Overview of New Updates to the Cap-and-Invest Program

analysis full AN LAO REPORT Overview of New Updates to The Cap-and-Invest Program GABRIEL PETEK | LEGISLATIVE ANALYST | DECEMBER 2025 SUMMARY Legislature Recently Extended and Modified Cap-and-Invest Program. In September 2025, the Legislature adopted Chapter 117 of 2025 (AB 1207, Irwin) and Chapter 121 of 2025 (SB 840, Limón), which extended and made various changes to the cap-and-invest program. These changes: (1) modified the program’s design features and allowance allocations; (2) added reporting, evaluation, and oversight provisions; and (3) changed the allocation of Greenhouse Gas Reduction Fund (GGRF) revenues. Issues for Legislative Consideration and Oversight. In this report, we summarize the major changes contained in AB 1207 and SB 840 and identify some key potential implications, including: • Extension Provides Certainty That Key Climate Strategy Can Continue. The passage of these two pieces of legislation ensures one of the state’s main climate strategies—the cap-and-invest program— can continue for the next two decades. Also, by providing clear statutory authority, the legislation removes potential legal uncertainty, which helps businesses make long-term investment decisions and facilitates the state’s plans for how it can pursue its greenhouse gas (GHG) goals. • While the Legislation Maintains Most Aspects of the Program, Changes Reflect Legislative Goals. The legislation maintains most aspects of the program, including retaining significant discretion for the implementing department, the California Air Resources Board (CARB), to make important decisions on the program’s design. However, the legislation also makes some notable changes to reflect legislative priorities and goals, such as related to affordability and GHG reduction. • Changes in GGRF Allocations Will Affect Funding for Particular Programs. Senate Bill 840 allocates GGRF to a similar mix of programs as has been the case historically, while making some key modifications that will affect the funding levels that particular programs receive. For example, SB 840 makes some allocations fixed amounts rather than percentage allocations, which frees up funding for other legislative priorities in years when revenues are relatively high. • Certain Effects of the Legislation Will Become Clearer Over Time and Will Depend on CARB Decisions. The legislation has important potential implications for key state priorities, such as addressing climate change and preserving affordability. However, how the impacts will unfold still is uncertain and will depend heavily on CARB’s forthcoming decisions. • Some Important Legislative Decisions Remain. Some important decisions remain for the Legislature, such as related to establishing a new oversight entity envisioned by the legislation and spending the portion of GGRF that is not already allocated to specific programs through statute. • Legislative Oversight of Program Continues to Be Important. Continued and robust legislative oversight of the program—including related to CARB’s future rulemakings—can help ensure that it operates effectively and balances competing policy trade-offs in a way that is consistent with legislative priorities. • Oversight Provisions Have Potential to Help Ensure the Program Is Meeting Intended Goals, but Effectiveness Will Depend Upon Implementation. The new oversight provisions added by AB 1207 and SB 840 could provide the Legislature and other interested parties with important information to help direct future policy and regulatory decisions. The ultimate effectiveness of these provisions, however, will depend on the specifics of how they are implemented. www.lao.ca.gov 1 analysis full AN LAO REPORT INTRODUCTION Legislature Adopted Cap-and-Invest we refer to the program as cap-and-invest Legislation at the End of the 2025 Session. throughout this report.) In September 2025, the Legislature adopted This Report Summarizes and Comments on a package of several pieces of energy and the 2025 Cap-and-Invest Legislation. This report climate-related legislation. This package included begins with some background information. Next, we two bills, AB 1207 and SB 840, that extended and provide a summary of the key components of made important changes to the cap-and-invest AB 1207 and SB 840, which include changes program, one of the state’s core efforts aimed that (1) modify the program’s design features at reducing GHG emissions. (This program and allowance allocation; (2) add reporting, historically has been called “cap-and-trade.” As we evaluation, and oversight provisions; and (3) modify discuss later in this report, AB 1207 expresses the allocation of the auction proceeds that are the Legislature’s intent to rename the program deposited into GGRF. Finally, we summarize “cap-and-invest.” Accordingly, for simplicity, some notable implications of these two pieces of legislation and provide some concluding thoughts. BACKGROUND State Created Cap-and-Invest Program • Reducing their GHG emissions. 13 Years Ago to Help Meet Climate Goals. • Obtaining allowances (essentially a permit to To try to reduce California’s contributions to emit one ton of carbon dioxide equivalent) to climate change and encourage innovations that cover their emissions. influence actions in other states and countries, the • Purchasing “offsets” (paying to support a Legislature has adopted three successive statewide GHG reduction project outside of the capped GHG emission reduction goals for 2020, 2030, sectors) to cover their emissions. and 2045. The state has implemented various We provide additional background on the programs and policies in order to meet these goals. cap-and-invest program in other publications, For example, in 2006, the Legislature adopted including California’s Cap-and-Trade Program: Chapter 488 (AB 32, Núñez), which authorized Frequently Asked Questions and Assessing CARB to create a market-based mechanism to California’s Climate Policies: Cap-and-Trade reduce GHG emissions from large emitters through Reauthorization. 