In a high-stakes decision that will shape California’s economy for years, air officials late Friday approved a sweeping overhaul of the state’s signature climate program, cap-and-invest.

The 10-3 vote from the California Air Resources Board determines how aggressively the Golden State will curb planet-warming greenhouse gas emissions in the years ahead — and how billions of dollars in revenue will flow through communities, businesses and public programs statewide.

Cap-and-invest was nation-leading when it launched in 2013. The program forces major polluters to pay for their share of emissions by buying allowances at auctions or being granted them for free. It uses the revenue to fund public transit projects, wildfire prevention, affordable housing, clean energy, electric vehicles and safe drinking water.

The pollution limit — or cap — declines each year, reducing the total amount of emissions in the state and helping California reach its ambitious climate targets, including 100% carbon neutrality by 2045.

The Legislature voted last year to extend cap-and-invest through 2045. Officials at the Air Resources Board then spent the last several months drafting and revising the plan voted on this week, which received considerable feedback from oil and gas companies, environmental groups, lobbyists and lawmakers all jockeying for different priorities.

Some 200 people testified in person during the marathon two-day meeting preceding the vote, and the final proposal received more than 1,000 written comments.

Industry groups warned that capping emissions too much and too quickly would push refineries out of the state and drive up already soaring energy costs. But environmentalists and other stakeholders said giving too many concessions to fossil fuel interests would defeat the program’s purpose, which is to drive down emissions along a pathway consistent with what scientists say could preserve a recognizable climate.

The program was always planned to become stricter as the years unfolded, to give businesses more time to make the stronger reductions in their emissions.

Officials were under legal, market and budgetary pressure to pass a plan without delay, and also said it’s important for California to signal market certainty.

“It is no secret that climate policy is at a crossroads — under attack by an openly hostile and well-funded opposition and upended by global economic upheaval,” CARB chair Lauren Sanchez said during the meeting. “At a moment of uncertainty at the federal and international levels, California has the opportunity to lead with consistency.”

Among the key updates to the program are the removal of 118 million pollution permits, or allowances, from the market by 2030, and 900 million after 2030. Officials say this will amount to a steep, 11% annual lowering of the cap by the end of this decade, and 7% from 2031 to 2045, in keeping with the state’s mandated targets.

Critically, however, the update will also create a new pool of 118 million allowances above the cap that polluters can apply for and receive if they invest in decarbonization projects, a program dubbed the Manufacturing Decarbonization Incentive.

The incentive program is intended to discourage regulated industries from leaving the state. Two major refineries have announced exit plans in recent years, including Valero’s Benecia refinery and Phillips 66’s Los Angeles refinery, which shut down in 2025.

But many critics — including transit, affordable housing, environmental justice and clean water groups — said this amounts to a dismantling of the program.

“CARB has proposed creating exactly 118.3 million additional allowances … outside the cap, the precise number of allowances that must be removed from the cap to keep us on track for our 2030 targets,” said Caroline Jones, a senior analyst with the nonprofit Environmental Defense Fund. “This undermines the cap’s role in actually limiting climate pollution, which is the core function of this program.”

The board approved the decarbonization incentive but committed to additional workshops and evaluations of the program before issuing any allowances for it.

Other updates include more free allowances for industrial facilities and refineries, which regulators said will help reduce pressure on gasoline prices. Critics described the free permits as subsidies for oil and gas.

The update will also shift some allowances from gas to electric utilities, and increase funding for the California Climate Credit, a rebate that appears automatically on people’s utility bills.

But perhaps most controversial is how the update will affect the program’s multibillion-dollar revenue, which flows into the state’s Greenhouse Gas Reduction Fund each year and is distributed to various programs. Cap-and-invest has delivered $35 billion for climate projects in California since its inception.

The new incentive pool will mean the loss of $2 billion annually to the fund, or roughly half the amount it has received in recent years, according to an analysis from the Legislative Analyst’s Office.

While the Air Resources Board does not determine how the fund is divvied up — that’s the Legislature — opponents warned that this could amount to significant cuts for the Affordable Housing and Sustainable Communities Program, the Low Carbon Transit Operations Program, the SAFER drinking water program and the Community Air Protection Program, among many others that rely on revenue from cap-and-invest.

“This could create serious consequences, including a potential zeroing out of the state’s support for critical emission reduction programs,” said Phillip Fine, executive officer at the Bay Area Air District. “Striking the right balance is critical, but all consequences must be fully considered.”

It was a sentiment echoed by many who delivered comments during the board meeting.

“These additional allowances would not only endanger our emissions targets, they would also flood the auction market and depress cap-and-invest revenues,” said Pam Odell of the group Climate Action California. “These revenues fund vital programs, promote climate resilience, clean transit and transportation, and public health, especially in the most heavily exposed front-line communities.”

Some groups came out in support of the update, however, including Southern California Edison and Pacific Gas & Electric. The plan strikes a “balance between program stringency and affordability,” Fariya Ali, air and climate policy manager with PG&E, said during the meeting.

Assemblymember Jacqui Irwin (D-Thousand Oaks), who authored the bill that reauthorized the program last year, was cautiously supportive, noting that she would like to see more guardrails around the incentive program to ensure it aligns with state climate targets. But delaying the update would only create more uncertainty at a time when the Trump administration is already canceling clean energy funds and revoking California’s authority to set clean vehicle standards, she said.

“If we fail now to adopt the proposed amendments to cap-and-invest, it would be without a doubt the greatest victory that the Trump administration could possibly hope for to achieve against California’s climate policies this year,” Irwin said.

Oil and gas groups were tepid. Jodie Muller, chief executive of the Western States Petroleum Assn., said the update provides some near-term relief for refineries, but leaves too much uncertainty after 2030 to drive continued investment.

Brian McDonald, regulatory affairs manager with Marathon Petroleum Corp., said similarly that the oil company is “deeply concerned that the current proposal does not go far enough to provide the regulatory certainty needed to sustain in-state fuel production.”

In a briefing ahead of the vote, California climate economist Danny Cullenward said the update threatens both the “cap” aspect of the program by introducing the new allowance pool, and the “invest” aspect by threatening to reduce the program’s revenues.

The proposal is “being presented as a compromise when in fact it is sacrificing both of the key goals of the program,” he said.

The new plan is slated to go into effect Sept. 1.