California Air Resources Board adopts regulatory updates to the Cap-and-Invest Program
On 29 May 2026, the California Air Resources Board (CARB) adopted regulatory updates to California's Cap-and-Invest Program. The updates set new allowance budgets through 2045, introduce a new industry incentive mechanism, and expand affordability measures for consumers.
These changes align the program with the direction from California’s September 2025 legislation. They bring the emissions cap in line with the state’s 2030 and 2045 climate targets and change how offset credits are treated under the program's cap. The updates also create a new Manufacturing Decarbonization Incentive and provide additional support for industry and citizens.
California's Cap-and-Invest Program is one of the world's largest and longest-running carbon markets. It covers more than 75% of the state's greenhouse gas (GHG) emissions and has been linked with Québec's Cap-and-Trade System since January 2014. Legislation signed in September 2025 extended the program through 2045 and renamed it "Cap-and-Invest". It also directed CARB to align the program's cap trajectory with California's statutory targets to reduce greenhouse gas emissions to 40% below 1990 levels by 2030 and net zero emissions by 2045.
Tighter cap through 2030 and a new post-2030 trajectory
The updates remove approximately 118 million allowances from annual budgets between 2027 and 2030. CARB attributed this reduction to the 2022 GHG Inventory update, which indicated that allowance budgets set in the 2016 rulemaking had been too high. As a result, the cap is set to decline by 11% per year for the remainder of this decade. During 2031 to 2045, the updates establish a new cap trajectory averaging a 7% annual decline.
The updates also place offset credits under the cap: when a covered entity uses offset credits for compliance, CARB will retire an equivalent number of allowances from the following year's budget, ensuring total emissions remain within the capped volume.
A new industry incentive with guardrails
The rulemaking also creates the Manufacturing Decarbonization Incentive (MDI), a new pool of approximately 118 million allowances held in a dedicated reserve account and separate from the cap budgets. CARB will make these allowances available to industrial facilities that invest in on-site emissions reduction projects.
CARB designed the mechanism to minimize the risk of carbon leakage and to help backfill reductions in federal decarbonization funding. The MDI drew criticism from environmental groups, academic experts, and state lawmakers, who raised concerns that it could undermine the cap's environmental integrity and reduce revenues for the Greenhouse Gas Reduction Fund (GGRF).
In response, CARB board members agreed to institute a set of guardrails. These guardrails require CARB's Executive Officer to evaluate the MDI and report to the board before any MDI allowances are issued and CARB must hold at least one public workshop before awarding any MDI allowances.
Additionally, CARB must report annually on MDI allowances issued. By July 2028, CARB must evaluate the mechanism and propose amendments to ensure that facilities failing to achieve promised emissions reductions return their MDI allocations to the state.
Affordability measures expanded
The updates dedicate 80% of allowances to directly benefit Californians, providing an estimated USD 10 billion for electricity bill credits and maintaining approximately USD 8 billion for the GGRF.
They also provide an estimated USD 800 million in additional near-term compliance support for industry through 2030, delivered through upward adjustments to cap adjustment factors in the formula used to calculate free allowance allocation to industry. CARB expects this to reduce cost pass-through to consumers.
What is next?
The updates are set to take effect on 1 September 2026. CARB plans to hold a workshop in summer 2026 on updating compliance offset protocols, as required under state legislation.
California and Québec have been exploring the possibility of extending the existing link between their markets to include Washington. With the regulatory updates now adopted in California, attention has now turned to the ongoing regulatory update processes in Québec and Washington State.
