California may give Big Oil billions in free climate permits

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The Chevron refinery in Richmond is located behind a nearby neighborhood on Feb. 21, 2024. Photo by Loren Elliott for CalMatters

IN SUMMARY

California is considering giving oil refineries and other major polluters billions in free pollution permits under a major overhaul of its carbon market.

The fight is exposing a deeper question inside Gov. Gavin Newsom's climate agenda: Can California lower emissions without driving up gas prices?

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California is considering handing oil refineries and other major polluters billions of dollars in free emission allowances just as the state says carbon reductions need to come faster than ever.

In the last six months, two refineries have closed and gas prices have topped an average of $6 a gallon as the Iran-Israel war sent oil markets into turmoil. The oil and gas sector spent $10.3 million lobbying Sacramento in the first three months of the year, according to lobbying filings, with the Western States Petroleum Association and Chevron accounting for the bulk of it.

The result is a new proposal before the California Air Resources Board that would provide as much as $4 billion in new free emission permits to companies with half slated for the fossil fuel industry in exchange for commitments to invest in clean energy.

Environmentalists warn the proposal is a giveaway to Big Oil that would weaken California’s "cap-and-invest" program just as the state is relying on it to cut emissions and fund climate, housing and other programs. Anthony Martinez, a spokesman for Gov. Gavin Newsom, said the changes are necessary to keep the state’s carbon market "durable" and "affordable" amid mounting refinery closures.

The fight over California’s carbon market has exposed the political tensions at the heart of Newsom’s energy transition agenda. California is trying to preserve its climate ambitions while keeping gasoline affordable for drivers already facing the highest prices in the country. Critics say the air board’s proposal accomplishes neither goal.

"We are really concerned that this would significantly kneecap the program," said Chloe Ames, a policy adviser with NextGen Policy.

Weakening the backstop

Through California’s 13-year-old carbon market, major polluting companies must buy permits for every ton of greenhouse gases they emit, with the state capping total emissions year by year. Each permit is worth real money and companies can sell the ones they don’t use. The program is considered California’s climate backstop — the only state policy that sets a firm limit on greenhouse gas emissions.

At the heart of the dispute with environmentalists is a proposed subsidy program carved out of that carbon market. The air board, if it approves the proposal on May 28, would create a new pool of free pollution permits for refineries, cement plants and other big companies that pledge to invest in clean energy and efficiency projects.

The pool would be capped at 118.3 million permits — the same number the air board has said must come off the market for California to hit its 2030 climate target. Environmentalists say the proposal risks wiping out those reductions.

Berkeley energy economist Meredith Fowlie, who chairs an independent committee that oversees the carbon market, wrote in a recent analysis that the design would give qualifying refineries more free permits than they need to cover their emissions.

"One could use the word generous," Fowlie said.

Rajinder Sahota, the air board official overseeing the program, said the proposal would ensure emissions reductions. The new permits, she said, would only go to companies undertaking clean energy and efficiency projects and would be limited, temporary and rescinded if companies misuse them. The plan is meant to help keep refineries operating in California at a time of uncertainty, she added.

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"We want to make sure that there’s reliable, affordable fuel for California consumers while the demand persists," Sahota said.

But environmentalists say the air board has built in...