State leaders deliver transformational package of climate, energy affordability bills
After intense negotiations going right until the final moments of the legislative session, the Legislature and Governor successfully delivered a comprehensive package of reforms to drive down energy costs, stabilize markets, and accelerate clean energy deployment.
In sharp contrast to a federal administration that has completely turned its back on climate action, the stakes were high, and the suite of policies adopted by lawmakers reflects a blend of ambition and pragmatism that is likely to guide California’s energy transition in the coming years.
Central to the package was the reauthorization of the cap-and-invest program – a key pillar of the state’s climate agenda and long-term goal to achieve net-zero emissions by 2045. Additionally, multiple measures were adopted to address rising electricity costs, including a new policy to facilitate public financing of transmission and an $18 billion replenishment of the state's Wildfire Fund. Steps were also taken to address a potential shortfall in gasoline supply resulting from planned refinery closures, including by streamlining the review and approval of a limited number of new oil wells in Kern County. Lastly, state leaders authorized the California Independent System Operator (CAISO) and electrical corporations to participate in a west-wide energy market that would improve reliability and affordability.
In this article, we provide a high-level summary of the main policies in the package. We also highlight additional policies related to carbon management and forest and agricultural biomass that passed outside of this core set of bills. In a forthcoming analysis on electricity affordability (SB 254), we will unpack the state’s new Transmission Infrastructure Accelerator in more detail.
Cap-and-invest
Cap-and-invest is a key pillar in the state’s climate policy portfolio. However, under prior legislation it was only authorized to 2030. As confidence in the longevity of the program waned, auction prices collapsed, resulting in a growing amount of lost revenues to the state totaling billions of dollars in the last year alone.
AB 1207 (Irwin) officially extends the program to January 1, 2046, at the same time making a number of adjustments to improve the market-based mechanism. A companion bill, SB 840 (Limon), made initial revisions to the Greenhouse Gas Reduction Fund revenue allocation.
Market-based mechanism
AB 1207 makes a number of changes to the market-based mechanism, including various design elements that enhance the flexibility and emissions reduction potential of the program while at the same time improving outcomes for consumer affordability. Key changes include:
Program extension: Extends the cap-and-invest program through its current expiration in 2030 through to January 1st, 2046.
Offsets: Allows covered entities to meet 6% of their compliance obligations with offsets; directs CARB to consider developing additional carbon dioxide removal protocols.
Price controls: Establishes a California Climate Mitigation Fund to direct the proceeds from allowances sold at the price ceiling as direct rebates to consumers.
Allowances to industry: Authorizes CARB to adjust Industry Assistance Factors (i.e., the percentage of free allowances to industry to prevent leakage) from 2030, including potentially below the current 100% allocation for certain industrial emitters.
Allowances to utilities: Directs CARB to develop a method to redistribute allowances from gas to electric utilities consistent with the state’s electrification goals. Additional changes include:
Climate credit: The climate credit, which is a direct rebate to consumers, will continue to be the main usage of utility allowance proceeds. A key change is that this will be targeted to a maximum of four high-bill months per year to maximize affordability.
Transmission Accelerator Revolving Fund: 5% of utility allowances are to be directed to a new fund to support the public financing of transmission. This is a long-term affordability strategy relevant to a policy in SB 254 (see below).
Legislative oversight: The Legislature retains key oversight and partnership with the California Air Resources Board (CARB), including by requiring various reports to the Legislature, continued operations of the Independent Emissions Market Advisory Committee, and similar.
Next steps: A key next step is for CARB to restart its rulemaking related to cap-and-invest, which will seek to implement the directives as contained in AB 1207 and go into much greater detail regarding the mechanics and operations of the program. Program design features adopted in new legislation may also facilitate integration of carbon markets in California and Washington, which may be the subject of further legislative activity in the future.
Greenhouse Gas Reduction Fund (GGRF)
SB 840 sunsets the previous percentage-based continuous allocations, which were established back in 2014, and replaces them with fixed dollar ($) amounts for largely the same programs. This overall reflects a shift to there being a greater pool of discretionary funding available to the Legislature, as the GGRF is anticipated to expand in the coming years. A summary of key changes includes:
High-Speed Rail: $1B annual allocation;
Legislature: $1B annual allocation; $250M of which is earmarked for certain key programs in 2026-27 already, such as $85M for climate-focused technological innovation (e.g., industrial decarbonization; carbon removal);
Current programs: After the above $2B is allocated, the next approximately $2B, largely representing current continuous programs, is allocated as follows (note: any additional funding in excess of $1B + $1B + $2B = $4B, is available for allocation by the Legislature):
Affordable Housing and Sustainable Communities: $800M annual allocation;
Transit and Intercity Rail Capital: $400M annual allocation;
Community Air Protection: $250M annual allocation
Low Carbon Transit Operations: $200M annual allocation;
Forest Health and Wildfire Prevention: $200M annual allocation;
Affordable and Safe Drinking Water: $130M annual allocation.
