California governor Gavin Newsom (D) is planning to start discussions with lawmakers to enact a formal extension of the state's cap-and-trade program.
Newsom included the idea in the 2025-26 budget proposal he released on Friday.
"The administration, in partnership with the legislature, will need to consider extending the cap-and-trade program beyond 2030 to achieve carbon neutrality," the governor's budget overview says.
The California Air Resources Board (CARB) believes it has the authority to operate the program beyond 2030, but a legislative extension would put it on much firmer footing.
The cap-and-trade program, which covers major sources of the state's greenhouse gas (GHG) emissions, including power plants and transportation fuels, requires a 40pc cut from 1990 levels by 2030. CARB is eyeing tightening that target to 48pc as part of a rulemaking that could take effect next year to help keep the state on a path to carbon neutrality by 2045.
Newsom's budget proposal highlighted the need to weigh the revenue received from the program carbon allowance auctions. That money goes to the Greenhouse Gas Reduction Fund (GGRF), which supports the state's clean economy transition through programs targeting GHG emissions reductions, such as subsidizing purchases for zero-emission vehicles (ZEVs).
The budget plan added few new climate commitments, instead prioritizing funding agreed to last year.
The governor's $322.3bn 2025-26 budget proposal would continue cost-saving measures the state enacted in its 2024-25 budget to deal with a multi-billion-dollar deficit. These included shifting portions of expenditures from the state general fund to the GGRF over multiple budget years, such as $900mn for the state's Clean Energy Reliability Investment Plan.
The state's $10bn Climate Bond, passed by voters in November 2024, would cover the majority of new climate-related spending, including taking on $32mn of the reliability plan spending. The change in funding source would allow the state Department of Motor Vehicles to utilize $81mn in GGRF funds to cover expenditures from CARB's Mobile Source Emissions Research Program.
The governor's budget would also advance his proposal from October for CARB to evaluate allowing fuel blends with 15pc ethanol (E15) in the state, as a measure to lower gas prices. CARB would receive $2.3mn from Newsom's proposal to finish the multi-tier study it began in 2018 and implement the necessary regulatory changes to allow E15 at the pump.
Currently, California allows only fuel blends with up to E10 because of environmental concerns, such as the potential for increased emissions of NOx, which contributes to smog, by allowing more ethanol.
With the administration predicting a modest surplus of $363mn from higher state revenues, it is unlikely that California will return to the belt tightening of the past two state budgets. But the state cautions that tension with the incoming president-elect Donald Trump, potential import tariffs and ongoing state revenue volatility should leave California on guard for any potential future fiscal pitfalls.
The state's legislature's non-partisan adviser cautioned in November that government spending continues to outpace revenues, with future deficits likely.
The administration is keeping an eye on the issue, which could result in changes through the governor's May budget revision, state director of finance Joe Stephenshaw said.