2020. Under this authority, CARB established the cap-and-invest program—which first took effect in In 2017, Cap-and-Invest Was Extended 2012—as the market-based mechanism. Through 2030. Subsequent to AB 32, in 2017, the Legislature enacted Chapter 135 (AB 398, Cap-and-Invest Program Aims to Limit the E. Garcia) to extend the explicit statutory Overall Level of Emissions From Large Emitters. authorization for the cap-and-invest program Under the cap-and-invest program, CARB issues through 2030. With the passage of AB 398, the a limited number of allowances each year—this Legislature opted to provide more specific direction is what is referred to as the “cap” on emissions. about certain program design features, including Entities that must comply with the program the use of offsets. However, AB 398 still granted represent roughly three-quarters of the state’s CARB broad authority to make decisions about GHG emissions and include oil refineries, electricity many aspects of the program, such as determining generators and importers, and manufacturing the number of allowances to be issued each year facilities. These “covered entities” can meet and the maximum amount at which an allowance compliance obligations under the program through could be sold (known as the price ceiling). a combination of the following actions: 2 LEGISLATIVE ANALYST’S OFFICE analysis full AN LAO REPORT Governor Proposed Budget Trailer …But Legislature Extended a Modified Legislation to Extend Program Largely “As Version of Program Through the Policy Process Is” Through 2045… In May 2025, the Governor Instead. The enacted June 2025 budget agreement proposed budget trailer legislation to extend did not include action on the Governor’s proposed the cap-and-invest program through 2045. The budget trailer legislation, instead deferring proposal generally would have maintained the consideration of the cap-and-invest program to the same statutory guidance as was contained in policy process. Ultimately, in September 2025, the AB 398 (sometimes referred to as a “straight Legislature adopted two policy bills related to the reauthorization”). (We discussed this proposal in program—AB 1207 and SB 840. Assembly Bill 1207 The 2025-26 Budget: May Revision Proposals for included most of the changes to the program itself Cap-and-Trade Reauthorization and Greenhouse and to the allocation of the program’s allowances, Gas Reduction Fund.) while SB 840 mainly focused on modifications to the allocation of the associated GGRF revenues. We discuss these two pieces of legislation in greater detail below. KEY COMPONENTS OF LEGISLATION Assembly Bill 1207 and SB 840 include from the subsequent year’s allowance budget. provisions that (1) make various changes to the (This approach is often referred to as placing offsets program’s design features and allocation of “under the cap.”) This is a significant change from allowances; (2) add new reporting, evaluation, the program’s prior approach, under which the use and oversight requirements; and (3) modify the of offsets did not affect the number of allowances allocation of GGRF revenues to various programs. available for purchase and use by entities covered under the program. Senate Bill 840 also includes Key Changes to Program’s Design some provisions related to offsets. For example, Features and Allowance Allocations the legislation requires CARB to update the rules Assembly Bill 1207, and to a lesser extent governing the eligibility and quantification of offsets SB 840, modify the design of the program and (known as offset compliance protocols) to reflect the use of the free allowances that are provided the best available science by January 1, 2029, to utilities and industry. We summarize the key and evaluate them for potential update every five changes in Figure 1 on the next page, and briefly years thereafter. highlight a few of them below. Modifies Utility and Industry Allowances. Extends Program Through 2045 and Assembly Bill 1207 makes various modifications to Renames It Cap-and-Invest. Assembly Bill 1207 the way free allowances are provided to utilities and extends CARB’s explicit authority to operate the industry, including: program—which had been set to expire at the end • Reallocates Allowances Across Different of 2030—through the end of 2045. The legislation Types of Utilities. Currently, both natural gas also states the intent of the Legislature to rename and electric utilities receive free allowances. the program cap-and-invest. These are intended to be used primarily to Makes Some Changes to Program’s Design benefit ratepayers, such as by providing Features. Assembly Bill 1207 and SB 840 make annual or biannual rebates known as the some changes to the design of the cap-and-invest “California Climate Credit.” Assembly Bill 1207 program. Most notably, they modify the way the requires CARB, by January 1, 2031, to design program handles offsets. For example, AB 1207 regulations that shift the free allowances that specifies that for each offset that is used to meet natural gas utilities currently receive to instead a compliance obligation, an allowance is removed www.lao.ca.gov 3 analysis full AN LAO REPORT Figure 1 Key Changes in Cap-and-Invest Design Features and Allowance Allocations Prior Law and/or Regulation AB 1207 and SB 840a Program Sunset and Name • Sunset date of January 1, 2031. • Sunset date of January 1, 2046. • Program named “cap-and-trade.” • Expresses intent to rename the program “cap-and-invest.” Linkage to State Climate Goals • General guidance to CARB to set emission limits to meet the • Explicit requirement that CARB set emission limits to ensure the state’s GHG reduction goals. state meets, at a minimum, its 2030 and 2045 goals. Use of Offsets • Use of offsets does not affect allowance budget. • Reduces the subsequent year’s allowance budget for each offset used. • Covered entities can meet 6 percent of compliance obligations • CARB to determine the degree to which covered entities can meet with offsets in 2026 through 2030. compliance obligations with offsets (no more than 6 percent). • No requirement that CARB update its offset protocols. • CARB must update its offset compliance protocols by January 1, 2029, evaluate them for potential update every five years thereafter, and consider expanding protocols to new sectors. • No requirement for CARB to prepare a study on offsets. • CARB must prepare a study on offsets by December 31, 2026. Allowances Provided to Utilities • Electric and natural gas utilities allocated free allowances • CARB must develop regulations to transition gas utilities’ free (roughly one-quarter and one-eighth of total allowances, allowances to electric utilities by January 1, 2031. respectively) to benefit ratepayers. • 15 percent of electric IOU allowances may be provided for • 5 percent of electric IOU allowances