In September 2025, California extended and amended authority for its statewide greenhouse gas (GHG) “cap and trade” program through 2045 – and rebranded it as “cap and invest.” The California Air Resources Board (ARB) has administered this program since 2012, as part of broader GHG reduction provisions created by 2006’s Assembly Bill (AB) 32. AB 32 initially committed the state to reduce total GHG emissions back to 1990 levels by 2020 (achieved in 2018); ARB’s latest GHG reduction scoping plan (issued in 2022), seeks to reduce statewide emissions to 85% below 1990 levels by 2045, achieving carbon neutrality. Subsequent legislation extended implementing authority for cap-and-trade and other related programs available to the California Air Resources Board (ARB) and other agencies through 2030. (I wrote about that extension (AB 398) HERE ). The newest legislation (AB 2017 and Senate Bill (SB) 840) continues the state’s GHG reduction efforts by making further changes to ARB’s cap and trade authority. The rest of this note summarizes these changes.
How is cap and trade structured presently?
California principally seeks to reduce GHG emission through regulations targeted at specific categories of stationary sources of GHG emissions, and on motor vehicles and their fuels. ARB administers many of those traditional regulations, with the rest overseen by other state agencies within their respective areas of authority (such as Integrated Waste Management Board controls on solid waste facilities). The cap and trade program was designed to secure the additional reductions beyond those from traditional regulations, necessary to reach the state’s emission reduction goals. After revisions to implement the 2017 extension legislation, the existing cap and trade program is authorized through 2030 and includes the following features:
- Applicability: operators of facilities in specific high-emission sectors (including cement plants, petroleum refineries and self-generation facilities), with facility-wide emissions more than 25,000 tons of CO2 equivalent (TCO2e) per year from combustion and process emissions; first deliverers of electricity; suppliers of natural gas, fuels and CO2; and voluntary opt-in entities. (in 2025, 145 specific facilities and 61 electricity and natural gas distribution entities).
- allocation of direct GHG emission allowances (each allowance for 1 metric ton of CO2-equivalent) (direct allocations; 136.5 million in 2025, with electric distribution utilities 53% of total, natural gas suppliers approximately 24%, and industrial facilities approximately 23%)
- auction of additional emission allowances (in cooperation with Quebec’s program), over 200 million per year at quarterly auctions
- regulated entities can create or acquire offsets, from within the regulated community or from outsiders that meet ARB’s conditions to opt-in (no more than 4% of total through 2025, then 6% through 2030; at least half from projects in California)
- detailed rules are used to assign emissions to sectors and individual entities. Most allowances (including those to electric utilities) are initially free, although more have become subject to competitive auctions over time.
What Changes are Being Adopted Along With the Program Extension?
New AB 1207 extends the cap and trade program for another 15 years, through 2045. It also rebrands the program from “cap and trade” to “cap and invest.” Operational changes include the following:
- By 2030, allocations of free allowances will transition from natural gas utilities to electric utilities (which supports broader state policies supporting greater electrification of energy markets); electric utilities are to pass financial benefits through to customers
- ARB is to distribute industrial sector allowances in a manner that minimizes emissions leakage risk
- Adds “nature-based climate solutions” as an additional category of projects eligible for funding support from money raised by auctioning allowances
In addition, SB 840 removes a 2030 sunset on the state-sponsored Independent Emissions Market Advisory Committee to report annually to the Legislature on the economic impacts and benefits of the greenhouse gas emissions targets, so these reports will continue for the duration of AB 32 efforts.
What happens now?
The latest amendments make relatively minor changes to the state’s GHG allowance market program, and ensures that it will continue for will continue for the next twenty years. California continues to coordinate its efforts with Quebec, and to seek coordination with other US states and Canadian provinces. These efforts contrast sharply with the federal government’s withdrawal of support for activities designed to understand and/or mitigate climate change.
Self-Assessment Checklist
Is my organization subject to California’s cap and trade/invest program?
Did it sell or purchase allowances?
Is it preparing to sell or purchase allowances in future auctions?
Is my organization outside California, but in a sector subject to California’s program?
Has it considered effects on its market and competitors?
Is my organization considering investing in projects that might qualify to sell offsets to entities in California or other jurisdictions?
Where Can I Go For More Information?
About the Author
Jon Elliott is President of Touchstone Environmental and has been a major contributor to STP’s product range for over 30 years.
Mr. Elliott has a diverse educational background. In addition to his Juris Doctor (University of California, Boalt Hall School of Law, 1981), he holds a Master of Public Policy (Goldman School of Public Policy [GSPP], UC Berkeley, 1980), and a Bachelor of Science in Mechanical Engineering (Princeton University, 1977).
Mr. Elliott is active in professional and community organizations. In addition, he is a past chairman of the Board of Directors of the GSPP Alumni Association, and past member of the Executive Committee of the State Bar of California's Environmental Law Section (including past chair of its Legislative Committee).
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