California’s C&I Rulemaking Enters a Defining Phase: What the ISOR Changes

by Kate Haerizadeh (OPIS Insights) CARB has entered into an important phase of its rulemaking process for California’s C&I program. The board on Jan. 13 released an Initial Statement of Reasons (ISOR), a 356-page document outlining the agency’s rationale for a comprehensive package of regulatory amendments that would govern the program through 2045. The ISOR lays out CARB’s vision for how C&I should function over the coming decades, how the market is expected to behave as emissions decline, and what design priorities will be used to balance long-term decarbonization, consumer affordability and market stability.

This rulemaking marks a fundamental reset of the program as CARB looks to realign C&I more closely with California’s statutory climate targets by tightening the cap, updating compliance timing, revising allocation rules and enhancing market oversight, all while managing political sensitivities surrounding affordability and price volatility.

Once the Office of Administrative Law (OAL) posts the full rulemaking package, a 45-day public comment period will begin. CARB staff will then review comments, prepare responses and propose any revisions before a planned May 28 hearing. If the board adopts the amendments, CARB will finalize the regulatory language and submit it to OAL for legal review. Once OAL approval is secured, the regulation will be filed with the Secretary of State and become law. CARB aims to complete the process in time for the changes to apply beginning with the 2027 vintage year.

CARB’s proposal builds on the 2022 Scoping Plan update, which outlined a cost-effective and technologically feasible path to carbon neutrality by 2045, including an 85% reduction in GHG emissions from 1990 levels. This target was later codified through legislation, including AB 1279 and SB 905, which formally established the 2045 neutrality goal and elevated the role of carbon dioxide removal.

The Legislature last year passed AB 1207 and SB 840, reshaping the structure and objectives of the C&I program. AB 1207 requires integration of offsets into the cap, adjustments to allocation and cost containment mechanisms and prioritization of direct emissions reductions within California. SB 840 places new constraints on how auction revenue may be used, refining the program’s role as a public investment mechanism and narrowing the parameters for long-term spending.

Within this statutory context, the ISOR presents C&I as a primary implementation mechanism. It is framed as a tool for delivering a consistent price signal and regulatory certainty while offering compliance flexibility. In the text, CARB positioned C&I as a foundational element of California’s long-term climate architecture, working in tandem with sector-specific regulations and public investment strategies. Affordability was mentioned repeatedly, representing the delicate balance CARB is attempting to strike between maintaining an active and credible market, protecting environmental integrity and keeping prices affordable, particularly in light of the Legislature’s extensive discussions on these issues last summer.

CARB wants to phase out the natural gas climate credit beginning in 2029. The credit would begin at 20% and decline by 10% annually, with the resulting value shifting to electric utilities. CARB proposes to remove the prohibition on usage-based distribution for electric credits, potentially enabling more progressive outcomes. Final design decisions are expected to fall under the jurisdiction of the CPUC. The ISOR also would prohibit spending natural gas credit funds on voluntary credits, RNG and combustion-related uses.

Criticism on the ISOR has focused on environmental justice outcomes, revenue structure and technical design. Some question whether reliance on expected co-benefits between GHG reductions and air quality improvements sufficiently addresses facility level pollution in overburdened communities or whether alternative regulatory approaches were fully considered. Others note that the effectiveness of mitigation measures, including climate credits and programs funded through the Greenhouse Gas Reduction Fund (GGRF), depends on the reliability of future auction revenues.

Under SB 840, GGRF revenues are generated from allowances remaining after free allocation to covered entities, making funding levels sensitive to allocation design, offset use and allowance prices. Some stakeholders suggest that expanded allocation pathways and conservative price assumptions could limit revenues in later compliance periods, while others note that revenue outcomes reflect cap stringency and market conditions.

Environmental advocates have called for clearer boundaries to avoid program misalignment, double counting or weakened climate integrity. Some also note that grant-based investments may provide greater transparency and public accountability than assistance delivered through free allowances. Broader critiques address program design choices, including continued free allocation for some industrial sectors, the analytical basis for affordability claims and the balance between price stability, emissions reductions and revenue generation.

CARB’s 45-day public comment period will close in mid-May, after which staff will prepare responses and finalize proposed revisions in advance of the May 28 Board hearing. If the package is adopted, it will move to the Office of Administrative Law (OAL) for formal review—a process that may extend into late summer. Should CARB trigger a 15-day re-comment period, final approval could be delayed until early fall. Most stakeholders are anticipating final rule adoption by mid-to-late summer.

This rulemaking is under heightened scrutiny due to its implications for future linkage with Washington State. The finalization of California’s and Quebec’s regulatory amendments is widely seen as a necessary step before Washington can initiate its own rulemaking, likely in late 2026 or early 2027. However, full fungibility of allowances and offsets across jurisdictions remains unlikely. Differences in compliance cycles, allocation design, cost containment mechanisms and offset protocols continue to pose these structural barriers. As a result, linkage may unfold through a phased or conditional approach, rather than the seamless integration achieved between California and Quebec.

The ISOR reinforces CARB’s commitment to maintaining a strong and adaptive C&I program aligned with California’s long term climate goals. READ MORE