Newsom strikes climate deal extending California cap and trade, boosting oil production

By Maya C. Miller, Alejandro Lazo and Jeanne Kuang, CalMatters

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California legislative leaders in the wee hours of Wednesday morning reached an agreement with Gov. Gavin Newsom to extend the state’s greenhouse gas emissions reduction program, known as cap and trade, through 2045 — a contentious expansion that for weeks stewed in backroom discussions, held up other critical legislation and roiled insiders. 

Democratic leaders in the Assembly and Senate also struck compromises on bills to increase domestic oil production in California through new drilling permits and rehabilitating a defunct offshore pipeline; establish a state fund to monitor pollution mitigation in disadvantaged communities; re-up the state’s wildfire liability fund by $18 billion; and join neighboring states’ utilities to create a shared electricity market to sell California’s excess clean power.

The mountain of deals comes after a chaotic scramble of last-minute closed-door negotiations among Newsom, Assembly Speaker Robert Rivas and Senate President Pro Tem Mike McGuire, which frustrated lobbyists and angered rank-and-file members, some of whom said they felt iced out of the conversations.

Because the agreements landed so late in the final week of the legislative session, lawmakers will have to waive rules so they can extend what was supposed to be their last day of session, Friday, to vote Saturday on the climate and energy package. California voters approved a constitutional amendment that requires legislation to be public for at least 72 hours before a vote.

Newsom even made an after-hours visit to the Capitol Tuesday night, where he, Rivas and McGuire huddled in a Senate office for close to 90 minutes. 

Despite the tense, high-stakes haggling, the three leaders on Wednesday triumphantly celebrated what they declared a historic agreement that they said gives Californians the best of both worlds — stable gas and electricity prices as well as progress toward the state’s ambitious climate goals. 

“We took the time to get it right because real change, reduced prices and protecting homeowners is essential,” Rivas said in the joint statement.

The governor’s desire to keep lower gas prices — a crucial headline as he courts a national audience ahead of 2028 — also dovetailed neatly with Rivas’s early commitment to make 2025 the Legislature’s “year of affordability.” Critics often parroted that lofty goal to challenge legislation that they argued would raise costs for consumers. 

But while Newsom and Rivas were largely aligned on tempering the state’s ambitious climate goals amid the reality of rising costs, McGuire and his staff were wary of handing wins to polluting industries without extracting victories for environmental and social justice causes. 

Bickering over cap and trade

At the heart of the negotiations was disagreement over how to renew cap and trade, which the governor’s office has rebranded as “cap and invest.” The program is a key source of revenue for the state’s environmental, climate and other priorities in the midst of a challenging budget year marked by a $12 billion budget deficit. The Trump administration has also sought to block funding for key priorities such as clean energy, high-speed rail and electric cars.

The extension seeks to align the program with the state’s aggressive push to wean itself from fossil fuels by 2045.

Cap-and-trade is a policy that puts a price on carbon emissions. The government sets a hard limit on emissions and issues a fixed number of pollution permits. Companies must hold permits for every ton they emit — but if they pollute less, they can sell their spare permits for profit, turning cutting carbon into a market incentive.

Although the program wasn’t set to expire until 2030, proponents of reauthorization argued that buyers of these credits — industry polluters — needed certainty that the program would continue to exist to keep bringing in revenues needed to fund the state’s transition to clean energy. A group pushing for an extension, Clean and Prosperous California, estimated that uncertainty over the program had resulted in a loss of nearly $3 billion in auction revenues over a year.

Earlier this summer, Newsom proposed reupping the program without any substantive changes, much to the chagrin of environmental advocates. That was an early sign of his warming relationships with the state’s oil and gas industry as companies announced they would cease operations in California, and more threatened to yank operations due to high costs of doing business.

Ultimately, each chamber will carry a separate piece of the deal.

Assembly Bill 1207 reauthorizes the program and makes slight changes to how the California Air Resources Board distributes free “allowances” — or pollution permits — to various types of polluters. 

Meanwhile, Senate Bill 840 provides a blueprint for how the state should spend revenues from the program, reshaping it starting in 2026 to guarantee $1 billion a year for high-speed rail and $1 billion a year for lawmakers to direct through the budget, while continuing to support housing, transit, clean-air programs, wildfire prevention and safe drinking water. 

The bill also requires the air resources board to revisit its rules on “offsets” – which let companies cover their emissions by paying for pollution cuts somewhere else — with a study due in 2026.

Individual consumers will continue to reap a benefit from the program. The deal keeps a twice-yearly climate credit, tweaking it so that a break on utility bills shows up during months when bills are the highest.

