CARB’s half-billion-ton elephant in the room

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OPINION — The California Air Resources Board recently voted to authorize the state’s new Cap-and-Invest regulations after much hand-wringing over a last-minute amendment, purportedly in response to political pressure from oil refineries, to subsidize industry decarbonization projects.

The proposed Manufacturing Decarbonization Incentive (MDI) will finance industry projects by creating a new allowance reserve account with 118 million allowances over and beyond CARB’s previously planned carbon allowance budgets. (However, the Board suspended MDI activation pending further review and potential amendment.)

The Legislative Analyst’s Office had advised the Legislature prior to the Board’s vote that “By adding MDI allowances outside of the cap, the proposed regulations would allow for additional emissions above the capped level and reduce certainty that the state will meet its 2030 GHG reduction target.” Furthermore, the new allowance allocation could cut into revenues for the Greenhouse Gas Reduction Fund, which relies on allowance auctions to finance a variety of state programs. Surplus MDI allowances could depress auction sales or prices.

CARB staff rebutted LAO’s analysis, arguing that most of the MDI allowances would be issued after 2030, and in any case, the additional allowances would likely be banked for future use and would therefore not impact near-term allowance sales or emissions. (May 28 Board meeting @8:08:40.)

The “elephant in the room” that CARB and LAO were both ignoring is the MDI’s potential impact on attainment of the state’s 2045 GHG reduction target. There were already over 379 million banked allowances in circulation in late 2024 (and surely many more by now), comparable to CARB’s cumulative allowance budgets over the 2039-2045 time span (seven years).

Those allowances would allow industry to basically stop reducing emissions after 2035. CARB’s planned allowance budgets decline from 110 million in 2035 to 30 million in 2045, but a 379-million allowance bank would allow industry to meet its compliance obligation while holding annual emissions constant at 104 million tons-CO2 over the 2036-2045 time frame. An additional 118 million banked MDI allowances would raise the total in-circulation bank to over 497 million, allowing industry to hold 2035-2045 annual emissions at 116 million tons-CO2.

CARB doesn’t have a viable plan for attaining the state’s AB 1279 GHG target, and its new MDI reserve sends a clear signal to the market that CARB is not committed to enforcing its allowance budgets, and that the 2045 target is merely “aspirational.”

It is not clear what purpose the MDI is intended to serve. In its response to public comments on the MDI, CARB said “MDI allocation is designed to mitigate emissions leakage … .” But staff told the Board on May 28 (@7:31:23) that “although MDI certainly could benefit [ ] the program by reducing leakage, that’s not its principal purpose … it’s intended to decarbonize those sectors.” California already has a “decarbonization incentive” program, namely Cap-and-Invest, not to mention the GGRF, LCFS, RPS, electrification incentives, … . Why are those programs unable to sufficiently incentivize decarbonization?

California’s oil refineries (Chevron, PBF Energy, Marathon) did not ask for an investment subsidy; what they need is, first, protection from competition with unregulated and more highly-polluting imports, and second, relief from high regulatory costs.

The first need could be met with a carbon border adjustment, which would bring out-of-state refineries within the scope of California’s regulations for imported fuel. (The LCFS already accounts for upstream emissions of imported fuel.) CARB was dismissive of public recommendations for a border adjustment, asserting that “such a mechanism is unnecessary here as there is no evidence that emissions leakage will occur as a result of the Proposed Amendments, and as such a border adjustment alternative or measure, or other alternative mechanisms, are not necessary to reduce or avoid any significant emissions leakage related impacts.”

Why, then, is the MDI needed “to mitigate emissions leakage”?

Industry’s regulatory cost burden could be alleviated without cannibalizing the GGRF or breaching allowance budgets. The GGRF is revenue-starved at low allowance prices, whereas industry is primarily concerned with potential high costs at prices near the price ceiling. A supplemental, output-based GGRF allocation to industry at a low priority level would have no impact on existing GGRF programs, but GGRF revenue in excess of existing programs’ budget requirements (at high allowance prices) could give industry significant relief from high regulatory costs.

It is hard to comprehend CARB’s thinking and policy rationale on these matters, especially its obliviousness to the additional half-billion tons of CO2 emissions that will be permitted by the allowance bank – likely putting the state’s 2045 target out of reach.

Ken Johnson is affiliated with the Climate Reality Project: Silicon Valley Chapter and is a writer on climate-policy topics.