A pending renewal of California's greenhouse gas (GHG) emissions cap-and-trade program is caught up in a maelstrom surrounding the planned shutdown of two refineries in the state and fears about its tightly supplied and often volatile products market.
The cap-and-trade program requires a 40pc reduction in GHG emissions from 1990 levels by 2030. It includes a special category which gives free allowances to certain industries including refiners to cover a portion of their direct emissions. Refiners separately are also responsible for emissions from the use of road fuels, but they do not receive any allowances for them.
The issue of the free allowances has emerged as one of the major sticking points as California lawmakers seek to extend the cap-and-trade program, which sunsets in 2030, during the current legislative session, according to a source privy to the negotiations.
The state in recent months has been wary about upsetting refiners who see the allowances as key to any cap-and-trade extension.
The California Air Resources Board (CARB), which administers the program, allocates free allowances to utilities operating in state and hard-to-abate industries at risk of emissions leakage, known as emissions-intensive, trade exposed (EITE).
Emissions leakage is when an entity leaves for an area with less stringent or no emissions reductions requirements.
While state lawmakers come down to the wire on negotiations on an extension approach ahead of the 12 September session deadline, key Democrats in the Assembly and Senate were still at odds as of last week on free allowances for refineries.
The Assembly favors repealing requirements for CARB to tie these allowance allocations to earlier program methodologies added in the 2017 program extension.
The Senate leans towards eliminating allowance allocations, specifically for the oil and gas sector, according to a source privy to discussions.
CARB distributes free allowances to 13 of the state's refineries, including the Phillips 66 Los Angeles refinery set for closure this year. The agency issued 17.7mn metric tonnes of allowances to 23 facilities included under the Refining and Hydrogen Production sector for their 2025 emissions last October. The agency only releases information on these allocations to industry in aggregate by sector, citing the potential for revealing confidential information by publishing facility-level allocation information.
Program auctions, the primary way to buy allowances, have settled on average at $27.97/t this year, putting this year's sector allocation at just over $496mn.
Newsom walking a tightrope
US refiner Phillips 66 plans to start winding down operations at its 139,000 b/d Los Angeles refinery this month with a complete shutdown by the end of 2025. In addition, Valero aims to close or repurpose its 145,000 b/d Benicia, California, refinery by April 2026.
The planned closures, which amount to losing 17pc of the state's refining capacity, have put governor Gavin Newsom (D) in a tough position of trying to ensure that more refiners do not leave the state in the short term while also staying true to his environmental pledges, including the phase-out of petroleum-based fuels by 2045.
In light of the closures, Newsom directed the California Energy Commission (CEC) to work closely with refiners to ensure adequate supplies of transportation fuels. He also proposed a plan to stabilize the state's petroleum market, in part by expediting permitting of new oil and gas wells, a move that upset environmental groups.
The CEC voted on 29 August to pause rulemaking for five years on a refiner profit cap and a penalty for non-compliance. The refiner margin cap is part of a multi-year legislative effort by Newsom to mitigate price volatility in the state after gasoline prices rose to record highs in 2022.
The cap-and-trade renewal presents another challenge for the governor who has been gaining national prominence as a foe to President Donald Trump and a possible presidential contender in 2028.
Newsom and the Assembly appear to be largely aligned on their plans for a cap-and-trade extension, a source said.
The governor is not in support of removing allocations to industry, particularly the oil and gas sector, according to Ryan Schleeter, communications director of the Climate Center, a non-profit group favoring a phase-out of free allocations to the sector.
"The governor's office is not supportive of that because of the perception that it would raise prices," Schleeter said. "Even if we've pushed back on that perception, that's been their stance from the beginning."