must be provided to support clean energy and energy efficiency. a California Transmission Accelerator Revolving Fund through July 1, 2031. • Electric IOU rebates must be provided to residential, small • Electric IOU rebates must be provided to residential customers. business, and emissions-intensive trade-exposed retail Small business and certain retail customers may also be provided customers. rebates, as determined by CPUC. • Electric IOU rebates provided twice annually (in April and • Residential electric IOU rebates must be provided in up to the four October) and natural gas rebates provided once annually (in highest-billed months. April). • Electric IOUs required to adopt and implement customer • Electric IOUs required to update their customer outreach plans. outreach plans to inform the public about utility rebates. • POUs can use allowances for various purposes that benefit • POUs must use the incremental allowances they receive from the ratepayers. transition away from natural gas allowances for customer rebates. (No changes to requirements for POUs’ other allowances.) Allowances Provided to Industry • CARB must assume the highest leakage risk for all industries. • Starting in 2031, CARB must distribute allowances to minimize leakage risk to cost-effectively meeting the state’s climate goals. Price Ceiling • Proceeds from permits sold at the price ceiling must be used • Proceeds from permits sold at the price ceiling must be deposited to purchase offsets. into Climate Mitigation Fund to be appropriated by the Legislature to reduce energy costs and for other purposes. • General direction for CARB to consider avoiding adverse • CARB also directed to consider actions to ensure consumers are impacts on households, businesses, and the economy (among protected if it finds that the price ceiling and/or price containment various other factors) when establishing the price ceiling. reserve do not adequately protect consumers. a Most changes in the program design and allowance allocations are pursuant to Chapter 117 of 2025 (AB 1207, Irwin). However, some offset-related provisions are also included in Chapter 121 of 2025 (SB 840, Limón). CARB = California Air Resources Board; GHG = greenhouse gas; IOUs = investor-owned utilities; CPUC = California Public Utilities Commission; and POUs = publicly owned utilities. 4 LEGISLATIVE ANALYST’S OFFICE analysis full AN LAO REPORT be allocated to electric utilities. It further to consider actions to ensure consumers are specifies that the California Climate Credit protected—such as modifying the price ceiling— be provided to residential electric customers if it finds that the program’s structure does not of investor-owned utilities up to four times a adequately protect consumers. year (during the highest billed months) or to Adds New Reporting, Evaluation, and address unforeseen circumstances. Oversight Requirements • Reduces Allowances for Certain Industries. Starting in 2031, AB 1207 directs CARB Assembly Bill 1207 and SB 840 add several new to change how allowances are allocated requirements meant to enhance oversight and to industry to reduce the risk of leakage. accountability. As we discuss further below, these (Leakage occurs when companies move provisions express intent to create a new oversight their operations outside of California to entity, extend statutory authority and requirements avoid the need to comply with the program.) for some existing oversight entities, and augment Specifically, the legislation replaces an CARB’s reporting and evaluation requirements. existing statutory requirement—put in place Expresses Intent to Create a New Oversight by AB 398—that CARB assume the highest Entity. Senate Bill 840 expresses the Legislature’s leakage for all industries with a requirement intent to create a new entity to provide advice and that CARB distribute allowances in a way investigation services to the Legislature related that reduces leakage risk to cost-effectively to climate change, energy, environmental quality, meeting the state’s GHG reduction goals. resources, and water. This new entity—to be When this change is implemented, it could called the Legislative Counsel Climate Bureau reduce the number of free allowances (Climate Bureau)—is envisioned to be housed provided to industries that are deemed to be within the Office of Legislative Counsel. The roles at lower risk for leakage. and responsibilities of the new bureau are to be determined through subsequent legislation. Changes Related to the Price Ceiling. Assembly Bill 398 directed CARB to establish Makes Changes Affecting Existing Oversight a “hard” price ceiling, meaning a set maximum Entities. Assembly Bill 398 tasked various new amount at which an allowance could be sold. and existing entities with oversight roles related to To date, allowance prices have never gotten close the cap-and-invest program. Assembly Bill 1207 to that ceiling (roughly $95 per allowance in 2025). extends and modifies these oversight roles However, if allowance prices were to reach the as follows: ceiling, CARB could sell an unlimited number of • Extends Sunset for Prior Oversight permits at that price level. Effectively, this would Organizations and Modifies Certain ensure that the market price for allowances could Requirements. Assembly Bill 398 created not exceed the price ceiling level. While AB 1207 two new entities with oversight responsibilities does not explicitly change these policies, it does over the cap-and-invest program: the make a couple of changes related to the price Compliance Offset Protocol Task Force and ceiling. First, the legislation specifies that the the Independent Emissions Market Advisory proceeds from the sale of permits sold at the price Committee (IEMAC). Assembly Bill 1207 ceiling must be deposited into a newly established extends the sunset dates for these two Climate Mitigation Fund to be available, upon oversight organizations from the end of 2030 legislative appropriation, for direct rebates and to the end of 2045. Assembly Bill 1207 also other purposes. This is in contrast to AB 398, specifies that IEMAC members are subject which specified that these proceeds had to be to the state’s Political Reform Act. As such, used to pay for mitigation activities outside of the IEMAC members will be required to file annual capped sectors, such as those funded by offsets. conflict of interest forms and comply with Second, AB 1207 adds new direction to CARB certain