California Democrats threaten to block Newsom priorities over imperiled climate deal

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California Senate Democrats want to put the brakes on a new program by Gov. Gavin Newsom’s administration that steers free pollution permits to oil refineries and other major polluters — and they’re using the state budget to force the issue.

In the spending proposal they released last month, the senators moved to block the program until the state funds a three-party climate deal the governor struck with the Legislature last year, an agreement they say Newsom is now breaking. They call their counterplan “Deal is a Deal,” signaling a standoff that could stretch through the summer.

“We really need to stay to the deal,” said Sen. Eloise Gómez Reyes, a San Bernardino Democrat and chair of the Senate’s climate budget subcommittee.

At stake are billions of dollars earmarked for public transit, safe drinking water and affordable housing raised from climate market auctions. The Senate is also threatening to hold up many of Newsom’s own priorities, including funding for high-speed rail and wildfires, electric-car tax credits and a clean jet fuel subsidy.

At issue is a new incentive program created last month by the California Air Resources Board, which overhauled the state’s carbon market under pressure from Newsom and heavy lobbying by the oil industry. It offers free pollution permits worth as much as $4 billion to companies that pledge to invest in clean energy and efficiency initiatives, with half slated for the fossil fuel industry.

That program threatens to drain funds for a series of air quality, housing and transit programs that lawmakers and Newsom agreed to fund last year, when they extended the state’s carbon market through 2045, rebranding it “cap and invest.” The overhaul also puts up to $1 billion guaranteed to the Legislature for discretionary projects in jeopardy.

A climate bargain under threat

California’s carbon-trading program, launched in 2013, is California’s way of putting a price tag on greenhouse gas emissions responsible for climate change.

Last year’s late-session deal set a new pecking order for the billions of dollars the program raises by auctioning pollution permits.

Under the deal, high-speed rail gets $1 billion a year before many other climate programs are funded; another $1 billion annually is dedicated to lawmakers’ priorities. 

Last in line are the programs that turn carbon-market money paid by polluters into tangible benefits for some of California’s most burdened communities: affordable housing projects near transit, cleaner buses and rail, safe drinking water, wildfire protection and neighborhood air monitoring. 

Last month, following intense lobbying by the oil industry and ballooning gas prices, the air board adopted rules to cut the number of auctioned pollution permits drastically through 2030 with Newsom’s blessing. It also created a new incentive for oil and gas refineries and other industries investing in decarbonization.

“It’s unfortunate that the state of California empowers the oil industry to freak everyone out and adopt bad policies,” said Sen. Scott Wiener, a San Francisco Democrat.

The Legislative Analyst’s Office projects the changes could cut annual auction revenue for state climate programs from roughly $4 billion to $2 billion, which would wipe out community-focused programs.

Newsom spokesperson Anthony Martinez said the changes keep the carbon market “durable” while helping consumers and industry.

“That is not a retreat from climate leadership — it’s how California keeps leading while the federal government is retreating,” Martinez said.

Senate holds Newsom priorities hostage

Senate Democrats have countered with their own plan. It would protect the $1 billion lawmakers control, then steer as much as $2 billion to the housing, transit, clean air and drinking water programs. Newsom’s priorities would move to the back of the line, meaning if the climate fund brings in only $2 billion, Cal Fire, high-speed rail and other programs would get little or nothing.

“Why, at this time … would we take away critical funding to build affordable homes in California?” said Sen. Jesse Arreguín, an Oakland Democrat and chair of the housing committee.

Wiener said public transit should not have to fight for survival. “Every year, transit funding becomes a political football.” 

Meanwhile, Assembly Democrats are mum on the rule change in their budget plan and have not proposed any alternatives.

Assemblymembers Jacqui Irwin and Cottie Petrie-Norris, Democrats who chair key climate and energy committees, have supported the air board’s plan, saying the changes reflect the Legislature’s focus on affordability, including potentially more money for Californians’ electric bills. 

The governor and the Legislature have until June 30 to agree on a budget deal before the new fiscal year starts. But much of the climate funding tied up in negotiations is not bound by the deadline and can be hashed out before the legislative session wraps in September.

The Senate’s opposition is threatening to hold up many of Newsom’s priorities.

One is his January proposal to spend $200 million on electric vehicle incentives, $115 million of which would come from the climate fund. Senate Democrats have deferred negotiations on it and talks could last through the summer. 

The Senate also rejected Newsom’s proposed sustainable aviation fuel tax credit, which Newsom argues would encourage the production of greener fuel and boost refinery jobs. The initiative, which would allow eligible producers to pay less into the state’s road repair funding, followed intensive lobbying by petroleum refining company Phillips 66, the only company that has publicly announced it would benefit from the credit.

The climate funding dispute turns on the idea that California may be using its carbon market to soften the rules for some of the state’s biggest polluters.

Air regulators say the permits created through its new program, the Manufacturing Decarbonization Incentive, will go only to companies that cut their own emissions. They say the program has guardrails, including requirements to return the permits if companies fail to deliver. They argue the program will help keep refineries and other major industries in California while sustaining clean-energy investment as President Donald Trump withdraws federal support.

“The cap-and-invest program was updated to do what it was always designed to do: reduce pollution cost-effectively, protect ratepayers, and keep businesses operating in California,” Lindsay Buckley, a spokesperson for the board, said. “The program was never designed to maximize auction revenue.”

Critics of the new program see only a subsidy for polluters that does not guarantee emissions reductions. They argue the new program could threaten California’s ability to meet its legally mandated 2030 emissions targets. 

Several board members shared concerns. The overhaul passed 10-3, but only after the board required further review before the new incentive program launches.

The Senate plan would block climate-fund spending unless the Department of Finance certifies that last year’s deal can be funded. It would also stop the air board from handing out the new industrial permits unless state officials show they align with California’s climate targets, lower gasoline prices and leave enough money for threatened climate programs.

The budget fight could have political consequences for Newsom as he defends his climate record beyond California, said Katie Valenzuela, a policy advocate who focuses on environmental justice issues.

“If this [rule] goes forward and isn’t fixed, this is a huge stain on his climate legacy,” Valenzuela said. “He is showing loud and clear that the most vulnerable residents who are most impacted by climate change are not his priority.”

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