CARB Aims to Debut MDI Allowances in Cap-and-Invest Rulemaking
The California Air Resources Board is moving forward with a board meeting May 28 to advance proposed changes to the state’s Cap-and-Invest Program, including the debut of a controversial compliance mechanism.
CARB released the initial statement of reasons on Jan. 13 after the agency kicked off the Cap-and-Invest Program review in 2022.
The draft rulemaking in the original ISOR proposed a greenhouse gas emission reduction of at least 40% below 1990 levels by 2030. This would be accomplished by removing 118.3 million allowances from 2027-30 annual budgets, with an additional 146 million allowances removed after 2030.
Future compliance periods would change as the sixth and seventh periods will be two years until 2030. The compliance periods after 2030 would alternate between two and three years until 2045.
A major change in the updated ISOR released April 14 was the creation of a Build Up California Reserve Account populated by manufacturing decarbonization incentive allowances. The account would provide up to $4 billion in industry assistance for decarbonization projects.
What is the Manufacturing Decarbonization Incentive?
CARB staff previously introduced the MDI in the first ISOR, which would have been populated with about 40 million allowances taken from future annual budgets.
As part of an amendments package in April, the agency would reclassify 118.3 million allowances that were previously marked for removal from annual budgets of 2027-30 as MDI allowances.
The Build Up California Reserve Account would provide up to an estimated $4 billion in support for eligible compliance entities.
Eligible compliance entities would need to request MDI allowances for major projects aimed at long-term GHG emissions reductions rather than minor fixes to facilities.
CARB intends for the account to fund upgrades such as carbon capture and sequestration, low-carbon hydrogen use, carbon direct removals and other alternatives to incentivize facilities to replace fossil fuel-powered equipment.
The allowances would be limited to a period of 2028-35 and would be provided to eligible facilities. In the previous ISOR, MDI allowances were available from 2027-38.
“We’re really focused on project types that align with some of the largest statutes that we’ve seen, pushing hard on deep decarbonization that we know today are going to take a big capital investment,” Rajinder Sahota, CARB Deputy Executive Officer for Climate Change and Research, told state senators during a hearing May 6.
“And the added benefit of companies coming to the table and applying to make those big capital investments is they’re demonstrating that they do want to stay in California because they’re willing to go through the process and actually partner with us in some way to be able to have different technologies, different structures that will pay in emission reductions for many, many years,” she added.
Entities would need to invest in major decarbonization projects aimed at supporting the state’s emission reduction targets and the MDI would assist in capital costs such as design, engineering and permitting requirements that could take multiple years to complete.
The application process would require facilities to include annual GHG emissions reductions from a proposed project.
“The MDI is really designed to be used if requested, so there’s no guarantee that any of those allowances would come back into the market,” Sahota told state senators May 6.
Any MDI value that goes unused by a facility would be returned to CARB and would be unavailable to other facilities.
Facilities using the allowances would need to spend the MDI value by the end of two compliance periods.
The original ISOR limited MDI usage for industrial sectors, leaving out refineries.
In the April update, half of the MDI allowances totaling 59.15 million would be available to refineries; hydrogen producers; asphalt manufacturers; petroleum and coal products manufacturers; and industrial gas manufacturing, which could include hydrogen production. Meanwhile, the other half would go to “eligible industrial sectors.”
Uncertainty Over MDI
Following the April release of amendments to the Cap-and-Invest Program review, lawmakers, compliance entities and state residents have criticized MDI allowances as potentially weakening the state’s goal of lowering emissions.
Shortly after the release of the amendments, CARB noted the creation for the Build Up California Reserve Account was to assist industrial facilities with emissions reductions following the loss of federal funding under the Trump administration in 2025.
Lawmakers, refineries and state residents cited affordability as a major concern during the ISOR’s public comment period that ended March 9.
“We really see the MDI as an important fund that can support the near-term emissions that are needed across our industrial sector to make sure that we maintain that 11% annual decline,” CARB chair Lauren Sanchez told senators May 6. “I’ll note that the current cap decline for this decade is 4%, so it’s quite a steep increase, which is why you’re hearing a big focus on affordability in this rulemaking.”
Compliance entities could apply for MDI allowances as early as June 1, 2027, with the first possible CARB approval done by Sept. 1, 2027.
The recent public comment period for the amendments — which closed May 4 — included feedback with about 90 comments calling for the removal of the MDI over concerns it could “bust” the state’s cap on emissions. Separately, 19 comments requested CARB should keep the new allowances.
In total, CARB received 214 total comments during the most recent feedback period.
Sen. Catherine Blakespear (D-Calif.) noted her concerns to CARB staff during a May 6 hearing about the MDI potentially not supporting the state’s emissions reductions targets.
“It’s always a concern when we’re giving incentives and appear to not be getting anything from it,” Blakespear said. “That’s my caution and concern about this. It’s just I really don’t want us to do that.”
The California Legislative Analyst’s Office noted the MDI could interfere with the state’s environmental ambition.
“It’s not only a new program, but the mechanism this is being funded is also new in that this new program would be funded by adding allowances sort of above the cap,” Helen Kerstein, Legislative Analyst’s Office principal fiscal and policy analyst, told senators May 6.
An LAO analysis released Tuesday also noted the introduction of MDI allowances could “reduce certainty” for California to reach its 2030 goal of reducing emissions by 40% below 1990 levels.
Sahota defended the MDI program during the May 6 hearing amid concerns of depressed market prices in the quarterly auctions and excess allowances in the secondary market noted in the public comment period.
CARB staff would “monitor and adjust” the MDI program as needed, she said.
An estimated 25 million MDI allowances could potentially be released during a year if 100 facilities applied for assistance with major capital projects, Sahota noted.
“When we think about the return on those [projects], the investments that they would be making are things that would reduce emissions not just in a single year, but ongoing,” Sahota said. “That’s a reduction that means that you’re not just getting a single, one-time greenhouse gas benefit, but it would follow through in every subsequent year to 2030 and beyond.”
— Reporting by Mayra Cruz, mcruz@opisnet.com; Editing by Christie Citranglo,
ccitranglo@opisnet.com