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USA - California Cap-and-Trade Program
General Information
The California Cap-and-Invest Program began operation in 2012 with the opening of its tracking system for allocation, auction distribution, and trading of compliance instruments. Compliance obligations started in January 2013. The program was extended through 2045 and renamed Cap-and-Invest by legislation adopted in 2025. The program puts a carbon price on ~76% of the state’s GHG emissions.
The program covers fuel combustion emissions in the mining, power, buildings, transport, industrial, agriculture, and forestry sectors, as well as industrial process emissions of about 400 covered facilities. Fuel use in buildings, transportation, and in agricultural, forestry, and fishing operations is covered upstream at the fuel supplier. Covered entities must surrender allowances for all their covered emissions. Allowances are distributed via a combination of auction, free allocation, and free allocation with consignment. The proceeds from auctioning are reinvested in projects that reduce emissions, strengthening the economy, public health, and the environment, especially in disadvantaged communities.
The California Cap-and-Invest Program is implemented under the authority of the California Air Resources Board (CARB). California has been part of the Western Climate Initiative (WCI) since 2007 and formally linked its program with Québec’s in January 2014.
In September 2025, California adopted Assembly Bill 1207 (AB 1207) and Senate Bill 840 (SB 840), which extended the Cap-and-Invest Program (formerly Cap-and-Trade) through 2045 and made technical changes to the Program.
AB 1207 directs CARB to ensure that program-wide aggregate emissions from covered sources decline, at a minimum, in line with the state’s 2030 and 2045 climate targets, maintain robust price-containment mechanisms, set offset usage limits for 2031 to 2045, and remove allowances from future budgets equal to offsets used for compliance, while considering cost-effectiveness and affordability, minimizing leakage risks, and avoiding disproportionate impacts on low-income communities. SB 840 complements these changes by requiring CARB to conduct an evaluation of the Compliance Offsets Program by the end of 2026 and to update all existing compliance offset protocols to reflect the best available science by January 1, 2029.
By 2034 and every five years thereafter, SB 840 further requires CARB to evaluate all compliance offset protocols and consider whether updates are necessary to reflect the best available science. SB 840 also sets future appropriation rules for Greenhouse Gas Reduction Fund programs, including affordable housing, sustainable communities, community air monitoring, and high-speed rail.
In January 2026, CARB proposed changes to the Cap-and-Invest Regulation to implement the requirements of AB 1207. The formal rulemaking process is underway with regulatory amendments expected to be adopted and reflected in allowance budgets from 2027 onwards.
California and Québec continue to operate a joint carbon market, while California, Québec, and Washington continue discussions about potential future linkage of Washington’s program to the joint market.
Emissions & Targets
360.4 MtCO2e (2023)
By 2030: 40% reduction from 1990 GHG levels (“SB 32”)
By 2045: Carbon neutrality and 85% reduction from 1990 anthropogenic GHG levels (“AB 1279”)
Updated prices available here
- Average Current Auction price: USD 28.14* (2025)
- Average secondary market price: USD 29.10 (2025)
* “Current auction settlement price“ in USD, weighted by the total number of government-owned and consignment current vintage allowances sold in the year for both California and Québec.
Size & Phases
FIRST COMPLIANCE PERIOD: Two years (2013 to 2014)
SECOND COMPLIANCE PERIOD: Three years (2015 to 2017)
THIRD COMPLIANCE PERIOD: Three years (2018 to 2020)
FOURTH COMPLIANCE PERIOD: Three years (2021 to 2023)
FIFTH COMPLIANCE PERIOD: Three years (2024 to 2026)
SIXTH COMPLIANCE PERIOD: Three years (2027 to 2029)
An absolute cap limits the total emissions allowed in the system and is fixed ex-ante.
FIRST COMPLIANCE PERIOD: The system started in 2013 with a cap of 162.8 MtCO2e, declining to 159.7 MtCO2e in 2014, at a rate of ~2% annually.
SECOND COMPLIANCE PERIOD: With the program expanding to include fuel distribution, the cap rose to 394.5 MtCO2e in 2015. The cap decline factor averaged 3.1% per year in the second compliance period, reaching 370.4 MtCO2e.
THIRD COMPLIANCE PERIOD: The cap in the third compliance period started at 358.3 MtCO2e and declined at an average annual rate of 3.3% to 334.2 MtCO2e in 2020.
FOURTH COMPLIANCE PERIOD AND BEYOND: During the 2021 to 2030 period, the cap declines by about 13.4 MtCO2e each year, averaging ~4%, to reach 200.5 MtCO2e in 2030. The “Cap-and-Invest Regulation” (the Regulation) sets a formula for declining caps after 2030 through 2050.
