No, Your Gas Prices Will Not Rise by 65 Cents per Gallon in July

California’s gasoline prices have been a topic of intense discussion in recent months, with some prominent voices repeatedly asserting they will jump 65 cents per gallon in July, due to changes in California’s Low Carbon Fuel Standard (LCFS). This number has been repeatedly cited in media discussions and raised in speeches on the floor of the California Legislature.

A price hike of that magnitude would certainly be problematic for many Californians, but the key question is: How likely is it that prices will actually jump that much?

Answer: Not at all likely.

It would require a jaw-droppingly implausible combination of unlikely events for that to happen in July or at any point in the next few years. Despite its wild implausibility, the 65 cent per gallon number has stubbornly refused to fade from discussion, likely because it is a sensational talking point for opponents of climate policies, even if it has virtually no basis in fact.

To understand why it is so implausible, it helps to understand how the LCFS works and the recent history of that program. The LCFS is designed to gradually shift California away from fossil fuels for transportation use, in favor of lower-carbon alternatives. It created a system under which regulated businesses could buy or trade low carbon fuel credits, each representing a metric ton of emissions reduced beyond the program’s requirements; this allows businesses to find the lowest-cost method of compliance and bank credits for future use.  Under the LCFS, high-carbon petroleum producers must either reduce the carbon intensity of their fuels to meet the target, or buy credits from those selling low-carbon alternatives—such as electricity and biofuels.

The LCFS impact on gas prices is mainly determined by two things: the program’s target and the credit price. To actually raise gas prices by 65 cents per gallon this year the credit price would have to reach the maximum value allowed under the program—just under $270 per metric ton of carbon. Historically, the LCFS has never seen a credit price anywhere near that level; prices have been in the $50-70 range (considered quite low by experts including myself) since late 2022 because the supply of credits has greatly exceeded demand for several years. At the end of 2024, oil suppliers had banked over one and a half times as many credits as they needed to comply with that year’s requirements. While the recent amendments were, in large part, meant to reduce this oversupply to help support the deployment of clean fuels, analysis by my colleagues and I at UC Davis indicates that even the proposed tightening of the requirements will likely not change the underlying market conditions that resulted in the oversupply of credits in recent years.

In short: LCFS credit prices have been low because there have been far more credits than required under the program. Our analysis indicates there will be far more credits than required under the program for several more years at least, so the conditions that caused the low credit price will remain in effect. It is therefore unlikely we’ll see a significant increase in credit prices at all, much less one that could push them anywhere near the maximum level.

Evidence suggests that regulated companies and market participants agree with our assessment. The proposed regulations were first released in January 2024, after a year of pre-rulemaking workshops to seek feedback on proposed changes. Changes to the program’s overall targets—i.e. the part that most directly impacts credit and gasoline prices—were finalized around one year ago. The CARB Executive Board voted to approve the amendments in November, and it looked like they would take effect early this year before the Office of Administrative Law delayed the process to request clarifications. The text of the proposed amendments, and CARB’s supporting analysis has been publicly available throughout this process and CARB received hundreds of comment letters, including from oil companies and regulated parties themselves. Fuel companies have known that these changes were coming for months, none of this is a surprise. Given this transparency, if credit prices were going to increase, we should have seen some upward movement by now. Instead, we saw a brief, but temporary rise to about $75 after the amendments were approved, but they’ve subsequently receded and even briefly dropped into the $40 range.

So, the evidence suggests credit prices will remain in roughly the same range they’ve been in for the last few years, even after accounting for the new amendments to the LCFS. When we re-do the math on gas price impacts using this more reasonable assumption about credit prices, we project that the total price impact from the LCFS is more likely to be in the range of 20 cents per gallon, plus or minus 3 cents or so. Of that amount, the new amendments are responsible for only 8 or 9 cents per gallon of actual price increase that will occur in coming weeks—the rest was already in place at the start of 2024.

It is perfectly reasonable to have an open and critical discussion whether the benefits of the LCFS justify the 8 or 9 cent per gallon increase we’re likely to see this month. I’ve spent most of the last 15 years researching these topics and I think the evidence is very strong that the benefits—cleaner air, slowing climate change, spurring investments in new technologies, improving energy security, etc.—handily outweigh the costs. We can’t have a thoughtful discussion about real-world policy based on fantasy numbers. The sooner our discussion grounds itself on the evidence, the more useful and productive it can be.

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Colin Murphy is Co-Director, Low Carbon Fuel Policy Research Initiative and Assistant Director of the Energy Futures Research Program at ITS-Davis.