by Jeff Baldino and Meir Hasbani
January 22nd, 2026
At our core, we’re policy wonks here at EcoCira, so we were excited when CARB finally put out their Initial Statement of Reasons (ISOR) for the updates to Cap-and-Trade Invest and the Mandatory Reporting Rule (MRR) last week. Quick recap of the history: CARB almost finished rule-making in 2023-24, but backlash from an expensive SRIA (economic cost benefit analysis) for LCFS, and a desire to get legislation passed for the Cap-and-Invest extension, led to a lengthy delay.
Here we are two years later, and the changes to both Cap-and-Invest and MRR are extensive. None of this is a surprise since many of these changes were floating more than two years ago, but the potential impact is still significant.
Rooted in EcoCira’s focus on efficiency, we’ll evaluate the changes under three lenses:
- What is the impact on carbon emissions?
- How are costs for consumers impacted?
- Does the change increase or decrease administrative burden?
In an ideal world, changes would have 1) the most emissions reductions at 2) the lowest costs to implement with 3) a reduced administrative burden. Obviously, direct costs for energy and goods go up, so it’s impossible to model overall cost reductions without including the social cost of carbon, which the LA fires, Western USA Snow Drought, and potential east coast ice storm this week prove are very real. We discuss this more below.
We will give a narrative of what struck us as noteworthy on our first read through the updates, based on the lenses listed above. Curious about something we didn’t cover? Shoot Jeff or Meir an email.
Initial Statement of Reasons for Cap & Invest
A. 85% Emissions reduction by 2045; 118 million allowances removed by 2030
By far, the most consequential element of the reauthorization and accompanying ISOR is the emissions-reduction trajectory itself. By CARB’s own admission, an 85% reduction by 2045 implies success of multiple climate programs and a wholescale change of California’s energy and industrial systems. We think that for this target to be remotely achievable, several conditions must be met simultaneously:
- Near-complete decarbonization of power generation, with renewable and zero-carbon resources supplying the overwhelming majority of electricity.
- Successful execution of Advanced Clean Car / Truck / Fleet goals, despite current litigation / pullback. The 2045 target assumes zero light-duty internal combustion engine (ICE) sales by 2035 and a rapid drawdown of the legacy ICE fleet thereafter; in parallel, heavy-duty transport must transition at scale to hydrogen, electrification, or ultra-low-carbon renewable diesel, something with little momentum today.
- Orderly shutdown or repurposing of remaining oil refineries aligned with declining in-state fossil fuel demand and managed to avoid supply or reliability disruptions – clearly something the state is struggling with today.
- Widespread electrification of buildings, including home appliances and space and water heating.
- Deployment of advanced abatement solutions for hard-to-decarbonize industry, including renewable thermal energy and carbon capture for cement and other thermally-intensive manufacturing.
These are not just ambitious policy goals, but a wholesale transformation of California’s energy, transportation, and industrial base within two decades. These lofty objectives definitely reduce emissions but come with higher costs and administrative burden.
B. The economics in the SRIA are thoughtfully modeled but there are two assumptions that jumped out at us.
CARB applies a 5% discount rate for NPV calculations. While this is not unusual for public-sector or infrastructure analysis, it is below the discount rates used by industry (often 8–12%) and the cost of capital for most firms. This assumption makes decarbonization pathways appear more cost-effective than they actually are. Companies will also apply a higher hurdle rate when executing first-of-a-kind solutions with technology, execution and policy risks. The 5% assumption could lead to a lower carbon price projection (CARB forecasts an average of $68/ton) than the market needs to invest.
The SRIA also assumes a relatively smooth relationship between allowance prices and decarbonization investment. Projects grow exponentially more expensive to achieve the final 30-40% of carbon reductions, particularly in thermally-intensive, hard-to-abate sectors and heavy duty transport.
Let’s draw some parallels on price volatility from the LCFS, where investment in lower carbon fuels occurred in discrete steps only after price, policy, and technology thresholds were met. LCFS prices spiked, CARB had to back down on the regulation, and now prices have collapsed as industry invested faster than the regulation required. In that context, firms and CARB would be prudent to plan around price ranges, not point estimates, and to expect higher volatility than a single-modeled average price.
C. The costs are tangible, while the benefits are indirect
The SRIA presents compliance and abatement costs as direct, near-term, and tightly bounded, totaling $79.4–$82.8 billion through 2030 (less than 5% variance). These costs are passed through to consumers via higher prices for power, fuels, and goods. The modeling is similarly precise on physical outcomes. Reductions in NOx (312.0–312.1 thousand short tons), PM₂.₅ (51.5–51.8 thousand short tons), and GHGs (978.3–983.3 MMTCO₂e) vary by well under 1% across scenarios. In other words, the SRIA is quite specific about costs and emission reductions.
It is far less clear what those reductions are worth to those paying the bill. Monetized health benefits are reported as $73.0 billion, yet the underlying avoided cardiopulmonary mortalities range from 2,740 to 7,080 (roughly ±40%). The social cost of carbon, driven by assumptions rather than observed outcomes, spans $28–$460 billion, a variance exceeding 1,500%. This is the largest benefit category.
As a result of all these indirect and uncertain benefits, the SRIA highlights a policy challenge familiar to anyone trying to explain the cost of gasoline in California: costs are immediate and visible, while benefits are uncertain, long-dated, and largely invisible to consumers facing higher prices today.