Rulemaking is underway to implement recent legislative requirements and to align allowance budgets with California’s 2030 and 2045 targets.
FIRST COMPLIANCE PERIOD: Covered sectors included those that have one or more of the following processes or operations: large industrial facilities (including cement, glass, hydrogen, iron and steel, lead, lime manufacturing, nitric acid, petroleum and natural gas systems, petroleum refining, and pulp and paper manufacturing, including cogeneration facilities co-owned/operated at any of these facilities); electricity generation; electricity imports; other stationary combustion; and CO2 suppliers.
SECOND COMPLIANCE PERIOD AND BEYOND: In addition to the sectors listed above, suppliers of natural gas, suppliers of reformulatedblendstock for oxygenateblending (i.e., gasoline blendstock) and distillate fuel oil (i.e., diesel fuel), suppliers of liquefied petroleum gas in California, and suppliers of liquefied natural gas are covered by the program.
INCLUSION THRESHOLDS: Facilities emitting greater than or equal to 25,000 tCO2e per year. All electricity imported from specified sources connected to a specific generator with emissions greater than or equal to 25,000 tCO2e per year is covered. Emissions associated with imported electricity from unspecified sources have a zero threshold, and all imported electricity emissions are covered using a default emissions factor.
OPT-IN COVERED ENTITIES: A facility in one of the covered sectors that emits less than 25,000 tCO2e annually can voluntarily participate in the Program. Opt-in entities are subject to all registration, reporting, verification, compliance obligations, and enforcement applicable to covered entities.
Upstream (buildings, transport, agriculture, and forestry fuel use); point source (mining and extractives, industry, in-state power generation); imported electricity at the point of first delivery onto California’s electricity grid
~400 facilities (2025)
Allowance Allocation & Revenue
Proportion of 2025 cap auctioned as 2025 vintage units: 42.8%*
Allowances are distributed via free allocation, free allocation with consignment, and auction.
FREE ALLOCATION: Industrial facilities receive free allowances to minimize carbon leakage. For nearly all industrial facilities, the amount is determined by product-specific benchmarks, recent production volumes, a cap adjustment factor, and an assistance factor based on assessment of leakage risk. **
Leakage risk is divided into “low”, “medium”, and “high” risk tiers based on levels of emissions intensity and trade exposure for each specific industrial sector.
FIRST COMPLIANCE PERIOD: The Regulation as adopted in 2011 set assistance factors of 100% for the first compliance period, regardless of leakage risk.
SECOND COMPLIANCE PERIOD AND BEYOND: For facilities with medium leakage risk, the original regulation included an assistance factor decline to 75% for the second compliance period and to 50% for the third. For facilities with low leakage risk, it included an assistance factor decline to 50% for the second compliance period and to 30% for the third. However, amendments to the Regulation in 2013 delayed these assistance factor declines by one compliance period. Pursuant to “AB 398” adopted in 2017, all assistance factors were changed to 100% through 2030, citing continued vulnerability to carbon leakage. There is no cap on the total amount of industrial allocation, but the formula for allocation includes a declining cap adjustment factor to gradually reduce allocation in line with the overall cap trajectory.
Free allocation is also provided for transition assistance to public wholesale water entities, legacy contract generators, universities, public service facilities, and, during the period from 2018 to 2024, waste-to-energy facilities.
FREE ALLOCATION WITH CONSIGNMENT: Electrical distribution utilities and natural gas suppliers receive free allocation on behalf of their ratepayers.*** These utilities must use the allowance value for ratepayer benefit and for GHG emissions reductions. All allowances allocated to investor-owned electric utilities and an annually increasing percentage of the allocation to natural gas suppliers must be consigned for sale at the state’s regular quarterly auctions. Publicly owned electric utilities can choose to consign freely allocated allowances to auction or use them for their own compliance needs.
AUCTIONING:
- Auction share: ~67% of total California-issued vintage 2025 allowances made available through auction in 2025, which included allowances owned by CARB (~35%) and allowances consigned to auction by utilities (~32%).
- Auction volume: 174,505,948 (2025 vintage); 22,730,000 (2028 vintage).
- Share of the 2025 cap auctioned as vintage 2025 CARB-owned allowances so far: 42.8%.
Unsold allowances in past auctions are gradually released for sale at auction after two consecutive auctions are held in which the clearing price is higher than the minimum price. However, if any of these allowances remain unsold after 24 months, they will be placed into CARB’s price ceiling reserve or into the two lower reserve tiers (see ‘Market Stability Provisions’ section). To date, 37 million allowances originally designated for auction have been placed in reserves through these provisions.