other requirements. www.lao.ca.gov 5 analysis full AN LAO REPORT • Extends Legislative Analyst’s Office’s Makes Various (LAO’s) Annual Reporting Requirement. Changes to GGRF Allocations Assembly Bill 398 also established a Proceeds from the cap-and-invest auctions are requirement that our office report annually, deposited into GGRF. The Legislature has typically through January 1, 2031, on the economic approached appropriating GGRF revenues through impacts and benefits of the state’s GHG two methods, which we refer to as “statutory” and reduction targets and the state’s progress “discretionary” allocations. The statutory allocations towards achieving those targets. Assembly generally set aside ongoing GGRF funding each Bill 1207 extends this annual reporting year for certain programs or projects articulated requirement through January 1, 2046. in legislation. The Legislature then allocates the Requires CARB to Conduct Additional remaining discretionary GGRF revenues for various Reporting and Other Actions. Assembly Bill 1207 purposes through the annual budget process. and SB 840 also include various new requirements (We refer to these as discretionary allocations for CARB, including: because prior statute does not set them aside for specific programs but rather leaves them up to • Make Recommendations in Scoping Plan. the Legislature’s decisions in a given year. And, as Under current law, CARB is required to we discuss in further detail below, cap-and-invest prepare a Scoping Plan every five years that auction revenues can be allocated for any purpose, is meant to identify its strategy for achieving as they are considered akin to tax revenues. the state’s GHG targets. Assembly Bill 1207 Despite this labeling distinction, we would note that requires that future such plans include a all GGRF allocations are discretionary in the sense summary of the state’s progress toward that the Legislature has the authority to modify meeting its 2045 GHG reduction goal and them at any time.) Starting in 2026-27, SB 840 recommendations on statutory changes to modifies the existing statutory GGRF allocations further cost-effective emission reductions. that support particular activities. We summarize • Evaluate Cost Impacts. Assembly Bill 1207 these changes in Figure 2 and discuss them below. requires CARB to evaluate the cost impacts Changes Various Percentage Allocations to of the cap-and-invest program when it revises Set Amounts and Eliminates a Sunset. Under regulations for the program. prior law, certain programs received a percentage • Communicate With Legislature on Major of annual GGRF revenues. These consist of the Regulations. Under existing law, when CARB high-speed rail project, Affordable Housing and initiates major regulations, it is required to Sustainable Communities Program, Transit and conduct certain activities, including preparing Intercity Rail Capital Program, Low Carbon Transit economic analyses. Assembly Bill 1207 Operations Program, and Safe and Affordable adds a new requirement that CARB transmit Drinking Water Program. In contrast, beginning in these economic analyses to the Legislature. 2026-27, SB 840 provides these programs with The legislation also adds requirements fixed amounts of funding. These set amounts that CARB transmit any major regulations generally are equal to the funding levels the pertaining to the cap-and-invest program—as programs would have received under prior law if well as related board hearing agendas—to GGRF revenues totaled about $4 billion in a given relevant committees of the Legislature. year. (For reference, over the past decade, annual • Make Annual Presentations at Hearings. GGRF revenues have varied from a low of less than Assembly Bill 1207 requires that, upon $1 billion to a high of just over $5 billion.) Senate request, CARB and other departments Bill 840 also eliminates the prior sunset date for that receive GGRF funding must present the Safe and Affordable Drinking Water Program, annually to the Legislature’s Joint Legislative thereby extending its funding indefinitely. (The other Committee on Climate Change Policies and programs did not previously have statutory relevant budget subcommittees on GGRF sunset dates.) expenditures, as well as on new major cap-and-invest regulations. 6 LEGISLATIVE ANALYST’S OFFICE analysis full AN LAO REPORT Figure 2 Modifications to Statutorily Required GGRF Appropriations Pursuant to SB 840a Existing Statutory Program Department Allocations Starting in 2026-27b Starting in 2026-27, funding will be allocated first to the following programs: Manufacturing tax exemption N/A • Roughly $100-$140 million. • No changes (maintains • Sunsets on July 1, 2030. sunset). State Responsibility Area fee backfill CalFire • Roughly $70-$90 million. • No changes (maintains • Sunsets on January 1, 2031. sunset). Legislative Counsel Climate Bureau Legislative Counsel • None. • $3 million annually. Then second to the following programs: High-speed rail project HSRA • 25 percent of annual • $1 billion annually. revenues. • No sunset. Unspecified programs subject to Various • None. • $1 billion annually. appropriation Then third, if funding is available, to the following programs:c Affordable Housing and Sustainable SGC • 20 percent of annual • $800 million annually. Communities Program revenues. • No sunset. TIRCP CalSTA • 10 percent of annual • $400 million annually. revenues. • No sunset. Community Air Protection Program—AB 617d CARB • None.e • $250 million annually. Low Carbon Transit Operations Program Caltrans • 5 percent of annual • $200 million annually. revenues. • No sunset. Wildfire and forest resilience—SB 901f CalFire • $200 million annually. • $200 million annually. • Sunsets on June 30, 2029. Safe and Affordable Drinking Water Program SWRCB • 5 percent of annual revenues • $130 million annually. (up to $130 million). • Sunsets on June 30, 2030. Then fourth, remaining funding is subject to legislative appropriation for discretionary purposes. a Chapter 121 of 2025 (SB 840, Limón). b No sunset date unless otherwise noted. c Senate Bill 840 requires the Department of Finance to proportionately reduce the amounts for these programs if funding is not sufficient to fully support them and pay for state administrative costs. d Chapter 136 of 2017 (AB 617, C. Garcia). e AB 617 did not have a prior statutory allocation, but the program historically has received roughly $250 million annually on a discretionary