The states may follow the lead of California, which last year extended its pollution-trading system to cover fuel distributors and refineries. The impact would ripple far beyond the direct targets, however, affecting drivers at the pump, oil companies worried about gasoline sales and automakers that may see demand shift toward more efficient vehicles.

In their Nov. 24 letter, released on the eve of international climate talks in Paris, the five states vowed to “achieve substantial reductions in transportation sector emissions and provide net economic benefits." Besides New York, the effort includes Connecticut, Delaware, Rhode Island and Vermont, along with Washington, D.C.

Market-based policies

The group pledged to study “market-based policies” to cut transportation emissions; they’re expected to resume talks early this year, according to Vicki Arroyo of the Georgetown Climate Center in Washington, which is organizing the review.

Options under discussion include gas taxes, tolls or fees based on miles driven or vehicle efficiency. Also likely to be discussed: a cap and trade system, in which regulators set a limit on total pollution and let individual companies buy and sell permits covering their output. That theoretically encourages participants to find cost-effective ways to clean up the air.

New York and eight other states already run a trading system for power-plant emissions in the northeast, the Regional Greenhouse Gas Initiative. California has a similar market and expanded it last January to include transport fuels.

Oil companies

The oil industry resisted the move in California and would likely do the same in the Northeast, said Andre Templeman, managing director at Houston-based carbon consultant Alpha Inception.

“Transportation could be a huge expansion” for U.S. pollution markets, Templeman said. “The oil companies would probably not take this lying down. That’s a fight they’d pour a lot of energy into.

With crude already trading near a 12-year low, “If they cut meaningfully into the demand of oil not just in California but also in the Northeast, in this market that could be disastrous for the oil industry," he said.

California’s emissions market added about 10 cents to the cost of a gallon of gasoline, according to the California Air Resources Board, which oversees the cap-and-trade system. The impact on drivers was largely offset by the plunge in oil prices last year, Templeman said.

Greenhouse-gas cuts

In the northeast, some combination of taxes, tolls or trading may raise $3 billion annually over 15 years to support electric-vehicle sales, expand freight rail and mass transit and take other pollution-cutting steps, according to a Georgetown Climate Center report released with the November letter. Such efforts are a necessity if states are to make the deep greenhouse-gas cuts they’ve promised by mid-century. Transportation accounts for 35% of carbon emissions in the Northeast and Mid-Atlantic, the single largest source, according to the report.

Other states are watching the talks, said Arroyo, the center’s executive director. The attraction is both financial and environmental: States have seen gas-tax revenue shrivel as people drive less and use more efficient cars; they’ve also seen the power-plant cap-and-trade market generate more than $1 billion by auctioning permits to polluters.

“They come to the table interested in models that do something about transportation emissions while still bringing in revenue,” Arroyo said.

Additional costs for gasoline in the northeast would be more than covered by savings from cutting fuel consumption and traffic congestion, as well as consumer rebates funded by emissions payments, according to the Georgetown report. Benefits to businesses and consumers would reach $72.5 billion over 15 years, the Climate Center projected.

Adding transportation to the trading mix would seem a logical extension of the power-plant market, said Deron Lovaas, a senior policy adviser at the Natural Resources Defense Council in New York.

“There’s already a robust system set up for stationary sources and that could be expanded to include other sources,” Lovaas said in a telephone interview. “What the Northeastern states have announced could be building toward that.”

Are you following us on Facebook?

Copyright 2018 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.