

Complementary policies—transit infrastructure, low-carbon fuel standards, CAFE standards, transportation demand management, and smart growth policies—will give consumers more options to deal with rising fuel costs.

In fact, if these complementary policies are successful, the price of emissions allowances won’t be very high at all; the complementary policies will do the “work” of reducing emissions, without major price signals required.

However, if these complementary policies aren’t successful, or aren’t implemented effectively, then the cap will create a price signal for emissions reductions—a signal that’s precisely calibrated to meet the WCI’s conservation targets. Think of a transportation fuels cap as providing a pricing backstop, in case the other policies aren’t effective at reducing emissions economy-wide.

Further questions?

See also
Emissions by sector for the Northwest
Sightline’s climate policy project
Climate Pricing 101
Sightline’s blog entries on Climate & Energy

March 7, 2006