Climate resilience: GGRF monies are explicitly identified as needing to reduce greenhouse gas emissions or to support climate change adaptation or resilience investments.
Offsets: SB 840 also provides consideration of the role of offsets under the program, including by directing CARB to evaluate the contribution of offsets towards the state's climate goals.
Next steps: SB 840 establishes clear intent language, including to direct specific percentages of the available revenues to new programs, such as clean transportation, wildfire prevention, clean energy, and others, as part of multi-year spending plans to be developed by the Legislature going forward.
Electricity affordability
With electric rates climbing more than 100% for some investor-owned utility customers over the last decade, a key focus of legislators this session was to adopt reforms that would address the key drivers of rising rates and provide relief to consumers.
As noted, reauthorization of cap-and-invest was one piece of this puzzle, with utility allowances funding the climate credit and Transmission Accelerator Revolving Fund. SB 254 (Becker, Petrie-Norris) establishes a host of related policies to reduce rates over the short- and long-term.
Transmission Infrastructure Accelerator
A key new policy established under SB 254 was the creation of an interagency Transmission Infrastructure Accelerator, led by the Governor's Office of Business and Economic Development in coordination with the CPUC, CEC, IBank, and others, to facilitate the public financing and potential ownership of eligible transmission projects and in doing so save ratepayers billions of dollars each year.
Recent analyses show that the way investor-owned utilities finance grid infrastructure – with a substantial portion of shareholder equity in the capital stack – results in ratepayers paying many times the actual cost of a transmission asset. Pivoting to low-cost financing models for infrastructure, which prioritize replacing private equity with public debt, creates an enormous savings opportunity (Figure 1).
Figure 1: This diagram highlights the customer savings potential for building new transmission under alternative models. Applying public financing and ownership in combination with private sector operations (far-right chart) to only a portion of new transmission yields billion in annual savings.
As part of the new model, the Accelerator would be tasked with coordinating project financing to "maximize ratepayer savings", including by reducing or eliminating equity in the capital stack and pursuing public ownership (to reduce tax obligations) to the fullest extent possible. SB 254 also establishes the Transmission Infrastructure Accelerator Revolving Fund program, which would provide low-cost loans, guarantees, and credit support to eligible projects. With $325M from Proposition 4 and a five-year continuous allocation from cap-and-invest, it is estimated that this fund could total $2B by 2031. Finally, the Accelerator would perform functions that seek to expedite eligible projects, such as via local stakeholder engagement, land-use assessment, and permitting support.
Securitization of wildfire investments
Another infrastructure category where investor-owned utilities earn profits is wildfire mitigation capital expenditures, such as line undergrounding. SB 254 establishes financing reforms for a portion of these expenditures, by prohibiting utilities from putting in their equity rate base the first $6 billion of expenditures and instead authorizing the recovery of these costs via the issuance of ratepayer-backed bonds – a process known as securitization. It is estimated that this wildfire risk mitigation financing strategy could generate, on average, $300-400M per year of savings over the next decade.
Wildfire Fund
A final key policy is the replenishment of the Wildfire Fund. Established in 2019 with an initial $21B paid for by both utility shareholders and ratepayers, the fund provides backstop insurance to utilities in the event of excessive liability that threatens bankruptcy. Although the fund still currently holds over $13B, it is at risk of depletion following the catastrophic Eaton fire in LA earlier this year.
SB 254 would shore up the Wildfire Fund (technically a separate fund for potential future fires only) with a new $18B, paid for 50:50 by utility shareholders and ratepayers. There would be no near-term impact on ratepayers, who would instead start repaying this new cost via electric bills from 2036.
The Wildfire Fund may provide some affordability benefits by stabilizing the financial health of investor-owned utilities. However, it is also a (future) direct cost to ratepayers. This motivated the electricity affordability package, whereby the Wildfire Fund was paired with new policies such as the Transmission Infrastructure Accelerator, wildfire mitigation securitization, and more. Overall, SB 254 provides substantial net savings to ratepayers, on average in the billions of dollars each year.
Next steps: In the lead up to the Assembly floor vote, both Assemblywoman Petrie-Norris and Senator Becker acknowledged that further work needs to be done on energy affordability. This, at least, includes a more durable solution for wildfire prevention in California. Successful design and implementation of the Accelerator is a key opportunity to bank substantial ratepayer savings.
