Vermont policymakers are again considering new energy taxes, this time in the form of a “Cap-And-Invest” program (CAI) and a Low-Carbon Fuel Standard (LCFS).

Earlier this year, a report commissioned by the Agency of Natural Resources (ANR) and Agency of Transportation (AOT) outlined options for adopting CAI and LCFS.

The agencies were directed by Vermont lawmakers to study these programs as a means of meeting the state’s greenhouse gas emissions reduction mandates in the 2020 Global Warming Solutions Act.

You can read the full report here: Assessment of a Cap-and-Invest Program for Vermont

The Global Warming Solutions Act requires Vermont, under threat of special interest group lawsuits funded by state taxpayers, to reduce statewide GHG emissions by 80% compared to 1990 levels by 2050

The act empowers an appointed Climate Council to propose programs and strategies to meet the targets and requires the Vermont Agency of Natural Resources (ANR) to adopt rules that implement the plan.

NFIB Vermont members STRONGLY oppose these types of expensive schemes:

– 89% oppose adopting a Low Carbon Fuel Standard

– 92% oppose new taxes and fees on transportation to fund subsidies for people who buy electric vehicles or EV chargers/infrastructure

– 98% oppose carbon pricing schemes, which is the heart of CAI

When debating the merits of these policies, it’s critical for policymakers to remember that climate change is a global phenomenon and Vermont accounts for just 0.016% of global CO2 equivalent emissions (when comparing the Vermont Greenhouse Gas Inventory to the European Commission’s World Greenhouse Gas Emissions Report).

What’s Cap-and-Invest?

Cap-and-Invest (aka Cap-and-Trade) is a system that limits the amount of GHG emissions in one or more – or all – economic sectors. Its purpose is similar to a carbon tax: the government sets a price on emissions and creates a financial incentive to reduce them. Under CAI, a total cap on GHG emissions is imposed across all businesses, and each business is allowed a certain amount of emissions.

Governments sell emissions allowances and use the proceeds to fund energy efficiency programs, fuel switching incentives, and other GHG mitigation projects.

Individual businesses meet their GHG reduction obligation by reducing emissions, engaging in offset activities, or purchasing emissions allowances.

Businesses that reduce their emissions below their limit can sell excess allowances into a market, which is where the trading part of the system comes in.  Offset activities can include investing in forestry management programs that result in greater carbon sequestration or livestock management programs that limit methane.

There are two programs looked to as reference points in the ANR-AOT report on CAI: the Western Climate Initiative (WCI), which is a partnership between California, Washington, and several Canadian provinces, and the New York Climate Initiative (NYCI).

WCI has existed since 2013 and its GHG emissions reduction mandates apply to all economic sectors. NYCI is not yet operating and will apply to all economic sectors other than electricity generation; it has lower price ceilings compared to WCI.

Per the Vermont ANR-AOT report, in 2024, WCI increased the cost of gasoline by $0.26 per gallon and the price of diesel by $0.31 per gallon (pg. 30).

Using WCI and NYCI as reference points, the report concludes (Table 4-1, pg. 17) that a CAI would raise the price of gas, diesel, propane, oil, and other transportation or heating fuels by 11 to 13 cents on the low end and 66 to 83 cents on the high end.

The implementation details are murky, as the cost and complexity of establishing an emissions trading market (like Clean Heat) make it unlikely that Vermont could go it alone on a cap-and invest program. NYCI is not yet in operation, and the earliest Vermont could realistically join WCI is 2028.

This means CAI would not help Vermont meet the 2030 emissions reductions mandate, which would likely result in further legislative action or litigation to compel compliance. Both would bring additional programs and additional energy taxes.

Notably, the report states that without CAI – or presumably any additional action funded by new taxes on energy or other sources – Vermont will meet its 2030 mandate in 2036.

What’s Low-Carbon Fuel Standard?

Low-carbon fuel standard, or LCFS, works similarly to cap-and-trade schemes but is specifically aimed at emissions related to the carbon intensity – the emissions related to making and using – transportation fuels. As of 2025, only three U.S. states have adopted LCFS: California, Oregon, Washington.

The cost of LCFS depends greatly on the program’s emissions reduction targets. Washington’s program requires a 20% reduction below 2017 levels by 2038. Once fully implemented, it is expected to increase the price of gasoline and diesel by 58 cents per gallon.

California’s LCFS began in 2011 and requires a 20% reduction below 2010 levels by 2030. By 2020, Stillwater Associates estimated that LCFS raised the price of gasoline and diesel by 22 cents per gallon and achieved a 7.5% reduction in transportation fuel emissions.

Last year, California adopted new LCFS regulations that will ratchet up the program cost. The University of Pennsylvania Kleinman Center for Energy Policy estimates that “retail gasoline price impacts could be $0.65 per gallon in the near term, $0.85 per gallon by 2030, and nearly $1.50 per gallon by 2035.”

LCFS programs are designed to subsidize alternative fuels programs and electric vehicles. Over time, as the emission reduction targets ratchet up, electric vehicles subsidies become the dominant beneficiary of subsidies.

In addition to being funded by price hikes on gas and diesel, EV subsidies often benefit car buyers who don’t need them. According to a 2021 study published by the National Bureau of Economic Research: “70 percent of the credits were obtained by households that would have bought an EV without the credits.”

They also prop up the fledgling business plans of multinational auto manufacturers despite the fact that automakers are increasingly backing away from aggressive and unrealistic EV sales projections in the face of waning consumer interest.

As with CAI, it’s unlikely that Vermont could go it alone on developing an LCFS credit market so a path to implementation remains unclear.

What’s Next?

If implemented in tandem alongside existing mandates like California Cars and California Trucks, these programs would have a major financial impact on nearly every business in Vermont. The combined effect on fuel prices could easy exceed $1 per gallon – and still might not be enough to meet the economywide 2050 GHG reduction target.

The negative impact on affordability is one reason why State Treasurer Mike Pieciak threw cold water on the idea in February. In his report to the Vermont Legislature, Treasurer Pieciak recommended against pursuing membership in WCI, and encouraged further study on the potential of joining NYCI, how funds from a CAI program would be distributed, how to prevent large spikes in fuel prices for low-income people, and the impact of “leakage” – that is, people buying fuel in non-CAI states like Massachusetts and New Hampshire to avoid the CAI tax – on Vermont businesses and revenues.

The Vermont Climate Council will debate the policies in mid-March and decide whether to add them to the state’s Climate Action Plan. A proposal to the Vermont General Assembly is forthcoming but would likely face stiff opposition from Governor Phil Scott.