The California Air Resources Board (CARB) has published the modified text to the Initial Statement of Reason (ISOR) for amending the Cap-and-Invest regulations. This update will cover the major changes to the ISOR, implications for the program’s balances, and possible next steps in the Program Review process.
Summary:
The modified ISOR did not propose any changes to the California cap trajectory presented in the ISOR. The proposal continues to maintain the 118.3 million allowances to be removed from the 2027-2030 budget years, along with the cap trajectory declining to 30.3 million by 2045, in line with California’s climate targets. However, the modified ISOR did make a major change to how the 118.3 million removal is treated.
In the original ISOR, the 118.3 million allowance adjustment was retired and completely removed from the supply. The modified ISOR will instead see this volume diverted to a newly created “Build Up California Reserve” account. This new account will be used for distribution to entities eligible for the “Manufacturing Decarbonization Incentive” (MDI). As such, the 118.3 million allowance adjustment may partly make its way back into circulation.
The MDI is a new concept introduced in the original ISOR designed to minimize emission leakage risk and support the decarbonization of California’s manufacturing industry. As the cost of certain decarbonization options remains higher than allowance prices, the MDI provides additional free allowances to incentivize eligible facilities to undertake specific on-site GHG emissions reduction actions. While the original ISOR did not specifically state how many allowances would be made available for the MDI, CARB staff estimated that up to 40 million could be taken from vintage years. As such, the diversion of 118.3 million allowances for the MDI represents a significant expansion of the program. Furthermore, in the original ISOR, refiners were not eligible for the MDI, as eligible facilities were limited to general industrial sectors. In response to public comments received, CARB has now included refiners in the MDI program.
During the 45-day comment period, the most significant pushback the original ISOR received was regarding the free allocation of allowances to the refining and other industrial sectors. In response, CARB has made significant changes to the Cap Adjustment Factors (CAF) used in determining free allocation.
The original ISOR provided CAFs out to the 2035 compliance year. The modified ISOR instead only contains CAFs through the 2030 compliance year, with future CAFs to be addressed in subsequent rulemaking. CARB stated that this will allow more time to analyze emission leakage risks. The CAFs proposed in the modified ISOR are less stringent compared to those in the original ISOR, providing a significantly higher increase in free allowance allocations for eligible facilities.
Meanwhile, post-2030 proposed allowance allocations for Electrical Distribution Utilities (EDUs) have also been removed. The modified ISOR also proposes an accelerated allowance transition from Natural Gas Suppliers (NGS) to EDUs to benefit residential ratepayers. Instead of starting in 2029, the transition will now begin in 2028 and scale up to 70% by 2031. This change is in response to public comments that the original transition timeline was too slow.
The modified ISOR added a compliance carve-out for “Independent Merchant Refineries” (IMR). Per Appendix A-1 of the modified ISOR, an IMR is classified as a refinery that produces at least one million barrels of motor gasoline blendstock annually and is owned by a standalone company that primarily operates petroleum refining assets; furthermore, it must not be vertically integrated with crude oil exploration or production, nor with retail marketing through proprietary, branded stations.
These facilities will be granted an optional one-time delay to fulfill their full compliance period obligation, allowing them to shift their November 1, 2027, deadline to November 1, 2029. If applied, the IMR will instead submit its compliance obligations for the years 2024 through 2027 in 2029.
The modified ISOR also propose acceleration of the deadline for corporate associated groups (CAG) to disclose purchase limit shares, and associated entities from December 2029 to December 2027.
Other proposed changes concern compliance offset reporting, and how entities can stack incentives for biomass-derived fuels. The modified ISOR did not make any changes on how allowances are to be removed for offset usage.
Changes proposed in the modified ISOR concerning the 118.3 million allowances diversion for MDI and carve out for refining obligations will have an impact on the long-term supply and demand outlook for the program.
Overall, the modified ISOR is bearish compared to the original ISOR. This view is also reflected within the broader market, with CCA front-month contracts closing down 20 cents today and reverting to the program’s floor price.
However, we emphasize that the modified ISOR still represents a significant tightening compared to the program’s current regulations. The modified ISOR incorporates many of the comments from industrial entities, especially from the refining sector. High fuel prices and refinery closures have generated significant blowback against CARB’s initial regulatory amendments. By incorporating much of the feedback received from these entities, the modified ISOR should receive more support from both industrial and legislative corners, providing a higher likelihood of being passed by the CARB board and implemented.
With today’s publication, we expect CARB to be able to submit the proposed regulatory amendments to the Board in time for the target May 28 meeting. We do not expect CARB to issue another modified ISOR after the conclusion of the current 15-day comment period on April 29.
Meanwhile, we continue to await updates from Quebec, which has missed its “Winter 2026” program amendments target. Quebec’s regulators have indicated to us that they plan on publishing the documents in “the coming weeks.”
We will continue to monitor the WCI Program Review process and update our clients on all pertinent information.
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This information was first published on April 14 in ClearBlue Vantage as a Live Update report for our clients. The above version has been edited to remove price forecasts and additional proprietary analysis reserved for our paid subscriptions. If you are looking for a deeper level of detail, please contact us.