A new report on climate financing estimates California is falling short by more than $20 billion annually to meet its 2045 carbon neutrality goal. It recommends shifting more of the cost to the private sector to fund the energy transition.
The Climate Policy Initiative (CPI), a not-for-profit research organization, produced the report in partnership with the Strategic Growth Council, an interagency committee led by several of Gov. Gavin Newsom’s cabinet secretaries, and with help from the state’s Infrastructure and Economic Development Bank, known as I-Bank.
According to the report, the state needs an average of $62 billion in annual spending through 2035 to stay on track—though the cost could run as high as $83 billion. Half of that would support zero-emission vehicles, while the rest focuses on agriculture and land use as well as energy, buildings and general infrastructure. After 2035, California must spend up to $110 billion each year, mostly for transitioning residents and businesses to ZEVs. Private sector finance, such as Californians purchasing new ZEVs, currently accounts for 77% of the spending.
To fill the gaps, the government must lean further into private spending to support energy infrastructure and ZEVs, while also maximizing federal grants and loans and any local bond proceeds that could boost public transit and energy conservation, according to the report.
California has enacted numerous climate policies over the last two decades that have established the foundation for carbon neutrality. Most recently, the Newsom administration accelerated the state’s climate targets by enacting sales bans on new gas cars and diesel trucks.
The report is the first of its kind to assess the state of climate financing in California. According to CPI, the aim is to build more data on future investment needs and to inform policymakers and private sector actors in their efforts to “identify opportunities, establish priorities, measure progress and develop coordinated plans to meet the scale of the climate challenge, including for budgets, regulations, tapping into federal funding and investment plans.”
The report factored in the “substantial progress” that California has already achieved. It included $51.4 billion that Gov. Gavin Newsom had set aside for a seven-year climate spending package—though he has since trimmed that to $48 billion and is likely to cut it further.
The Legislative Analyst’s Office reported last week that January tax revenues indicate the state is already falling short of the governor’s admittedly optimistic budget forecast. Factoring in those numbers, Jason Sisney, budget director for Assembly Speaker Robert Rivas’ office, estimates that the combined tax collections across agencies will likely amount to about $6 billion less than Newsom’s estimate.
UC Davis Professor Aaron SmithThe CPI report accounts for a 26% annual growth rate in investments from the time Newsom took office in 2019 to 2022, primarily from the private sector. The state is also lined up to receive $41.9 billion over the next five years in federal spending from the Inflation Reduction Act and the Infrastructure Investment and Jobs Act. State investments, combined with private and federal dollars, amounted to about $39 billion in annual spending—filling just two-thirds of the actual need.
“That means help from the private sector,” said Newsom in a statement accompanying the report. “Investment in climate action is not just good for our communities, it’s good for business too.”
The administration hopes to catalyze private investment by matching funding and reducing regulatory barriers, such as streamlining project permits and accelerating interconnections for the electric grid.
“Mobilizing the private sector and leveraging federal dollars are critical to closing that gap,” said Bella Tonkonogy, who leads CPI's U.S.-based team. “Especially in light of budget constraints, California will need to strategically deploy public funds—state and federal—in ways that scale up private sector investment from its current levels.”
The Strategic Growth Council hosted a two-day conference last week to identify some of the opportunities ahead for private capital.
The report offers little detail for agriculture, but does indicate that the natural and working lands sector needs more than $10 billion in annual climate investments over the next 10 years, accounting for 17% of the overall share.
The new money would help to restore wetlands in the Sacramento-San Joaquin Delta, implement sustainable agricultural practices and support urban tree canopies, for example. Nearly $300 million more is needed each year to reduce methane emissions from livestock, waste and natural gas production.
The researchers considered alternative proteins as climate-friendly investments, noting that much of the venture funding from 2019 to 2021 came from large investments in plant-based foods. The sector matched—or even surpassed—transportation and energy for this type of funding. The following year energy investments nearly doubled those in agriculture and land use.
Alternative proteins was a segment that “completely let us down” in 2021, according to Walt Duflock, vice president of innovation at the Western Growers Association, who spoke at the annual conference for the California Association of Pest Control Advisers in October. He explained that foodtech startups like Beyond Meat and Impossible Foods gathered a large share of the market before “things fell off a cliff” and they began chasing a pile of money that is now half the size it was in 2021.
In a statement to Agri-Pulse, Duflock added that it would take $10 billion alone to retire all the diesel tractors and replace them with zero-emission models and called it “a trainwreck for growers and the grid.” Grants for reducing methane and sequestering carbon would push it “way past $10 billion probably for each” of the areas.
The report calls for more research into private investment in agriculture and other industries.
To decarbonize buildings, the state needs another $6.7 billion annually, even after venture capital investments increased eightfold from 2018 to 2022. ZEV trucks and buses will need more than $7 billion per year.
