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Breaking down more than two decades of the state’s gasoline price premium.
The war is back on, crude oil prices are back up, and the cost of gasoline has reversed its declines of a few weeks ago. Here in California, home of the most expensive gas in the country, the debate has resumed about why our drivers pay so much more than in other states.
I have been writing for a decade about California’s Mystery Gasoline Surcharge, the price premium after accounting for higher taxes and environmental costs. But a lot of the current discussion revolves around state taxes and fees, and the issues in California’s refining industry. In those debates, and in media reporting, the magnitudes of each component, and changes over time, often get lost.
So, in an attempt to nudge the discourse in a more fact-based direction, today’s post decomposes the state’s price premium compared to the rest of the US over more than two decades and suggests implications for useful public policy focus.
California’s growing gasoline price premium
The graph below shows California’s average price premium over the rest of the US for regular gasoline since 2004. (All of the costs and prices in today’s post are adjusted for inflation to 2026 dollars and all of the premia compare California to the quantity-weighted average of all other states. I go back to 2004, because that is the first full year for which all of these data are available.)
Comparing the first three years of these data, 2004-2006, to the most recent three years, 2024-2026 (through June), the State’s price premium has increased by roughly $1.03, from averaging $0.42 per gallon in the mid-oughts to about $1.45 per gallon in the last few years. The first big jump was in 2015, which was the year of the Exxon Torrance refinery fire, and the year that the Mystery Gasoline Surcharge first appeared. Still, even in 2015, the differential only got to about $1.08; it has continued to grow in the years since.
To get a better handle on why Californians pay more, the next graph decomposes the premium into four components: (1) higher taxes, (2) environmental fees, (3) higher wholesale (“spot”) bulk-fuel prices, and (4) higher margins in the sectors downstream from refining – marketing, distribution, and retailing. In each year, these four factors add up to the California gasoline premium. (More information on these calculations is at the end of the post.)
Gas and taxes
The blue dotted line in the graph below is the tax premium. California taxes started out averaging about $0.25 higher in the mid-oughts and are about $0.51 higher than elsewhere in the US over the last few years. Taxes account for about one-quarter of the growth in the California gas premium.
Environmental efforts
But the state also has important environmental policies: a cap and trade program (CaT) for greenhouse gases, which has included gasoline since 2015, and a low carbon fuel standard (LCFS) which began in 2012. Plus, since 1991 there’s been a small fee to fund cleanup of underground storage tanks that leak, which has been fairly constant (in 2026 dollars) around 2 cents per gallon. The total cost of these grew (dashed green line) from tiny in the oughts to around $0.41 in the last few years, of which CaT is about half today.
Together, increases in taxes and environmental fees amount to just over 60% of the California increase relative to the rest of the US over the last two decades. These were conscious policy choices with full recognition, despite occasional nonsense from regulators, that they would be passed through to consumers. The revenue from these programs goes to public expenditures for road and highway maintenance, safety improvements (improved lighting and road barriers, bike lanes), public transit, clean energy infrastructure, lowering the cost of low-carbon alternative fuels, and transfers to low-income customers to help them afford higher energy prices. You may not like all of these expenditures, but there is pretty clear documentation of where the money went.
Gasoline supply costs
Much of the debate over California retail gasoline prices has reflected concerns about the in-state refining industry and availability of imports that meet California’s globally-strictest pollution standards (“CARB gasoline”). Since the CARB standard was introduced in 1996, there has been widespread agreement that it is more expensive to produce, typically in the range of 5-15 cents per gallon depending on who you ask. But the data don’t suggest that it has contributed at all to the increase over the last two decades, as measured by the wholesale or “spot” price, which is typically paid for tanker-size transactions (heavy orange line). If there were a shortage of refining capacity to make our fuel, or growing additional costs of making it, it would show up in the spot price premium.
To be clear, the higher wholesale price does explain a substantial part of why California had a price premium even 20 years ago. But the spot price premium has declined by about ten cents from the first few years of these data to the most recent few years. Nonetheless, there is reason to keep an eye on this category. The increase over the last two years may be a harbinger of future trouble, particularly if the state does not ensure that there is sufficient gasoline import capacity.