Refinery transition
With two of California’s thirteen refineries planning to close by December 2025 (Phillips 66; Wilmington) and April 2026 (Valero; Benicia), concerns had been raised regarding potential supply shortages for gasoline that could increases prices at the pump.
SB 237 (Grayson) adopts a series of measures focused on stabilizing the petroleum market over the short- to medium-term. Key reforms include:
Expanding in-state supply: Exempts projects that comply with Kern County’s 2025 oil and gas permitting ordinance from needing new CEQA review; Authorizes CalGEM as the lead agency to approve up to 2,000 new wells for projects that do not meet the above exemption.
Summer blend requirements: Authorizes the Governor to suspend the state’s summer blend fuel requirements if gas prices rise substantially. (California’s summer fuel blend reduces smog during hot months but is generally costlier to produce).
Transportation fuels assessment: Requires the CEC to study how alternative gas blends could help maintain a reliable and affordable fuel supply, and to develop a strategy when those alternatives might be used in California; Directs the CEC to evaluate creating a regional fuel blend for western states to help stabilize prices across the region.
Additional provisions strengthen pipeline safety, update oil spill safeguards, and clarify coastal permitting rules.
Next steps: while these provisions can help stabilize the market in the short-term, the state does not yet have a comprehensive strategy to transition off of oil. Further work is needed to develop a strategy to do this in a way that is managed and minimizes impacts to workers.
Grid regionalization
As California faces increasing climate stressors such as wildfire as well as growing energy demand, ensuring access to a greater pool and variety of energy resources can improve reliability.
AB 825 (Petrie-Norris, Becker) would authorize CAISO and electrical corporations to participate in a west-wide energy market that is governed by an independent regional organization with representation from across the west. This is anticipated to drive market expansion and therefore an increased pool of resources available for import to California to manage grid reliability events, with onshore wind energy from the Intermountain West a likely option. Additionally, it will provide a greater opportunity for California generators to export excess energy, particularly curtailed solar, to other states. A study by the Brattle Group highlights potential savings to ratepayers of $400 million to $1.1 billion per year, depending on the level of market participation that occurs (Figure 2).
Figure 2: This diagram shows the potential consumer savings from a western market based upon the level of market participation. Note that the $112M and $790M estimates have been revised upwards to $400M and $1.1B, respectively, in an update to the analysis available here.
Other: Carbon management; Forest biomass
Outside of the core package, there were are a number of additional bills passed that are worth highlighting.
SB 614 (Stern) removes the moratorium on carbon dioxide pipelines in California. This is significant for the purpose of the state’s ambitious carbon capture, removal and storage goals, which total 100 Mt/year or roughly 25% of the state’s total climate solution per the 2022 Scoping Plan. Studies show that moving CO2 by pipeline is the most economical and scalable form of transport and is key to incentivizing both carbon capture (upstream) and storage (downstream) development. In a forthcoming study anticipated to be released in early 2026, Net-Zero California, Stanford and Princeton researchers will evaluate the policy and investment needs and provide a roadmap for the state to achieve its ambitious carbon capture, removal and storage goals.
SB 88 (Caballero) requires that CARB develop a lifecycle assessment of forest and agricultural biomass waste as well as a comprehensive strategy to support biomass carbon removal. A forest biomass lifecycle assessment has long been a key need for prospective developers interested in establishing biomass-to-fuels pathways, such as hydrogen, renewable natural gas, and sustainable aviation fuel. The result is that this policy creates a basis for a sustainable forest bioeconomy – one of the only solutions capable of supporting forest treatments and wildfire risk reduction at scale.
SB 643 (Caballero) establishes a Carbon Dioxide Removal Purchase Program at CARB and directs CARB to develop guidelines and purchase $50 million of eligible carbon removal, including direct air capture, biomass carbon removal, enhanced mineralization, and marine carbon removal. This can provide grant funding for initial projects and supports the state’s net-zero emissions goal.
Conclusion
Last year, the US was in the midst of implementing groundbreaking federal programs to innovate clean technologies and decarbonize the nation's energy and industrial sectors. Now less than 12-months later, this leadership has been substantially undermined by a new federal administration that has sought to dismantle previous commitments to climate mitigation and renewable energy.
California has already shown that emissions reductions and economic growth can go hand-in-hand. State leaders reaffirmed their commitment to this future with this ambitious and pragmatic bill package. Multiple policies contained in the package will provide a model for other states. For more information on the climate and affordability package, please contact Sam Uden (sam@netzerocalifornia.org).
