MDI Will Decide How Much of California’s Cap Cut Sticks

The California Air Resources Board (CARB) issued a request for information (RFI) on the Manufacturing Decarbonization Incentive (MDI) on 26 October. MDI gives eligible manufacturers and refiners additional free allowances, from budget year 2028, to fund projects that cut their emissions. Responses are due on 20 November through CARB’s public docket and will inform a public workshop. CARB will not reply to them.

The MDI pool holds 118.3 million allowances, created outside the annual budgets. The same amendments removed exactly 118.3 million allowances from California’s 2027–2030 budgets. Each MDI allowance that is awarded and kept puts one of those allowances back into the market. Each one that is never awarded, or is returned unspent and retired, leaves the cut in place.

Three of the RFI’s eleven questions bear directly on that balance: the total number of MDI allowances, limits on awards in each compliance period, and limits by sector. The Board gave staff until 1 July 2030 to evaluate them, a month after the third of four application windows closes. The RFI raises them before the first window closes on 1 June 2027.

CARB Cap-and-Invest Regulation as amended effective 1 September 2026, Table 6-2, §95871(k), §95891(g); Resolution 26-7; MDI Request for Information (26 October 2026).

The 2026 amendments lowered California’s allowance budgets for 2027 to 2030 from 882.3 million to 764.0 million. The cut of 118.3 million deepens each year, from 15.0 million in 2027 to 41.7 million in 2030 (Exhibit 1). Resolution 26-7 attributes it to technical adjustments in CARB’s greenhouse gas inventory, made to align the program with the 2030 target set by SB 32.

Exhibit 1 · Allowances removed from the 2027–2030 budgets and the MDI pool

CARB Cap-and-Invest Regulation, Table 6-2 before and after the amendments effective 1 September 2026; §95871(k); §95891(g)(9); Climate Decode.

The MDI pool is also 118.3 million. CARB’s January proposal funded MDI by borrowing allowances from future budgets. The 15-day changes replaced that with new current-vintage allowances held in a Build Up California Reserve Account, which the Final Statement of Reasons says preserves future vintages for sale at auction (§95841(b), §95871(k)). MDI allowances are therefore additional supply, not budget allowances brought forward. CARB’s April FAQ described the pool as a $4 billion fund; at the $32.48 settlement of the August 2026 joint auction it is worth $3.84 billion.

The pool and the cut reach the market by different routes. The cut shrinks the budgets that feed free allocation and the auctions. MDI allowances go only to eligible industrial facilities, as additional free allocation that CARB says they can use for compliance or sell. The cut is confined to 2027–2030, while MDI can be awarded for any budget year from 2028 to 2035.

A facility may request a cap adjustment factor modifier of up to 0.8 for a compliance period, added to its factor. For 2028 that factor is 0.782 for most industrial activities and 0.799 for cement, lime, nitrogen fertilizer and coke calcining, so the full modifier roughly doubles a facility’s initial free allocation for the year (§95891(g)). Each application covers a whole compliance period: budget year 2028 alone in the first window, 2029 and 2030 in the second, 2031 to 2033 in the third, and 2034 and 2035 in the fourth (§95891(g)(5)).

The pool is split into two halves of 59.15 million (§95891(g)(9)). Half A serves petroleum refining, asphalt, other petroleum and coal products including coke calcining, industrial gases including hydrogen, and other basic organic chemicals. Half B serves every other eligible activity. Oil and gas extraction can apply only for carbon capture projects, which in turn await a Board-approved quantification methodology. When approved requests in a budget year exceed what remains in a half, awards in that half are prorated.

Apart from the per-facility ceiling and the balance left in each half, no provision limits total awards in a given year. Spread evenly over eight budget years, the pool would release 14.8 million a year. Resolution 26-7 cites preliminary third-party analyses finding it unlikely that more than 30 million will be awarded in the first year. Thirty million would exceed the 26.5 million removed from the 2028 budget.

Refining and hydrogen facilities received 17.2 million vintage-2026 allowances, against about 9.1 million for cement, food, glass, metals, chemicals and other industry combined (CARB’s vintage 2026 allocation summary). Each half holds 59.15 million, and a facility’s maximum award scales with its allocation. On 2026 allocations, refining and hydrogen facilities can draw down half A roughly twice as fast as the other sectors can draw down half B.

An award is valued at the number of MDI allowances times the average settlement price of the four current auctions held in the year for which they are allocated (§95891(g)(3)). The facility must spend that value on eligible activities and achieve the reductions by 31 December of the final year of the second compliance period after the one in which the budget year falls, which is 2033 for budget year 2028 (§95891(g)(8)). Unspent value is returned as allowances, at the same per-allowance value, by 1 November of the following year, and CARB retires them. A facility that does not file its spending report is treated as having spent nothing.

