January 9, 2025

By Jamie Pew, Climate Policy Advisor

Tomorrow, Governor Newsom will release his administration’s proposed state budget for the coming fiscal year. With wildfires continuing to rage in Southern California, we will be watching closely to see how this budget sets our state up to act on climate and build a more resilient future. Too many California residents have experienced first-hand climate catastrophe, and it is now more clear than ever that we need to invest in a more sustainable and climate-ready state for all Californians.

In a budget preview press conference on Monday, Governor Newsom announced a balanced budget and projected a slight surplus for the coming fiscal year. Jason Sisney’s January 7th blog post helpfully summarizes the budget toplines from the press conference, placing it in the context of the most recent tax return data and the latest revenue projections coming out of the Legislative Analyst’s Office. In short: current revenues are outperforming last year’s forecasts, but analysts still anticipate significant future deficits.

But the Governor’s Monday remarks were light on details pertaining to climate spending and, at the time, the disastrous wildfires across the Los Angeles region had not yet begun. It is too early to understand the full extent of the fires’ devastation, but analysts already project that they could be the most costly in California history, if not the world. Their impact will be top of mind this legislative session, affecting state spending allocations and policy discussions across a range of issue areas. Below are the items we will be tracking in tomorrow’s release to assess how this budget proposal puts California on a path to climate action and recovery.

Climate Bond:

California voters approved Proposition 4 last November, authorizing the state to issue up to $10 billion in bonds for resource protection and climate resilience programs. A lot of that funding could show up in the Governor’s budget proposal, though the state is under no requirement to spend it all at once.

With another tight budget year ahead, we are concerned that policymakers may be tempted to balance spending by replacing General Fund commitments with Prop 4 dollars. Prop 4 was sold to the voters as a way to shore up funding for certain climate programs, particularly after a multi-year budget deficit imposed cuts on the $54 billion (now $45 billion) California Climate Commitment. Using new bond funds to backfill cuts to existing climate programs would both undermine voters’ intentions in passing Prop 4 and constitute a further reduction in overall funding headed to climate programs.

Greenhouse Gas Reduction Fund:

While the reauthorization of California’s Cap and Trade program beyond 2030 is at the top of this year’s legislative agenda, this week’s budget proposal kicks off Sacramento’s annual exercise to decide how to spend the current stream of discretionary revenue that the program generates. The Greenhouse Gas Reduction Fund (GGRF) provides a steady stream of dollars — both discretionary and non-discretionary funding – for programs that reduce climate pollution. We’ll be watching out for “fund shifts” from the GGRF in tomorrow’s proposal – General Fund cuts to climate programs that are backfilled using Cap and Trade revenues. Similar to the hypothetical use of Prop 4 spending described above, these fund shifts would essentially amount to reductions in overall climate spending.

As part of the 2024 budget process, lawmakers agreed to a 5-year spending plan for the GGRF’s discretionary pot. The agreement was not binding, and the current Legislature – whose composition has changed significantly since the deal was made – will now have a say in how GGRF is spent for the 2025-2026 fiscal year (and every year thereafter). That said, it would not be surprising if a shift in the Governor’s climate priorities since 2024’s deal leads his Administration to propose changes in GGRF spending.

Zero Emission Vehicles:

Speaking of shifting climate priorities, Governor Newsom’s proposal to revive the state Clean Vehicle Rebate Program (CVRP) – in the event that the incoming federal Administration repeals the existing $7,500 federal rebate for electric vehicle purchases – would require finding a big chunk of cash somewhere in the state’s coffers to fund the incentive. GGRF is the most likely candidate to fund such an endeavor, but we are unlikely to see such a dramatic change materialize in this week’s budget proposal – the Governor demurred when asked about specifics at Monday’s press conference. California lawmakers will probably only want to take the plunge if and when the federal rebate is actually revoked. Still, keep an eye out for clues in tomorrow’s press conference.

Climate Commitment:

If you have been following NextGen’s Climate 100 project, you’ll know that the 5 year, $54 billion California Climate Commitment championed by Governor Newsom in 2022 has gradually been whittled down to $45 billion in climate spending across 8 years. For this year’s budget negotiations, the outlook is bittersweet. The good news is that most of the remaining commitment has either been appropriated, or is scheduled to be allocated from the more fiscally stable GGRF over the next several years. Out of the entire $45 billion, there is only $3 billion in General Fund programming that has yet to be appropriated by the Legislature. In other words: not much can be easily cut from General Fund climate programs, because so much is already on the books!

Of course, the flip side of this coin means that California’s spending on climate is set to return to business-as-usual – that is, dozens of critical pollution reduction programs competing for vastly oversubscribed Cap and Trade revenues – after several years of being augmented by tens of billions of dollars from the General Fund. We’ll be looking to see whether the budget proposal released tomorrow includes efforts to better align existing state spending with the demands of responding to the climate crisis, as recommended by our Climate 100 project.

Responding to the Southern California wildfires:

While the devastation in Los Angeles is still coming into view, it is clear that the damage caused by the catastrophic fires will demand a fiscal response. Already, state and federal emergencies have been declared, freeing up disaster funding to address immediate life-saving needs and recovery. But the scale of the damage from this disaster – possibly the costliest fire on record – promises to send ripple effects through California’s economy. California’s insurance market is already under immense strain, and an event like this one is likely to destabilize it further, complicating ongoing efforts at reform and potentially impacting policyholders statewide.

In 2023, massive winter floods across the state caused by a series of atmospheric rivers led the Governor to insert a nearly billion dollar flood resilience package into his January proposal. It is possible that a similar effort may appear in tomorrow’s budget proposal. But with the destruction ongoing, and the Governor’s budget proposal being delivered to meet the statutory deadline of January 10th, further legislative and administrative action to address the crisis is likely to be explored outside of this step in the budget process.

An uphill battle

If there is one takeaway from the last several years of climate budgeting in California, it is that the state cannot rely on one-time General Fund surplus revenues and Cap and Trade auction proceeds to meet the full need for climate action. A 2024 report from the Climate Policy Initiative projected that California would need to invest a grand total of $62 billion annually over the next decade, from both public and private sources, to meet its climate goals. In order for the state to contribute even a fraction of that sum, policymakers will need to innovate new approaches to climate finance and identify a diverse range of methods to raise climate revenue.

As November’s elections and this week’s fires have demonstrated, California will face significant headwinds, crosswinds, and doldrums in its endeavors to decarbonize the economy. Policymakers who are committed to progress will have to navigate attacks from a hostile federal administration, unpredictable natural disasters unfolding on the ground, and the pain of constituents who for too long have been asked to bear the burden of pollution as well as the costs of transition.

But there are places to look for hope. In just the past few weeks, New York has shown that state leadership can forge new paths to raise revenue for climate programs amidst challenging political conditions, by deploying policies and programs that force big polluters to foot the bill and improve the lives of everyday people. If California’s leaders are seeking inspiration while crafting paths towards a fiscally solvent climate transition, New York State’s just-passed Climate Superfund Act and the Metropolitan Transportation Authority’s newly minted Congestion Relief Zone are a good place to start.

The catastrophic fires still burning in Southern California are a grim and forceful reminder that when it comes to funding the climate transition, later is too late. So how are California’s climate champions going to ensure we invest in action today? Tomorrow’s budget proposal will begin to answer that question.