The new California Air Resources Board proposal is a big step backwards for California’s 2030 climate goal — but there’s time to fix it

Last year, California took a major step forward in its climate leadership when the Legislature reauthorized the Cap-and-Invest program and directed the California Air Resources Board to ensure it delivers the emissions reductions needed to meet the state’s 2030 and 2045 climate targets.

CARB’s most recent proposal for implementing the program, however, does the opposite: it guts the most essential part of the program — the emissions cap — by making it possible for millions of more emission allowances above the cap to come into the market.

This sudden backsliding proposed by CARB not only blows a hole in the emissions cap — it also threatens the household affordability benefits that make Cap-and-Invest such a powerful tool for California families. CARB needs to fix this before it goes to a Board vote this spring.

The problem with CARB’s April proposal: the cap has sprung a leak

Cap-and-Invest works by putting a firm, declining limit on how much pollution covered entities can emit. That limit — the cap — is enforced by issuing a limited number of allowances equal to the cap. Each allowance represents one ton of emissions under the cap, and polluters must turn in allowances to cover their emissions. Since fewer allowances are issued each year, emissions go down as the cap declines. That’s why the level — and integrity — of the cap is the bedrock of this program.

When CARB issued its first formal draft for this rulemaking, they proposed removing 118 million allowances from the 2027-2030 allowance budgets. This is the bare minimum required for California to meet its 2030 target, and a figure not driven by increased policy ambition but by a methodological update to the greenhouse gas emissions inventory.

But in CARB’s April proposal, it claims to remove 118 million allowances from the 2027-2030 budget, then creates an additional 118 million compliance instruments — beyond allowances in the ‘budget’ — to fund a new “Manufacturing Decarbonization Incentive” (MDI) for industry. The result is that the near-term cap, on net, is simply status quo: the reductions CARB needs to make to stay on target are canceled out, allowance-for-allowance, by this new stream of compliance instruments created above the cap. That means covered polluters would be able to emit higher pollution than the cap, and thus the binding, declining limit on emissions which gives this program the greatest possible certainty of meeting our climate targets is in jeopardy.

CARB can and should be doing more than the bare minimum here: modeling shows that removing 180 million allowances from the near-term cap would deliver greater cumulative emissions reductions while still delivering meaningful affordability benefits to California households. Instead, CARB’s April draft moves in the opposite direction by eroding even the bare minimum 118 million reductions that are needed.

An oversupply of allowances threatens the affordability benefits California households need

In addition to reducing pollution, Cap-and-Invest returns billions of dollars in benefits to California households by raising revenue when allowances are sold at auctions and reinvesting the funds into affordability strategies. For example, California households have already received over $17 billion in utility bill credits through the California Climate Credit — funded by Cap-and-Invest revenues. Cap-and-invest also funds investments in clean energy, public health, and climate resilience through the Greenhouse Gas Reduction Fund (GGRF), which gets revenue from the quarterly auctions of emissions allowances.

Those revenues depend on a healthy allowance market. When the cap is calibrated correctly and allowances are in demand, auctions raise more revenue, GGRF investments grow, and households see bigger credits on their utility bills through the Climate Credit. When the market is flooded with excess allowances, prices fall, revenue dries up, and those benefits erode. Over the past year, auction prices have dropped sharply — they have hovered at the price floor for a year, with one of the last auctions failing to sell out. That means covered polluters are literally paying the lowest possible price for their emissions, and the GGRF is losing revenue, with an estimated $3 billion in lost revenue in 2025 as a result.

CARB’s April proposal makes this problem significantly worse. Forthcoming modeling from Greenline Insights finds that creating 118 million additional compliance instruments above the cap would flood the market, further depressing demand and prices and further reducing the revenue available for GGRF investments and Climate Credit bill savings.

For example, Greenline Insights finds the program is modeled to deliver over $6 billion in net savings to households earning $100,000 or less each year — if CARB preserves the integrity of the cap and actually removes 118 million allowances. But if the new manufacturing incentive creates an extra 118 million allowances, above the cap, those household savings are cut in half. That’s because adding another 118 million allowances to the market is projected to create an oversupply of allowances and result in more undersubscribed auctions.

When auctions don’t sell out, Californians lose the revenue that would have been used to lower their utility bills. A separate analysis from UC Santa Barbara’s Environmental Markets Lab confirms that adding 118 million more allowances to the program via the MDI would reduce funding to the California Climate Credit and the GGRF. If the MDI is fully utilized over the next four years, the study found auction revenues could be cut by $4 billion.

CARB’s April proposal to add extra allowances to the program doesn’t just weaken the cap — it also puts in jeopardy the program’s affordability revenues. At the exact moment California needs to be strengthening this program, CARB is proposing to give billions in additional free allowances to industry at the expense of households.

CARB should remove the MDI to restore the cap and finalize this rulemaking

The good news is that CARB has real options to fix this problem, but it must act fast. The simplest approach is to remove the Manufacturing Decarbonization Incentive from this rulemaking package and take it up properly in the next rulemaking, a process which CARB has already stated will be necessary to deal with post-2030 allowance allocations. Revisiting the MDI in the next rulemaking would give CARB and stakeholders the time needed to design this new feature in a way that helps — rather than hurts — emissions reductions. Given the urgency of finalizing the current rules promptly so they can be implemented this fall, this is the option most likely to result in a final rule that meets the emissions requirements of this program and is implemented on schedule.

If CARB keeps the MDI in this rulemaking, it must be restructured so that the allowances funding the incentive are drawn from under the cap, not created above it.

The clock is ticking for CARB issue an updated proposal with a credible emissions cap aligned with California’s climate targets. That is the program California needs, and CARB should deliver it.