Cap-and-trade for motor fuels
What it is
A cap-and-trade program works by:
- Setting an annual cap on total greenhouse-gas emissions from covered sectors
- Issuing allowances equal to the cap; one allowance permits one ton of CO2-equivalent emissions
- Requiring covered emitters to surrender allowances equal to their emissions each year
- Allowing allowances to be traded, so prices are set by market demand
- Lowering the cap over time, raising the price of allowances as scarcity increases
When a cap-and-trade program covers motor fuel, fuel suppliers (refiners and importers) must buy allowances for the CO2 emissions that will be released when the fuel is burned by end users. The cost is paid at the wholesale level and embedded in retail gasoline prices.
What it costs drivers
The pass-through arithmetic is straightforward. Each gallon of gasoline produces roughly 0.0089 metric tons of CO2 when burned. At a $30 per-ton allowance price, that's about 27 cents per gallon of embedded compliance cost. At a $50 price, about 45 cents per gallon. At a $100 price (where California's cap-and-trade is projected to be by 2030), about 90 cents per gallon. The actual retail pass-through tracks these levels closely in markets where the program covers transportation fuels.
Which states have it
| State | Program | Effective for motor fuels |
|---|---|---|
| California | Cap-and-Trade | 2015 |
| Washington | Climate Commitment Act | January 2023 |
California's program has been in effect for stationary sources since 2013 and added transportation fuel under the cap starting January 2015. Washington's Climate Commitment Act took effect January 2023 and covers transportation fuels from the start.
The Regional Greenhouse Gas Initiative (RGGI), a multi-state cap-and-trade program in the Northeast, covers electricity generation only, not motor fuels. Pennsylvania and Virginia joined RGGI in 2022, but their participation has been the subject of legal challenges and does not affect gasoline prices.
New York has proposed a Cap-and-Invest program that would cover transportation fuels, scheduled for 2027 implementation.
The Washington natural experiment
Washington's Climate Commitment Act provides the cleanest natural experiment available for measuring cap-and-trade's effect on gas prices. The program took effect January 1, 2023, on a single day. From the 2017–2022 average to the 2023–2026 average, Washington's retail gasoline price rose $0.97 per gallon while the national average rose $0.48 — a $0.49 differential attributable to "whatever changed in Washington at the start of 2023." Three estimation methods (a pooled regression, a within-state regression, and naive arithmetic) all return estimates in the $0.41 to $0.48 per gallon range.
The Washington estimate captures the combined effect of the CCA (cap-and-trade) and the Clean Fuel Standard (LCFS), which took effect on the same day. About half of the combined effect is attributable to each program based on the relative allowance prices and credit prices.
How it differs from a carbon tax
A carbon tax sets a fixed price per ton of CO2 and lets emissions adjust. A cap-and-trade program sets a fixed quantity of emissions and lets the price adjust. The two policies are mathematically equivalent at the limit but operate differently in practice.
| Carbon tax | Cap-and-trade | |
|---|---|---|
| Price certainty | Yes (set by statute) | No (set by market) |
| Emissions certainty | No (depends on response) | Yes (set by cap) |
| Revenue to government | Yes (tax revenue) | Yes (auction revenue) |
| U.S. states using for transportation fuels | 0 | 2 (CA, WA) |
The debate
Supporters of cap-and-trade argue it is the most economically efficient way to reduce carbon emissions, because emissions trading allows reductions to occur where they are cheapest. The Energy and Policy Institute and most academic economists have generally supported carbon pricing as the preferred climate policy.
Critics, including the Institute for Energy Research and the American Petroleum Institute, have argued that cap-and-trade functions as a hidden tax on consumers and is regressive (a larger share of low-income household income goes to fuel costs). Critics also note that the U.S. is responsible for roughly 13 percent of global emissions and that state-level programs cannot meaningfully reduce global concentrations on their own.
Voter opinion on cap-and-trade has been tested in Washington. A 2024 ballot initiative (Initiative 2117) to repeal the Climate Commitment Act failed, with 62 percent of voters opposing repeal. This was the first direct popular vote on a cap-and-trade-on-fuels program in the United States.
FAQ
Why don't I see cap-and-trade on my gas receipt?
The cost is paid by fuel suppliers at the wholesale level when they surrender allowances. It is rolled into the wholesale price you pay at the pump. Unlike state and federal excise taxes, which are disclosed on receipts, cap-and-trade pass-through is embedded.
How much does cap-and-trade lower emissions?
California's program covers about 80 percent of state emissions and has been associated with emissions declining at roughly 1 percent per year since 2015. The transportation-fuel sector specifically has seen smaller reductions because transportation demand is relatively inelastic to price. Most of the documented emissions reductions in California have come from the electricity sector.
Will more states adopt cap-and-trade?
New York's Cap-and-Invest program is scheduled to take effect in 2027 and would cover transportation fuels. Other states have proposed similar programs (Vermont, Massachusetts, Rhode Island) but none have advanced through their legislatures as of 2026.
Sources
- California Air Resources Board, Cap-and-Trade Program: Quarterly Auction Reports, ww2.arb.ca.gov.
- Washington State Department of Ecology, Climate Commitment Act Quarterly Auctions, ecology.wa.gov.
- Institute for Energy Research, "A Carbon Tax and 'Pricing Carbon,'" September 7, 2016.
- Institute for Energy Research, "Carbon Tax Recap, September 2021," September 30, 2021.