D. CARB moves offsets under the “Cap”
Paralleling Washington’s Cap-and-Invest, CARB proposes to place emissions offsets under the Cap via an offset-use account that is ” trued-up” at the end of each year by retiring allowances equal to the number of offsets used. This effectively changes offsets from a compliance tool –> to a cap tightening mechanism, reducing the risk that offsets don’t achieve real emissions reductions. This will end the compliance period adjustment volatility we used to witness every three years under the existing policy. Offset use will be limited to 6% annually, but we’ll see CCA costs increase as credit use reduces supply over time.
E. Some thoughts on Emissions Leakage
Under a declining emissions cap, carbon leakage becomes an increasing risk: regulated in-state production faces rising compliance costs, while unregulated imports can gain a cost advantage serving the same demand. The EU has responded to this dynamic through the Carbon Border Adjustment Mechanism (CBAM), which applies a carbon price to certain imported products to better align consumption with emissions intensity, regardless of where production occurs.
California has unevenly adopted elements of this logic under Cap-and-Invest. Imported electricity is already subject to reporting and compliance, effectively functioning as a CBAM-type mechanism. The 2026 MRR amendments extend upstream emissions reporting to imported cement and hydrogen (though no compliance obligation, yet!) reflecting a recognition that emissions tied to California demand in these sectors would otherwise escape accounting.
By contrast, leakage in the fuels sector remains a real and growing issue: in-state refineries face allowance obligations for process emissions, while refined products imported from out-of-state facilities do not. As the cap tightens and in‑state refining shuts down, the asymmetry shifts toward imports — yet fuels are still the sector where CARB hesitates to act.
While we welcome the reporting changes for cement and hydrogen imports, we think leakage is already occurring in the fuels sector. In general, without a clear mechanism for CBAM, leakage is a major risk to the success of Cap-and-Invest.
Initial Statement of Reasons for MRR
Like Cap-and-Invest, the changes proposed in the ISOR for MRR are quite extensive. We’ll scratch the surface with just a few that caught our attention. Like always, we’re happy to chat about these or any other changes.
A. Biogenic Fuels and Emissions Reporting
The alternate method provisions for reporting biogenic emissions are, frankly, a win. Reporters will have flexibility on how they measure and quantify biogenic emissions. We feel like this is good policy – it gives reporters more leeway to reduce their emissions through biogenic sources and provides much needed certainty. That said, alternate method provisions only work if they are solid. Reporters should think about how CARB will enforce 5% accuracy standards and make sure their methods are defensible since they will have to pass accredited verification.
We also welcome the changes to how biomass-based fuels are reported. Essentially, CARB has carved out categories for biomass-based equivalents for all fuels (gasoline, LPG, etc.) to match the reporting methods for biomass-based diesel. We’ve seen clients jump through hoops for lower carbon fuels reporting before, and we think this is a change that reduces the administrative burden.
B. Liquid Hydrocarbon Fuels
At first read, the new Liquid Hydrocarbon Fuel (LHF) framework seems like it would penalize the remaining refineries in California. However, we did some estimating on refinery allowances, and this method may give some refiners a few more free allowances every year.
We’ll watch the public comment period to see if they agree with us when they do their own forecasts, and whether any opt-in early. This change is heavily outweighed by the reduction to the Cap described above, so we’d hardly say CARB is coming down easy on the refineries. The chart below is CARB’s showing where they expect different facilities to fall relative to the new LHF benchmark; the notes are ours.
Source: California Air Resources Board
The Complexity Weighted Barrel method was working well and was based on an industry standard methodology. To us, given the minimal impact on emissions, this change is a solution in search of a problem. All the LHF shift does is create a high administrative burden on reporters and verifiers to change methods with minimal emissions reductions.
C. Elimination of Crude Oil Benchmark for Thermal Extraction
A lot of the heavy crude produced in California is done via thermal extraction. Essentially, this crude is so thick and viscous (solid at room temperature, like tar); it needs to be heated underground to flow. This uses a lot more energy than light crude production, and Cap-and-Invest used to recognize this via a separate benchmark for thermal and non-thermal crude extraction.
At EcoCira we believe a successful energy transition doesn’t involve outsourcing California’s pollution to the Middle East or Canada. So that’s why the elimination of a thermal crude benchmark (i.e. combining steam-flood production with conventional) seems like bad policy to us. Look how many facilities are above the combined benchmark in CARB’s Figure below, meaning their free allowances will decrease and their cost of compliance will explode – possibly to the point where continued operation isn’t profitable.
Source: California Air Resources Board
An unintended outcome of this change is therefore that California heavy oil production declines and the refineries buy Canadian tar sands, Middle East grades, or even Venezuelan crude instead. It’s no secret that California wants to phase out crude oil production; Upstream operators are already reeling from nearly a decade of drilling bans. But if upstream producers shut in production because of this change, emissions won’t actually fall — they’ll simply shift elsewhere.
D. The MRR officially references LCFS data for the first time.
CARB is clearly stepping into new territory by formally linking LCFS-reported data with transportation fuels under §95121. We’ve been warning reporters for years to assume CARB is comparing numbers across programs, but this is the first time that linkage is explicitly written into regulation. That has real implications for data governance, reconciliation, and verification scope, creating additional burden for both reporters and verifiers. Stakeholders should absolutely be commenting on this now, especially to establish some reasonable boundaries around how third-party verifiers are expected to navigate cross-program consistency (if at all).
E. Cal-eGGRT must track regulatory changes.
If these biogenic emissions, product data reporting, and biomass-derived fuel changes are approved, they need to actually work in Cal eGGRT. The program does not support biogenic emissions reporting well, especially under process categories like refineries and hydrogen plants. These subparts are limited in the current version of the system, and if the regulation changes but the tool doesn’t, everyone loses.