This category would also reflect any increase in the premium due to reduced crude oil production in California, an argument widely rejected by economists and not supported at all by these data. Oil output in the state has fallen steadily, declining by more than half since 2004, but there is no indication that has increased the wholesale price of the commodity.
What gets added when gas leaves the refinery?
The last category is the residual after accounting for taxes, environmental fees, and wholesale prices. It’s the amount added on in the marketing, distribution, and retail sectors (double red line). Two decades ago, these sectors of California’s gasoline industry collected smaller margins than the rest of the country. But that has reversed, from a 24 cent negative differential in the first few years of these data to about a 26 cent positive differential in the last few years, a total change equal to nearly half of the change in California’s price premium. Exactly who is getting this revenue and whether it is needed to cover increased costs is one of the mysteries inside the Mystery Gasoline Surcharge.
(Source) Prices reported on July 26, 2026
Takeaways and unanswered questions
So, what does this breakdown contribute to the policy debate about California gas prices?
- The California premium has indeed grown steadily over two decades, more than tripling.
- Rising taxes and environmental fees have played a major role, including the addition of the Cap and Trade and the Low-Carbon Fuels Standard programs.
- Higher cost of producing CARB gasoline or limited available supply have not contributed to higher gasoline prices over the last two decades, but continued attention to this factor is warranted, due to both recent spot price increases and recent refinery closures.
- The margins downstream from refining have increased substantially over the last two decades, with a fairly abrupt change around 2014-2016.
This breakdown does not shed light on some of the other important questions about California gasoline markets, such as why, compared to other states, we have
- a larger share of gasoline sold through branded stations;
- a larger share of those branded stations are under contractual arrangements with their major brand refiner (known as “dealer tankwagon supply arrangements”) that give the refiner more control over downstream margins;
- much larger price differences between stations in the same city, or even on the same block.
Of course, past drivers of California gas prices may not predict future causes. Many questions need further study.
Californians bought over 13 billion gallons of gasoline last year (down about 16% from the all-time high), spending nearly $60 billion. If our price premium only reflected higher taxes and environmental costs, California consumers would have paid about $70 billion less since 2015. It seems well worth finding some answers.
I post suggested energy readings (and some political views) most weekdays on Bluesky @severinborenstein.bsky.social
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Suggested citation: Borenstein, Severin “Why Do Californians Pay More At the Pump?” Energy Institute Blog, University of California, Berkeley, July 27, 2026
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Data Notes: All of the data and calculations for this blog post are in a spreadsheet available here. Most of the data are from the US Energy Information Administration though some are sourced from other information as noted in the spreadsheet.
Some notes on the calculations:
- All annual figures are the unweighted average of 12 monthly measures, except 2026, which are the unweighted average of January through June.
- Average price for all other states is calculated by assuming that California constitutes 10% of US gasoline consumption (which is roughly accurate on average over the sample) and removing California from the US average.
- California taxes include both excise and sales taxes. Sales tax includes the average of local jurisdiction sales taxes, as well as the state-level sales tax.
- Calculation of the environmental fee premium assumes that no other states have such fees. This is not entirely accurate: Oregon (1.1% of national gasoline consumption in 2024) has had a LCFS program since 2016 and Washington since 2024 (1.9% of national gasoline consumption in 2024). Washington has also had a cap and trade program that applies to gasoline since 2023.
- Cost of cap-and-trade allowances include only the CO2 emissions from tailpipes. Cost of GHG emissions from refineries are assumed to be offset by free allowances distributed to refiners under output-based allocations.
- LCFS allowance costs based on weekly reporting from Stillwater Associates, averaged to the monthly level.
- California spot gasoline premium based on comparison of Los Angeles spot price for CARBOB to New York harbor price for conventional gasoline. This is a CORRECTION. Thanks to Jeremy Martin of UCS for pointing out the error to me, noting that the EIA posts daily data for New York Harbor reformulated gasoline, but the historical data series it makes available is for conventional gasoline.
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