California approves cap-and-invest overhaul, $3.5B incentive

California air regulators approved a major overhaul of the state's cap-and-invest climate program on Friday, a decision that will reshape the market for pollution permits and redirect billions of dollars in state revenue. The 10-3 vote by the California Air Resources Board followed two days of hearings and intense lobbying from industry and environmental groups.

The updated rules tighten the annual cap on greenhouse gas emissions from major polluters but also create a new incentive program that could provide up to roughly $3.5 billion in free pollution allowances to manufacturers and oil refiners. To qualify, companies must invest in projects that reduce emissions, such as replacing fossil-fuel equipment or working on carbon sequestration. State officials said the Manufacturing Decarbonization Incentive is designed to prevent businesses, particularly refineries, from leaving California amid concerns over high energy costs and market volatility.

The program's revenue, which flows into the state's Greenhouse Gas Reduction Fund, is projected to be significantly affected. The nonpartisan Legislative Analyst's Office estimates annual auction revenue could drop by about $2 billion,...