California’s Big Climate and Energy Package, Explained

California is in the trenches. The state has pioneered ambitious climate policy in the United States for more than two decades, and each time the legislature takes up the issue, the question is not whether to expand and refine its strategy, but how to do so in a politically and economically sustainable way.

With cost of living on everyone’s minds — California has some of the highest energy costs in the country — affordability drove this year’s policy negotiations. After a bruising legislative session, however, California emerged in late September with six climate bills signed into law that attempt to balance decarbonization with cost-reduction measures — an outcome that caught many climate advocates off guard.

“It was definitely touch and go whether this was all going to come together,” Victoria Rome, the director of California government affairs for the Natural Resources Defense Council, told me. “It was a lot of complicated policy to put forward in a relatively short time frame.”

The package reauthorizes California’s signature cap and trade program, rebranded as “cap and invest,” with a slight tweak that will help lower electricity bills. It clears a major hurdle to creating a more integrated Western electricity market that has the potential to deliver cleaner energy throughout the region at lower cost. It replenishes a rapidly diminishing wildfire fund that ensures utilities don’t go belly-up when they’re found liable for wildfires — and offsets the cost to customers by limiting how much of the cost of transmission upgrades utilities are allowed to pass on. And lastly — and most controversially — in an attempt to stabilize gasoline prices, it streamlines approval of new oil wells in Kern County, California.

Not everyone was happy with the compromise. The Center for Biological Diversity condemned the oil and gas bill, while environmental justice advocates were angry that lawmakers did not do more to protect low-income communities in the reform of cap and trade. It also remains to be seen how much the cost containment measures will help. Some of them, like the new Western electricity market, likely won’t pay off for many years. The cap and trade extension could ultimately exacerbate costs.

A few other groundbreaking climate-related bills are still sitting on Newsom’s desk, such as one that would set a safe maximum indoor temperature, requiring landlords to provide cooling to tenants, and another that would override local zoning rules to allow taller, denser housing to be built near public transit. He has until next Monday to sign them. But even without those, the package illustrates how California Democrats are at least trying to leverage the new politics of affordability to advance their climate goals, and the ways in which the two are difficult to align.

Here’s a breakdown of the major changes.

Cap and trade invest through 2045

California’s cap and trade program is the state’s centerpiece climate policy. It puts a price on pollution by requiring dirty industries to buy and retire state-auctioned “allowances” for every ton of carbon they emit, with a declining amount of allowances released into the market each year. Funds raised through allowance sales are funneled into utility bill credits for consumers as well as climate-friendly projects throughout the state.

Prior to last month’s legislation, the program was only authorized to continue through 2030, and the closer that date got, the greater the uncertainty became about whether it would continue. According to one analysis, that uncertainty cost the state $3.6 billion in revenues over the year ending in May 2025 as companies relied on allowances they’d stocked up on in previous years, when they were cheaper and more plentiful. If the program was going to expire in 2030, there was less incentive to collect more — or to invest in emission-reducing solutions like replacing their boilers with industrial heat pumps.

The legislature extended cap and trade through 2045, rebranding as “cap and invest” — a more politically resonant title originating in Washington State that highlights the revenue-raising aspect of the program. It also introduced several key reforms. By 2031, earnings from the program reserved for utility credits will go exclusively toward electric bill savings, i.e. it will no longer subsidize residential gas. “The general idea was that almost every gas customer is an electric customer,” Danny Cullenward, a California-based climate economist and lawyer, told me. “And so if you shift the same total dollars from gas and electric to just electric, you concentrate the benefits on the electric side, which supports building decarbonization, but you don’t take any dollars away from the customer.”

California has the highest electric rates in the continental U.S., and so right now, switching from using natural gas to all-electric appliances is not in everyone’s best interest. Providing more relief on the electric side will help with that — especially as the price of allowances increases in the coming years, translating into more revenue to fund bill credits. The legislation also directs electric utilities to apply the credits over the summer, when bills are highest, rather than on the twice-a-year schedule they used previously.

The other major reform has to do with the way carbon offsets are integrated into the program. Previously, companies could purchase offsets instead of allowances to account for a certain amount of their emissions, giving them a cheaper way to comply. Now, every time a company retires an offset instead of an allowance, the state will also retire an allowance. This is an implicit recognition by lawmakers that carbon offsets haven’t been effective at reducing emissions, Cullenward told me.

While he called the extension of cap and invest a “profound and important accomplishment,” Cullenward also raised major concerns about its future impacts on affordability. The program literally puts a price on carbon, after all, and that price is now set to rise, pervading much of California’s economy, from the pump to the cost of goods and services. “Outside of my hope that this will be a net benefit for electric utility ratepayers, which I think is a very good and positive thing, this is not an affordability bill,” he told me.

Lawmakers have done nothing to mitigate the program’s effect on gasoline and diesel costs, he pointed out. They also haven’t addressed the elephant in the room — a $95 price ceiling on allowances that, if they ever get there, may be politically untenable. (Right now prices are around $30.) State regulators now have a chance to revise the price ceiling, Cullenward said, ideally with an eye toward balancing ambition with consumer cost impacts. “That’s the main part of the work that is completely not yet done,” he said.

Toward the creation of a coordinated Western grid

Energy nerds throughout the West have been scheming to unite its disparate grids for years. Unlike the entire eastern half of the country, where utilities buy and sell energy across state lines in competitive markets on both a daily and realtime basis, and work together to plan transmission upgrades throughout their territories, most Western states do all of their energy trading through longer-term bilateral contracts.

