California’s Cap-and-Invest overhaul puts climate goals to a new test
California’s environmental advocates and the oil and gas industry found themselves on the same side Tuesday — both unhappy with state air regulators’ latest revisions to the Cap-and-Invest program.
At the center of the debate is the program’s core mechanism, which creates revenue by selling greenhouse gas pollution permits to businesses and directs those revenues back to ratepayers through electricity bill credits and rebates. What businesses can purchase at state auctions are called allowances, and the program aims to decrease the number of these allowances in the market each year, until California reaches its goal of cutting greenhouse gas emissions 40% below 1990 levels by 2030, and ultimately carbon neutrality by 2045.
In what environmental advocates are calling a significant rollback, the latest update would eliminate the planned permanent retirement of 118 million pollution permits and instead place them in a reserve fund that businesses can potentially draw from if they invest in emission-reducing initiatives.
“If those allowances are available for industrial users, then they are not being removed from the program. You are not tightening the cap that California Air Resources Board laid out in January,” Katelyn Sutter, California state director of Environmental Defense Fund said, urging CARB to review and work on the proposal quickly, so that the board could still be on track to approve the regulation this spring.
The disappointment stems from the fact that, since air regulators proposed removing 118 million allowances from California’s carbon market in January, environmental advocates have been calling for even deeper cuts to drive emissions down, while the oil and gas industry has pushed for looser requirements. Now, those allowances would linger in the system instead of being permanently taken off the table.
The 118 million allowances would be divided between two groups — one for refineries, hydrogen producers and related sectors like petroleum and coal product manufacturing, and another for all other industries. The 15‑day public comment period will continue until April 29, and the board is scheduled to vote on the proposal on May 28.
The air board argues it is still removing the allowances because they can only return to the market if a business proves it actually cut emissions. Rajinder Sahota, CARB’s deputy executive officer for climate change and research, said the overall emissions cap will still decline 11% each year through 2030 as initially planned and 7% every year from 2031 to 2045 under the proposal.
“The 118 (million allowances)...is not automatically pushed back into the market. That only comes back in, if there is a covered entity…has demonstrated emission reductions,” Sahota said during a media briefing on Tuesday.
There were signs CARB tried to respond to lawmakers’ push to speed up the shift of moving more value from natural gas to electric utilities, aiming for the outcome to show up more quickly as lower power bills for ratepayers. In the updated proposal, the agency has increased the California Climate Credit for electricity customers from $8 billion to $10 billion through 2030 by boosting free allowances to electric utilities.
Across the country, rising energy demand and infrastructure costs are showing up as higher power bills — and California, already known for some of the highest electricity rates in the nation, is no exception. Between 2015 and 2025, average residential electricity rates for PG&E customers increased by 104%, according to the Public Advocates Office at the California Public Utilities Commission.
Meanwhile, regulators also stripped out the roadmap for free allowance allocations beyond 2030, saying they needed flexibility amid economic uncertainty and put that decision to a future rulemaking. While the board did not spell out those conditions, the update comes as fuel price concerns have intensified in recent months due to global oil supply disruptions related to the Iran War.
For industries that plan their business years in advance, the board’s decision to delay a detailed post‑2030 plan in the name of navigating an uncertain economy could further deepen uncertainty for their businesses and investment plans.
“It is clear the state is not serious about keeping refineries in California,” said Jim Stanley, a spokesperson for a Sacramento-based oil and gas lobbying group, Western States Petroleum Association. “Regulations that last for just four years do little to provide the certainty refiners need to plan for the future and justify continued investments in this state.”
This story was originally published April 15, 2026 at 10:49 AM with the headline "California’s Cap-and-Invest overhaul puts climate goals to a new test."
