May Revision Proposals for Cap-and-Trade Reauthorization and Greenhouse Gas Reduction Fund

Cap-and-Trade Extension Trailer Bill

LAO Bottom Line: We recommend the Legislature—after taking as much time as it needs to adequately deliberate—modify the Governor’s proposal, as relevant, to provide additional statutory direction to ensure that legislative priorities are reflected as part of the cap-and-trade reauthorization.

Governor’s Proposal

Governor Proposes Budget Trailer Legislation to Extend Current Design of Cap-and-Trade Program Through 2045. The Governor proposes budget trailer legislation to extend the cap-and-trade program from 2030 through 2045. The proposal generally would maintain the same statutory guidance as was contained in previous enacted legislation. The main exception is that the Governor proposes to specify that the share of compliance obligations that can be met with offsets is capped at up to 6 percent rather than being fixed at 6 percent (as is the case under current law from 2026 through 2030).

LAO Comments and Recommendations

Proposal Would Continue Existing Approach of Deferring Most Decisions on Program Design to the California Air Resources Board (CARB). The Governor’s proposal would maintain the historical approach of giving CARB broad discretion over how to design the cap-and-trade program. Additionally, by making the limit on offset usage up to 6 percent rather than a fixed 6 percent, the language also would allow CARB some additional flexibility—beyond what is in current law—to set the offset limit lower than the designated level.

Providing Statutory Direction in Key Areas Would Help Ensure Legislature’s Policy Priorities Are Reflected. As we discuss in greater detail in our May 2025 report, Assessing California’s Climate Policies: Cap-and-Trade Reauthorization, we recommend the Legislature weigh in—through providing additional statutory direction to CARB—on any areas it deems to be of particular importance and for which it has specific preferences. This would help ensure that decisions reflect legislative policy priorities. Our report highlights a variety of options for modifying the cap-and-trade program depending on legislative policy priorities, including through changing the design of the program and/or directing the use of the value of the program’s allowances.

Proposal Does Not Need to Be Considered by Budget Deadline; Legislature Should Take the Time It Needs to Think Through Complicated and High-Stakes Decisions. In general, should the Legislature want to continue the cap-and-trade program, doing so well ahead of the current statutory sunset date of 2030 would enhance program certainty. However, the Legislature still has significant flexibility regarding when to act. The proposed extension does not need to be considered alongside the budget that the Legislature adopts in June. Instead, the Legislature could take additional time to deliberate on the Governor’s proposal and other available options over the coming months. The Legislature’s decisions around the program are high stakes, as they could shape the program for many years to come and have significant implications for various legislative priorities such as greenhouse gas reductions and affordability. We recommend the Legislature take the time it needs to weigh its policy choices before deciding on whether and how to reauthorize the program.

GGRF Expenditure Plan

LAO Bottom Line: In crafting the Greenhouse Gas Reduction Fund (GGRF) expenditure plan, we recommend that the Legislature: (1) ensure its legislative priorities are reflected, (2) minimize the use of continuous appropriations, (3) give serious consideration to using GGRF to help solve the budget problem and preserve highest-priority activities, (4) defer decisions on high-speed rail funding until additional information is provided to inform legislative decision-making, and (5) provide statutory direction for high-speed rail to ensure that legislative priorities are reflected and any potential future securitization is consistent with legislative intent.

Governor’s Proposal

The Governor’s May Revision GGRF spending proposal includes the following major components:

Shifts at Least $1.5 Billon of CalFire’s Budget to GGRF on Ongoing Basis. The proposal shifts the portions of the California Department of Forestry and Fire Protection’s (CalFire’s) budget related to fire control, fire prevention, and resource management—currently totaling $1.54 billion, rising to $1.86 billion by 2028-29, and likely growing more in future years—from the General Fund to GGRF for a like amount of General Fund savings. The proposal includes language that would allow the Department of Finance to backfill with General Fund should GGRF fall short of the levels necessary to fund these programs in any given year.
Eliminates Planned Discretionary Spending. To “make room” for the CalFire proposal within available GGRF resources, the Governor’s proposed language eliminates all planned discretionary GGRF spending (that is, the portions that are not currently required by statute) totaling about $1.8 billion. The planned reductions affect multiyear spending plans included in prior budget agreements for activities such as the AB 617 community air protection program, support for local transit agencies, and various zero-emission vehicle programs. Representatives from the administration have indicated the Governor wants to determine future funding allocations for both discretionary and statutory GGRF-funded programs through negotiations with the Legislature.
Maintains One-Time Motor Vehicle Account (MVA) Fund Shift Proposal From January. The proposal continues to provide $81 million from GGRF to support CARB activities typically funded by MVA on a one-time basis in 2025-26 to help backfill for a shortfall in that account.
Expresses Intent to Negotiate With Legislature on All GGRF Expenditures, Articulates High-Speed Rail as Continued Funding Priority. The Governor does not propose any specific statutory changes to modify the current law governing continuous appropriations or other statutory allocations of GGRF. However, the administration indicates that it views all of the existing allocations as pending negotiation with the Legislature. Additionally, the Governor has indicated a priority that any new spending plan include at least $1 billion per year annually for the high-speed rail project. (Under current law, high-speed rail receives roughly 25 percent of GGRF revenues.)