basis. f Chapter 626 of 2018 (SB 901, Dodd). GGRF = Greenhouse Gas Reduction Fund; CalFire = California Department of Forestry and Fire Prevention; HSRA = High Speed Rail Authority; SGC = Strategic Growth Council; TIRCP = Transit and Intercity Rail Capital Program; CalSTA = California State Transportation Agency; Caltrans = California Department of Transportation; and SWRCB = State Water Resources Control Board. Continues Existing Funding Levels for maintained at existing levels. Senate Bill 840 also Some Allocations and Eliminates a Sunset. removes the existing sunset for the wildfire and Prior law provided three other programs with forest resilience funding. Notably, however, the fixed annual amounts of GGRF. Under SB 840, legislation does not modify the existing sunsets funding for these programs—which include that apply to the other two programs. Accordingly, wildfire and forest resilience activities specified the statutorily required GGRF allocations for the under Chapter 626 of 2018 (SB 901, Dodd), a SRA fee backfill and manufacturing tax exemption backfill of the State Responsibility Area (SRA) still are scheduled to end January 1, 2031 and fee, and lost revenue associated with AB 398’s July 30, 2030, respectively. expansion of a manufacturing tax exemption—is www.lao.ca.gov 7 analysis full AN LAO REPORT Adds a Few New Statutory Allocations. Senate Modifies Order in Which Program Allocations Bill 840 also adds statutory allocations for a few Are Made. Senate Bill 840 changes the order new programs, including the following: in which the GGRF statutory allocations are to be made each year. This, in turn, will affect • Set Aside for Future Legislative which programs ultimately are funded if there are Appropriation. The legislation sets aside years in which GGRF revenues are insufficient $1 billion annually to be appropriated by to fully support all of the statutory allocations, the Legislature through the annual budget as well as the costs to CARB and other state act or other statute. It also expresses the departments associated with administering the Legislature’s intent that some specific programs (known as state administrative costs). activities be funded from this $1 billion In Figure 2, we display the order in which SB 840 set aside in 2026-27, as discussed in the allocates funding to four categories of activities. nearby box. Specifically, beginning in 2026-27, first priorities • Community Air Protection Program. for available GGRF funds are the SRA fee backfill, The legislation provides a statutory allocation the manufacturing tax exemption, and the Climate of $250 million annually to implement Bureau. After those programs receive their allotted Chapter 136 of 2017 (AB 617, C. García). allocations, funding must next be provided to This program has not received a statutory the high-speed rail project and the $1 billion set allocation in the past. However, since the aside for discretionary allocations. The remaining passage of AB 398, the Legislature typically statutory allocations are next in priority order, to the has provided roughly this amount on an degree sufficient GGRF revenues remain. If GGRF annual basis for this program. funding is insufficient to fully support the statutory • Climate Bureau. The legislation allocates amounts for all of these programs and pay for state $3 million annually for the Climate Bureau administrative costs, then the legislation directs discussed above. This funding is contingent the Department of Finance to reduce the statutory on the adoption of subsequent legislation that allocations in this third category proportionately. formally establishes the Climate Bureau and identifies its roles and responsibilities. Legislative Intent for Discretionary Greenhouse Gas Reduction Fund Expenditures Through the passage of recent legislation, the Legislature has expressed its intent to use discretionary Greenhouse Gas Reduction Fund (GGRF) monies to support certain activities in future years. For example, Chapter 121 of 2025 (SB 840, Limón) expresses the Legislature’s intent to fund the following specific activities from the $1 billion discretionary GGRF set aside in 2026-27: • $125 million for transit passes. • $85 million for climate-focused technological innovation. • $25 million for seed funding for a University of California Climate Research Center. • $15 million to rebuild Topanga Park (which sustained damage in the Palisades fire). Additionally, Chapter 5 of 2025 (AB 102, Gabriel)—expresses the Legislature’s intent to provide GGRF in 2026-27 and potentially future years to support some California Department of Forestry and Fire Protection (CalFire) activities that otherwise would be funded from the General Fund. Specifically, if the General Fund continues to experience deficits, AB 102 expresses the Legislature’s intent that GGRF cover $1.25 billion of CalFire’s costs in 2026-27, $500 million in 2027-28, and $500 million in 2028-29. If the General Fund is not projected to be in a deficit in 2026-27, GGRF would only cover $500 million for CalFire in that year. 8 LEGISLATIVE ANALYST’S OFFICE analysis full AN LAO REPORT (For reference, roughly $4.2 billion and $100 million direct specific percentages of future GGRF to annually, respectively, are required to fully fund new individual Funds dedicated to supporting all of the statutory allocations under SB 840 and (1) clean transportation, (2) housing and community state administrative costs.) Any residual revenues investment, (3) clean air and water, (4) wildfire after funding these statutory allocations will be prevention and resilience, (5) agriculture, (6) clean available for appropriation by the Legislature. energy, and (7) climate-focused innovation. Notably, SB 840’s priority order for GGRF revenues The legislation further states legislative intent that is somewhat different from prior law. For example, appropriations from each of those individual Funds high-speed rail was not previously prioritized be guided by a multiyear spending plan. Senate relative to other programs receiving statutory Bill 840 is not specific as to which future GGRF allocations, whereas it receives a comparatively allocations the Legislature intends this language higher priority for funding under SB 840. to apply, such as the $1 billion set aside and/or Expresses Legislative Intent to Allocate whatever residual monies remain, if any, after all of Funding to Broad Program Categories. Senate the statutory