The ABCs of California Decarbonization for 2025

With concern about decarbonization rapidly fading on the federal level, other states – even other nations – will be closely observing California for signs of ongoing leadership in reducing emissions harmful to the environment and human health.

Based on the current political and economic climate, we’ve grouped a few overarching themes we expect to play out over this year’s California legislative session into the “ABCs of Decarbonization.”

• A is for how to make electricity more affordable – and we have some ideas that could help.
• B is for the budget battles to come.
• And C is for the need to reauthorize cap-and-trade, which delivers billions of dollars for the fight to curb greenhouse gas emissions.

Among the unknowns is the question of how much the state will be able to press forward with climate actions without the previously promised federal funding and how a reauthorized cap-and-trade program might set the pace for continued progress.

“A” is for “Affordability”

Affordability for everyday items, from groceries to gasoline, is a key concern for many Americans.

In his 2025 budget proposal, Gov. Gavin Newson noted that as the state works to decarbonize its economy, it is also paramount to take multifaceted actions to “yield meaningful electric cost savings for Californians.”

In response to an Oct. 30, 2024, Executive Order directing the California Public Utilities Commission (CPUC) and California Energy Commission (CEC) to make suggestions on affordability, the CPUC issued a Feb. 18 report that includes several recommendations likely to be discussed in the Legislature.

Of note, the report identifies the California Climate Credit as a “significant equity opportunity for California.” Twice a year, the program delivers energy bill reductions to residential and qualified small business customers of investor-owned utilities. In 2024, it distributed $2.7 billion in utility bill credits to electric and natural gas customers paid for by cap-and-trade revenues.

One proposal is to allocate the credit based on usage, reducing the volumetric rate for electricity. While this would not reduce total annual bills, it could make electrification more appealing to ratepayers. It could also reduce volatility, easing the seasonal ups and downs of utility bills for many Californians.

CSE recommends another change to the California Climate Credit: Eliminate eligibility for non-primary residences. Currently, all customer accounts receive the credit, regardless of income or whether the home is a vacation property. According to CSE research, over $3 million could be distributed to primary home accounts with this fix, making the credit more equitable.

Another affordability solution CSE recommends is expanding the Solar on Multifamily Affordable Housing (SOMAH) Program. SOMAH helps low-income residents save money on electricity bills by installing solar panels on low-income multifamily housing properties.

Tenants in SOMAH properties experience bill reductions ranging from $21 to $39 every month. That’s a significant savings for these customers, ranging from 39% to 61% of their average total bill. This can be considered a “SOMAH climate credit” for tenants in over 50,000 affordable housing units across the state.

In addition, SOMAH lowers the bills of all ratepayers by shifting costs from the California Alternative Rates for Energy (CARE) program, which is paid for via a Public Purpose Program charge on bills. In 2024 alone, SOMAH saved ratepayers $1.69 million. The program has saved $4.1 million since 2020, with benefits increasing as more projects come online.

“B” is for “Budget”

After a $47 billion deficit in the 2023-24 budget cycle, the incoming Legislature got welcome news from the Legislative Analyst Office in a November report calling the state’s finances “roughly balanced” going into 2025. It cautioned, however, that there’s “no capacity for new commitments” and that future budget challenges remain--and that was before April’s stock market plunge.

Governor Newsom’s Jan. 10 budget proposal predicted a modest $363 million surplus. But new fiscal challenges include federal funding freezes, tariffs and delayed tax returns due to the catastrophic fires in Southern California. These headwinds could challenge California’s ability to meet its goals to reduce the greenhouse gas emissions that fuel climate change impacts.

Among the questions that have been raised:

• Will the state further invest in programs that support solar and battery storage for homes?
• Will the state do more to encourage the adoption of electric vehicles and build electric vehicle charging infrastructure?
• Will California fund investments in heat pumps, energy efficiency retrofits, and other building decarbonization programs?

“C” is for “Cap-and-Trade”  

On the legislative agenda this year is reauthorizing California’s groundbreaking cap-and-trade pollution permitting program beyond its 2030 expiration. The market-based program has provided $26.4 billion for pollution-reduction programs, ratepayer assistance and industry support over the past 10 years. To send a bold market signal, the Legislature is expected to extend the program by another decade.

California’s cap-and-trade funds finance important climate investments, making this a key policy initiative that will define California’s path toward long-term environmental goals.

There is work to be done to reduce the number of pollution allowances in the market and so-called “free allowances” that have been a blockade in reaching state decarbonization goals. There will also be debates on how best to ensure the program increases affordability in the clean energy transition, based on lessons learned from the Climate Credit program.

California’s climate leadership will be tested in 2025 as it navigates affordability challenges, budget constraints, and the future of cap-and-trade. The decisions made this year could shape not just the state’s decarbonization trajectory but also influence climate policy far beyond its borders.