Late on Friday, May 29th, the California Air Resources Board (CARB) adopted updates to California’s Cap-and-Invest Program on a 9 to 4 vote, ending a process that effectively began in 2023 and clearing the way for the amended program to take effect on September 1, 2026. The package tightens the program’s emissions cap through 2030 and provides guidance on the program through 2045. It directs the bulk of allowance value toward ratepayer relief and climate spending, and adds new industry support measures, including a doubled Manufacturing Decarbonization Incentive Fund that became the central flashpoint of the Board’s deliberations.

Background: Cap-and-Invest, formerly known as Cap-and-Trade, sets a declining limit on greenhouse gas (GHG) emissions from California’s largest emitters and was extended through 2045 last year under Assembly Bill (AB) 1207. CARB released draft amendments on January 13th and held a 45-day public comment period from January 23rd through March 9th. In April, staff issued a revised package with significant changes intended to ease near-term economic pressures, increase free allowance allocations to utilities and industrial entities, and add the Manufacturing Decarbonization Incentive program. The Board took up the proposal at its May 28th hearing, with deliberations and the final vote running into Friday, May 29th. Stillwater’s prior overview of the draft amendments and the companion Mandatory Reporting Regulation (MRR) changes is available here, and our analysis of the likely impacts of the proposed changes is available here.

May 28-29 Board Meeting: The public comment period lasted some eight hours with numerous commenters across society and industry. Several themes emerged from the comments:

1. Scope and process. Some commenters questioned whether the changes, particularly the Manufacturing Decarbonization Incentive (MDI), fell within the scope of the existing environmental analysis and other procedural requirements, with some arguing that a restart of the rulemaking is required.
2. The MDI as a perceived giveaway. The new MDI was one of the most discussed features of the amendment package. Many commenters characterized it as a giveaway to oil companies and industry and urged the Board to reject the provision. This item received the bulk of Board discussion before the vote and is addressed in more detail below.
3. Allocations and the GGRF. Much of the discussion centered on allocations – including the impact of leakage, utility allocations, and effects on the Greenhouse Gas Reduction Fund (GGRF), which drew extensive comment from across society, local government, and agencies. Commenters cited potential losses of funding for public programs such as healthcare, housing assistance, public transit and GHG reductions as a result of reduced auction proceeds. CARB staff responded that its estimates of GGRF proceeds were not a prediction, and that GGRF allocation is determined through the State’s budget process rather than by C&I.
4. Post-2030 Cap Adjustment Factors. The amendments removed industrial Cap Adjustment Factors (CAFs) for all years after 2030, leaving industry without guidance on how the program will evolve over the next decade. This concern was especially acute for industrial entities, who pointed to the lack of regulatory certainty around their future allowance picture.
5. Items drawing little comment. The Mandatory Reporting Regulation (MRR) amendments and the “offsets under the cap” (OUC) provision drew limited or no comment. The MRR amendments update the regulation to make it consistent with the C&I amendment. The OUC provision, which is mandated by statute under AB 1207, reduces the cap by the number of offsets used for compliance, in turn lowering both the allowances offered at auction and the amount raised for the GGRF.

The MDI flashpoint: The MDI program drew the most scrutiny during the hearing. As we covered in our analysis last week, the proposal would take 118.3 million allowances originally slated for removal and instead direct them toward the MDI. As reported by Argus, at least four Board members questioned whether the program would deliver guaranteed emissions reductions and how it would affect state revenues that fund other emissions-reduction programs. CARB staff advised that removing the MDI or reverting to the January proposal would trigger a new 15-day comment period and potential additional review under the California Environmental Quality Act (CEQA), which would put the September 1st implementation date out of reach. Chair Lauren Sanchez brokered a compromise in the Board’s resolution directing staff to return to the Board before any MDI allowances are issued, preserving Board authority over the program’s design. Four members nonetheless voted against the package, citing unresolved concerns about the MDI and limited ability to shape the final amendments

Under the program as described in the Legislative Analyst’s Office (LAO) review of the April proposal, industrial entities would apply to CARB to receive MDI allowances in support of decarbonization projects, with half of the allowances reserved for refining, crude production and similar industries and the other half for other industries. The final allocation mechanics will be governed by the adopted regulation and by the future Board action that the resolution now requires before any MDI allowances are issued.

Cost and market implications: CARB maintains that the adopted industry support measures avoid additional near-term fuel-price passthrough. That position contrasts with industry estimates reported earlier this year, including projections that the program’s tighter allowance supply could raise refiner compliance costs from roughly $357 million in 2026 to about $1.5 billion annually by 2035, and Chevron’s assertion that the tightening could add more than $1 per gallon by 2030. At Stillwater, we see uncertainty in how the MDI specifics will evolve and how many projects will qualify for the program. The relaxed Cap Adjustment Factors reduce pressure on California refineries through 2030 and should help keep CCA prices more modest than projected after the draft rule released in January.

Next steps: The amendments are expected to take effect on September 1, 2026. CARB plans to host a workshop this summer to begin updating compliance offset protocols, as required under Senate Bill (SB) 840, and staff will return to the Board before issuing any MDI allowances. Stillwater will be monitoring and reporting on the detailed MDI specifics as they are developed. With additional certainty in the rules through 2030 and an ambitious target through 2045, now is the time for market participants to assess CCA prices and conduct analysis on impacts. Stillwater will be developing our own proprietary C&I outlook in the coming months. Stay tuned!