The energy sector is short $13.4 billion. About a third of that would address transmission bottlenecks and interconnection delays. Rooftop solar accounts for 20% of the energy need, which runs counter to decisions by the California Public Utilities Commission to cut net energy metering benefits for residential and on-farm projects.
CPI also factored investments by county. Climate financing spreads relatively evenly per capita across counties, which means the areas with the worst pollution, such as the San Joaquin Valley, are not receiving a higher rate of investments.
Kern County dominated Central Valley investments, averaging about $2 billion annually, while Yuba County has taken in just $31 million. Tulare County led per capita financing, spending more than $4,000 per resident on average.
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The report recommends the state develop a comprehensive roadmap for closing the investment gap in each sector, while removing barriers to investment and creating more incentives for the transition. It also calls for tracking the impacts that new policies have on climate finance and to pivot as needed.
The researchers urge the state government to maximize its relatively scarce dollars by prioritizing programs that catalyze investment from private and federal partners, with an emphasis on socioeconomic priorities. It could, for example, prioritize its spending on less commercially viable technologies or on transmission infrastructure.
From the perspective of agricultural economics, more opportunity lies in reducing emissions than sequestering carbon. Aaron Smith, a UC Davis professor in agricultural economics, explained to Agri-Pulse that incentive programs have been successful in reducing methane emissions at dairies and more could be done with reducing nitrogen oxide emissions from fertilizer. But he was skeptical of the science behind incentivizing cover crops or reduced tillage to store carbon in the soil.
Smith has examined the costs and benefits of dairy digesters for capturing and repurposing methane as fuel. He argued that crediting digesters in the Low Carbon Fuel Standard serves to offload the cost to consumers who fill up their tanks with gasoline or diesel. He preferred to see the state instead put public money into research and development for new technologies and to pair that with requirements, such as the industry-wide mandate envisioned as the regulatory backstop in Senate Bill 1383. That would put the burden on private investment for combating climate change.
But he recognized the delicate balancing act of policymaking. Imposing such costs on small dairy farmers would likely force them to downsize their herds, leading to more cows leaving California and creating more emissions in other states.
Jeana Cadby, Western Growers“You can't just come in with a [regulatory] stick because you'll just chase everyone out of the state,” he said. “So you might have to substitute some public funding to come up with a solution that's going to benefit the climate but also not be too costly.”
CDFA Secretary Karen Ross knows that adding up the total dollars needed for the energy transition can seem overwhelming.
“Everyone acknowledges these transitions come at cost,” she said in an interview with Agri-Pulse. “But they also can improve efficiencies, and most importantly they can be part of the solution.”
For farmers considering such investments, the choice is not a simple decision of good or bad, she explained. They have to consider the business case, such as the value of improving efficiencies or reducing input costs. Some are already adopting climate-smart practices in response to upstream consumer demand and find incentives through higher premiums or carbon credits, she added.
“I don't know that anybody in any position has the checkbook available to fund it all now,” she said. “But we've got 20 years to get there.”
Ross called incentive programs “absolutely critical” in facilitating that adoption. She estimated the administration has spent nearly $1 billion over the past decade on programs for climate-smart agriculture. It started with SWEEP—which helps farmers upgrade irrigation equipment—and now includes grants for healthy soils, alternative manure management practices, pollinator habitat, sustainable land conservation, food processing efficiency, phasing out open burning, and upgrading engines through FARMER grants. The fact that many of those programs are oversubscribed tells Ross that “farmers are very interested in this.”
With the report’s recommendations for removing regulatory barriers, Ross pointed out that Newsom has often shared frustration over the time it takes to complete infrastructure projects in California and has pushed for removing roadblocks without sacrificing environmental protections or public safety.
Ross acknowledged a need “to just be smarter about our regulations” to avoid conflicts or unnecessary slowdowns for projects and “make this system work faster and better for all stakeholders.”
Jeana Cadby, director of environment and climate at Western Growers, emphasized that grower buy-in is critical for adopting climate-smart practices. She told Agri-Pulse that farmers are acutely aware of climate change—not just with more extreme droughts and flooding, but with an unprecedented surge in insects and disease recently. While many are interested in climate grants and the industry has already invested heavily in sustainability initiatives, most farmers are racing to address the biggest issues at hand, whether it is food safety, pesticides or water issues, she explained.
“How do you navigate all of this to figure out what the priorities are?” she said. “What do you need to maybe move more staff to, or even figure out if you have the staff to address some of these things?”
Along with the high cost of transitioning to new practices, a lot of groundwork is needed to determine best practices for the many specialty crops grown in California.
“It's really nuanced, and it's not plug and play,” she said. “There's so much research that needs to be done to really make sure we can continue to produce fresh and affordable food for consumers.”
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