California extends cap-and-trade to 2045, renames program “Cap-and-Invest”
On 19 September 2025, California Governor Gavin Newsom signed AB 1207 and SB 840 into law, extending the state’s cap-and-trade program until 1 January 2046 and renaming it “Cap-and-Invest.” The legislation also includes mandates for California Air Resources Board (CARB) to consider adjustments to the price ceiling, revise offset provisions, and provide periodic reports to the Legislature, and establishes a revised framework for spending auction revenues under the Greenhouse Gas Reduction Fund (GGRF).
Specific amendments introduced by the two bills are as follows.
AB 1207: Reauthorization and core design changes
AB 1207 extends California’s market-based compliance mechanism to 2045 and rebrands it as “Cap-and-Invest.” It directs CARB to align covered‑sector emissions with statutory targets: 40% below 1990 levels by 2030 and net zero GHG emissions by 2045. CARB must report to the Legislature by 31 December 2025 on progress toward statutory targets and assessment of emissions leakage, including potential measures such as a border carbon adjustment.
The bill changes offset limits from the current 4% of compliance obligations (2021-2025) to 6% from 2026 through 2045, with no more than half from projects outside California. However, under the new rules, offset credits used for compliance require retirement of an equivalent number of allowances from the following year's allowance budget, effectively placing offsets "under the cap."
AB 1207 also provides direction for price containment, directing CARB to consider adjustments to the price ceiling to protect consumers while staying on track for the targets. Proceeds from sales at the price ceiling are deposited into the newly created California Climate Mitigation Fund for direct household energy cost relief.
The legislation builds on existing affordability measures, including the California Climate Credit administered by the California Public Utilities Commission, which provides on-bill credits to utility customers from auction proceeds. AB 1207 specifically requires credits to be applied during high-bill months to maximize customer electric bill affordability.
SB 840: GGRF spending framework and oversight
SB 840 establishes how regular quarterly auction proceeds are allocated through the Greenhouse Gas Reduction Fund under a new spending framework. It replaces prior continuous appropriations starting in fiscal year 2026-27. Spending is directed across categories such as clean transportation, housing and community investments (including the Affordable Housing and Sustainable Communities program, AHSC), clean air and water, wildfire prevention and resilience, agriculture, clean energy, and climate‑focused innovation.
The bill also directs a reevaluation of compliance offsets. CARB must study offset usage and compliance offset protocols and report back to the Legislature in 2026, including recommendations on definitions (for example, “direct environmental benefits in the state”) and options to expand in‑state project supply. CARB must also update all offset protocols by 1 January 2029 to reflect best‑available science, drawing on other markets, Paris Agreement Crediting Mechanism, academia and industry to prioritize quality. From 1 January 2034, protocols face five‑year reviews and updates as needed.
Outlook for California’s Cap-and-Invest Program
CARB will resume rulemaking to implement the legislative direction, including aligning the cap trajectory with the 2030 and 2045 targets, updating offset treatment under the cap, and reviewing price containment design.
With authority now extended to 2045, Cap-and-Invest has a clear statutory pathway: a declining cap, regular auctions, and ongoing oversight through defined reporting and studies. This provides a robust and stable regulatory basis for compliance planning and signals program continuity for advancing linkage negotiations with Washington State.