allocations are satisfied. Bill 840 states that the Legislature intends to ISSUES FOR LEGISLATIVE CONSIDERATION AND OVERSIGHT In this section, we highlight what we see as Extension Helps Ensure Key Climate some of the key potential implications of AB 1207 Strategy Can Continue… The continued and SB 840, which we also summarize in Figure 3. operation of the cap-and-invest program through Our comments are not intended to serve as a 2045, as authorized by AB 1207, could be a comprehensive evaluation of these pieces of key tool in helping the state achieve its climate legislation and their potential impacts, but rather goals cost-effectively. This is because the to provide some initial observations to assist the program creates financial incentives for entities Legislature in its policymaking and oversight roles. to try to find relatively low-cost approaches for Figure 3 Cap-and-Invest Program: Issues for Legislative Consideration and Oversight 9 Extension helps ensure key climate strategy can continue and provides important program certainty. 9 While the legislation maintains most aspects of the program—including significant discretion for CARB—changes reflect legislative goals. 9 Changes in GGRF allocations will affect funding for particular programs. 9 Certain effects of the legislation will become clearer over time and will depend on CARB decisions. 9 Some important legislative decisions remain. 9 Legislative oversight of program continues to be important. 9 Oversight provisions could potentially help the Legislature ensure the program is meeting intended goals but effectiveness will depend upon implementation. CARB = California Air Resources Board and GGRF = Greenhouse Gas Reduction Fund. www.lao.ca.gov 9 analysis full AN LAO REPORT emission reductions. Moreover, the program has summarized above, the pieces of legislation also the potential to serve as a “backstop” to help the make some key modifications to the program, state meet its targets. That is, to the degree other particularly around the use of offsets. Together, policies collectively fall short of meeting the state’s these modifications generally are aimed at helping GHG reduction goals, the cap-and-invest program the program better accomplish the Legislature’s could help ensure that covered entities reduce policy goals, including around GHG reduction and emissions further to make up the difference. affordability. In particular: …And Provides Important Program Certainty • Some Provisions Are Likely to Have and Flexibility. By providing an explicit statutory Implications for GHG Reduction. In contrast extension of the cap-and-invest program to the to prior law, by directing CARB to put offsets end of 2045, AB 1207 gives clear legal authority for under the cap, AB 1207 will effectively lower CARB to implement the program for the next two the overall emissions limit compared to what decades. This is important because whether CARB it otherwise would have been. This, in turn, could have continued the program beyond 2030 means that the program will allow fewer GHGs absent explicit statutory authority—under the broad to be emitted from entities covered by the powers it has been granted by the Legislature—had program, thereby strengthening the program been subject to some legal uncertainty. Moreover, from an environmental perspective. Some even if CARB could have continued to operate the other provisions of the legislation also could program absent explicit statutory reauthorization, have some effects on the state’s climate goals, it could have faced limitations around the structure though these likely will be comparatively of the program and the use of GGRF revenues. more modest and/or uncertain. For example, By resolving this legal uncertainty, AB 1207 helps SB 840’s requirement that CARB update businesses make long-term investment decisions offset compliance protocols to reflect the and facilitates the state’s plans for how it can best available science could potentially result pursue its GHG goals and support high-priority in lower emissions if they lead to a greater programs. Also, importantly, AB 1207 not only number of offset projects that provide real, provides explicit statutory authority to continue permanent GHG reductions. the program, but the legislation also received a • Some Provisions Are Also Likely to two-thirds vote of both houses of the Legislature. Have Implications for Affordability Accordingly, GGRF funds can continue to be for Consumers. Assembly Bill 1207 and viewed as akin to tax revenues and be legally SB 840 include components that could available to expend for any purpose. This allows have a variety of potential implications for the Legislature flexibility to use GGRF for its highest consumer affordability. Certain provisions priorities—including activities to reduce GHGs could potentially help improve affordability. but potentially also climate adaptation initiatives, For example, if allowance prices reach the offsetting consumer costs, or other purposes. ceiling, redirecting the proceeds from the sale While Legislation Maintains Most Aspects of those allowances from the purchase of of Program—Including Significant Discretion offsets to other purposes that could reduce for CARB—Changes Reflect Legislative Goals. consumer costs (such as rebates) would Assembly Bill 1207 and SB 840 maintain most of help mitigate the costs of the program on the elements of the existing program, including consumers. Additionally, directing CARB continuing to provide CARB with significant to consider actions to ensure consumers discretion in many key areas. For example, under are protected if it finds that the program these pieces of legislation, CARB continues to have structure does not adequately protect authority to set the level of the program’s price them could potentially encourage CARB ceiling and floor, the total number of allowances to modify the program’s structure—such issued, and the share of allowances to sell versus as by lowering the price ceiling—in the provide for free to industry and utilities. However, as event significant affordability concerns 10 LEGISLATIVE ANALYST’S OFFICE analysis full AN LAO REPORT arise. However, some of the provisions are • Making Program Allocations Fixed likely to put upward pressure on costs, and Amounts Frees Up Funding for Other thus reduce affordability for consumers. Legislative Priorities if Revenues Are For example, putting offsets under the cap is Comparatively