The California Cap-and-Invest program is the state’s market-based system for cutting greenhouse gas emissions from large polluters. Run by the California Air Resources Board (CARB), it sets a declining annual cap on total emissions from roughly 400 covered businesses, then issues tradable permits called allowances — each covering one metric ton of carbon dioxide equivalent — that companies must surrender to match what they emit. The program was known as Cap-and-Trade from its 2013 launch until September 2025, when Governor Gavin Newsom signed legislation renaming it and extending it through 2045.1ICAP. California Extends Cap-and-Trade to 2045, Renames Program Cap-and-Invest It covers about 80% of California’s emissions and is one of the largest carbon markets in the world.2C2ES. California Cap and Trade
How the Cap and Allowances Work
CARB sets a cap each year on total greenhouse gas emissions from covered sources and issues a matching number of allowances. One allowance equals one metric ton of CO2 equivalent. Covered entities must hand in enough allowances, plus a limited number of offset credits, to cover every ton they release.3ICAP. USA – California Cap-and-Invest Program The 2026 cap is 254 million metric tons.
Coverage kicks in at 25,000 metric tons of CO2 equivalent per year. The program directly regulates large point sources — power plants, refineries, cement plants, and other industrial facilities — and reaches transportation and building emissions upstream by requiring fuel suppliers to hold allowances for the emissions their products will produce when burned. Electricity imported into the state is covered at the point it enters the California grid.3ICAP. USA – California Cap-and-Invest Program
Allowances reach companies two ways. Some are sold at quarterly auctions. Others are given out free: industrial facilities receive free allocations based on production benchmarks and carbon-leakage risk, while electric and natural gas utilities receive free allowances that they must auction, returning the proceeds to ratepayers.4California Public Utilities Commission. Greenhouse Gas Cap-and-Trade Program The cap declines each year, tightening supply and raising the pressure to cut emissions.
Auctions and Price Controls
Auctions run quarterly and are held jointly with Québec. They use a single-round, sealed-bid, uniform-price format: every winning bidder pays the same settlement price regardless of what they bid.3ICAP. USA – California Cap-and-Invest Program
Three mechanisms keep prices inside a predictable range. A reserve price sets the floor; no allowance sells below it. In 2026 the floor is $27.94, and it rises each year by 5% plus inflation. If auction prices run high, CARB releases allowances from the Allowance Price Containment Reserve at two fixed tiers, priced in 2026 at $65.31 and $83.92.5California Air Resources Board. Cost Containment Information At the top sits a hard price ceiling, set at $102.52 in 2026, where CARB will sell an unlimited supply of allowances as a last resort.3ICAP. USA – California Cap-and-Invest Program
Companies can bank allowances for later use, subject to holding limits tied to the annual cap that prevent any one party from cornering the market. Borrowing against future-year allowances is not permitted.3ICAP. USA – California Cap-and-Invest Program
Recent auctions have cleared near the floor. The February 2026 auction settled at the $27.94 reserve price. The May 2026 auction sold all 49.6 million current-vintage allowances at $28.81, with future-vintage allowances at $28.76, generating roughly $770 million.6Environmental Defense Fund. California’s Latest Cap-and-Invest Auction Shows What’s at Stake That is more than $330 million below the May 2024 auction, which generated $1.1 billion when prices had peaked at $41.76 earlier that year.
Offsets
Covered entities can satisfy part of their obligation with credits from emission-reduction projects outside the capped sectors. CARB has approved six project types for compliance offsets: livestock methane management, destruction of ozone-depleting substances, mine methane capture, rice cultivation, U.S. forest projects, and urban forest projects.7California Air Resources Board. Compliance Offset Protocols
Under the 2025 reauthorization, offsets are capped at 6% of a company’s compliance obligation through 2045, and at least half must come from projects delivering direct environmental benefits inside California.1ICAP. California Extends Cap-and-Trade to 2045, Renames Program Cap-and-Invest Offsets now also count “under the cap,” meaning CARB retires one allowance from the following year’s budget for every offset credit used for compliance. CARB must update all offset protocols by January 1, 2029, and re-evaluate them every five years starting in 2034.8CATF. California Reauthorizes Cap-and-Invest Program
Where the Money Goes
Revenue from state-owned allowances sold at auction flows into the Greenhouse Gas Reduction Fund (GGRF). As of November 2024, total appropriations from the fund had reached $32.9 billion, with $12.8 billion in implemented spending. About 73% of those implemented funds have gone to projects benefiting disadvantaged and low-income communities.9California Air Resources Board. 2025 Annual Report on California Climate Investments
SB 840 set a tiered spending framework. The first tier covers baseline items including a manufacturing tax exemption and the Climate Bureau. The second tier dedicates $1 billion to high-speed rail and $1 billion to a discretionary set-aside. The third tier funds the major programs: $800 million for Affordable Housing and Sustainable Communities, $400 million for transit rail capital projects, $250 million for community air protection, $200 million for low-carbon transit operations, $200 million for wildfire and forest resilience, and $130 million for safe drinking water. If revenues come in short, third-tier allocations are reduced proportionally.10California Legislative Analyst’s Office. Cap-and-Invest Revenue Allocations
Households see the program on their utility bills. The California Public Utilities Commission oversees the California Climate Credit, which returns utility auction proceeds to customers. More than 11 million households receive the electric credit each year and more than 12 million receive the natural gas credit. Since 2014, more than $19.4 billion has been distributed to residential customers, small businesses, and industry.4California Public Utilities Commission. Greenhouse Gas Cap-and-Trade Program
The 2045 Extension and 2025 Changes
The program’s legal authority traces to the Global Warming Solutions Act of 2006 (AB 32), which required California to cut emissions to 1990 levels by 2020 and made CARB the lead agency.11California Air Resources Board. AB 32 Global Warming Solutions Act of 2006 SB 32 (2016) set a 2030 target of 40% below 1990 levels. AB 398 (2017) reauthorized the market through 2030 and added the hard price ceiling.
