Analyzing the Governor’s proposed climate actions in the May Revise budget
Faced with a federal government that is hostile to climate action, California’s leadership in demonstrating a credible phase down of fossil fuels while at the same time facilitating an unprecedented expansion in affordable clean energy is more important than ever.
The state budget presents a key opportunity for progress. Yesterday, Governor Newsom released the May Revision to the 2025-26 State Budget, totaling $322 billion in proposed expenditures and including multiple key climate actions. In this short article, we analyze the degree to which these actions could support the state’s climate and energy affordability goals. The key actions include:
Reauthorizing the state’s cap-and-trade program to 2045;
Establishing a $1 billion continuous allocation for High-Speed Rail from the state’s Greenhouse Gas Reduction Fund;
Retaining the California Climate Credit to 2045; and
Establishing a $1.5 billion continuous allocation for wildfire prevention and control from the state’s Greenhouse Gas Reduction Fund.
Cap-and-trade reauthorization
A key feature of the May Revise is the proposal to reauthorize cap-and-trade (renamed “cap-and-invest”) to the end of 2045. This action is aligned with, and would support, the state’s goal to achieve net-zero emissions by 2045. It is also expected to bring greater stability to the compliance market, where the auction clearing price has fallen from over $40/ton to below $30/ton due to investor uncertainty related to the longevity of program. However, the Governor’s proposal does not recommend any more granular program changes that some advocates have highlighted as important in recent committee hearings, such as to allowance allocations, price ceilings/floors, and the use of offsets.
High-Speed Rail (HSR)
Roughly 50% of cap-and-invest auction proceeds, or $4-5 billion per year, is deposited into the Greenhouse Gas Reduction Fund (GGRF) to support a variety of state climate programs. HSR receives the largest allocation of this amount each year (25%), followed by Affordable Housing and Sustainable Communities (20%) and Transit (15%). Since 2013, HSR has received a total of $7.4 billion from GGRF.
The May Revise budget proposes to amend the HSR percentage allocation to a fixed $1 billion annual allocation, ensuring HSR continues to receive a significant share of the GGRF into the future. It is important to note that although the HSR project may provide certain economic benefits, it is expected to provide very limited, if any, climate and energy affordability benefits. Notably, HSR is not referenced – at all – in the California Air Resources Board’s Scoping Plan to achieve statewide net-zero emissions by 2045. Additionally, evidence suggests that HSR is one of the least cost-effective investments in the entire GGRF portfolio, with an estimated cost of $140,000/ton by 2030 and $819/ton to $3,780/ton by 2045, based upon the HSR Authority’s own emissions and cost projections.
HSR could be considered a worthwhile investment for reasons other than climate and energy affordability. That said, policymakers might consider whether HSR’s economic benefits could be captured via investments in other large-scale infrastructure with a greater nexus to the state’s clean energy goals, such as transmission, offshore wind, carbon management, clean hydrogen, or similar.
California Climate Credit
Roughly 40% of cap-and-invest auction proceeds, or $2-3 billion per year, is returned to ratepayers in the form of a biannual rebate known as the California Climate Credit.
The May Revise proposes to retain this credit, which at $3 billion per year for the next 20-years could total $60 billion by 2045. The credit is notable in that it provides immediate affordability benefits, although it is important to note the size of the benefit. For example, a $3 billion credit in recent years has translated into roughly $10/month bill savings for PG&E and SCE customers. In terms of climate, the credit does not appear to have a direct benefit to state climate goals.
Policymakers should consider how investing in clean energy infrastructure can deliver similar or greater affordability benefits – but at a fraction of the cost. For example, research from Net-Zero California and Clean Air Task Force shows how using public financing on a subset of key transmission lines could also save ratepayers $3 billion per year over 20-years – but from a total public investment of feasibly as low as $5 billion, compared to the $60 billion that is required under a rebate approach.[1] An investment approach also supports state climate goals and addresses a key structural cause of rising energy costs, which is the need to both expand and harden the state’s electrical system. A trade-off, though, is that these customer savings cannot be realized until the new clean energy asset is operational.
Wildfire prevention and protection
Wildfire is one of the state’s largest climate problems, with emissions in a single year capable of offsetting the state’s progress from multiple prior years combined. Wildfire costs, including historic liability and current prevention efforts such as vegetation management and line undergrounding, are also a key cause of recent rate increases. Therefore, investments in wildfire risk reduction have a clear nexus to generating climate and energy affordability benefits in California.
The May Revise proposes to establish a $1.5 billion per year continuous allocation from GGRF to CAL FIRE to support wildfire prevention and protection. A key question relates to how the funding between prevention and protection is apportioned. For example, if a majority of the funding goes to protection (firefighting), climate and affordability benefits will be more limited. There is some evidence this may be being contemplated, with the Administration's proposed General Fund cuts to wildfire (backfilled here in GGRF) weighted heavily towards Fire Protection ($1.7B cuts) vs Resource Management ($0.02B). More information related to the full budget is needed, though, to properly understand the proposed changes.
The fundamental challenge to achieving wildfire resilience in California continues to be developing a credible strategy to pay for forest treatments at scale. As highlighted by the Assembly Utilities and Energy Committee, it is simply not possible to achieve this via GGRF allocations alone. New strategies that are self-sustaining and crowd-in private investment, such as by establishing a circular economy that converts forest biomass waste into valuable products, is one key option. Policymakers might consider how planned wildfire investments could be leveraged to solve this core problem also.
An Affordable Net-Zero GGRF investment strategy
The Governor’s May Revise is an important step in terms of putting forward a concrete proposal for cap-and-invest reauthorization as well as an expenditure plan. The Legislature now has the opportunity to respond, with a final budget expected to be agreed upon and delivered in June.
Net-Zero California staff have developed a series of analyses on the state’s cap-and-invest program, including a deep dive on GGRF program data, assessment of the strengths and limitations of cap-and-invest policy, and more. To help guide future investment decisions, policymakers could consider an Affordable Net-Zero investment framework focused on aligning cap-and-invest investments with the state’s decarbonization and energy affordability goals (Figure 1). To learn more, see Net-Zero California's memorandum titled An Affordable Net-Zero investment strategy: Analysis and recommendations to reallocate GGRF to achieve California's climate and energy affordability goals.
Figure 1. The Affordable Net-Zero Investment Framework. This framework outlines three key categories for GGRF allocations that would be targeted to support emissions reductions and energy affordability goals in California. For more information, see: https://www.netzerocalifornia.org/affordable-net-zero-ggrf-strategy.
For more information, please contact Sam Uden (sam@netzerocalifornia.org) and Amanda DeMarco (amanda@netzerocalifornia.org).
[1] $5 billion is a preliminary and rough estimate developed as follows: CAISO's 20-Year Outlook identifies approx. $50B in needed transmission investments (6-8 separate large-scale projects). We assume 20% of this cost is funded with low-cost public debt from GGRF ($10B) to address initial development phases. This $10B is derived from a $5B capitalized fund that is revolved one time after 3-5 years as the initial set of transmission projects reach key milestones such that the state can "refinance out": https://www.netzerocalifornia.org/blog/a-clean-energy-infrastructure-plan-for-the-ggrf. The balance would be funded by either public revenue bonds, similar to the financing approach considered by NZC and CATF in Wired for Savings, or private financing with a revised capital structure (e.g., more leveraged; lower ROE) given the substantial de-risking that has taken place. Note: Wired for Savings does not propose this estimate - it is a subsequent NZC estimate only. A more refined version of this estimate, which factors in additional project financing considerations, is forthcoming.