California has become the latest Democratic-led state to retreat on climate goals amid affordability concerns as regulators Friday revamped its carbon market to ease costs to the oil industry.
The California Air Resources Board (CARB) voted to give up as much as $4 billion worth of free allowances to oil refiners and other industrial polluters to help them comply with greenhouse gas limits imposed by the state’s 13-year-old carbon market, called Cap-and-Invest.
Economists and environmentalists said the change may lead to higher emissions and lower prices on the carbon market, which is key to meeting a state mandate to achieve carbon neutrality by 2045. That would slash billions of dollars in revenues that pay for other initiatives to reduce emissions as well as for safe drinking water, affordable housing and wildfire resilience programs.
But in the wake of Iran war-fueled inflation, New York, Massachusetts and other states have also tempered their climate ambitions.
“It’s no secret that climate policy is at a crossroads, under attack by an openly hostile and well-funded opposition and upended by global economic upheaval,” CARB Chair Lauren Sanchez said Thursday. “Moving forward shows that we can be responsive to affordability concerns.”
After some board members voiced concern about the unclear impact of the new allowances, the board on Friday directed staff to provide further analysis before issuing the allowances.
More than 200 people queued up to speak at the two-day meeting, underscoring divisions over the future of California’s landmark climate policy, which has influenced other states and nations’ actions to reduce carbon emissions.
Representatives of petroleum companies, utilities and other industries spoke in support of the carbon market revision, while environmentalists denounced it as a “major handout to Big Oil.” The mayors of Los Angeles and San Francisco opposed the amendments as regional transportation and air quality officials expressed worries that the loss of hundreds of millions of dollars in carbon market revenues for public transit and zero-emission programs would increase pollution in low-income communities.
“Eliminating these programs could impair our ability to build affordable housing and improve transit in San Francisco, which will help reduce GHG emissions,” said Silvia Solis Shaw on behalf of San Francisco Mayor Daniel Lurie.
California sets an annual limit on industrial greenhouse gas emissions that account for about 80% of the state’s carbon pollution. The cap declines each year and oil refiners, cement manufacturers and other companies must acquire allowances, each equivalent to one metric ton of carbon dioxide, to cover their emissions. Polluters can either buy allowances at quarterly auctions or use free ones that CARB gives corporations as an incentive to remain in California.
In January, CARB proposed further tightening emission limits by removing 118 million allowances from the market to keep the state on track to meet its 2030 targets. That meant oil refiners, for instance, would have to either further reduce emissions or likely pay more for allowances. As California’s already-high gasoline costs soared above $6 a gallon during the war, oil industry executives told officials that would further increase prices at the pump and prompt an exodus of refiners from the state.
Some state Democratic legislators echoed those concerns and pressed CARB to make changes. The agency subsequently issued a revised proposal that offset the removal of the 118 million allowances with the creation of 118 million new free allowances worth $4 billion. Those allowances would be issued to oil companies and other industrial companies to pay for decarbonization projects through 2035. The amended rule also included an additional $800 million in support to help “ensure no additional cost passthrough at the pump.”
An analysis by economist Meredith Fowlie of the University of California at Berkeley found that “a qualifying refinery could receive free allowances well in excess of its GHG emissions.” That in turn could lead to a rise in emissions and lower carbon prices, she wrote.
A report from the state Legislative Analyst’s Office concluded the additional allowances would “reduce certainty” that California would hit its 2030 emissions target.
CARB pushed back against those projections at the meeting. The change, said carbon market staffer Michael Turgeon, “doesn’t weaken the integrity of the program. It simply makes it more affordable.”
The Legislative Analyst report said the revision would halve annual auction revenues from about $4 billion on average to $2 billion. CARB executive Rajinder Sahota said Thursday that any revenue drop would be much smaller as only a certain percentage of free allowances would likely be used in any given year.
Under legislation enacted last year, $1 billion of yearly carbon market revenues must be reserved for California’s decades-delayed high-speed rail project.
An analysis by economists at the University of California at Santa Barbara concluded there could be significantly less money left over to finance many of the climate programs currently funded by the carbon market.
Top photo: Motorists drive vehicles on the 101 freeway during the morning commute on September 23, 2024 in Los Angeles, California. Bloomberg.
Copyright 2026 Bloomberg.
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