The award is fixed in allowances; what the facility keeps depends on what it spends. Take a facility awarded 1 million MDI allowances for a $24 million project (illustrative values, not a price view). Valued at $30 each, the award is worth $30 million and 200,000 allowances come back. Valued at $40, it is worth $40 million and 400,000 come back. The higher the auction price in the valuation year, the fewer allowances a given set of projects absorbs.

Exhibit 2 · When MDI allowances arrive and when unspent ones are due back

CARB Cap-and-Invest Regulation as amended, §95840, §95891(g)(5), (g)(6), (g)(8); Resolution 26-7; MDI Request for Information; Climate Decode.

Allowances for budget year 2028 reach facilities by 24 October 2027; the deadline to return unspent ones is 1 November 2034 (Exhibit 2). Each MDI allowance a facility surrenders is also one it does not have to buy, at auction or from others. The Board asked CARB to report each year on trends in allowances sold at auction and MDI allowances issued.

The RFI’s eleven questions track the directions in Resolution 26-7 (Table 1). Questions 6, 7 and 8 bear on supply: the total number of MDI allowances, limits on awards per compliance period beyond the 0.8 modifier, and sector limits beyond the two halves. Questions 7 and 8 ask about limits the rule does not yet contain, which could only slow or narrow awards. Question 6 could move the pool either way.

Question 3 asks what objective information could show that a project needs the incentive. As written, the Executive Officer approves by 1 September any application that names an eligible activity with its equipment, timeline, costs and expected reductions (§95891(g)(6)). The rule contains no test of need. Question 9 asks how projects with air quality or workforce benefits could be prioritized, and question 10 how new facilities could be supported. Questions 2 and 4, on methane and on returning value when promised reductions fall short, carry the Board’s earlier deadline of 1 July 2028.

Table 1 · What the RFI asks and the Board direction behind each question

CARB, MDI Request for Information (26 October 2026); Resolution 26-7 (28–29 May 2026); Climate Decode.

Unless the rule changes sooner, awards for budget years 2028 to 2033 will be made under the current text, because the Board’s 2030 deadline falls after the third window closes. Resolution 26-7 also requires a report to the Board, with amendments proposed as appropriate, before MDI applications are received and allowances issued, and at least one public workshop before any MDI allowance is issued. The pool size and the sector halves are written into the regulation, so changing either would take a rulemaking.

• 20 November 2026. RFI responses due on CARB’s public docket. Responses are public.
• Before the first award. A public workshop on MDI implementation, and a report to the Board with any proposed amendments, both required by Resolution 26-7.
• 1 June 2027. First application deadline, for budget year 2028. Approvals by 1 September; allowances transferred by 24 October 2027.
• Each quarter and each year. MDI allowances appear as their own category in CARB’s quarterly compliance instrument report. Each year CARB publishes the applications received and approved and the MDI allowances issued by sector, remaining, returned and retired, along with summaries of approved projects by facility.
• 1 June and 1 July 2028. The second window sets awards for 2029 and 2030 together. A month later come the Board’s deadlines on methane and on returning value, and the latest start for a public process on post-2030 industrial allocation that must consider MDI investments.
• The courts. Communities for a Better Environment asked the Los Angeles Superior Court on 1 July 2026 to set aside the amendments under the California Environmental Quality Act, with MDI at the center of its petition. No ruling has been reported, and the amendments took effect on 1 September 2026.

Climate Decode · Advisory

How much of the 2027–2030 cut will MDI put back, and when?

We track every MDI window, award and return against the California–Québec allowance balance, and model how the pace of awards moves supply year by year.

Sources

• CARB, Manufacturing Decarbonization Incentive (program page), accessed 26 October 2026
• CARB, Manufacturing Decarbonization Incentive – Request for Information, 26 October 2026, and public comment docket
• CARB, Resolution 26-7, 28–29 May 2026
• CARB, Cap-and-Invest Regulation, unofficial version effective 1 September 2026, §§95840, 95841, 95871(k), 95891(g), Tables 6-2 and 9-2; prior Table 6-2 from the unofficial regulation in force before the amendments
• CARB, Final Statement of Reasons, 2026 amendments to the Cap-and-Invest Regulation, section II.A.4
• CARB, Manufacturing Decarbonization Incentive Fund FAQ, April 2026
• CARB, Cap-and-Invest Program Vintage 2026 Allocation Summary, December 2025
• MELCCFP and CARB, Joint auction #48 summary results, 19 August 2026
• Communities for a Better Environment v. California Air Resources Board, verified petition for writ of mandate, Superior Court of California, County of Los Angeles, 1 July 2026
• Climate Decode WCI analysis, October 2026

This article is market analysis provided for information only and is not investment advice.