The California Air Resources Board is preparing to vote May 28 on a sweeping overhaul of the state’s cap-and-trade program that would hand oil refineries, cement plants, and other heavy-emitting industries a pool of up to 118.3 million free pollution permits, a proposal valued at roughly $4 billion that has split lawmakers, environmental advocates, and the Newsom administration.
The plan would carve out a new subsidy program inside California’s 13-year-old carbon market, allowing qualifying industrial polluters to receive free emission allowances in exchange for pledges to invest in clean energy and efficiency projects. Roughly half of the permits are earmarked for the fossil fuel industry.
A Climate Backstop Under Strain
California’s carbon market requires major polluting companies to purchase permits for every ton of greenhouse gases they emit, with the state lowering the cap each year. The program is regarded as the only state policy that places a firm ceiling on greenhouse gas emissions, making it central to California’s plan to hit its 2030 climate target.
The 118.3 million permits the air board is now considering setting aside for free distribution match the same number it has said must come off the market for California to meet that 2030 goal. Environmental groups say carving them back into circulation as free allowances could neutralize the reductions the cap was designed to deliver.
Berkeley energy economist Meredith Fowlie, who chairs an independent committee that oversees the carbon market, wrote in a recent analysis posted to the Energy Institute at Haas blog that the design would give qualifying refineries more free permits than they need to cover their emissions. Fowlie described the structure as “generous.”
Chloe Ames, a policy adviser with NextGen Policy, said the proposal would “significantly kneecap the program.” Katelyn Roedner Sutter, state director for the Environmental Defense Fund, said the framework is built on “proposed investment, not any guaranteed reduction” — a structure she called a red flag.
The Newsom Administration’s Case
Anthony Martinez, a spokesman for Gov. Gavin Newsom, said the changes are necessary to keep the state’s carbon market “durable” and “affordable” amid mounting refinery closures. Two California refineries have shuttered in the past six months, and gasoline prices have climbed past an average of $6 a gallon as the Iran-Israel conflict roiled global oil markets.
Rajinder Sahota, the air board official overseeing the program, defended the structure. The new permits, she said, would only go to companies pursuing clean energy and efficiency projects, would be limited and temporary, and could be rescinded if companies misuse them. The plan, she added, is meant to help keep refineries operating in California while consumer demand persists.
The oil and gas sector spent $10.3 million lobbying Sacramento in the first three months of the year, with the Western States Petroleum Association and Chevron accounting for most of it, according to filings with the California Secretary of State’s office. Industry representatives have pushed for even broader and more permanent protections than the April proposal offers.
Lawmakers Split Over Climate Money
The financial stakes for state programs are substantial. The Legislative Analyst’s Office estimates quarterly auction revenue could drop from roughly $4 billion a year to about $2 billion under the proposal.
State Sen. John Laird, the Senate budget chair and a co-author of California’s original 2006 climate law, warned at a May 6 hearing of the Senate Environmental Quality Committee that the proposal “flies against many things we negotiated just last fall” with the governor and could put the carbon market deal “back on the table.”
Other lawmakers see the plan differently. Assemblymembers Jacqui Irwin and Cottie Petrie-Norris, who chair the climate and energy committees respectively, issued a joint statement saying the proposal “reflects the Legislature’s focus on affordability” and urged the board to proceed without delay. They highlighted potential increases in the Climate Credit, the twice-yearly rebate that appears on Californians’ utility bills, though a UC Santa Barbara analysis found the subsidy could shrink that credit by as much as $1.7 billion.
Newsom struck an eleventh-hour deal with the Legislature last year that extended the carbon market through 2045 and ranked how auction revenue would be distributed. Under that hierarchy, California’s high-speed rail project receives $1 billion annually. Programs lower in the queue, including affordable housing, transit-oriented development, wildfire resilience, clean drinking water in low-income communities, and neighborhood pollution monitoring, would be most exposed to a revenue decline.
Frontline Communities and the Road to May 28
Newsom’s revised state budget, released May 14, did not account for the potential drop in carbon market revenue. Laird said the administration told him the shortfall would not appear in the coming fiscal year but acknowledged it “would still be a big hit the year after.”
Eddie Ahn, executive director of Brightline Defense, which oversees community air sensors in San Francisco neighborhoods funded by the state’s community air protection program, warned that frontline communities could lose the most. “If the funding is cut off,” he said, “it means frontline communities get disconnected from environmental policy.”
The air board’s May 28 vote will determine whether California’s climate backstop can hold its shape under the weight of a $6-a-gallon gas market.
