California has one climate rule everyone already knows: every new car sold in the state must be zero-emission by 2035. It has a second rule almost nobody’s heard of. The agency writing that first rule just spent the spring on something else entirely. It quietly handed California’s oil refineries the richest subsidy package its cap-and-trade program has ever offered. A community environmental group is now suing to unwind it. The paperwork behind that lawsuit is more interesting than anything in a typical press release.
On July 1, Communities for a Better Environment (CBE) filed a verified petition in Los Angeles Superior Court. Its target: the California Air Resources Board and executive officer Steven Cliff. Specifically, CBE challenges CARB’s May 29 approval of what it called “Regulatory Amendments to the Cap-and-Invest Program” — the formal name for what most people still call cap-and-trade. CBE argues the approval violated the California Environmental Quality Act because CARB never properly studied the environmental fallout of what it actually voted on.
How cap-and-trade normally works
Cap-and-trade is simple in theory. Refineries, power plants, and other big polluters that emit more than 25,000 metric tons of carbon dioxide a year have to buy “allowances” to cover their emissions. Each year, the state issues fewer of them. Scarcity is the entire engine. As allowances get harder to come by, they get more expensive. That rising cost is supposed to push industry toward cleaner operations, including nudging the market toward the EVs the state is simultaneously mandating. The state also gives some allowances away free to industries it worries might otherwise pack up and leave — a phenomenon regulators call leakage.
The subsidy that got a last-minute rewrite
Here’s the part that should catch an enthusiast’s attention. In January, CARB proposed a new subsidy called the Manufacturing Decarbonization Incentive. It was worth an estimated 40 million allowances over 12 years, aimed at cement plants, glassmakers, and food processors — and it explicitly excluded oil and gas. Then came an April rewrite, with just a 15-day public comment window that most Californians never saw. CARB nearly tripled the program to 118.3 million allowances, shortened its timeline, and added petroleum refining, petroleum and coal manufacturing, and industrial chemical plants to the list of who qualifies. The same refining industry that already receives most of the program’s free allowances got a new pool to draw from. Regulators built this one “above the cap,” so it wouldn’t even count against the official emissions ceiling on paper.
CBE’s petition makes a case that should sound familiar to anyone who’s watched a subsidy program before. CARB has handed free allowances to refiners since 2017. By the petitioners’ own account, gas prices have stayed high anyway, while the industry has posted large profits. Refining capacity in California has been shrinking for years. But that decline predates cap-and-trade, and it tracks more closely with the rise of EVs and hybrids eating into gasoline demand. That means the leakage these subsidies are supposed to prevent may not be driven by climate policy at all. More striking: an economics researcher cited in the filing found something else. Between the standard industrial allowance and the new manufacturing incentive, some refineries could end up with more free allowances than they actually need to cover their own emissions. They could then simply resell the extras for profit.
Where the money would come from
That subsidy has to come from somewhere. The petition says it’s coming out of the fund that makes California’s climate programs tangible to regular people. Auction revenue flows into the Greenhouse Gas Reduction Fund. That fund has generated roughly $4 billion a year for transit and fenceline community air-quality programs. It also funds the California Climate Credit — the recurring bill credit utilities apply specifically to make electricity, the fuel EVs run on, more affordable.
A UC Santa Barbara economist cited in the filing ran the numbers. A fully used manufacturing incentive could cut the Greenhouse Gas Reduction Fund by $2.3 billion and the Climate Credit fund by $1.7 billion between 2027 and 2030 — a 17 percent hit to each. The state’s own Legislative Analyst’s Office separately warned lawmakers about the changes. It said they could drain up to $2 billion a year from the fund and put California’s 2030 and 2045 emissions targets at risk.
This is the real story, and it isn’t really about carbon accounting. It’s about which side of California’s climate machinery gets protected when the state’s own agency has to choose. CARB’s board didn’t approve this quietly or unanimously. Members openly said the plan before them “admittedly needs additional analysis.” Someone raised a motion to strip the manufacturing incentive out entirely, and it failed. The board’s own Environmental Justice Advisory Committee, meanwhile, hadn’t met since October to weigh in at all. The board approved it anyway, 10 to 3, two days after the final environmental analysis was even posted.
The bigger picture
None of this happens in a vacuum. The Auto Wire has already covered how Washington is squeezing California’s climate rules, through the federal fight over the state’s 2035 gas car phaseout. We’ve also covered the parallel collision between five-dollar gas and CARB’s authority to set its own emissions rules. It’s the same backdrop that made Newsom’s promised fixes for why California gas costs more than anywhere else ring hollow. And it’s the same oil industry profit margins that pushed the DOJ to open its own inquiry into oil companies. Cap-and-trade compliance costs are one of the quiet reasons California gas carries a built-in premium at the pump, no matter who’s in the White House. This lawsuit is a reminder that the money that premium generates is just as politically contested as the price itself.
CBE is asking the court to void CARB’s certification of the environmental review and void the board’s approval of the amendments. It also wants the court to block implementation until the agency actually does the analysis it skipped. Whatever a judge eventually decides, the filing itself is valuable. It’s a rare, detailed look at how regulators can re-engineer a subsidy program in the final weeks before a vote. The changes are technical enough that almost nobody outside a courtroom would ever notice.
Remember this the next time California announces a new climate milestone. The same agency ordering Californians into electric cars by 2035 just spent the first half of 2026 on something else. It made sure the refineries fueling their current gas cars get a better decade. And it’s funded by the same market that’s supposed to be phasing them out.