On Monday, 9 June, the California State Assembly and Senate published a joint budget plan as part of California’s budget approval process. As expected, the Legislature’s budget does not approve the Cap-and-Trade/Invest extension bill as proposed by the California Governor in May. Instead, the legislative budget plan leaves the Cap-and-Trade extension to the “Legislature’s policy bill process.”
Recall that as part of the California budgeting process, California Governor Gavin Newsom presented a May revision budget on 14 May. The Legislature then needed to assess the Governor’s budget and pass their own budget bill by 15 June. The Governor would then have until 30 June to approve or veto the budget, with the budget enacted at the start of California’s new fiscal year on 1 July.
As part of the May budget revision, the Governor also included an unbacked Cap-and-Trade trailer bill, which would see the program extended to 2045 with the current program’s legislative design remaining mostly intact. The Governor also presented a spending plan for the revenues raised by the Cap-and-Trade program. Specifically, the Governor proposes to divert USD 1 billion per year from the Greenhouse Gas Reduction Fund (GGRF) for the state’s beleaguered high-speed rail project and divert another USD 1.5 billion per year from the GGRF to the general budget to help fund California’s firefighting operations.
There was significant pushback against the Governor’s GGRF spending plan in the legislative hearings in the days after the Governor’s budget presentation. Legislative members were skeptical of the continued funding of the high-speed rail and would rather see continuous appropriations from the general budget for firefighting operations, rather than funding it via Cap-and-Trade auction proceeds. Legislators and members of the public also raised concerns that the Governor’s plan would result in funding cuts to other climate programs. As a result of these concerns, Legislators have expressed interest in looking at the Cap-and-Trade extension separately from the state budget.
Furthermore, lawmakers have expressed their desire to look closely at aspects of the Cap-and-Trade regulations, with concerns having been raised about the program’s offset and free allocation components. Thus, given the concerns about the Governor’s GGRF spending plan and the desire to have more say on the program’s design, we expected the Cap-and-Trade extension to be addressed later in California’s legislative calendar.
This is now confirmed via the joint budget plan. Only the Governor’s plan for funding firefighting activities was partially approved by the Legislature, with the Legislature agreeing to transfer USD 500 million per year for two years from the GGRF to the general budget for firefighting operations. Remaining GGRF appropriations for the 2025-26 budget year will be addressed in later budget bills, while the program’s extension will be addressed in the policy bill process instead.
Despite not approving the Governor’s extension plans, Legislators insist that they plan to complete the extension process within the current legislative year, which ends on 12 September. California State Senate President Pro Tempore, Mike McGuire, commented that the Senate is “knee deep in Cap-and-Trade discussions.” McGuire further stated that the extension is “our top priority” and that he wants to see the Cap-and-Trade extension deal completed within the current legislative year. McGuire will step down from the Senate Presidency in 2026 and be replaced by Monique Limón. McGuire and Limón introduced SB 840 into the California Senate earlier this year as a spot bill for the extension. SB 840, along with another extension spot bill AB 1207, has been passed through their respective chambers and has crossed over to the other legislative chamber. Though both bills do not contain specifics related to the extension just yet, we expect the bills’ language to evolve as the negotiations on the extension take shape over the remainder of the Legislative session.
In terms of timing, the California Legislature will likely continue to work through the budget process with the Governor this month. Extension specifics will likely follow in July and August, but keep in mind the Legislature will then go on a summer recess session 18 July returning 18 August.
Given the reliance on GGRF funds for climate-related spending and support for the extension from both the executive and legislative branches of the state government, we do expect the extension to be completed within the current legislative year. We then expect CARB to be able to progress with its long-delayed Program Review (ISOR) process after seeing movements within the Legislature on the extension.
President Trump’s April 8 Executive Order continues to hang over the program, however. The US Attorney General was due to present her report on whether the state-level climate programs constitute state overreach by 7 June. The Attorney General is not obligated to present the report to the public. As such, there could still be federal attacks on California’s Cap-and-Trade program, along with climate programs from other states, which could add uncertainties to the program’s operations. California is poised to vigorously defend itself against any federal attack.
We will continue to monitor all updates related to California’s efforts to extend the Cap-and-Trade program.