California air regulators on Friday approved a contentious overhaul of the state’s carbon market, creating a program that could steer billions of dollars in free pollution permits to oil refineries and other major polluters over the objections of environmental groups, key lawmakers and three of the board’s own members.

Ten members of the California Air Resources Board voted to adopt the changes to its cap-and-invest program after two days of lengthy hearings, including a full day dedicated to hundreds of public comments.

The overhaul followed intensive lobbying by the oil industry as well as pressure from Gov. Gavin Newsom’s administration to help keep refineries operating in the state amid rising gas prices.

The approval sets up a potential budget fight in Sacramento. The Legislative Analyst’s Office projects that quarterly auction revenue for state climate programs will drop from roughly $4 billion a year to about $2 billion under the new overhaul.

Such a shortfall would effectively zero out programs lawmakers spent last year fighting to fund: affordable housing, public transit, drinking water in low-income communities and pollution monitoring in California’s most polluted neighborhoods.

The governor’s office praised the measure as a compromise that balanced economic uncertainty with the state’s climate goals. Refinery closures and the Iran-Israel war have driven average California gas prices above $6 a gallon.

Newsom, in a statement, used the moment to draw a contrast with President Donald Trump.

“While Trump sows ongoing chaos and uncertainty, California is staying focused by protecting our economy, safeguarding public health, and doubling down on the clean energy future all Californians deserve,” he said.

Environmentalists warned the changes to the program amount to a giveaway to the fossil fuel industry that weakens California’s only program setting a firm cap on greenhouse gas emissions.

Katelyn Roedner Sutter, California senior director for the Environmental Defense Fund, called the decision “deeply misguided” for prioritizing polluters over communities.

“Newsom’s air regulators are handing billions to oil executives at the expense of our climate, health, and affordability for working families in a rushed process that has shortchanged meaningful public participation,” said Bahram Fazeli, policy director at Communities for a Better Environment.

How the program works — and what changes

California’s 13-year-old carbon market forces major polluters to buy permits while the state lowers the overall cap each year. Friday’s vote will reduce those permits – and creates a new subsidy program carved out of the market.

The program, which may still see changes, could make available a new pool of free pollution permits available to industry valued at as much as $4 billion. Companies that pledge to invest in clean energy and efficiency may qualify for the permits in exchange for investments in clean energy.

The pool will be capped at 118.3 million permits — the same number the air board has said must come off the market for California to hit its 2030 climate target. Environmentalists say the proposal risks wiping out those reductions.

Half are reserved for the fossil fuel sector. A recent Berkeley analysis, by the chair of an independent committee that oversees the carbon market, found refineries could end up with more free permits than they need to cover their emissions.

The air board has defended the design. Officials say the credits will go only to companies undertaking decarbonization projects, will be limited and temporary and can be clawed back if companies misuse them. The plan, they say, is meant to keep California refineries operating at a time of mounting closures and global market pressure. According to air regulators, the amended program will spur clean-energy investment as Trump cuts federal support.

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