On the gas price impact of NDP cap-and-trade

Here’s what you need to know about the NDP program and gas prices.

The NDP cap-and-trade program would require “big emitters” including oil refineries and major producing sites including oil sands facilities to buy emission permits at auction, with a price floor at $45/ton.  This will increase the costs of producing oil and refining gasoline. The maximum increase in gas prices would result if all of the increased marginal costs of production were passed through to consumers.

Production and refining emissions from gasoline production are about .875kg/l of gas for the average barrel of crude in North America, and closer to 1kg/l for oil sands.   This means that marginal gasoline production costs would increase approximately 3.93c/l at $45/t.

While I agree with Dr. Mintz that an ideal system would place a carbon price on the entire 3.5-4 kg/l of ghg emissions embedded in gasoline, the NDP system does not do that. As such, there is no reason to expect that companies could pass through 10c/l of costs while incurring additional marginal costs of 4c/l .

Changed below for clarification – 9:00pm 4/29/2011

The proportion auctioned should not be expected to have any effect on the eventual gas price increase.  With a 25% auction,  the average cost increase on gasoline production (in the early years) would be closer to 1c/l. However, since the value of the permits at the margin (what a firm could sell a permit for if they opted not to produce the gasoline) would still be $45/t, the price effect would reflect that value in a competitive or monopolistic market. So, regardless of whether the NDP chose to auction 100%, 50%, 25%, or give all the permits away for free, you should expect similar gas price swings.

That’s what you need to know. If you don’t want to take my word for it, check in on Clare Demerse’s blog.


20 responses to “On the gas price impact of NDP cap-and-trade”

  1. Robert McClelland

    How could the oil production costs from cap and trade be passed on to the consumer when the price of oil is set on the commodities market?

  2. Dave Sawyer

    With evidence of a full cost pass through in gasoline markets (links below), the full value of the permits, whether obtained freely or not, will be passed on to the consumers. Opportunity cost matters, just like freely obtained hockey tickets that you scalp at the gate. To the extent permits are freely obtained, refiners will likely be over compensated as they pass on the opportunity cost of retiring a permit to produce fuel. This explains why the petroleum sector is excluded from EITE status under Waxman-Markey.

    Translation = 4c/l likely is the full cost impact of the proposed policy.

    Cost pass through: “Estimates showed that the price passthrough from the spot to the retail market is complete within two-and-one-half months”


  3. Troy

    Because demand for gas is inelastic which means consumers will pay more because they won’t change their habits… Canada and all of its urban centers were designed for automobiles. As a result, this is just another tax.

    1. Russil Wvong

      What makes you say that demand for gas is inelastic? In the short run, people can’t suddenly replace their cars with more fuel-efficient ones just because the price of gas is up. But over a five- or ten-year period, a lot of people do replace their cars, and with higher gas prices, they tend to buy smaller, more fuel-efficient ones. Mike Moffatt summarizes a couple of meta-studies: in the long run, a 10% increase in gas prices reduces consumption of gasoline by 5-6%.

  4. Roger

    Apples, oranges and fruit salad.

    The Mintz and Olewiler paper (www.sustainableprosperity.ca/dl308) calculated a 10c/L tax to gasoline on the premise of imposing a carbon tax of $42 per tonne of CO2 on the emissions specific to the combustion of gasoline. There is no mention in the paper that the 10c/L is the cumulative impact of upstream CO2 emissions and, indeed, at an emissions intensity of 2.341kg/L (CO2-e per NIR emissions factor) a $42/t tax would result in a levy of 9.8c/L. (The Apple)

    If the NDP proposal is to apply the $45/t floor to refineries and upstream, that’s a separate tax point-of-sale and would lead to your estimate 3.5-4c/L. (The Orange) Without the direct tax on the specific emissions for combustion of gasoline, the refiners don’t have the cost push to increase sale prices by 10c/L. (Which is to say, I agree with you last paragraph.)

    The Mintz and Olewiler paper did not stop at the proposal to impose a CO2 tax. They proposed it as a replacement to other inefficient or ineffective taxes. Revenue-neutrality was a critical element of the proposal. In all likelihood, the way forward with CO2 taxes will require revenue-neutrality or at least a give-to-get reduction in other taxes. So while we can all postulate about tax impacts based on emissions intensities for each element of the supply chain, we are simply speculating on the ultimate economic impact to individuals without due consideration of the whole picture. (The Fruit Salad)

    Let’s not loss focus. The environment isn’t getting any better if its business as usual.

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  6. mamapeggie

    Alberta already has an emissions charge – penalties go to research. Has ANY OTHER PROVINCE got any kind of control on their emissions. Not going to stand for another NEP to bankrupt this province.

    1. Russil Wvong

      BC has a broad-based carbon tax. It’s currently at $20/tonne, rising to $25/tonne in July 2011. It’s revenue-neutral: there’s offsetting cuts to income tax.

  7. Rick Hoff

    While the math may work, we are starting from the wrong end of the equation. The NDP needs xx.x billions to meet spending plans, therefore we need to work back through the calculation to arrive at the correct assumption.

    If the NDP forms the next government, the price increase in a liter of gasoline will be directly propoptional to the popularity of Jack Layton. And as he reminded us yesterday, if it exceeds that amount, he’ll simply regulate the price down to a more acceptable level.

    It’s just that easy.

  8. Rundle

    Thanks to andrew for doing the math. I did the math and came up with the 1 – 4 cents as well (with the sensitivity on the auction %). Its a relief others agree. I was thinking to myself, this Dr. Mintz must be a respectable fellow, he’s got a quality CV, how’s he getting 10? What am I missing?

    Well, in hindsight and given the extent to which he’s seems to have taken a hell-or-high water approach to the 10 prognostication, maybe there’s some political motivation related to it? After all, dropping bombs on the advancing enermy during an election gives you better odds of scoring a purple heart than it would in peacetime — a nice swan song appointment courtesy of those you helped, perhaps.

    I don’t live in Canada by the way. I live in the US. You know, if this was an American election and some high profile economist made a statement like Dr. Mintz did that was subsequently repeated by a Presidential candidate, every network would have some talking head on within an hour disecting the number and offering their own number — in other words, you wouldn’t need to fact check it on some esoteric board in cyberspace.

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  10. Rundle

    Andrew — no need to publish this but thanks for the clarification on your inductive reasoning of the coverage. Why you are clarifying it and not he is another question. One plays with fire when they wade into a debate in a late stage election – its folly not to bring a fire extinguisher along.

    There’s a lot of scare mongering going on in terms of the costs of carbon pricing — you tell a guy driving an F150 that his fill up is another 10 bucks and that’s a real vote swinger (grey policy or not). Misinformation on the costs killed C&T in the US (that, and the fact that most Americans are skeptical of the science). And when comments come from someone in Alberta — and from a school that has accepted lots of cash from the administration using your quote for political purposes — the reader has a knee-jerk reaction to assume you come from a different church than Paul Krugman.

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