CO2 tax pushes Washington gas prices higher than the rest of the nation

Gas prices in Washington State rose to new a new high this week, which means drivers here now pay more per gallon on average than anywhere else in the country. Not only has Washington taken over the top spot from California, it’s by a significant amount – more than four cents per gallon when it comes to regular gas.

According to AAA’s data, the average price for a gallon of unleaded gas in Washington sits at 4.91 cents, and keeps growing week by week. This price trend puts Washington at odds with the rest of the country. National data shows an average decrease of nearly 28 percent in the price of a gallon of regular unleaded gas from June 2022, when the price sat at $5.0006 per gallon.

Why are Washington state motorists feeling pain at the pump? Experts point to the state’s implementation of a tax on carbon dioxide emissions, which went into effect on January 1. This “cap-and-trade program” limits the amount of carbon dioxide a business or organization can produce, requiring companies that emit greenhouse gases over that limit to purchase allowances at quarterly auctions. 

The first auction, on Feb. 28, raised $300 million from the sale of 6.18 million allowances at a price of $48.50 per ton. The second auction, held on May 31, saw 8.6 million allowances sold at $56.01 per allowance, raising $480.5 million. 

Clearly, the cost of these credits is now being passed to consumers. Todd Myers of the Washington Policy Center puts the cost of this “tax” at about 45 cents per gallon for regular unleaded gas, and 54 cents per gallon for diesel. As Myers explains, “Although Washington is paying more for CO2 emissions than California, that additional cost doesn’t help the environment – it just harms our economy.” 

As prices continue to surge ever higher, Washington state residents are doing whatever they can to secure cheaper gas. Some Washington motorists are driving across the border into Idaho, where prices are closer to the national average. Last month, members of more than a dozen Native American tribes sought a meeting with Governor Inslee, expressing their alarm at the rapid rise in costs and seeking a reprieve.

The other embedded cost to consumers beyond their own gas tanks, is the increased prices for transporting goods to the store shelf.  75% of the consumer economy moves via truck, so the sharp increase in diesel gets passed from refiner, to fuel station, to trucking company to the end retailer.  Everything from food to medicine will see an increased cost due to the cap and trade fuel price increase.

It’s unclear what the state is doing to address rising prices, but it’s possible that they underestimated the cost to consumers. Leading up to this program’s implementation, Governor Inslee predicted that the cost would be minimal, stating in January of 2022, “This is going to have a minimal impact if any. Pennies. We are talking about pennies.” He added, “Potentially, not all of this would be passed off to the consumer and what they would (pass on), would be pennies.” 

By law, the minimum price to purchase credits is $22 per metric ton, which is about 17 cents per gallon at the very least. It’s difficult to believe Inslee did not expect gas companies to pass this cost on to consumers, which is exactly what they did.

Despite his rhetoric, this outcome was entirely predictable – and it certainly wasn’t “pennies.” In addressing earlier cap-and-trade efforts, experts at the Tax Foundation warned about the difficulty of effectively implementing a state-level cap-and-trade program. In his analysis of previous cap-and-trade efforts in Washington, Tax Foundation VP Jared Walczak predicted that, rather than addressing CO2 emissions across the board, these taxes might just narrowly raise prices on electricity and fossil fuels, acting as “a second level of utility and motor fuel taxes, just with different uses for the revenue.” 

The pain at the pump will continue as cap-and-trade programs continue to force prices upward. As Myers notes, “As long as the governor and agency staff continue to deny that reality, Washington residents will pay a high price for energy, but won’t receive the environmental benefits they are paying for.”