The truth about cap-and-invest

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Opinion – In May, Governor Gavin Newsom proposed a reauthorization of California’s Cap-and-Trade program (rebranded as Cap-and-Invest) to bring stability to the state’s carbon market. Despite this step, the program’s auction failed later that month, leaving millions of pollution allowances unsold because of investor concern about the state’s commitment to the program. Prices dropped far below the levels needed to drive clean energy investment and slashed state revenue to less than half of early 2024 levels, costing the state billions of dollars.

The collapse of the May 2025 market auction exposed the dire situation. Without strong signals from policymakers, many investors are choosing to take their capital elsewhere. With stable returns of 5% available in government bonds, investors are struggling to justify the higher risks and uncertainty of investing in the program.

Without swift action to reauthorize the program and implement updates to align with the state’s climate targets, one of California’s cornerstone environmental policies could unravel due to lack of market confidence. This threatens not only clean energy investment but also funding for firefighting, clean air programs, transportation infrastructure, and key programs to lower utility bills.

As investors, we have a stake in the success of California’s Cap-and-Invest program, and our interests align with the state’s broader goals. A strong, predictable program benefits the economy, consumers, and the environment. We’re here because the data and economics are clear: the sooner California accelerates toward a cleaner energy future, the better the state’s climate outcomes and the stronger its economy.

We are seeing fear and misinformation distort this debate. California policymakers are caught between two extremes: oil industry propaganda and lobbying stoking fear about gasoline prices, and environmentalists’ warnings of the dangers of an imperfect program. Both sides overlook the program’s real strength: built-in flexibility. California can direct funds to make energy more affordable, continually improve program design, and offer compliance pathways that harness California’s unmatched capacity for innovation, which continually proves skeptics wrong and drives California’s economy to ever new heights.

California’s landmark Cap-and-Invest program, launched under Republican Governor Arnold Schwarzenegger and renewed under Democratic Governor Jerry Brown, is a bi-partisan market-based tool to cap pollution, encouraging private sector innovation to reduce emissions at the lowest possible costs. It has powered a clean energy economy with over 540,000 California jobs — more than five times the number of oil jobs — proving that for the world’s fourth-largest economy, sustainability builds economic strength.

Cap-and-Invest directly benefits Californians, already raising over $30 billion from polluters to clean the air, combat wildfires, build affordable housing, clean transportation, and more. It has also paid $15 billion directly to California families to lower utility bills through “California Climate Credits,” saving roughly $180 per household this year alone.

But markets evolve, and policymakers must keep up. Over time, the program’s pollution cap has not fallen fast enough, and the oversupply of free allowances and offsets have severely weakened the program.  Without policy action, critical programs like Cal Fire and utility rebates could face funding challenges, while clean energy investment falls.

There is a better way. If California swiftly reauthorizes the program and adopts the smart program updates the Administration proposed last October, investment can flow into the state, generating nearly $4 billion more per year from polluters—without raising taxes. That’s enough to either double Cal Fire’s budget, take an extra $300 per year off every California family’s electricity bill, or cut California’s gas tax in half while still fully funding the roads, bridges, and electric infrastructure needed to build clean transportation systems of the future.

This is THE affordable solution to the climate crisis.

We urge California’s policymakers to listen to the truth coming from the market and see through special interest groups’ campaigns of fear.

Investors and policymakers must block out the noise and place their bets, backing companies, technologies, and solutions that drive innovation and move the world toward a cleaner, more resilient economy. Investing behind the state’s clean energy leadership is the strongest growth thesis on the horizon. We urge state leaders to stand behind California’s climate commitments and seize the opportunity to unleash the power of markets, turning their ambitions for a cleaner future into reality.

Ari Freisinger resides in San Francisco and is a Managing Partner of Liminality Capital, LP. Nik Mittal is Managing Partner of Molecule Ventures, LP.