California air regulators updated the rules of the state's cap-and-trade program on Friday, a move that drew sharp criticism from environmental groups who argue the changes will weaken efforts to reduce greenhouse gas emissions. The oil industry, meanwhile, contended that the program still fails to address high energy costs in the state.
Background of the Program
Democratic Governor Gavin Newsom and the state legislature reauthorized the cap-and-trade program last year, extending it through 2045. The program sets a declining limit on total greenhouse gas emissions from major polluters. Companies must reduce their pollution, purchase allowances from the state or other businesses, or fund offset projects. Similar systems operate in Europe and Asia, and California's is linked with Quebec, Canada, and Washington state.
Key Changes Approved
Under the updates approved Friday, the state will give away up to roughly $3.5 billion worth of allowances to companies—primarily manufacturers and oil refiners—for free if they undertake projects to reduce emissions. State regulators say this is designed to prevent businesses from leaving California. However, environmentalists argue it undermines the program's purpose of incentivizing pollution reduction and will reduce funding for climate mitigation programs.
California Air Resources Board Chair Lauren Sanchez, formerly Newsom's chief climate adviser, defended the changes, stating they allow the state to remain a climate leader while addressing affordability concerns and providing a clear signal for continued investment in clean energy jobs and pollution reduction.
Climate Goals and Funding
California law requires reducing emissions 40% below 1990 levels by 2030 and 85% by 2045. The cap-and-trade program is intended to help meet these targets. Newsom signed laws to better align the cap with state goals, allocate program revenue for climate, housing, and transit initiatives, and potentially boost carbon-removal projects. The program was renamed "cap and invest" to emphasize its funding of climate programs.
The updated rules also increase funding from allowance sales by $2 billion from 2027 through 2030 for utility bill credits and set aside about $800 million to help businesses limit program costs on consumers. Before the changes, approximately $4 billion in annual revenue from allowance sales went to the Greenhouse Gas Reduction Fund, which supports climate mitigation, affordable housing, and transportation projects. The updates are expected to halve annual revenues for this fund, largely due to the new incentive program for manufacturers and refiners.
Debate and Criticism
The board's deliberations stretched over two days after hours of public comment. Environmentalists, Democratic lawmakers, and critics say the changes hinder emission reduction efforts. Climate economist Danny Cullenward called the new incentive program untested and lacking safeguards against abuse. Michelle Pariset of Public Advocates warned that fund cuts would harm programs benefiting students, seniors, and families. The oil industry, however, argued the updates do not adequately address energy affordability. Jodie Muller of the Western States Petroleum Association said refineries need long-term certainty beyond 2030. Rock Zierman of the California Independent Petroleum Association claimed the changes would increase reliance on oil imports, leading to higher emissions, fewer jobs, and more expensive gasoline.
The board agreed to delay issuing allowances from the new incentive program until the executive officer reviews it and proposes any amendments.
