Governor’s Budget from Cap-and-Trade to Cap-and-Invest

An initial review of Governor Gavin Newsom’s May Revise paints a troubling picture for California. The May Budget Revision projects a deficit of $12 billion for 2025-26. Total state spending is estimated at $322 billion, about $100 billion more than when Newsom first became governor.

Newsom’s May Budget Revision includes a proposal to extend California’s Cap-and-Trade program under a new name: “Cap-and-Invest.”  The proposed budget plan also marks a shift in how revenues from the Greenhouse Gas Reduction Fund (GGRF) will be distributed. Notably, rather than continuing the 25% set-aside from auction revenues for High-Speed Rail (HSR), Newsom proposes locking in $1 billion annually.

The governor also proposes redirecting $1.5 billion in GGRF revenues to fund Cal Fire under the “polluter pays” principle. With Cal Fire’s budget more than doubling over the past decade amid worsening wildfire seasons, this would ease general fund pressures but raises questions about long-term fiscal stability and GGRF’s original intent.

As this proposal becomes the Legislature’s starting point, stakeholders should prepare for an intense negotiation period that could reshape California’s carbon market and redefine who pays, who benefits, and how the state meets its climate goals amid growing fiscal constraints.