OPIS Insights

California’s carbon market has entered a new phase of both stability and transformation. The passage of AB 1207 and SB 840 in 2025 extended the state’s greenhouse gas program through 2045 and rebranded it as Cap and Invest, marking the most significant structural reform since the program’s inception.

At the recent OPIS webinar, California Cap and Invest at a Crossroads: What the 2045 Extension Means for Markets, panelists examined how the legislative extension, ongoing rulemaking, and potential regional linkage are reshaping expectations for compliance entities and traders across the Western Climate Initiative.

Legislative Certainty Brings Market Stability

Panelists agreed that the 2045 extension was the single most important policy development for California’s carbon market, providing a long-term horizon that had been missing for years. The extension reaffirmed the program’s durability, giving traders, regulators, and recipients of Greenhouse Gas Reduction Fund proceeds a stable policy foundation through mid-century.

Despite anticipation of sweeping reform, the most notable outcome was continuity. Core design elements including allowance banking, allocation systems, and offset provisions remain intact. That stability helped restore confidence after months of legislative uncertainty, with California Carbon Allowance prices climbing from the high twenties to above thirty-two dollars per metric ton following the bills’
passage.

Affordability and equity were also defining themes of the legislation. Lawmakers chose to retain the Cap and Trade framework, including offsets and cost containment reserves, to keep emissions reduction pathways achievable without burdening consumers or industries.

Offsets Stay in Play with New Guardrails

From an offset perspective, the extension preserved key flexibility for compliance entities while adding new integrity measures. The six percent offset usage limit was extended through 2045, providing long-term continuity for offset markets. However, offsets will now be fully brought under the cap, meaning one allowance must be retired for every offset used for compliance.

This change ensures that offset use does not increase total emissions allowed under the program, aligning California more closely with Washington’s Cap and Invest Program and tightening overall supply. Under SB 840, CARB must update all offset protocols by 2029 and review them every five years thereafter, marking the first comprehensive update since 2015.

Rulemaking Ahead: Adjusting the Cap and Allocations

The upcoming 2026 rulemaking will be pivotal. CARB confirmed it will remove roughly 118 million allowances between 2027 and 2030 to align the cap with updated emissions data. Budgets will then decline gradually through 2045 to remain consistent with the state’s carbon neutrality trajectory.

The rulemaking will also address industrial allocation reform, exploring two approaches: one that scales allocations proportionally to the new budgets and another that retains existing levels to protect trade-exposed sectors. CARB is also developing a Manufacturing Decarbonization Incentive, which would direct some industrial allowances to fund facility-level projects such as electrification, renewable heat, and low-carbon fuel switching.

Panelists noted that CARB’s leadership emphasized affordability, equity, and predictability as the guiding principles for these reforms. The agency confirmed that price floors, ceilings, and reserve tiers will remain unchanged, and that the rulemaking will focus on modernization by aligning program design with updated inventories, renewable integration, and refinery operations. The process is expected to conclude by April 2026, with new provisions taking effect for vintage 2027.

Utility Allocations and Climate Credit Expansion

A major affordability measure included in AB 1207 will transfer allowance value from natural gas suppliers to electric utilities by 2031. This transition will expand the California Climate Credit, which returns allowance revenue directly to ratepayers on their utility bills. The move aligns with California’s broader equity goals by ensuring consumers, rather than suppliers, benefit directly from the program’s value.

Linkage on the Horizon

Looking beyond state borders, Washington has signaled strong interest in linking its Cap and Invest Program with California and Quebec, potentially by 2027. Before linkage can occur, each jurisdiction must complete its rulemaking and demonstrate equivalency under California Government Code Section 12894.5, which requires CARB to confirm that partner programs are equally stringent and enforceable.

If alignment proceeds as planned, linkage would create an integrated West Coast carbon market, enhancing liquidity and lowering compliance costs. Analysts have already observed the market beginning to price in this potential convergence.

Federal Pressure and Market Response

Federal oversight remains a variable to watch. The April executive order on Protecting American Energy from State Overreach and an unreleased Pam Bondi report have raised concerns about possible federal challenges to state climate authority. Although no action has been taken, the uncertainty briefly cooled trading activity earlier this year. Market participants expect these concerns to subside absent tangible federal intervention.

Market Fundamentals: Banking on Supply Cuts

California’s allowance bank continues to expand, with analysts estimating more than 500 million allowances in circulation by the end of 2025. Planned supply reductions of around 265 million allowances between 2027 and 2030 could mark the first meaningful drawdown in the program’s history.

In contrast, Washington’s allowance bank remains relatively small, estimated between 10 million and 15 million allowances, which could lead to price convergence if linkage occurs. Analysts expect Washington prices to gradually move toward California’s levels due to the larger liquidity and compliance flexibility of the CCA market.

Looking to 2045: Defining Success

As California sets its long-term course through 2045, experts agreed that success should be measured by the program’s endurance, credibility, and equity. A durable Cap and Invest Program must continue reducing emissions, maintaining affordability, and supporting industries and communities through the clean energy transition.

“If California is still cutting emissions, keeping costs stable, and maintaining a functioning market by 2045, that is success,” one panelist said. Others noted that competitiveness and equity must remain at the center of California’s climate design as carbon prices rise over time.