Friday, 8th May 2026

Legislative Analyst’s Office

California’s proposed amendments to the Cap and Invest Program are drawing major attention as lawmakers, regulators, utilities, industries, and climate stakeholders debate the future of the state’s greenhouse gas reduction strategy. Presented on May 6, 2026, to the Senate Environmental Quality Committee and the Senate Budget and Fiscal Review Subcommittee, the proposals outline significant changes to California’s carbon market framework through 2045. California has established statutory goals to reduce greenhouse gas emissions to at least 40 percent below 1990 levels by 2030 and at least 85 percent below 1990 levels by 2045. The Cap and Invest Program remains one of the state’s primary tools to achieve those targets. Under the program, the California Air Resources Board (CARB) sets a declining cap on greenhouse gas emissions and issues allowances equal to the annual emissions limit. Covered entities can comply by reducing emissions, purchasing allowances, or buying offsets. The proposed amendments follow recent legislation including AB 1207 and SB 840, which extended the program until 2046 and introduced multiple structural changes. One of the most closely watched proposals would remove 118 million allowances through 2030 to support California’s climate targets. However, the revised proposal would also add back up to 118 million allowances above the cap through a Manufacturing Decarbonization Incentive program valued at an estimated $4 billion. The Manufacturing Decarbonization Incentive program would allow industrial entities to apply for additional allowances to support decarbonization projects. Half of the allowances would be reserved for refining and similar industries, while the other half would support other industrial sectors. The proposal has intensified discussions about balancing environmental ambition with affordability and industrial competitiveness. The amendments also increase allowances for industry by revising the formula used to calculate free allocations. At the same time, allowances for electric utilities would decline compared to existing regulations. CARB also plans to gradually shift allowances from natural gas utilities to electric utilities beginning in 2028, with 70 percent of the transition completed by 2031. The remaining allowances would support low income natural gas customers. Another major proposal would place offsets under the cap, meaning an allowance would be removed from the market for every offset used for compliance. CARB must also update offset compliance protocols by January 1, 2029, and prepare a study on offsets by December 31, 2026. The revised amendments could significantly reduce revenues flowing into the Greenhouse Gas Reduction Fund. CARB estimates annual revenues could fall to around $2 billion per year, roughly half the level seen in recent years. This could affect funding for high speed rail, wildfire resilience, affordable housing, low carbon transit operations, and community air protection programs. The California Air Resources Board is expected to vote on the revised regulations on May 28, 2026, following the close of the 15 day public comment period on May 4. The outcome could shape the direction of California’s climate policy, industrial decarbonization efforts, and carbon market structure for the next two decades.