Other climate bills delayed before deal

Caught up in the negotiations were several other proposals that now can also move forward. 

One is a multi-pronged plan to aid oil refineries by boosting the state’s domestic crude oil production. A key part of the measure waives the state’s landmark environmental review law for new oil wells in Kern County and clears the way for drilling projects to receive permits that were tied up in nearly a decade of litigation. The plan also makes it more difficult to rehabilitate defunct oil pipelines and requires extra layers of environmental assessment. 

Also part of the deal were various Democrats’ strategies for reining in Californians’ utilities bills, including a Newsom-backed measure to create a Western regional energy market. 

Proponents, including mainstream environmental groups and the powerful statewide electrical workers’ union, say such a market is important for the state to meet its carbon-free goals and lower electricity rates for consumers. 

The package also contains measures for Democrats who want to further regulate utilities to lower costs. 

Senate Bill 254 would set up a public financing system to fund the construction of new transmission lines, which are largely owned by the major utilities. Transmission costs are a significant factor in utility bills. Consumer advocates believe some public ownership of new transmission lines would reduce costs because developers could take advantage of low-interest bonds to pay for them. Funding would need to be approved through the budget process.

Utilities would also be barred from profiting on the first $6 billion in costs the three major investor-owned power companies incur after this year from making their infrastructure more fire-safe. This builds on a similar 2019 law excluding the first $5 billion from profit-making.

“They were kicking and screaming on that,” Sen. Josh Becker, a Menlo Park Democrat and author of several of the energy proposals, said of the utilities.

SB 254 also includes a Newsom priority to add $18 billion to the state’s wildfire fund, which was created in 2019 to pay wildfire victims in disasters caused by utilities to avoid bankrupting utilities. The utility companies had pushed hard to replenish the fund as it was running dry from claims after the January Eaton Fire in Altadena, which sparked near Southern California Edison equipment. 

Contributions to the fund would be split equally among the shareholders and ratepayers of Southern California Edison, Pacific Gas & Electric and San Diego Gas & Electric.

Do Democrats have the votes for cap and trade?

Despite the last-minute scramble, it’s unclear whether Newsom and Democrats have the necessary support to clear the two-thirds majority required in both chambers for tax-related measures like cap and trade. Lobbyists and advocates were reading the new language Wednesday and evaluating whether to support the measures. 

The last time the program was reauthorized, then-Gov. Jerry Brown swayed some Republicans and won the support of both the oil and gas industry and CalChamber.

While Republicans have not outright denounced the proposals, Democrats shouldn’t necessarily count on their allyship.

Sen. Shannon Grove, a Republican from Bakersfield who for years has warned against overregulating the oil and gas industry, said she was scrambling to assess the details of a plan that was completely secret until just a few hours earlier. 

Although Grove said she was pleased the proposal would unlock more oil drilling in Kern County, she was concerned there isn’t a strong enough provision in the deal to keep refineries from closing. Without refineries, there’s no in-state destination for the crude oil produced in her district.

“It’s a multibillion-dollar piece of legislation, and I don’t know what’s in it, so I can’t tell you,” Grove said when asked if she would support the bills. “We have to nail the refinery piece.”

The business community, including the California Chamber of Commerce and the powerful Western States Petroleum Association, strongly opposed the changes even before the final wording was released, staging an all-out lobbying effort this week as lawmakers returned to the Capitol. 

“WSPA strongly opposes this rushed attempt to reauthorize the state’s Cap-and-Trade program behind closed doors in the remaining days of the legislative session,” the association said in a statement Monday night. Neither the Chamber or WSPA commented on the public cap and trade proposals Wednesday.

Meanwhile, environmental justice advocates — who advocate for low-income and disadvantaged communities that often live closer to polluting industries — and other environmental advocates said the proposal doesn’t go far enough. The coalition was primarily disappointed that the bill to mandate a pollution monitoring program for disadvantaged communities did not include the specific areas and neighborhoods that they outlined in previous legislation. 

The group wrote in a joint statement Wednesday that key parts of their proposals had been rejected and said the legislation continues to make “communities into sacrifice zones for the benefit of industry profit.”

“There’s a lot of money left on the table,” said Ryan Schleeter, a spokesman for the Climate Center. “There could have been more done to shore up that revenue for future years, and there’s a lot of money that’s still flowing to oil and gas corporations through the cap-and-trade program.”

CalMatters reporters Malena Carollo and Alexei Koseff contributed to this story.

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