After years of failed efforts to change that, lawmakers have finally given California’s grid operator their blessing to work with other states in the region on creating such a market. Proponents argue that more competition and coordination between utilities in the West will create efficiencies that save money, improve reliability, and accelerate decarbonization. For example, California, which often produces more solar energy than it can use during the day, would be able to sell more of that power to other states. When there’s a heat wave coming, it’ll have more supply to draw from.

To be clear, California was already working on all this prior to last month’s legislation. The state’s grid operator launched a realtime electricity trading market in 2014, which now has 21 utility participants throughout the West. Next year it will launch an extended day-ahead market, enabling utilities to buy power about a week in advance of when they’ll need it. That will initially have just two participants, PacifiCorp and Portland General Electric, with five others planning to join in later years.

But seven companies does not a competitive market make. To grow to its fullest potential, the day-ahead market will need many more participants. That was always going to be a tough sell so long as California was in charge, Vijay Satyal, the deputy director of regional markets at the nonprofit Western Resource Advocates, told me. CAISO, California’s grid operator, is overseen by a governor-appointed board, “which is one reason why the larger West never wanted to be part of CAISO, if the governance and decision making would be controlled by the governor of one state,” he said.

An effort is already underway between state officials, utilities, and other stakeholders, including those from California, to create an independently-governed Western Energy Market called the West-Wide Governance Pathways Initiative. The new legislation grants CAISO permission to transition governance of its realtime and day-ahead markets to the organization that comes out of that effort — as long as the group meets certain requirements around transparency and engagement with state leadership.

“Now there’s opportunity for all the utilities across the West to come together and for clean energy developers to be part of a larger market and be transparent, independent, and not controlled by one state’s policies,” Satyal told me. The other advantage of having this regional organization is that it can engage in more coordinated transmission planning — another potential cost-saving measure.

Some relief from wildfire costs

Wildfires have been a huge part of California’s electricity affordability crisis. Case in point: Since 2019, Californians have had to pay an extra fee on top of their electric bills that goes into a state Wildfire Fund to help utilities cover post-wildfire loss and damage claims — a sort of insurance mechanism to prevent utility insolvency.

This year, lawmakers were under pressure to add more money to the pot. Experts worried that without another infusion, payments related to January’s Eaton Fire in Los Angeles, which the U.S. Department of Justice alleges was caused by faulty utility equipment, would deplete much of what’s left.

The legislature extended the fee, adding $18 billion to the Wildfire Fund that will be split evenly between ratepayers and utility shareholders over the next decade. But it also passed several measures that will help offset that cost by minimizing future rate increases. First, utilities will be prohibited from earning a profit on the first $6 billion they spend on wildfire mitigation projects, such as burying power lines, starting next year. Companies will be required to finance this spending more cheaply through ratepayer-backed bonds rather than through equity, which commands a higher rate of return.

On top of that, the legislature directed the governor’s office to create a “Transmission Infrastructure Accelerator,” a program that will develop public financing options for new transmission lines, such as low-cost loans, revenue bonds, or even partial public ownership of the projects. The program will have a dedicated “Revolving Fund” that will be replenished each year with a portion of cap and invest revenue.

“It is the largest electricity affordability measure in the whole package,” Sam Uden, the co-founder and managing director for the nonprofit policy shop Net Zero California, told me — to the tune of $3 billion in savings per year once the new lines are constructed, according to an analysis his group commissioned.

More drilling

Gavin Newsom has not necessarily been a friend to the oil industry. He’s instituted distance requirements for new oil wells barring drilling near homes and schools, and given local jurisdictions more authority over drilling. But gasoline prices — ever a political issue in California — have tested his resolve. The price at the pump in California has averaged around a dollar higher than the rest of the U.S. for the past several years, and that margin has crept up closer to $1.30 this year. After two of the state’s refineries announced they would close this year and next, threatening to drive prices higher, Newsom backed a bill this session to increase oil production in Kern County.

Uden of Net Zero California justified the bill as a “short term measure.” The provisions that streamline drilling permits only apply through 2036. “We are really trying to grapple with what is a very difficult transition,” he told me. “We’ve got to phase down oil, but we can’t do it in a way that just spikes gas prices.”

It’s unclear, however, whether more drilling in Kern County will do much to address the problem — especially if the cap and invest program continues to drive up prices, as Cullenward fears. At least to date, the state’s high gasoline prices have not been caused by a lack of gasoline supply, according to University of California, Berkeley, economist Severin Borenstein. The bigger factors driving price increases are taxes and environmental fees and the special blend of gasoline required by the state’s air quality regulators.

What will drive prices up are refinery closures. Lawmakers are making a bet that increased in-state oil production will prevent further closures by giving refineries access to cheaper crude. But Borenstein notes that the state will continue to rely on crude imports, meaning the price of gasoline will still be tied to the global market. His preferred solution to keep prices in check is to remove barriers to importing more refined gasoline.

“The longer run challenge is to balance refining supply and demand, which oil production doesn’t address,” Borenstein wrote.

Michael Wara, a senior research scholar at Stanford University’s Woods Institute for the Environment, agreed on the urgency of opening a new import terminal. He told me he saw the Kern County bill as a way to buy time. “We’ve done the kind of stopgap measure. The increased permits will help stabilize Northern California refineries for probably a couple years,” he said. “But if we don’t use that couple of years in the right way, then we will be in big trouble.”

Wara also wasn’t too worried about the measure creating some kind of oil Renaissance. “Permits are one thing. The decision to actually drill a well is an economic decision that’s going to be driven by oil prices, which are pretty low right now. I don’t think anybody thinks that handing out more permits is going to stem the decline in that industry.”