* Excluding consigned allowances.
** See Section 95891(c) of the Regulation for a minor exception.
*** See Section 95892 and Section 95893 of the Regulation for further details on the approach to free allocations for electrical distribution utilities and natural gas suppliers, respectively.
USD 34.5 billion since beginning of program
USD 3.13 billion* in 2025
* Does not include revenues from the auction of consigned allowances.
Revenue from auction of California-owned allowances: Most of California’s auction revenue goes to the Greenhouse Gas Reduction Fund, of which at least 35% must benefit disadvantaged and low-income communities. The funds are then distributed as California Climate Investments, which support projects that deliver significant environmental, economic, and public health benefits across the state. As of November 2024, USD 12.8 billion had been invested in 590,703 projects, with expected GHG reductions of 116.1 MtCO2e.
Over USD 9.2 billion has reached disadvantaged and low-income communities.
Revenue from auction of utility-owned allowances: Investor-owned electric utilities and natural gas suppliers are allocated allowances, a portion of which must be consigned to auction. Auction proceeds must be used for ratepayer benefit and for GHG emissions reductions. Since the Program’s inception, approximately USD 26.5 billion in allowance value has been provided to ratepayers. Investor-owned electric utilities and natural gas suppliers have provided USD 13.5 billion directly to residential ratepayers through 2024 via the California Climate Credit.
Flexibility & Linking
Banking is allowed but is subject to a holding limit on allowances to which all entities in the system are held. The holding limit is based on the year’s cap and decreases annually. Entities may also be eligible for a limited exemption from the holding limit based on their emissions levels to support meeting annual compliance obligations or obligations at the end of a three-year compliance period.
Borrowing is not allowed.
The use of compliance offset credits is allowed. Such credits, issued by CARB or by the authority of a linked system, are compliance instruments under the California Cap-and-Invest Program.
QUALITATIVE LIMIT: Currently, offset credits originating from projects carried out according to one of the following six compliance offset protocols are accepted as compliance instruments:
- US forest projects;
- urban forest projects;
- livestock projects (methane management);
- ozone-depleting substances projects;
- mine methane capture projects; and
- rice cultivation projects.
Compliance offset credits issued by jurisdictions linked with California (i.e., Québec) are eligible, subject to the quantitative limits described below.
To ensure environmental integrity, California’s compliance offset program has incorporated the principle of buyer liability. The state may invalidate an offset credit that is later determined not to have met the requirements of its compliance offset protocol due to double counting, over-issuance, or regulatory non-conformance. The entity that surrendered the offset credit for compliance must then substitute a valid compliance instrument for the invalidated offset credit.
QUANTITATIVE LIMIT: The share of offsets that can be used by an entity to fulfill its compliance obligation is 4% per year for 2021 to 2025 emissions, and 6% for 2026 to 2045 emissions.
In addition to setting new quantitative limits on the use of offset credits, AB 398 set new limits on the types of offset credits that can be used to fulfill compliance obligations. Starting with compliance obligations for 2021 emissions, no more than 50% of any entity’s offset usage limit can come from offset projects that do not provide direct environmental benefits to the state (DEBS).
Projects located within California are automatically considered to provide DEBS. Offset projects implemented outside of California may still result in DEBS, based on scientific evidence and project data provided. For example, a forest project outside California has been determined to provide benefits within California by improving the quality of water flowing through the state. Recent regulatory amendments specify the criteria used to determine DEBS.
In November 2022, California entities surrendered ~2.2 million offset credits for a portion of 2021 emissions. In November 2023, California entities surrendered ~2 million offset credits for a portion of 2022 emissions.
In November 2024, California entities surrendered an additional 22 million credits for the remainder of their emissions during the fourth compliance period, while Québec entities surrendered 13.3 million California-issued offset credits. Of the 35.2 million credits surrendered, 26.5 million were from US forest offset projects and 5.3 million from mine methane capture projects.
In November 2025, California entities surrendered ~2.2 million offset credits at the annual compliance event for the first year of the fifth compliance period (2024), when compliance for 30% of the 2024 annual emissions was required.
California’s program linked with Québec’s in January 2014. The two expanded their joint market by linking with Ontario in January 2018 until the termination of Ontario’s system in mid-2018. In March and September 2024, joint statements from the governments of Québec, California, and Washington affirmed their commitment to explore potential linkage.
Compliance
Except for the year following the last year of a compliance period, compliance instruments equal to 30% of the previous year’s verified emissions must be surrendered annually, by the start of November. Compliance instruments equal to all remaining emissions must be surrendered by the start of November of the year following the last year of a compliance period.
