California’s Climate Policy Is Already Exporting Emissions

A few months ago, we wrote about the possibility that California climate policy could start pushing refinery emissions across state lines. The idea was straightforward: if California refineries reduce production or shut down, the fuels still have to come from somewhere.

CARB has posted the public comments for the Initial Statement of Reasons for Cap-and-Invest rule modifications. In reviewing those comments, we noted a lot of worry about leakage from the refining sector.

So we thought this would be a prudent time to explore how leakage is already occurring. Using CARB lifecycle emissions estimates and California Carbon Allowance prices, we estimate that over the past 10 years, 30 million metric tons of stationary emissions from refineries have leaked out of state due to fuel imports. These leaked emissions correlate to $678 million in lost carbon allowance auction revenue, with nearly $127 million lost in 2025 alone.

It’s not just industry alarmism: California is importing a lot of Transportation Fuel

Last year was a challenging year for California’s refineries: PBF, Valero and Chevron all had major incidents. P66 shut down its LA refinery, and Valero began winding down their Bay Area refinery. Simply put, these developments put pressure on a refining system already reliant on imports, so unsurprisingly, fuel imports surged.

Total imports of refined transportation fuels hit a record high of 55 million barrels in 2025. At current levels, California has effectively replaced the output of a large in-state refinery with tanker shipments from overseas.

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Source: EIA, EcoCira

Two interesting notes in the above chart. First, we barely see any diesel imports – that makes sense since the state is largely exporting conventional diesel and importing renewable to comply with the LCFS.

Second, we’re seeing less jet imports. There’s a few reasons for this. Jet demand never fully recovered from the Covid drop and the refineries that shut down were gasoline, not jet-focused facilities. This data only includes foreign imports – so it’s possible some of the jet production loss was filled domestically.

We do see gasoline imports surging, and at the same time, as you can see in the below chart, we see a corresponding decrease in imports of refinery intermediates (gasoils). This makes sense – fewer refineries running, less need for intermediate feedstocks.

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Source: EIA, EcoCira

Fuel Imports Mean Emissions Exports

When products are refined out of state, the emissions still occur but they aren’t regulated by Cap-and-Invest. We call the phenomenon of emissions shifting outside the regulatory jurisdiction leakage. In effect, the emissions are still occurring, but they are “leaking” outside the purview of the regulation. Functionally, in the case of the refining sector, California is exporting its emissions to refineries in other countries.

Estimating Carbon Leakage 

We used CARB’s lifecycle data from the development of the LCFS (i.e. GREET 3.0) to estimate how many emissions are leaking because of imports. CARB doesn’t publish refining emissions factors for every product or refining intermediates. To fill these gaps, we made some conservative estimates:

• Jet fuel refining emissions assumed to be equal to diesel
• Refining intermediates (gasoil) assumed to be roughly half of finished fuels

Using this approach, we estimated and plotted yearly carbon leakage in the below graph. For 2025, we estimate that the refining sector is leaked 4.5 million tons of emissions. Even if emissions intensities differ across refineries globally, the overall magnitude remains substantial.

A growing carbon market gap

The annual value of these emissions has increased over time. As both imports and carbon allowance prices have risen, the value of emissions occurring outside California’s regulatory boundary has grown to well over $100 million per year. We charted the loss in allowance auction credits every year below.

Adding it all together, we estimate that the state has lost out on over $678 million in carbon allowance revenue over the past ten years.

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Source: EcoCira

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Is Refining Really a Medium Leakage Risk?

CARB is aware of the potential for emissions leakage risk – the language shows up in the legislation itself – and evaluates industries based on their exposure to it.

The California Air Resource Board (CARB) knows leakage is a risk, and they classify each industry as a high, medium, or low. Inexplicably, despite refineries shutting down citing the California Regulatory environment, despite sustained and climbing imports, despite higher gasoline prices than the rest of the country, oil refining is classified as a medium risk in the new Cap-and-Invest rulemaking.

We think CARB should reconsider this classification and bump refining into the high risk category, and we have an idea of how to mitigate the leakage risk. We explain our thoughts more below.

A policy fix to prevent leakage – Carbon Border Adjustment Mechanisms

Leakage isn’t just a loss of revenue for the state – these are fees that in-state refiners pay and importers do not. CARB is ratcheting down the carbon cap to a 40% reduction by 2030 and an 85% reduction by 2045. This creates price and decarbonization pressure that could drive carbon costs above $300 million per refinery per year. These costs can create a permanently open arbitrage to other markets while eating up the refining sector’s profits entirely – leading to a PADD 1 style collapse of the entire segment. This certainly makes refining a high risk for leakage in our opinion.

California already applies a mechanism to prevent leakage from electricity imports: importers must report emissions and purchase allowances to cover them. This is called a Carbon Border Adjustment Mechanism (CBAM). The net impact on this is a very clear carbon cost for the full lifecycle of power generation based on where that power is consumed (i.e. California) and not where it is generated.

Extending this concept to transportation fuels would therefore not be unprecedented.

Leakage is a major risk for any isolated carbon market operating without a CBAM. This is why the European Union adopted one (not for transportation fuels yet though), and we think the state should institute a CBAM for transportation fuels imports to prevent additional leakage.

Without a CBAM, if refining capacity continues to shrink while fuel demand remains high, California may reduce emissions within its borders, at the price of increasing reliance on fuels produced elsewhere.

The question for CARB is whether Cap-and-Invest should regulate where fuels are produced — or where they are consumed.