On September 19, 2025, Governor Newsom signed AB 1207 and SB 840, extending the program through December 31, 2045, and renaming it Cap-and-Invest. The bills cleared both chambers with supermajorities — 58 to 10 in the Assembly and 29 to 6 in the Senate.12EnviroVoters. AB 1207 Assembly Floor Vote
Several design changes came with the extension:
- CARB must set allowance budgets consistent with the 2030 target and the state’s 2045 goal of net-zero emissions.13California Legislative Analyst’s Office. Cap-and-Invest Program Extension
- Offset limits were set at 6% through 2045, and offsets now reduce the following year’s cap one-for-one.
- Revenue from allowance sales at the price ceiling flows into a new California Climate Mitigation Fund dedicated to household energy cost relief, instead of being used to purchase offsets.
- By January 1, 2031, CARB must shift free allowances currently going to natural gas utilities over to electric distribution utilities, reflecting the state’s electrification push.
- Industrial facilities keep 100% free allocation through 2030. After that, CARB can adjust allocations based on actual leakage risk rather than assuming the highest risk across the board.
The 2026 CARB Amendments
In late May 2026, CARB’s board voted 9 to 4 to adopt a broad set of amendments to the Cap-and-Invest regulation after hearings on May 28 and 29.14Argus Media. CARB Adopts Cap-and-Invest Changes The amendments take effect September 1, 2026. They remove 118 million allowances from future budgets, targeting roughly an 11% year-over-year reduction in the cap through the end of the 2020s and an average 7% annual decline from 2031 through 2045.15Morgan Lewis. California Amends Cap-and-Invest Program
The most debated piece was the Manufacturing Decarbonization Incentive, which CARB doubled from $2 billion to $4 billion. The fund helps energy-intensive industries — food processors, cement producers, refiners, and steelmakers — invest in facility upgrades, electrification, fuel switching, and carbon-reduction technologies.16CMTA. CARB Adopts Cap-and-Invest Amendments Allowances backing the fund will be tracked in a separate reserve account. Companies can apply starting September 2026, awards go out in 2027, and credits become eligible for compliance in 2028.17Local News Matters. California Cap-and-Invest Changes Hearing The Environmental Defense Fund warned the new allowances could flood the market and suppress prices, and climate policy researcher Danny Cullenward said half the fund was earmarked for the oil industry with “no significant guardrails.” The board’s resolution directs CARB staff to return with implementation details and public outreach before any allowances are issued, with an effectiveness review scheduled for July 2028.
The Linked Market With Québec
California and Québec formally linked their carbon markets on January 1, 2014, creating the largest carbon market in North America.18California Air Resources Board. Program Linkage Compliance instruments from either jurisdiction can be used in the other. The two run joint quarterly auctions through the Western Climate Initiative and share a tracking system called CITSS.19ICAP. Canada – Québec Cap-and-Trade System Ontario briefly joined in January 2018 but left six months later after its incoming provincial government revoked the regulation; CARB formally removed Ontario in December 2018.
In September 2024, California, Québec, and Washington announced an intent to link all three programs. By early 2026, Washington’s Department of Ecology had released draft linkage agreements and an environmental justice assessment, with public comment running from March through May 2026.20Washington Department of Ecology. Cap-and-Invest Program Linkage On the California side, the Governor still needs to issue positive findings under SB 1018 and CARB must complete a formal rulemaking.21California Air Resources Board. CARB Market Notice on Linkage If all three complete their steps on schedule, the three-way linked market could begin in 2027.
Where Emissions Stand
California’s total greenhouse gas emissions reached 360.4 million metric tons of CO2 equivalent in 2023, a 3% drop from 2022 and the lowest level in a state inventory that goes back to 2000.22California Air Resources Board. California Greenhouse Gas Emissions from 2000 to 2023 Emissions fell below the AB 32 target of 431 million metric tons in 2014 and have stayed below it every year since, meaning the 2020 goal was met six years early.
The SB 32 target for 2030 is tougher: 260 million metric tons, leaving roughly 100 million tons to cut over the remaining years. Between 2000 and 2023, carbon intensity — emissions per million dollars of economic output — fell 56.6% while gross state product grew 81.2%. Transportation remains the largest source at 37% of emissions, followed by industry at 19% and electricity generation at 16%.22California Air Resources Board. California Greenhouse Gas Emissions from 2000 to 2023