California’s Cap-and-Invest Proposal Sparks Industry Backlash

Proposed changes to California’s Cap-and-Invest program has sparked industry opposition as the state’s remaining refiners warned the added compliance costs will lead to additional plant closures.

“The Legislature intended the C&I Program to function as a market-based mechanism to reduce GHG emissions, not as a punitive regime targeting individual sources,” said Marathon Petroleum West Coast Regulatory Affairs Advisor Brian McDonald in a letter sent to California Air Resources Board Chair Lauren Sanchez on Monday.

Several of the state’s remaining refiners, including Marathon, submitted letters to CARB outlining potential ramifications if the proposed amendments to the Regulation for the California Cap on Greenhouse Gas Emissions and Market-Based Compliance Mechanisms Regulation are passed, suggesting the “policy-driven costs” to refiners will increase reliance on imports and drive production capacity out of the state.

“CARB’s proposal undermines the intent of AB 1207 (Irwin, 2025) by threatening to exacerbate the already elevated fuel production costs faced by in-state refineries and drive more refining production out of the state, resulting in adverse impacts on California’s economy and environmental objective due to a greater reliance on imports of fuel from out-of-state and international
refineries,” McDonald said in Marathon’s letter.

Chevron President Andy Walz echoed that sentiment, saying the proposed program changes would discourage investment in an “already constrained refining system” leading to lower refiner run rates and supply disruptions in a “geographically isolated market with limited resources.”

Paul Davis, Senior Vice President at PBF Energy, voiced similar concerns in a letter sent to the CARB last month, calling on the agency to address the state’s gasoline supply-demand imbalance and to put California refiners on “equal regulatory footing” with fuel importers.

“The Proposed Amendment’s dollarized impact on PBF, showing our costs escalating from 2024 by 400% to $309,000,000 annually by 2035,” said Davis. “However, competing importers are exempt from paying C&I fees, so they pay nothing.”

McDonald struck a similar tone, stating “the projected costs to comply with CARB’s Proposed Amendments will place California refineries at a pronounced competitive disadvantage, lead to curtailed operations, and drive refining production capacity out of the state.”

Although the trio presented a united front on the competitive disadvantages posed by international fuel suppliers that have “not adopted any, or as stringent, GHG emission regulations,” their proposed solutions differed.

Marathon and Chevron urged board members to finalize long-term Cap Adjustment Factors beyond 2035 as well as raise CAFs for petroleum refining, liquid hydrocarbon fuel production, crude petroleum and natural gas extraction to minimize the risk of economic leakage associated with the C&I Program.

Both refiners recommended increasing the CAF to 0.85 for the petroleum refining sector, including the Hydrogen and Cogeneration facilities supporting petroleum refining, beginning with compliance year 2026, with Marathon seeking to maintain the CAF at that figure through 2045 and Chevron pushing for a Carbon Border Adjustment Mechanism on imported refined petroleum products.

The 2026 CAF for industrial activities stands at 0.824 and is set to decline annually by 0.017, but the amended legislation moves to reduce the CAF by 0.137 between 2031 and 2032.

CARB aims to reduce the CAF to 0.547 by 2035, with no further insight in years following.

“The lack of finalized CAFs beyond 2035 is unacceptable and increases the long-term uncertainty for industries that must comply with the program,” stated Chevron’s Walz. “Long-term operation and upgrading of these facilities are incompatible with uncertainty around allowance allocations. Without long term certainty, more refineries will likely close.”

Marathon and Chevron both requested CARB to increase the CAF for biorefineries to 1.0 to carry through 2045.

Western States Petroleum Association President Jodie Muller was also supportive of an increased CAF in a letter submitted to the agency Monday, indicating that a flat 0.85 CAF for petroleum refineries from 2026 through 2045 represents the “minimum action necessary” to halt the decline of cap-related assistance for the sector and contribute to leveling the playing field with out-of-state and international competitors.

In a separate letter sent Monday, PBF’s Davis asked CARB to put in-state refiners on equal regulatory footing with fuel importers otherwise refiners will be “forced to address the viability of our (PBF) in-state operations in the near-term.”

