California has put a new manufacturing decarbonization allowance program into effect for industrial facilities already covered by the state's Cap-and-Invest system. Eligible facilities have until June 1, 2027 to submit the first applications for Manufacturing Decarbonization Incentive allowances tied to the 2028 budget year.

The California Air Resources Board adopted the broader Cap-and-Invest amendments in May. The Office of Administrative Law approved the final package and filed it with the Secretary of State on August 31, and the amendments took effect September 1.

The incentive is optional. Missing the application deadline does not create a new operating violation, but a facility cannot receive the additional 2028 allocation through a late application. The program is also not a cash grant with a fixed award. It adds allowances to a qualifying facility's industrial allocation, subject to the amount available for its sector.

Which facilities can apply

The new program is limited to a covered or opt-in covered facility that already qualifies for industrial allowance allocation under section 95891(b) or (c) of the Cap-and-Invest Regulation. The facility must also have reported and verified its operations under California's Mandatory Reporting Regulation for the applicable prior year.

Most eligible applicants must operate in an industrial sector identified in Table 8-1 of the rule. Crude petroleum and natural gas extraction facilities listed in Table 9-1a are generally excluded from the incentive, except that they may apply for qualifying carbon-capture equipment under the rule's separate conditions.

This boundary separates the new program from the California Industry Assistance Credit for non-MRR utility customers. The utility credit is for eligible facilities that do not report directly under the Mandatory Reporting Regulation. The new CARB incentive instead begins with facilities inside the state reporting and allowance-allocation system.

An otherwise eligible facility also needs an approved project application and enough allowances remaining in the reserve assigned to its sector. If qualified requests exceed that sector's available pool, the rule requires CARB to prorate the additional allocations.

What projects qualify

The rule allows the value of the additional allowances to support eight categories of facility work:

  • Biomass-derived fuel or methane reduction: eligible capital costs and, within the rule's limit, certain fuel costs.
  • Electrified equipment: new electric equipment, related electricity costs, and associated design, engineering, and permitting that reduce or avoid onsite fossil-fuel combustion.
  • Low-carbon hydrogen: hydrogen meeting one of the rule's federal-tax-credit, biomass, or renewable-electrolysis pathways.
  • Renewable electricity generation or storage: capital and associated project costs that reduce or avoid onsite fossil-fuel combustion.
  • Solar thermal or geothermal energy: qualifying equipment and related project costs that displace onsite fossil-fuel use.
  • Electrified thermal energy: purchases of thermal energy generated with electricity that reduce or avoid onsite fossil-fuel combustion.
  • Alternative materials: equipment and associated project costs for eligible material substitutions that reduce process emissions.
  • Captured carbon dioxide: qualifying capture, use, or storage equipment after CARB incorporates the required quantification methodology into the regulation.

Eligible expenditures must occur on or after September 1, 2026. The regulation bars use of the allowance value for administrative or overhead costs, lobbying, employee bonuses, shareholder dividends, or costs and activities required by a legal settlement, enforcement action, or court order.

What the June 1 application requires

For the first allocation cycle, a facility must apply by June 1, 2027. The application must identify the eligible activity and explain how the project satisfies the rule. It must include the equipment or fuels involved, major project milestones, a timeline, cost estimates, expected annual reductions in combustion and process emissions, and projected changes in fossil fuel, electricity, thermal energy, hydrogen, biomass fuel, or alternative-material use, as applicable.

The rule directs CARB to approve a qualifying complete application by September 1 of the application year. Additional allowances for the 2028 budget year are scheduled to transfer by October 24, 2027.

Receiving the allocation creates continuing documentation duties. After an applicable compliance period, the facility must report project progress, costs, allowance value spent and unspent, energy-use changes, and achieved emissions reductions. Contract or procurement records must support the reported spending. If required reporting is missing, the regulation treats the full allowance value as unspent. Unused value can require the facility to return an equivalent number of allowances, and failure to return them can result in violations under the Cap-and-Invest enforcement rules.

The practical takeaway

A California industrial facility already reporting under the Mandatory Reporting Regulation should confirm whether it qualifies for allowance allocation under section 95891(b) or (c) before treating this incentive as available. It should then match a planned project to one of the eight permitted categories and separate eligible costs incurred on or after September 1, 2026 from earlier or excluded spending.

For a first-cycle application, assemble the project scope, equipment or fuel details, milestones, cost estimates, expected annual emissions reductions, and projected energy or material changes before June 1, 2027. Keep contract and procurement records from the start because the reporting and allowance-return rules continue after an allocation is awarded.