California lawmakers are heading into the next budget cycle with a climate spending plan that does not quite add up. A new analysis says the state is staring at a more than $1.8 billion gap in its cap-and-trade cash next year, thanks to softer carbon auction revenue colliding with freshly locked-in spending rules.
The problem stems from how lawmakers rewrote the rules this year. Instead of grabbing percentage slices of the Greenhouse Gas Reduction Fund, a series of programs now get fixed dollar amounts. When the cap-and-trade auctions come up short, those hard promises run straight into financial reality, putting wildfire prevention, housing and transit programs that rely on those dollars in the crosshairs.
In a December 9 report, the nonpartisan Legislative Analyst’s Office estimated that if recent auction trends hold, the Greenhouse Gas Reduction Fund would bring in roughly $3.4 billion next year. The new statutory allocations, however, total about $4.3 billion. “The Legislature would have to make some difficult choices,” the office warned, projecting commitments would exceed available funds by more than $1.8 billion under that scenario. The report walks through how AB 1207 and SB 840, the measures that reauthorized and reshaped the program, reset allocation rules and raise the stakes for near-term budgeting.
The warning first surfaced publicly in coverage by E&E News, which noted lawmakers had already penciled in roughly $1.5 billion in additional next-year uses of the fund. That includes shifts meant to help cover part of CalFire’s operations. The broader cap-and-trade extension through 2045, approved as part of this year’s package of energy and climate bills, drew national attention as well, including reporting from the Associated Press.
Where the shortfall comes from
The Legislative Analyst’s Office singles out recent auction performance as the main culprit. The November joint auction generated about $844 million, roughly in line with the prior quarter but a bit below what the state’s Budget Act assumed for each auction. Under the scenario the office models, about $3.4 billion would arrive via auctions and another $600 million through interest income, for total Greenhouse Gas Reduction Fund resources near $4 billion.
Stack that up against the roughly $4.3 billion in required allocations next year and the math spits out a gap topping $1.8 billion. If nothing else changes, that shortfall would likely force midyear trims or push some commitments into later years.
How auctions will shape next year
The size of the problem depends heavily on how those quarterly auctions perform. The California Air Resources Board continues to run joint auctions through 2026, with settlement prices and volumes updated every three months for anyone obsessively refreshing the spreadsheets.
If allowance prices rebound and demand tightens, the funding gap could shrink in a hurry. If prices stay soft, budget writers may have to pull back on discretionary Greenhouse Gas Reduction Fund spending or shove some climate and wildfire costs back onto the state’s main General Fund, where there are plenty of competing demands already lined up.
What lawmakers will have to decide
The Legislative Analyst’s Office is urging a go-slow approach before lawmakers lock in their 2026-27 climate spending. Its report suggests close oversight of auction results and careful use of the $1 billion in unallocated money that the new statute set aside.
In practical terms, the Legislature has three broad levers: it can reprioritize or delay discretionary Greenhouse Gas Reduction Fund projects, rely on one-time or temporary shifts between funds to smooth over bumps, or wait for a couple more auctions and make midyear adjustments if things go south. Advocates for housing, transit and forest resilience will be reading every line of the governor’s January budget proposal for clues on how much pain is coming.
For now, the analyst’s message is blunt. The new cap-and-invest structure gives programs more certainty when the money is there but offers less flexibility when the market slumps. Any fiscal choices tied to auction revenue, the report argues, should be made with a clear view of short-term market performance. Expect a fresh round of hearings and updated revenue math early in the legislative session as officials scramble to line up promises with whatever the auctions actually deliver.
