Placing Fuels Under the Cap Puts Low-Income Households Under the Bus

Justin Adams, Ph.D.
President and Chief Economist of Encina Advisors

John Husing, the Inland Empire economist, asserts that California’s policies are short-sighted when it comes to many important subject areas like energy policy. Specifically, he argues that the state’s leadership from wealthy coastal counties tends to design policies that make sense for these same counties, but that ultimately create unintended, negative consequences for poorer inland counties.

Husing may be on to something. However, I think his conclusion applies not only to California’s geography, but to its socio-economics as well.

Case in point: incorporating transportation fuels into the state’s Cap-and-Trade Program (“placing fuels under the cap”).

The California Drivers Alliance retained Encina Advisors to conduct an economic impact analysis of placing fuels under the cap, and this week the study was released. One of my major findings is the sizeable burden that this policy will place on low-income households.

Placing fuels under the cap means that the cost of refining and distributing gasoline and diesel in California will increase next year to account for the cost of emissions allowances. And most believe that the costs for these allowances will be passed along rather quickly to consumers.

Estimates vary as to how much prices at the pump will increase, and the California Air Resources Board (ARB) has not provided any additional insight since its economic analysis of 2010. But the most credible estimates that I have seen (from the Market Simulation Group, a handful of academics that advise the ARB) suggest that Californians can expect price hikes of 10 cents a gallon next year, with about a one-in-five chance of seeing gas prices rise by 37 cents or more.

The study shows that California can expect to lose over 18,000 jobs and $2.9 billion of economic output next year at 10 cents a gallon. At 37 cents a gallon, job losses would total at least 66,000 and economic output would be reduced by more than $10.9 billion. The job losses will be widespread job losses across the service sector of the economy, particularly impacting the food services industry, retail establishments, and health care.

Low-income households end up doubly affected by the policy. In addition to being affected by higher gas prices – according to the U.S. Bureau of Labor Statistics, some low-income households spend 38 percent more on gasoline as a share of income than do higher-income households – the service industries that will experience large job losses typically employ large numbers of lower-income workers. So many low-income households could face losing their jobs as well.

And while Sacramento plans to spend the allowance revenue on programs and projects to help reduce GHG emissions, little of this money will directly benefit low-income households. Consider the following:

  • Although there are plans to spend money on low-income housing and clean buses for disadvantaged communities, most of these investments will take years to be realized.
  • Many of the jobs (eventually) created by government spending will be construction-related, which are good for the economy but which do not replace the lost service-sector jobs.
  • The Economic and Allocation Advisory Committee (of which I was a member) recommended to the ARB that the state return “a significant fraction of allowance value to households” such as through lump-sum rebates, but this recommendation has been ignored.

Perhaps California policymakers are perfectly content with having low-income households ditch their cars, however impractical that is, and take the bus (to their hopefully still-existing jobs). But given the extent to which low-income households are impacted – they are effectively being put under rather than on the bus – I have to believe that policymakers again have not thought through all the consequences.

Dr. Justin L. Adams is the President and Chief Economist of Encina Advisors, LLC, a Davis-based research and analysis firm.

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