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A proposed overhaul of California’s signature carbon-pricing program is drawing strong reactions from businesses, environmental groups and agricultural stakeholders as the California Air Resources Board moves toward adopting updated cap-and-invest regulations later this year.
CARB has released draft amendments to update the state’s carbon market following legislation extending the program through 2045. The changes are intended to ensure California remains on track to meet its greenhouse-gas reduction targets while maintaining stability in the allowance market that underpins the program.
The proposal —extending and renaming California’s longstanding cap-and-trade program — tightens the emissions cap, revises allowance budgets, and modifies offset rules, allowance allocations and price-containment tools. CARB is expected to consider revisions and vote on the final regulation in the coming months.
While environmental advocates say strengthening the program is essential for meeting California’s climate goals, industries across the economy — particularly energy-intensive sectors like food processing and agriculture — warn the changes could significantly increase costs.
The debate has also attracted attention from national biofuel and renewable energy groups that supply fuels used in California’s transportation and energy markets.
Industry warns of higher fuel costs
Oil refiners, fuel suppliers and business organizations say the proposal could significantly increase energy prices in the state.
Industry groups argue that reducing the number of emissions allowances available in the market will raise compliance costs for companies regulated under the program, particularly those supplying transportation fuels. Those costs, they say, would likely be passed on to consumers.
Some projections cited by industry leaders suggest the updated policy could add more than $1 per gallon to gasoline prices by 2030, although regulators and climate advocates dispute those estimates.
Energy companies and trade associations have also warned that more aggressive emissions limits could accelerate refinery closures in California, raising concerns about fuel supply reliability.
Lawmakers raise costs concerns
California lawmakers are increasingly weighing in on the proposed amendments, with several urging regulators to carefully consider the potential economic impacts of tightening the state’s carbon market.
Emily Rooney, Ag Council presidentA group of Democratic legislators sent CARB a letter warning the proposal could add additional costs to fuels and energy at a time when Californians are already facing high prices for gasoline and electricity. The lawmakers asked CARB to examine how the proposed allowance reductions could affect transportation costs, energy affordability and the broader economy.
While voicing support for California’s climate goals, they cautioned that “California’s fuels, electricity and natural gas markets are all undergoing significant transition.” The lawmakers urged CARB to ensure that new policies do not “unintentionally increase costs for consumers and businesses already struggling with affordability.”
Republican lawmakers have been more critical of the proposal, arguing the program could function as a de facto tax on fuels and raise costs for households and businesses. Rep. Vince Fong, whose district includes parts of Kern County’s energy-producing region, warned the proposal could undermine energy reliability and economic stability in the state.
“Californians are already paying some of the highest fuel prices in the nation,” Fong said in a statement. “Policies that further increase energy costs will hurt families, workers and businesses across the state.”
Agriculture raises concerns about diesel costs and competitiveness
Although most farms are not directly regulated under the program, the sector depends heavily on fuel and energy that are affected by it.
The Agricultural Energy Consumers Association and Dairy Cares represent processors, agricultural manufacturers and other food production companies that are directly regulated under the Cap-and-Invest Program or supply companies that are.
“The food production sector operates in highly competitive national and international markets, and [is] facing increasing cost pressures from energy, labor, logistics and regulatory compliance,” the groups wrote in comments to CARB.
The organizations also warned that tightening the cap could increase the risk of leakage, where companies shift production outside California to avoid higher compliance costs.
The Agricultural Council of California said rising costs have already forced several major companies to scale back operations or move production out of state. The organization pointed to the bankruptcy of Del Monte Foods and operational changes by companies like Smithfield Foods and Ruiz Foods.
“California’s high costs already put California companies at a disadvantage when dealing with global economies,” the organization wrote in its comments to CARB.
The Agricultural Council also raised concerns that the proposed allowance budget through 2045 could reduce emissions caps too quickly, limiting the ability of companies to transition to lower-carbon operations.
“The cap decline outlined in the regulation is extraordinarily aggressive and does not allow for an ample transition period,” the organization wrote.
Decarbonization options limited for food processing
The proposal includes a manufacturing decarbonization incentive intended to encourage industrial facilities to invest in cleaner technologies. Yet agricultural energy users say electrification and fuel switching opportunities are often constrained by high electricity prices and the limited availability of alternative fuels.
The AECA and Dairy Cares letter notes that converting food processing operations to biomethane or other alternative fuels may not be economically feasible for many companies operating in competitive global markets.
