By Alejandro Lazo, CalMatters

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California is considering handing oil refineries and other major polluters billions of dollars in free emission allowances just as the state says carbon reductions need to come faster than ever.

In the last six months, two refineries have closed and gas prices have topped an average of $6 a gallon as the Iran-Israel war sent oil markets into turmoil. The oil and gas sector spent $10.3 million lobbying Sacramento in the first three months of the year, according to lobbying filings, with the Western States Petroleum Association and Chevron accounting for the bulk of it.

The result is a new proposal before the California Air Resources Board that would provide as much as $4 billion in new free emission permits to companies with half slated for the fossil fuel industry in exchange for commitments to invest in clean energy. 

Environmentalists warn the proposal is a giveaway to Big Oil that would weaken California’s “cap-and-invest” program just as the state is relying on it to cut emissions and fund climate, housing and other programs. Anthony Martinez, a spokesman for Gov. Gavin Newsom, said the changes are necessary to keep the state’s carbon market “durable” and “affordable” amid mounting refinery closures.

The fight over California’s carbon market has exposed the political tensions at the heart of Newsom’s energy transition agenda. California is trying to preserve its climate ambitions while keeping gasoline affordable for drivers already facing the highest prices in the country. Critics say the air board’s proposal accomplishes neither goal.

“We are really concerned that this would significantly kneecap the program,” said Chloe Ames, a policy adviser with NextGen Policy.

Weakening the backstop

Through California’s 13-year-old carbon market, major polluting companies must buy permits for every ton of greenhouse gases they emit, with the state capping total emissions year by year. Each permit is worth real money and companies can sell the ones they don’t use. The program is considered California’s climate backstop — the only state policy that sets a firm limit on greenhouse gas emissions.

At the heart of the dispute with environmentalists is a proposed subsidy program carved out of that carbon market. The air board, if it approves the proposal on May 28, would create a new pool of free pollution permits for refineries, cement plants and other big companies that pledge to invest in clean energy and efficiency projects.

The pool would be capped at 118.3 million permits — the same number the air board has said must come off the market for California to hit its 2030 climate target. Environmentalists say the proposal risks wiping out those reductions.

Berkeley energy economist Meredith Fowlie, who chairs an independent committee that oversees the carbon market, wrote in a recent analysis that the design would give qualifying refineries more free permits than they need to cover their emissions.

“One could use the word generous,” Fowlie said.

Rajinder Sahota, the air board official overseeing the program, said the proposal would ensure emissions reductions. The new permits, she said, would only go to companies undertaking clean energy and efficiency projects and would be limited, temporary and rescinded if companies misuse them. The plan is meant to help keep refineries operating in California at a time of uncertainty, she added.

“We want to make sure that there’s reliable, affordable fuel for California consumers while the demand persists,” Sahota said.

But environmentalists say the air board has built in almost no accountability for how companies invest in those projects. Katelyn Roedner Sutter, state director for the Environmental Defense Fund, said the proposal  “is based on proposed investment, not any guaranteed reduction.” 

“That’s a red flag,” she said.

A climate money crunch

Quarterly auction revenue for state programs could drop from roughly $4 billion a year to about $2 billion under the proposal, according to the Legislative Analyst’s Office.

Sen. John Laird, the state Senate budget chair and a co-author of California’s original 2006 climate law, warned at a May 6 hearing that the proposal “flies against many things we negotiated just last fall” with the governor and could put the carbon market deal “back on the table.”

Not all lawmakers are critical. Assemblymembers Jacqui Irwin and Cottie Petrie-Norris, who respectively chair climate and energy committees, said the proposal “reflects the Legislature’s focus on affordability,” and urged the board to proceed “without delay.” 

They pointed to an increase in the Climate Credit, the twice-yearly rebate that the carbon market funds on Californians’ utility bills; a UC Santa Barbara analysis, however, found the new subsidy could shrink the credit by as much as $1.7 billion under the proposal.

A separate, bipartisan group including Assemblymember David Alvarez, a Democrat, and Senator Suzette Valladares, a Republican, argues the purpose of the carbon market is to cut emissions, not raise money for programs.

Newsom struck an eleventh-hour deal with lawmakers last year that extended the state’s carbon market through 2045 and set the order of which state programs get auction money first.

Under that plan, California’s high-speed rail project receives $1 billion a year before many other programs. Lawmakers also carved out a $1 billion annual pool for priorities they control themselves, but Newsom in January proposed committing that money to wildfire spending and other programs. 

Last in line are programs lawmakers have spent years building into California’s climate agenda: affordable housing and transit-oriented development meant to reduce driving and climate pollution, rail and bus service, wildfire resilience, clean drinking water in poor communities and neighborhood pollution monitoring. 

Newsom unveiled a revised state budget on May 14 that did not reflect the potential drop in carbon market revenue. Laird, in an interview, said the administration told him the revenue drop wouldn’t show up in the coming fiscal year.

Laird said he planned to “ground truth” that assessment in the weeks ahead. The hit “would still be a big hit the year after this budget year,” he added.

Big Oil’s biggest target

California’s carbon market became a central focus of the oil industry’s lobbying efforts after the air board released a January proposal sharply reducing free pollution permits for industry.

Seven of the 10 highest-spending oil and gas lobbying groups in California pushed state officials on the proposal, state filings show. The petroleum association and Chevron mounted some of the industry’s most aggressive lobbying, pressing lawmakers, the governor’s office, the air board and the California Energy Commission on the plan.

The April plan raised free permits for most industries through 2030 above the January version, but deferred decisions on permits after 2030 to a future rulemaking.

Jim Stanley, a spokesman for the petroleum association, said the group has been pressing lawmakers, regulators and the governor’s office about “the potential consequences of a poorly structured cap-and-invest program.”

Chevron spokesman Ross Allen declined to comment beyond letters Chevron filed with the air board. Chevron initially warned the proposal threatened refinery survival in California. After last month’s revisions, the company is continuing to push for additional protections.

Zach Leary, a lobbyist for the petroleum association, said California needs to go further than even its latest proposal. He wants California to lock in a higher level of free permits permanently. 

“The state is acknowledging that affordability and ambition are not getting along very well right now,” Leary said.

Eddie Ahn, executive director of Brightline Defense, oversees community air sensors in San Francisco’s Tenderloin, Mission and South of Market neighborhoods funded through the state’s community air protection program. That program is among those that could lose state money if carbon market auctions decline under the proposal. 

“If the funding is cut off, then convening groups of people on a monthly basis — that goes away,” Ahn said. “It means frontline communities get disconnected from environmental policy.”

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