California legislators will leave for their summer recess after they wrap up work on Friday, keeping plans for a reauthorization of the state's cap-and-trade program in limbo for the next month.
Lawmakers held hearings this week on potential reauthorization vehicles, with the Assembly environment committee examining SB 840 on 14 July, and its Senate panel counterpart reviewing AB 1207 on Thursday. The cap-and-trade program sunsets in 2030.
But in the nearly five months the bills have cycled through the legislature, lawmakers have yet to provide details on how they would extend the program, a source of frustration and uncertainty for market participants.
Making allowances
Governor Gavin Newsom (D) proposed a fast and "clean" reauthorization in May, with little-to-no changes to the program, through a budget trailer bill. But lawmakers were not keen on the idea and instead opted to take their time to consider ways to keep the program affordable and to potentially overhaul some of its mechanics.
Both chambers have convened work groups for reauthorization negotiations, but their preferred "reform" and affordability approaches remain behind closed doors. The hearings this week advanced the bills to the Senate and Assembly appropriations committees without adding any new language.
Significant areas of interest are carbon offsets, no-cost allowance allocations for certain industries, cost-containment measures and environmental justice concerns, said Dallas Burtraw, a senior fellow at nonprofit energy and environmental policy think tank Resources for the Future and a former member of the state's Independent Emissions Market Advisory Committee (IEMAC).
Not all these items are likely to make the final legislation, and odds are a final agreement will lean closer to Newsom's proposal, leaving it to the California Air Resources Board (CARB) to make any substantial program changes.
Ideas such as ending the use of carbon offsets — a compliance tool generated by projects that reduce GHG emissions in California and around the US that are not covered by the state's emissions cap — would contradict the legislature's plans to focus on affordability, according to Joey Hoekstra, a policy associate at International Emissions Trading Association (IETA).
Advocacy groups such as the California Environmental Justice Alliance have pushed for the extension legislation to include a redistribution of no-cost allowances, particularly an end to such allocations for refiners.
But during the Assembly committee meeting this week, lawmakers expressed concern about retaining the state's existing refineries, given planned closures by Valero and Philips 66.
CARB provides no-cost allowances to emissions-intensive traded-exposed (EITE) industries to minimize the potential for emissions leakage, when an industry leaves for a state with less-stringent or no emission reduction requirements.
Assembly member Al Muratsuchi (D), who has three refineries in his district including the one Philips 66 is closing in Los Angeles, expressed concern that further closures will drive up fuel prices and potentially trigger a "political backlash" against the state's climate goals.
Political will in the Senate also appears to be insufficient for this type of change to EITE allocations.
"I expect that industry will prevail and they will continue to receive free allocation," Burtraw said.
Tick Tock
When legislators return from their recess on 18 August, they will have 21 working days, or until 12 September, to pass their reauthorization plan.
Completing an extension of the cap-and-trade program sooner rather than later is likely a priority for Newsom, who finishes his final term as governor next year.
Lawmakers will need to weigh their desire for significant program changes with the need to quickly provide certainty to the carbon market. Revenue at the quarterly allowance auctions since mid-2024 has declined because of the lack of clarity, resulting in less-than-expected money for the state's climate project funds.
If lawmakers cannot pass the extension this year, the 2026-27 session presents its own set of complications. Legislators historically focus on localized policy efforts rather than sweeping climate bills in such election-year sessions.
In addition, a delay will affect CARB's plans to finalize and implement a package of program changes, including shifting the program's mandate to a 48pc reduction in emissions by 2030, from the current 40pc.
"I don't know exactly when that rulemaking would start but CARB has pretty clearly signaled that they're waiting for the legislature to act on reauthorization before they take up the rulemaking," said Katelyn Roedner Sutter, California state director for the Environmental Defense Fund and an IEMAC member.
The agency signaled [earlier this year] that it could implement the long-delayed changes mid-2026, rather than the traditional regulatory start of 1 January, if needed.