In the days leading up to the letter, a Statement of Changes in Beneficial Ownership filed with the Securities & Exchange Commission showed Davis sold 50,000 shares of PBF Energy stock in a transaction last week. The senior VP sold the stock at an average price of $44.795, for a grand total value of $2.24 million. The filing also indicated that Davis acquired 50,000 shares of Class A Common Stock at $28.67, for a total of $1.43 million.

Sourabh Pansare submitted a letter on behalf of Phillips 66 Monday, recommending CARB adopt a gradual CAF reduction trajectory for sustainable aviation fuel production facilities that starts at 0.494 in 2031 and ends at 0.279 in 2035, marking a decline rate of approximately 10.9% per year.

Phillips 66 joined Marathon and Chevron’s stance to reclassify biorefineries in the “High” risk classification category.

“However, as currently proposed, SAF production facilities appear to be excluded from eligibility – an outcome that is perplexing and inconsistent with the state’s broader policy goals for SAF,” said Pansare. “If the goal is to incent facilities to implement decarbonization technologies by making up for lost federal funding opportunities, such as those under the Inflation Reduction Act, and to achieve additional ‘hard-to-decarbonize’ GHG reduction, then the eligibility should be expanded, even if there are Low Carbon Fuel Standard (LCFS) benefits that also accrue.”

World Energy Net-Zero Services President Scott Lewis also noted SAF-related concerns stemming from the proposal in his letter addressed to CARB’s Deputy Executive Officer for Climate Change & Research, Rajinder Sahota Monday.

Lewis also urged CARB staff to include all SAF in the exemptions for other biomass-derived fuels, as the current proposal only exempts SAF when produced as a co-product of renewable diesel.

Issues surrounding the amended treatment of emissions-intensive, trade-exposed (EITE) sectors were also raised among industry groups.

“CARB’s proposal to tighten the cap while simultaneously reducing the number of allowances allocated to industrial entities would substantially increase compliance costs by requiring regulated entities to purchase a greater share of their required allowances,” said Marathon’s McDonald.

Matt Pennington, manager of California State and Local Government Affairs with BP America asked the Board to “carefully re-evaluate” the proposed changes to the EITE sector in a letter submitted to the agency Monday.

“BP is concerned that tightening EITE obligations without proportionate safeguards could increase greenhouse gas (GHG) emissions leakage risk and erode the competitiveness of domestic facilities supplying California’s energy markets,” said Pennington. “Imported products from refineries in Asia compete with West Coast refineries yet face little to no carbon obligations, materially less stringent regulatory obligations, and in many cases access to discounted feedstocks.”

Pennington contended that California’s energy supply reliability will be “jeopardized” as domestic production is displaced by higher-carbon imports, citing similar market dynamics contributed to the erosion of competitiveness and displacement of production in Europe.

Chevron pointed to the “numerous” other state policies imposed on California refiners and the “cumulative burden” of “overlapping” programs.

“The LCFS, CARB At-Berth, Minimum Inventory (AB X2 1), and Maximum Gross Gasoline Refining Margin and Penalty (SB X1-2) collectively impose significant costs and financial uncertainty on in-state refiners, increase leakage risk, and increase cost impacts on consumers,” Walz stated. “Refiners contribute billions of dollars per year to the California economy. When refineries close, California communities lose good paying jobs and tax revenue.”

Nevada Gov. Joe Lombardo expressed his concerns in a letter addressed to California Gov. Gavin Newsom Monday, advising the Golden State leader to consider the rippling effects of his policies on neighboring states.

“Nevada does not have the infrastructure to quickly replace lost California refining capacity,” wrote Lombardo. “Increased reliance on marine imports would expose our state and residents to international supply disruptions, port congestion, weather events, and geopolitical instability. Such reliance would also increase costs and reduce supply predictability.”

Marathon’s McDonald also shed light on the issue, stating “According to the California Energy Commission’s (CEC) Transportation Fuels Assessment, California refineries are a source of transportation fuel for in-state users, and a source of transportation fuels for California’s neighboring states of Arizona and Nevada.”

“California refineries also fulfill the majority of the state’s jet fuel demand, including the jet fuel for military operations along the West Coast,” McDonald added.

Reporting by Sydnee Novak, sbeach@opisnet.com; Editing by Michael Kelly, mkelly@opisnet.com