California Senate Democrats are challenging Gov. Gavin Newsom’s administration over new carbon-market rules that could redirect billions of dollars away from climate programs, setting up a budget fight with major implications for transit, drinking water, affordable housing and air-quality projects across the state.
At the center of the dispute is a plan approved by the California Air Resources Board that would provide free pollution allowances to oil refineries and other large industrial polluters if they commit to investments in clean energy or efficiency upgrades. Senate Democrats say the program threatens a climate-funding agreement reached last year between Newsom and lawmakers, and they are trying to use the state budget to stop it.
Sen. Eloise Gómez Reyes, a San Bernardino Democrat who chairs the Senate’s climate budget subcommittee, said the state should honor the agreement that was negotiated when lawmakers extended California’s carbon market through 2045.
“We really need to stay to the deal,” Reyes said.
The Senate’s budget proposal, released last month, would block the new incentive program until the administration shows the state can still fund the climate commitments made in last year’s agreement. Senate Democrats are calling their approach “Deal is a Deal,” a pointed message to Newsom as budget negotiations continue.
The stakes are substantial. Money from California’s carbon market helps pay for programs such as public transit, safe drinking water, neighborhood air monitoring, wildfire protection and affordable housing near transit. Many of those programs are intended to benefit communities that face heavy pollution burdens and limited public investment.
The Senate plan also puts pressure on some of Newsom’s own priorities, including funding for high-speed rail, wildfire programs, electric vehicle incentives and a proposed tax credit for sustainable aviation fuel.
California’s carbon market, launched in 2013, is designed to limit greenhouse gas emissions by requiring major polluters to obtain allowances for the carbon they emit. Companies can buy those allowances at state auctions, generating billions of dollars for climate-related programs.
Last year, Newsom and lawmakers agreed to extend the system, now rebranded as “cap and invest,” through 2045. The agreement set a spending order for the money raised through carbon allowance auctions. Under that deal, high-speed rail would receive $1 billion annually before many other programs, and lawmakers would control another $1 billion each year for their own priorities.
Other programs, including affordable housing near transit, cleaner buses and rail service, safe drinking water, wildfire prevention and local air monitoring, were placed further down the funding list.
But last month, amid concerns over rising gasoline prices and after heavy lobbying from the oil industry, the Air Resources Board adopted changes that reduce the number of allowances sold at auction through 2030. With Newsom’s support, the board also created the Manufacturing Decarbonization Incentive, which could provide up to $4 billion in free allowances to companies that invest in emissions reductions. About half of that amount is expected to go to the fossil fuel industry.
Critics say the changes could dramatically shrink the money available for climate programs. The Legislative Analyst’s Office has estimated the new rules could cut annual auction revenue from about $4 billion to roughly $2 billion, potentially leaving little or no funding for some community-focused programs.
Sen. Scott Wiener, a San Francisco Democrat, criticized the state’s response to pressure from the oil industry.
“It’s unfortunate that the state of California empowers the oil industry to freak everyone out and adopt bad policies,” Wiener said.
Newsom’s office defended the changes, saying they are meant to keep the carbon market stable while addressing costs for consumers and industry.
Anthony Martinez, a spokesperson for the governor, said the administration is trying to preserve California’s climate program in a difficult political and economic environment.
“That is not a retreat from climate leadership — it’s how California keeps leading while the federal government is retreating,” Martinez said.
The Senate’s counterproposal would preserve the $1 billion controlled by lawmakers and then direct up to $2 billion toward housing, transit, clean air and drinking water programs. Newsom’s priorities would be moved lower in the funding order. If carbon-market revenue falls to $2 billion, programs such as Cal Fire, high-speed rail and other administration priorities could receive little or no money from that fund.
Sen. Jesse Arreguín, an Oakland Democrat who chairs the Senate housing committee, questioned why the state would risk reducing funding for affordable housing during a severe housing crisis.
“Why, at this time … would we take away critical funding to build affordable homes in California?” Arreguín said.
Wiener said transit systems also should not be left vulnerable to annual funding fights.
“Every year, transit funding becomes a political football,” he said.
Assembly Democrats have not taken the same position as the Senate. Their budget plan does not directly address the Air Resources Board rule change, and they have not advanced an alternative. Assemblymembers Jacqui Irwin and Cottie Petrie-Norris, Democrats who lead key climate and energy committees, have supported the board’s approach, saying it reflects the Legislature’s interest in affordability, including the possibility of providing more help with electricity costs.
Newsom and lawmakers face a June 30 deadline to approve a state budget before the new fiscal year begins. However, much of the climate spending dispute could continue beyond that date, since some of the funding decisions can be worked out before the legislative session ends in September.
The fight has already slowed some of the governor’s proposals. Newsom in January proposed spending $200 million on electric vehicle incentives, including $115 million from the climate fund. Senate Democrats have delayed negotiations on that item, and discussions could continue through the summer.
The Senate also rejected Newsom’s proposal for a sustainable aviation fuel tax credit. The governor has argued the credit would encourage production of cleaner fuel and support refinery jobs. The proposal would allow eligible producers to pay less into the state’s road repair fund. It followed lobbying by Phillips 66, the only company that has publicly said it would benefit from the tax credit.
Supporters of the Air Resources Board’s new manufacturing incentive program say it is a practical tool for reducing emissions while keeping major employers in California. The board says companies would receive allowances only if they cut their own emissions and that the program includes safeguards requiring companies to return allowances if they fail to meet their commitments.
Lindsay Buckley, a spokesperson for the Air Resources Board, said the cap-and-invest program was revised to reduce pollution in a cost-effective way, protect ratepayers and keep businesses operating in the state.
“The program was never designed to maximize auction revenue,” Buckley said.
Opponents see the program differently. They argue that giving free allowances to major polluters amounts to a subsidy without enough assurance that emissions will actually fall. Some critics also warn the changes could make it harder for California to meet its legally required 2030 climate targets.
The Air Resources Board approved the overhaul on a 10-3 vote, but several members raised concerns. Before the new incentive program begins, the board required further review.
The Senate proposal would restrict climate-fund spending unless the Department of Finance certifies that last year’s agreement can still be funded. It also would prevent the Air Resources Board from distributing the new industrial allowances unless state officials determine the program aligns with California’s climate goals, helps lower gasoline prices and leaves enough funding for endangered climate programs.
The dispute could carry broader political consequences for Newsom, who has often presented California as a national and international leader on climate policy.
Katie Valenzuela, a policy advocate who works on environmental justice issues, said the rule change could damage the governor’s climate record if it is not revised.
“If this rule goes forward and isn’t fixed, this is a huge stain on his climate legacy,” Valenzuela said. “He is showing loud and clear that the most vulnerable residents who are most impacted by climate change are not his priority.”
Original source: CalMatters
