California Plans $60B Carbon Cap-And-Invest Program

Defying increasing federal pushback, California Governor Gavin Newsom has released a revised 2025–2026 state budget proposal that includes a major expansion of the state's climate policy. At the center of the proposal is the expansion of California's Cap-and-Invest program, a market-based carbon pricing system, which is expected to raise $60 billion through 2045.

The Cap-and-Invest program, which was formerly referred to as Cap-and-Trade, was originally set to sunset in 2030. But Newsom's revised plan keeps the program 15 years longer, ensuring California remains on track to meet long-term climate objectives. The policy requires large greenhouse gas (GHG) emitters—electricity generators, fuel distributors, cement producers, and refineries—to buy emission allowances if they go over state-set limits. The cap reduces every year, lowering the amount of available allowances in the future. Allowances are purchaseable through state-operated auctions or sold between firms, encouraging firms to reduce emissions and invest in cleaner technologies.

Since its inception in 2006, California’s carbon pricing system has raised approximately $33 billion, funding a wide range of climate-friendly projects. The extended program is expected to nearly double that amount over the next two decades. According to the Governor’s office, revenue from the program will be funneled into “transformative climate projects,” including the state’s high-speed rail network, a flagship infrastructure initiative intended to connect major cities with low-emission transportation.

Even as the state pursues its climate goals, the ramping up of Cap-and-Invest occurs amidst a rising tide of antagonism from Washington. In April, President Donald Trump signed an executive order instructing the U.S. Attorney General to recognize and push back against state and local legislation that supposedly hinders domestic energy production. The order specifically singles out policies defined in terms of climate action, environmental justice, and ESG (Environmental, Social, and Governance) initiatives. California's Cap-and-Invest program is directly referred to among the ones Trump wants to revoke.

The executive order also places a high priority on overturning state legislations that seek to levy economic penalties on energy firms for their contribution to climate change. The Trump government, together with some Republican states, has already begun litigating against newly enacted environmental regulations in New York and Vermont. California now joins those states as the first to resist policies that lead to a cost burden on corporate polluters.

Governor Newsom has put California at odds with itself as a recalcitrant outlier in the midst of what his administration refers to as a "Trump Slump"—a term applied in the budget document to explain the state's current $12 billion budget deficit. The deficit is blamed on economic uncertainty brought about by the Trump administration's policies, such as trade tariffs, market volatility, and declining international tourism.

Despite the financial challenges, Newsom has emphasized California’s commitment to progressive environmental policies. “California’s fundamental values don’t change just because the federal winds have shifted,” he said during the budget announcement. “Even as the Trump Slump slows the economy and hits our revenues, we’re delivering bold proposals to build more housing, lower costs for working families, and invest in our kids.”

The Governor's revised budget is a more expansive vision of resilience and leadership in the wake of national setbacks. It is invested in economic recovery, housing construction, and family support while prioritizing long-term climate resilience.

California's insistence on pushing climate policy despite federal opposition highlights the widening gap between state and national environmental policy approaches. As the Trump administration works to reverse climate policies for the sake of conventional energy development, California insists on leveraging market forces to foster innovation and sustainability.

With legal and political fights on the horizon, California's Cap-and-Invest extension marks the state's unyielding commitment to leading on climate action even as the specter of federal interference looms. The months ahead are likely to be filled with increasing tension between Sacramento and Washington, but for the moment, at least, the state has doubled down on being a climate change trailblazer.