LAO Comments and Recommendations

Important for Expenditure Plan to Reflect Legislative Priorities, Including on an Ongoing Basis. GGRF is a key mechanism for the Legislature to support its climate, environmental, and budget priorities. The amount of revenues available in the fund could become even more robust in future years, particularly if the program is reauthorized and allowance prices increase. Accordingly, we recommend the Legislature ensure its decisions around its GGRF expenditure plan—especially any statutory allocations or other ongoing spending commitments—reflect its policy priorities under a variety of allowance price scenarios. For example, as we discussed in our recent report, to the extent that affordability is a key priority for the Legislature—particularly in the event that allowance prices and consumer price impacts increase—it could use GGRF to provide rebates to households or offset ratepayer costs.

Recommend Legislature Be Sparing in Its Use of Continuous Appropriations, as They Limit Legislative Oversight and Flexibility. Continuous appropriations provide affected programs with greater funding certainty, as they are not subject to annual funding decisions through the budget process. However, this budgeting approach also comes with significant downsides. Specifically, continuous appropriations (1) reduce legislative oversight by eliminating a natural opportunity for the Legislature to regularly review and revisit the allocations through the annual budget process and (2) make it more challenging for the Legislature to flexibly respond to evolving priorities and budget conditions. Accordingly, we recommend the Legislature only use continuous appropriations in limited instances.

Using GGRF as a Budget Solution to Help Preserve Highest-Priority Activities Is Worth Serious Consideration. Given the deteriorating General Fund condition, we think it makes sense to use GGRF to offset some General Fund costs. Since the passage of AB 398 in 2017 (with a two-thirds vote of both houses of the Legislature), GGRF is considered akin to a tax. As such, it is a flexible funding source that can be used to help meet the state’s most important activities (similar to the General Fund). Using GGRF to achieve budget solutions is not without trade-offs, as it results in a need to reprioritize the use of GGRF and make reductions to previously planned expenditures from the fund. However, these trade-offs are present throughout the budget this year. Moreover, if the Legislature does not use GGRF to help address the state’s budget problems, it will be faced with making even greater reductions to General Fund-supported programs or increasing revenues by a like amount. Given funding limitations, we recommend the Legislature focus both General Fund and GGRF on its highest priorities across the entire state budget.

Legislature Has Other Options for Using GGRF as a Budget Solution. The Legislature could modify the Governor’s CalFire proposal to achieve at least the same amount of General Fund savings based on its priorities and overall budget plan. For example, the Legislature could offset CalFire costs for a designated period of time while the General Fund needs the relief, such as for one year or a few years, rather than on an ongoing basis. The Legislature also could fund a larger share of CalFire’s budget with GGRF, or choose to pay for a range of other costs that currently are supported by the General Fund—not just those related to CalFire—with GGRF instead of or in addition to the Governor’s proposal.

If Legislature Elects to Offset CalFire General Fund Costs, Recommend Adding Reporting Language to Enhance Transparency. If the Legislature decides to proceed with the Governor’s proposal to shift CalFire funding to GGRF, we recommend it include language requiring the administration to report to the Joint Legislative Budget Committee if and when GGRF is not adequate to cover CalFire’s costs and a General Fund backfill is triggered. Such language—which could be “after-the-fact” to avoid operational impacts—would help improve transparency and legislative awareness of budgetary impacts.

Recommend Deferring Action on High-Speed Rail Funding Until Legislature Has Sufficient Information on Project Status and a Detailed Plan for Potential Borrowing Against GGRF. We have identified a number of concerns with the administration’s stated intent to continue funding the high-speed rail project beyond 2030 with at least $1 billion annually. Specifically:

Key Cost and Plan Information Still Missing. Under existing statute, the High-Speed Rail Authority (HSRA) was supposed to provide a Project Update Report by March 1 including updated cost and schedule information. As outlined in an April 2025 report by the High-Speed Rail Office of the Inspector General (HSRA OIG), HSRA did not meet some of these statutory requirements. Absent complete information, the Legislature faces difficulty in determining how best to proceed with the project, including how much funding to provide and the specific project scope and time line that additional funding might support.
Project Has Significant Funding Gap for Merced-to-Bakersfield Segment. As highlighted in an October 2024 report by the HSRA OIG, HSRA needs to secure funds to meet most of its identified funding gap for the Merced-to-Bakersfield portion of the project before June 2026 to avoid negative impacts on its schedule. Based on recent information we have reviewed from HSRA, we estimate this funding gap has grown to roughly $10 billion (assuming the project retains its federal funding and $1 billion annually from GGRF through 2030).
HSRA Has Indicated Need to Securitize GGRF Revenues but Has Not Shared Plan for How to Do So. To address its near-term funding need, HSRA likely would need to borrow against future cap-and-trade revenues. However, HSRA has not yet outlined a clear plan for how it would borrow against these revenues, nor has it proposed specific statutory or other changes that would be sufficient to enable securitization through traditional means. HSRA’s plan for securitization—including what specific statutory changes or secondary source of repayment (beyond GGRF), if any, would be necessary, as well as the anticipated costs associated with such borrowing—will be important for the Legislature to understand prior to proceeding with providing additional funding for the project.

In light of these concerns, we recommend deferring action on whether and how much GGRF to provide to high-speed rail until HSRA provides clear information that allows the Legislature to understand the costs and status of the project and options available for moving forward, as well as its specific plan for borrowing against GGRF. We also recommend that should the Legislature ultimately extend HSRA’s funding beyond 2030, it provide statutory direction to ensure that legislative priorities for the project are reflected and that any potential future securitization is consistent with legislative intent.