California’s carbon market changed this year, and the next governor will inherit the fallout

In September, Gov. Gavin Newsom unveiled what is likely one of the last large climate announcements of his tenure: California will move forward with linking its decade-old carbon market with a newly formed market in Washington state, aiming to merge it with the market California already shares with Quebec.

Newsom said California was “choosing certainty, partnership, and clean energy” amid a stream of federal climate policy rollbacks.

But the announcement didn’t distract environmental advocates from the sting of a challenging year back home for the so-called “cap-and-invest” program. As Newsom leaves his post, many policy and climate experts say the adjustments to the program put California’s climate goals further out of reach. The program provides billions of dollars in funding for climate and other programs.

Yet with little talk of climate policy in the governor's race, Californians are largely left guessing about how Steve Hilton or Xavier Becerra would handle the program or California’s broader climate ambitions. The Becerra campaign did not respond to multiple emailed requests for comment. Hilton told CalMatters he would move to suspend the carbon market — which he called “a disaster of a program” — entirely.

Twenty years ago, lawmakers made California the first state to mandate broad cuts in greenhouse gas emissions with AB 32, the landmark carbon emissions reduction law, which authorized the subsequent creation of a market. The law requires the program to be as cost-effective as possible while maximizing benefits to the state’s economy.

Whoever wins in November can appoint a handful of new members to the California Air Resources Board, which has to finish writing the linkage rules and will propose the budget that leans on carbon market revenue. The next governor will also help decide how aggressively California leads on climate, after a year of mixed signals about where the program is headed.

“It's really set up the politics of these issues to get worse and not better over time, and that is the problem that is being tossed like a live grenade into the lap of the next governor,” said Danny Cullenward, an economist who sits on an advisory committee focused on the carbon market.

A question of climate leadership

In May, a process to reauthorize the keystone climate program ended with a controversial agreement that the Legislative Analyst’s Office projects will roughly halve annual auction revenue, offering about $2 billion less in funding for priority environmental programs while opening a separate pool of free permits for polluters that pledge to invest in decarbonization, valued at as much as $4 billion.

Oil companies fought the initial cap-and-invest reauthorization proposal, arguing it would encourage companies to leave the state or further increase fuel prices. The California Air Resources Board, which manages the program, said the increased allowances it eventually approved were meant to balance affordability and economic uncertainty alongside emissions targets. In an email, a board spokesperson said the new incentives would not have any impact on the market’s auction revenue. (The Western States Petroleum Association, which represents refiners in the state, declined an interview for this story.)

The concern comes as California prepares to elect its next governor and nears its own 2030 target to reduce greenhouse gas emissions 40% below 1990 levels, on its way to zeroing out emissions by 2045.

“This is not a question anymore of whether or not we'll reach the target. This is a guarantee that we won't,” said Katie Valenzuela, a consultant for Communities for a Better Environment who previously co-chaired an environmental justice committee that advised regulators on the state’s program.

State officials have long framed cap-and-invest as a backstop, keeping the state on track for its climate targets by ratcheting down the emissions limit even if other programs fall short. Advocates worry the changes will have a chilling effect rather than signal the market’s long-term strength, just as California loses ground to federal rollbacks.

“It is going to become very difficult for us to say we are a climate leader when we are visibly missing our targets,” Cullenward said.

Others remain more optimistic. Cap-and-invest is one tool in California’s toolbox, even if this year dulled it. Meredith Fowlie, an economist at the University of California, Berkeley, said the program is not optimal but has done the basics of its job: sending a price signal to drive down emissions while raising revenues for important programs.

Linking with Washington’s market will strengthen California’s program overall, air board Chair Lauren Sanchez wrote to Newsom in September. In addition to creating a larger market with more credits available to industries in both states, the link is expected to raise carbon credit prices in California, where recent auctions have yielded prices at state minimums. A connected market could also lower prices in Washington, making the state’s more stringent program less lucrative. Low prices reduce the program’s revenues and starve polluting industries’ incentive to invest in lowering emissions.

Regulators have not yet established a rulemaking timeline for the linkage process, a spokesperson for the board told CalMatters, but the board expects the joint market to begin operating next year.

Chloe Ames, policy adviser at NextGen Policy, an organization founded by former gubernatorial candidate Tom Steyer, called linkage a strong step forward. The group is disappointed by the other changes made to cap-and-invest this year, she said, and will keep urging the legislature to adjust the industry incentives and California’s next governor to take climate seriously.

“It's been more challenging for us to say that we're a climate leader, and that's why we need to step up,” Ames said. “In this work, what are you going to do other than to be hopeful?”

Kicking the can

Since the market began, revenue has funded a wide range of priorities, including job training, clean energy and affordable housing. Managing those investments, alongside costs to Californians and emissions cuts, has been a balancing act — one the next governor will inherit, Fowlie said. “Some of those objectives are potentially in tension,” she said. “A sole focus on designing the program to meet our greenhouse gas reductions misses this really important larger picture that this program is about more than that.”

The legislature approved the program’s reauthorization and the state’s air regulators lay out its rules, but a governor has influence over how that process plays out and can exert his own priorities, Cullenward said.

Beyond the carbon market, governors have wider latitude: Newsom has used his executive authority on wildfires, water shortages and clean energy.

In the governor’s race, neither candidate has centered climate in his campaign. In their one debate, both candidates steered a question about climate change’s impacts toward affordability concerns, offering little detail on the actual climate policies they favor.

“I think it's fair to say that climate probably isn't the top priority of either one,” said Barry Vesser, the chief operating officer at the Climate Center, a California environmental group that opposed this year’s changes to the carbon market.

Becerra’s campaign website emphasizes affordability in climate policy. He has faced criticism for defending Chevron and for accepting large oil and gas donations. As attorney general, though, he defended the state’s carbon program in court, arguing that “carbon pollution knows no borders” and promising that California would fight the first Trump administration’s rollbacks.

Hilton has rallied against California’s Democratic establishment, and he told CalMatters he would aim to de-bloat the bureaucracy guiding the state’s climate policies. He likened the market’s recent programmatic changes to “rearranging deck chairs on the Titanic.” Hilton, who considers himself an environmentalist, has argued for redirecting resources from current climate programs and wildfire mitigation toward management of the state’s natural lands. He also wants to rework renewable incentives to create “a level playing field” for technologies like rooftop solar, hydropower and geothermal energy. His strategy, he claims, will reduce economic burdens for Californians while exceeding the state’s climate targets.

The relative lack of attention to climate policy is a missed opportunity, according to Valenzuela and Vesser. They see a chance for the next governor to more directly and publicly connect climate programs to affordability, a key concern for likely voters and an issue on which Becerra and Hilton agree.

Ultimately, the race’s rhetoric has advocates like Valenzuela “freaked out.” She points to a “huge chasm” between present reality and the policies that would put California on the right track. The state has little time left for the aggressive action its climate ambitions require, she and other advocates say, and it’s time to start dealing in reality.

“There's not many more governors left we can kick the can to before that bill comes due,” Cullenward said.

This article was originally published on CalMatters and was republished under the Creative Commons Attribution-NonCommercial-NoDerivatives license.