California Governor Gavin Newsom proposed a 15-year extension of California’s cap-and-trade system for greenhouse gases, which has been a revenue generator for the state. His proposal would reauthorize the state’s quarterly auction of emissions permits, as well as change the way some of the proceeds are spent. He plans to shift a proportion of revenue to fighting wildfires and to fund the state’s high-speed rail project. This project has been in the works since the Obama administration first funded it, and Newsom’s plan would change its level of funding from a 25% share of cap-and-trade dollars to a guaranteed minimum funding level of $1 billion annually. The governor also wants to continue funding utility bill credits from the program to help lower-income families’ electric bills. Nearly one in five households is behind on utility payments.
Newsom is calling for shifting $1.5 billion of the program’s revenues to the general fund to backfill the state’s firefighting agency, whose share of the general fund has doubled over the last 10 years due to the need to hire more firefighters and purchase more equipment. Cal Fire’s total budget was $4.2 billion in 2024. Newsom’s proposal will be debated in the state’s legislature, which has already pledged to reauthorize the state’s cap-and-trade program this year.
Newsom now wants to call the 13-year-old cap-and-trade program, under which companies buy emission permits to meet an industry-wide cap on carbon emissions, “cap-and-invest.” The current program expires in 2030, and uncertainty about its future has caused auction revenues to drop. The quarterly state-run auctions generate about $4 billion annually, with revenues due to increase as the cap gets lowered and the state-set price floor rises.
Energy Prices May Rise Further
The state’s cap-and-trade system requires natural gas power plants, coal power plants, and other companies to purchase allowances to offset emissions. As mentioned above, the program establishes a declining limit on major sources of greenhouse gas emissions, which is expected to incentivize companies to invest in “cleaner, more efficient technologies and energy.” The tightening of the program and the planned closing of two major oil refineries in the state could significantly increase gasoline prices over the next several years.
According to a May report from California’s Legislative Analyst’s Office, Californians could pay an additional 74 cents per gallon of gasoline if the state’s legislature extends its cap-and-trade program, adding about $700 per year to the average household, compared to the current gas charge from the program of about 23 cents per gallon based on February 2025 allowance prices. The increase in gas prices would hurt the state’s lower-income households because they tend to spend a higher portion of their income on transportation fuels than higher-income households.
California’s oil production has fallen by a third under Governor Newsom’s watch, which means the state has had to import more oil from the Middle East and South America. Due to the pending refinery closures, California will have to import more refined petroleum products due to its boutique fuel standards, which other states do not require. Almost 20% of California’s refining capacity is set to shut down over the next 12 months. More than a third will have shuttered since Newsom became governor. According to the Wall Street Journal, the state also lacks port infrastructure and storage facilities to handle more gasoline imports.
Filling up a Jeep costs Californians $100. Charging an electric vehicle is also costly since California’s electricity rates are nearly double the rest of the country’s and continue to increase due to the state’s climate policies, particularly its reliance on wind and solar power, which need back-up technology due to their intermittency. For example, Pacific Gas & Electric recently proposed a rate increase after having six last year to deal with wildfires and state climate policies.
California is facing a budget shortfall of about $12 billion, which Governor Newsom has blamed on economic impacts from President Trump’s tariffs. However, California’s spending has increased significantly since the governor took office in 2019, with California’s state budget increasing over 63% from that year to June 2024, rising from around $200 billion in 2019 to about $327 billion in the current fiscal year ending June 30, according to a May 2024 report from the Hoover Institution. That increase in spending, along with fewer Californians paying into the state’s coffers as many have left the state due to the high cost of living, are more likely the culprits for the shortfall.
As Allysia Finely of the Wall Street Journal Opinion Board explains, since January 2020, California has lost jobs in information (54,100), finance (62,200), professional and business services (49,100), leisure and hospitality (59,200), and manufacturing (70,200). While employment initially rebounded after the pandemic lockdowns, most industries have lost jobs since the summer of 2022. During the first three months of this year, California has lost 54,800 jobs.
California’s Bullet Train Fiasco
California’s bullet train was originally to span from Los Angeles to San Francisco and be completed around 2020. The Obama administration provided $3.5 billion in grants, and President Biden gifted the project $3.1 billion from his Infrastructure bill in December 2023 on top of $1 billion he provided earlier. The train is currently planned to cover a much shorter route than the original project. In 2019, Newsom declared that the train would span 171 miles from Merced (a 130-mile drive from San Francisco) to Bakersfield (110 miles from Los Angeles). Completing the Bakersfield-Merced line of the system is not expected until 2030 at the earliest. It needs $7 billion in additional funding by June 2026 on top of $14 billion that the state has already provided. The train’s full costs have risen above $100 billion, and current plans are to complete the Merced to Bakersfield line at a cost of at least $44 billion.
Conclusion
Governor Newsom wants to blame the financial woes of his state on President Trump’s tariffs. Still, the state’s economic problems have been worsening since he took office in 2019, primarily due to his climate policies. They will continue to get worse as he plans even tougher future policies. He wants to extend the state’s cap-and-trade program 15 years, with the cap continuing to decline and the price floor continuing to rise, costing more for companies to meet their emissions reductions. With other policies that shutter refineries, reduce state oil production, and increase gasoline and electric rates, additional families and industries will be fleeing the state. Unfortunately, state residents are sacrificing much with little gain, as greenhouse gas emissions are a global phenomenon, and without big emitters such as China and India participating, little, if anything, will result from the pain.
