CARB Cap-and-Invest & the Manufacturing Decarbonization Incentive

From Cap-and-Trade to Cap-and-Invest

Assembly Bill 1207 (2025) extended California’s market-based compliance mechanism through December 31, 2045 and renamed it the Cap-and-Invest Program. For energy-intensive manufacturers, the stakes of the implementing rulemaking were direct: the program’s allowance allocation rules determine how much of California’s carbon price lands on industries that compete against producers facing no equivalent cost. AB 1207 preserved 100 percent industry assistance for Emissions-Intensive, Trade-Exposed (EITE) facilities through 2030 and directed CARB to design allocation to minimize emissions leakage — the risk that production, jobs, and emissions simply move out of state.

CLECA participated in every stage of CARB’s 2025–2026 amendments rulemaking: workshop comments in November 2025, formal comments on the Initial Statement of Reasons in March 2026, and comments on the 15-Day Modifications in May 2026, ahead of the Board’s adoption of the amendments on May 28–29, 2026.

Allowance allocation and the CAF cliff

CLECA’s central objection to the original proposal was a Cap Adjustment Factor trajectory that would have dropped standard-CAF coverage of industrial compliance costs to roughly 28 percent by 2035 — an allocation “cliff” CLECA argued is contrary to AB 1207’s leakage-minimization mandate. The comparison CLECA put on the record comes from CARB’s own analysis: California’s 2023 ratio of industrial allocation to covered emissions was 62 percent, below every major comparator carbon-pricing program — Washington near 100 percent, Quebec at 99 percent, the EU at 84 percent. No western competitor state has a comparable carbon price at all.

The 15-Day Modifications moved substantially in CLECA’s direction: higher Cap Adjustment Factors for 2027 and slower annual declines through 2030 (standard from 4 to 3 percent; alternate from 2 to 1 percent). CLECA supported timely adoption on that basis, arguing that regulatory uncertainty itself drives leakage — facilities cannot commit capital to California operations without a settled allocation framework.

The border carbon adjustment sequencing argument

CLECA’s structural position is about sequencing. The European Union paired the phase-down of free industrial allocation with a Carbon Border Adjustment Mechanism, recognizing that declining free allocation without border protection accelerates relocation rather than reducing global emissions. California has no border carbon adjustment. CLECA therefore urges CARB to suspend further CAF reductions until a border carbon adjustment or equivalent embodied-carbon mechanism is in place — and supported CARB’s decision to defer post-2030 CAFs to a future rulemaking where that question can be squarely addressed.

Making the MDI workable

The most significant new mechanism in the amendments is the Manufacturing Decarbonization Incentive (MDI) — roughly 118 million allowances, on the order of $4 billion in value, reserved for industrial facilities undertaking major on-site decarbonization projects, with applications opening June 1, 2027. CLECA engaged the MDI design in detail and secured meaningful improvements in the 15-Day Modifications: a flat 0.8 CAF modifier in place of a steeply declining schedule that penalized projects by vintage; a spending window extended from five years to six–seven years, matched to real industrial project timelines; a first application deadline moved to June 2027 so facilities are not asked to apply before the regulation is in force; and expanded technology-neutral eligibility — including biomass fuel-handling infrastructure, waste heat recovery, and carbon capture capital costs.

CLECA’s remaining asks are precise: confirm that new facilities commencing production during the MDI window are eligible in their first year; set expenditure eligibility from the January 2026 ISOR date rather than September 2026, so facilities are not rewarded for deferring investment; and coordinate direct and indirect allocation so a facility that electrifies a gas-fired process — cutting its on-site emissions but raising its electricity purchases — is not left worse off for having decarbonized.

Electricity bill credits and the indirect allocation transition

The amendments also transition administration of indirect (electricity) emissions allocation from CPUC-administered California Industry Assistance credits toward CARB-published benchmarks. CLECA’s position is verification, not opposition: because the prior CPUC benchmarks were never published, CARB must publicly document that the new Table 9-1 electricity efficiency benchmarks are consistent with what EITE facilities received before — so an administrative handoff does not silently reduce leakage protection. CLECA also supported retaining the CPUC/utility route for distributing indirect emissions credits to non-covered opt-in entities.

The through-line across every CARB position is the same one CLECA carries at the CPUC: California’s climate program succeeds only if energy-intensive production decarbonizes in California — not by relocating to jurisdictions with weaker rules and dirtier grids.