The price of CO2 emissions allowances in Washington’s climate law jumped to $40.26 yesterday – equivalent to 32 cents per gallon of gas. The new price is a 35% increase from the last auction price of $29.88 per MT CO2. Prices are expected to climb next year as the number of CO2 allowances offered by Ecology is set to decline by about twelve percent.

It is unlikely Washington residents will see much of an additional impact on gas and diesel prices because fuel suppliers have already increased prices based on the expectation that the price of CO2 allowances would increase. Washington’s gas prices are currently about 46 cents per gallon higher than in Oregon according to GasBuddy – exactly the amount implied by the current market CO2 price, and higher than the amount indicated the auction results. Six months ago, Washington’s gas prices were only 27 cents per gallon higher than Oregon. The new CO2 price will increase costs for natural gas and other fuels.

Although we predicted prices would increase after the election, this increase is smaller than we anticipated. We expected prices to increase closer to the level on the private market, where prices increased to $59 per MT CO2 after the election. Prices had been artificially depressed by the potential that the state’s CO2 tax, known as the Climate Commitment Act, would be repealed by voters. Once voters declined to repeal the CCA, prices shot up with the certainty that the law would remain in place.

The increase is contrary to the claims of supporters of the CO2 tax, who claimed price decline earlier in the year had nothing to do with the potential that the tax would be repealed. The 35 percent increase at the auction and the large increase in the private market confirms that I-2117 was keeping prices lower than what would have occurred.

The objective of the CCA is specifically to increase the costs of carbon fuels (which translates into higher prices at the pump) in order to achieve emissions reduction.