High. By changing from likely to increase the scarcity and associated percentage-based to fixed allocations for costs of allowances. Many of these higher existing programs, SB 840 effectively caps allowance costs likely would be passed on the amount of funding provided to these to consumers in the form of higher prices for programs at predetermined, set amounts. GHG-intensive products. This, in turn, means that these programs will not automatically receive additional new GGRF Changes in GGRF Allocations Will Affect monies if revenues increase substantially. Funding for Particular Programs. The changes Instead, the “excess” revenues will now SB 840 makes to the statutory allocations of GGRF be available to expend on other legislative revenues are likely to have a variety of implications priorities in years where auction revenues starting in 2026-27, including: are comparatively high. Notably, the specific • Allowance Allocations Affirm Legislative fixed amounts provided by SB 840 are higher Priorities. While many of the current GGRF than historical average funding levels for these statutory allocations were first established programs, as GGRF revenues have trended roughly a decade ago, reauthorizing them in mostly upward over time. SB 840 allowed the Legislature an opportunity • Changes Provide Additional Funding to reaffirm that they continue to reflect Certainty for High-Speed Rail Project. legislative priorities. Moreover, SB 840 added The changes contained in SB 840 will result in two new statutory allocations for the Climate greater certainty around annual funding levels Bureau and AB 617, signaling the Legislature’s for the high-speed rail project. Historically, the interest in prioritizing ongoing funding in project received 25 percent of annual GGRF these areas. monies, which resulted in varying annual • Modifying Prioritization Order Affects amounts depending on auction revenues. How Much Funding Programs Receive Under SB 840, the project will receive a set Under Lower Revenue Scenarios. The $1 billion annually before allocations are order in which statutory allocations are made to most other funding commitments, made plays a key role in determining how which makes it much more likely that it will much funding goes to each program under receive this amount each year. This higher lower revenue scenarios. This is because if level of funding certainty, in turn, may make GGRF revenues are insufficient to fund all it easier for the project to plan and potentially of the identified statutory allocations and seek financing support, as it seeks to state administrative costs, the programs address its large funding gap. Financing is that receive funding later in the ordering will important for the project, since its funding have their funding proportionally reduced. needs are not well-aligned with the timing of By modifying this ordering relative to existing cap-and-invest revenue allocations. law, SB 840 prioritizes a somewhat different Certain Effects of Legislation Will Become set of programs for funding than currently Clearer Over Time and Will Depend on CARB is the case. For example, by setting aside Decisions. Accurately predicting the net effects $1 billion for discretionary allocations earlier of the extension of the cap-and-invest program in the priority list, SB 840 makes it more likely on the Legislature’s key policy priorities—such that a significant amount of funding will still as GHG reduction and affordability—is difficult, if be available to address the most pressing not impossible. This is in part because AB 1207 legislative priorities for these categories even if and SB 840 include provisions that have various, revenues are relatively low. sometimes opposing, effects on key policy goals. www.lao.ca.gov 11 analysis full AN LAO REPORT Additionally, and perhaps more importantly, the Climate Bureau. Such legislation would the program’s impacts on GHG reductions provide an opportunity for the Legislature to and consumer costs will be heavily dependent clarify and refine direction for this new entity. on CARB’s forthcoming decisions, including For example, such legislation could (1) clarify the following: the Climate Bureau’s roles and responsibilities, such as identifying specific areas of focus or • Price Ceiling and Floor. If CARB were to types of work to be completed; (2) provide any set a relatively low ceiling price, it would help additional powers deemed necessary to carry limit the costs of the program on businesses out the identified roles and responsibilities; and households—improving affordability—but (3) identify the organizational structure of the would also increase the likelihood that prices Climate Bureau and the process for selecting reach the ceiling. This, in turn, would increase its leadership; and (4) clarify how it should the likelihood that emissions exceed the cap relate to other existing oversight entities, (as it would lead the state to sell additional such as the LAO, IEMAC, and Compliance permits)—resulting in comparatively fewer Offset Protocol Task Force. Providing specific GHG reductions. direction would increase the likelihood that • Number of Allowances Issued. the Climate Bureau will provide the type of The aggregate number of allowances CARB oversight and information the Legislature will decides to issue will affect not only emissions find most valuable. levels but also the scarcity of allowances. • Allocating Discretionary GGRF. The This will, in turn, impact allowance prices and Legislature will face annual decisions about costs paid by households and businesses. how to allocate discretionary GGRF, including • Allocation of Allowances Among Purposes. both the $1 billion set aside and any remaining How CARB decides to allocate allowances funding that is available after statutory across various broad purposes—such as allocations are fully funded. In making these selling them to benefit GGRF or providing decisions, the Legislature will face choices them for free to industry and/or utilities— about how much funding to allocate to any ultimately will determine where the revenue new individual category-specific Funds it from the charges paid by emitters will go, intends to create, as well as how to most including which entities will receive these effectively use the envisioned Fund-specific, revenues and for what purposes. If, for multiyear spending plans to guide that example, CARB allocates a relatively smaller funding. Additionally, the