California Senate Democrats are escalating a budget standoff with Governor Gavin Newsom, threatening to block several of his key climate initiatives unless the administration abandons a new program that provides free pollution permits to oil refineries and other major industrial polluters. The dispute centers on the state's carbon market, known as "cap and invest," which was extended last year through 2045.
Under the original deal, billions of dollars from auctioning pollution permits were earmarked for public transit, safe drinking water, affordable housing, and other climate programs. However, the Newsom administration's new Manufacturing Decarbonization Incentive program would give away permits worth up to $4 billion to companies that pledge to invest in clean energy, with half of those permits slated for the fossil fuel industry.
Senate Democrats argue this would drain the climate fund, potentially cutting annual auction revenue from roughly $4 billion to $2 billion, according to the Legislative Analyst's Office. This would jeopardize funding for community-focused programs, including $1 billion that lawmakers control for discretionary projects.
Senator Eloise Gómez Reyes, a San Bernardino Democrat and chair of the Senate's climate budget subcommittee, emphasized the need to honor the previous agreement, stating, "We really need to stay to the deal." The Senate's counterplan, dubbed "Deal is a Deal," would protect the $1 billion lawmakers control and steer up to $2 billion to housing, transit, clean air, and drinking water programs. Newsom's priorities, including $1 billion annually for high-speed rail, funding for wildfire prevention, electric vehicle tax credits, and a clean jet fuel subsidy, would be moved to the back of the line.
If the climate fund brings in only $2 billion, these programs could receive little or no funding. Senator Scott Wiener, a San Francisco Democrat, criticized the administration's approach, saying, "It's unfortunate that the state of California empowers the oil industry to freak everyone out and adopt bad policies." He also expressed frustration that transit funding becomes a political football every year.
Assembly Democrats have remained largely silent on the rule change, with key committee chairs supporting the air board's plan, citing affordability concerns for consumers. The governor and Legislature have until June 30 to agree on a budget deal, but much of the climate funding can be negotiated through September.
The standoff could have political consequences for Newsom as he defends his climate record, with environmental justice advocates warning that the new program could be a "huge stain on his climate legacy." The dispute highlights the tension between maintaining California's climate leadership and addressing the economic concerns of industries and consumers.