The groups urged CARB to broaden the types of technologies and operational changes eligible for decarbonization incentives.
They also asked regulators to allow companies to receive credit for emissions-reducing investments already made but still within their depreciation schedules, arguing that such a “look-back” provision would better align incentives with typical capital investment cycles.
Dairy methane and renewable gas projects in focus
The associations also emphasized the importance of maintaining strong incentives for methane reduction and renewable energy projects in the dairy sector. California’s dairy industry has invested heavily in anaerobic digesters that capture methane from manure and convert it into renewable natural gas.
The AECA and Dairy Cares letter urged CARB to clarify regulatory language affecting biomass-derived fuels to ensure that renewable natural gas projects can continue operating effectively within the program. They argue that dairy-based renewable natural gas often has extremely low — and sometimes negative — carbon intensity scores, making it one of the most effective tools for reducing methane emissions.
They also warned that certain regulatory interpretations could limit the ability of utilities and other entities to monetize the environmental attributes associated with renewable natural gas.
Providing flexibility in how those attributes are recognized could help finance additional dairy digester projects while supporting California’s climate goals, they said.
Biomass, offsets and agricultural innovation
Agricultural groups also highlighted opportunities for the Cap-and-Invest Program to support additional climate solutions within the farming sector. The Agricultural Council urged CARB to expand eligibility for agricultural wastes and byproducts that can be used as biomass-derived fuels.
Developing additional biomass energy pathways could reduce reliance on fossil fuels while creating new markets for agricultural residues.
The group also urged CARB to reconsider proposed restrictions on combining offset credits with Low Carbon Fuel Standard credits for certain projects.
Many climate projects in agriculture require significant upfront investment and permitting costs, and limiting the ability to stack incentives could discourage investment.
The organization also questioned a proposed requirement for 100-year monitoring of certain sequestration projects tied to offset credits, warning that such lengthy commitments could deter private investment.
Michael Boccadoro, executive director, Dairy Cares and Ag Energy Consumers AssociationClimate funding remains critical
Despite their concerns about the proposed amendments, agricultural groups emphasized the importance of maintaining funding for climate programs that support farmers and ranchers.
Revenue from the carbon market flows into California’s Greenhouse Gas Reduction Fund, which finances a variety of agricultural climate initiatives.
The Agricultural Council urged policymakers to continue funding programs that help farmers reduce emissions while improving efficiency.
Among the programs they highlighted are:
- The FARMER program, which helps farmers replace older diesel equipment with cleaner alternatives.
- The Food Production Investment Program, which supports energy-efficiency improvements at food processing facilities.
- Sustainable agricultural waste management programs.
- Livestock waste reduction initiatives.
National biofuel and biogas groups weigh in
Food and agriculture interests outside California have also weighed in on the rulemaking, warning that certain provisions could disrupt markets for renewable fuels and agricultural energy products that supply California.
The American Biogas Council, representing more than 400 companies involved in converting organic waste into renewable energy and fertilizer, generally supported the cap-and-invest framework but urged CARB to clarify provisions affecting biomethane.
The organization warned that proposed changes to the state’s reporting rules could unintentionally classify certain biomethane transactions as fuel imports even when no physical fuel enters California. Such an interpretation could require renewable natural gas suppliers to assume compliance obligations under the program, potentially discouraging participation in the market.
Biofuel producers raised separate concerns related to ethanol.
The biofuel trade group Growth Energy urged CARB to maintain exemptions for bioethanol under the program, arguing that ethanol already delivers greenhouse-gas reductions through LCFS. The organization further warned that proposed compliance obligations tied to small quantities of fossil denaturant added to ethanol could create unnecessary costs and administrative burdens across the fuel supply chain.
Similar concerns were raised by POET, the world’s largest bioethanol producer, which argued that regulating denaturant under the Cap-and-Invest Program would raise the cost of low-carbon biofuels while delivering minimal climate benefits. POET estimated that denaturant accounts for roughly 0.2% of a gallon of gasoline at the pump, meaning the emissions impact is extremely small compared with petroleum fuels already regulated under the program.
The Renewable Fuels Association urged regulators to focus on expanding the supply of lower-carbon fuels like ethanol, particularly as California moves toward wider adoption of higher-ethanol blends like E15.
CARB is reviewing public comments and is expected to revise the proposed regulation before presenting it to the board for a vote later this year.