Legislature will share of allowances to utilities (and a larger face some near-term decisions in 2026-27. share to GGRF and/or industry), utility Specifically, budget bill language expressed customers would receive smaller rebates— intent to fund up to $1.5 billion from GGRF and therefore experience higher costs—than for purposes outside the statutory program would otherwise be the case. allocations in 2026-27 ($250 million for various Some Important Legislative Decisions purposes specified in SB 840 and $1.25 billion Remain. While AB 1207 and SB 840 made a for California Department of Forestry and Fire number of key changes to the cap-and-invest Protection activities that otherwise would be program and delegated many other decisions to paid for by the General Fund). Should GGRF CARB, some important decisions also remain for be insufficient in 2026-27 to fully fund all the Legislature. In particular: of these intended activities (along with the statutory allocations and state administrative • Defining Scope and Direction for the costs), the Legislature will face choices about Climate Bureau. Assembly Bill 1207 how to prioritize among them. and SB 840 express legislative intent to pass subsequent legislation establishing 12 LEGISLATIVE ANALYST’S OFFICE analysis full AN LAO REPORT Legislative Oversight of Program Continues However, the Legislature can be proactive to Be Important. Over the coming years, the about monitoring these programs to ensure Legislature can use its oversight role to closely that they are achieving legislative goals in monitor the continued implementation of the a cost-effective manner, such as through cap-and-invest program. Some reasons this requesting information, reviewing outcomes, oversight role remains important include: holding oversight hearings, and/or adjusting them as warranted. • Stakes Are High. As mentioned above, the program has the potential to have significant Oversight Provisions Could Potentially Help implications for some of the state’s key Legislature Ensure Program Is Meeting Intended priorities, such as GHG reduction and Goals… The new oversight provisions added by affordability. However, the specifics of how AB 1207 and SB 840 have the potential to provide the program operates over the coming years the Legislature and other interested parties with will determine how effective it is at achieving important information to help direct future policy those priorities. and regulatory decisions. For example, the new • Meeting All of the Legislature’s Goals Climate Bureau could serve as a helpful resource Will Be Difficult. The Legislature’s climate to the Legislature, adding valuable capacity to goals are ambitious and are likely to come conduct program reviews and evaluations that are with trade-offs, such as related to costs to independent of the Executive Branch. Additionally, households and businesses. Monitoring the the requirements under AB 1207 that CARB report program’s implementation will be an important certain information and participate in various way for the Legislature to help ensure that the legislative hearings may improve information flow to state is striking its intended balance between the Legislature on key topics, such as the cost and key goals and priorities. impacts of the cap-and-invest program and other • CARB’s Regulations Could Have Important market-based regulations. Implications for the Program. In September …But Effectiveness Will Depend Upon 2025, CARB issued a notice that it plans to Implementation. The ultimate effectiveness begin updating the regulations governing of the new oversight provisions, however, will the program to reflect the requirements of depend heavily on the specifics of how they AB 1207, as well as make other modifications are implemented. The Legislature can play an to the program. Closely monitoring this and important role overseeing and guiding these other future rulemaking efforts—and providing efforts. For instance, the newly envisioned Climate input on them, as appropriate—can help Bureau’s usefulness is likely to be enhanced if its ensure the board’s decisions are in line with activities are directed to high-priority topics and if the Legislature’s vision. it is created such that it can build a reputation as • Ensuring State Funding Achieves a credible source of timely analyses. Additionally, Goals Effectively Will Be Important. CARB’s required reporting is likely to be more Cap-and-invest auction revenues support helpful if the Legislature closely reviews its reports a variety of programs and policy priorities. and notifications and takes subsequent actions if As such, ensuring that GGRF is being used in they raise questions or identify areas of concern. the most effective way to meet these priorities The Legislature can use oversight hearings to is an important role for the Legislature. provide a venue to follow up on areas of concern Notably, under the revised allocation structure, identified by the Climate Bureau or CARB’s nearly $3 billion in GGRF monies could be reporting, gather key information, monitor the continuously appropriated annually to specific state’s progress towards meeting legislative goals, programs and activities. Since funding for identify lessons learned, and determine whether those programs does not require annual additional legislative intervention might be merited. budget action, the Legislature generally has fewer natural opportunities to oversee them. www.lao.ca.gov 13 analysis full AN LAO REPORT CONCLUSION Enacting AB 1207 and SB 840 and reauthorizing as a result—remain uncertain and subject to the cap-and-invest program represent significant future implementation decisions. Continued steps in the Legislature’s ongoing efforts to limit and robust legislative oversight will be key to GHG emissions. However, numerous aspects of helping ensure that the cap-and-invest program how the program operates and what its ultimate operates effectively and balances competing impacts will be on the state’s climate goals—as policy trade-offs in a way that is consistent with well as on costs that Californians experience legislative priorities. 14 LEGISLATIVE ANALYST’S OFFICE analysis full AN LAO REPORT www.lao.ca.gov 15 analysis full AN LAO REPORT LAO PUBLICATIONS This report was prepared by Helen Kerstein, and reviewed by Rachel Ehlers and Ross Brown. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, California 95814. 16 LEGISLATIVE ANALYST’S OFFICE