FRAMEWORK: California’s MRV framework is set by the “Regulation for the Mandatory Reporting of Greenhouse Gas Emissions (MRR), title 17 California Code of Regulations (CCR) §§ 95100-95163”. The “Cap‑and‑Invest Regulation, title 17 CCR §§ 95801-96022” relies on MRR data.
MONITORING: Reporters must use calculation, monitoring, QA/QC, missing data, recordkeeping, and reporting methods specified in MRR.
MRR requires that reporters subject to the regulation maintain a GHG Monitoring Plan for facilities and suppliers that includes detailed, source‑specific monitoring and QA/QC obligations and record retention for all data used to calculate emissions, specified in MRR § 95105(c). Similarly, electric power entities that import or export electricity must maintain a GHG inventory program, as specified in MRR § 95105(d).
REPORTING: Annual reporting for the following entities based on emissions thresholds listed, using the standardized methods and formats specified in MRR:
- Facilities in specified categories (e.g., large power plants under 40 CFR Part 75, cement, lime, nitric acid, refineries, CO₂ sequestration/injection) report regardless of emissions level.
- Other facilities (e.g., stationary combustion, glass, hydrogen, iron and steel, pulp and paper, petroleum and natural gas systems, geothermal, lead) report at ≥10,000 tCO₂e/year of stationary and process emissions; petroleum and natural gas systems also apply a 25,000 tCO₂e threshold when including vented and fugitive emissions.
- Fuel and CO₂ suppliers report at ≥10,000 tCO₂e/year, calculated as volume of CO2 supplied, or based on emissions that would result from combustion of the fuels supplied
- Importers or exporters of electricity as defined in § 95102(a) with any volume of imported or exported electricity, retail providers as defined in § 95102(a), along with certain public agencies specified in § 95101(d)
VERIFICATION: Third‑party verification is required under MRR for emissions data reports of entities with a compliance obligation under the Cap‑and‑Invest Regulation and for other reporters above specified thresholds or categories, as specified in § 95103(f).
Verification requirements, including requirements for the accreditation of verification bodies and individual verifiers are specified in §§ 95130-95133. Similar accreditation and conflict‑of‑interest provisions apply to offset verifiers and verification bodies under Cap‑and‑Invest Regulation §§ 95977–95978.
Entities remain subject to annual reporting (and, where applicable, verification) under MRR until they meet the cessation conditions in § 95101(h)-(i).
A covered entity that fails to surrender sufficient compliance instruments to cover its verified GHG emissions at a relevant compliance deadline is automatically assessed an untimely surrender obligation. It is required to surrender the missing compliance instruments as well as three additional ones for each it failed to surrender.
Failure to meet this untimely surrender obligation would subject the entity to substantial financial penalties for its noncompliance, pursuant to “California Health and Safety Code Section 38580”.
Separate and substantial penalties apply to mis-reporting or non-reporting under the MRR.
Market Regulation
MARKET PARTICIPATION: Covered entities, opt-in covered entities, and voluntarily associated entities can participate in the program. Voluntarily associated entities are approved individuals or entities that intend to:
- purchase, hold, sell, or retire compliance instruments but are not covered under the program;
- operate a compliance offset project registered with CARB; or
- provide clearing services and derivative clearing services as qualified entities.
Voluntarily associated entities must be in the United States and have an approved account in the system registry, the Compliance Instrument Tracking System Service (CITSS). Additional eligibility criteria apply, including for individual market participants.
MARKET TYPES:
Primary: Allowances are made available through sealed-bid auctions. State-owned and consigned allowances are offered through quarterly allowance auctions organized jointly with Québec. Auctions are administered by WCI, Inc.
Secondary: Allowances, offset credits, and financial derivatives are traded in the secondary market on the Intercontinental Exchange (ICE), CME Group, and Nodal Exchange platforms. Any company qualified to access these platforms can trade directly or through a future commission merchant. Companies can also trade directly over the counter but must have a CITSS account to take delivery of compliance instruments.
LEGAL STATUS OF ALLOWANCES: Allowances are defined as limited tradable authorizations to emit up to one tCO2e. According to the “California Code of Regulations”, an allowance does not constitute property or bestow property rights and cannot limit the authority of the regulator to terminate or limit such authorization to emit.
AUCTION RESERVE PRICE
Instrument type: Price-based instrument
Functioning: The auction reserve price is set at USD 27.94 and CAD 26.47 per allowance in 2026.
It was initially established at USD 10.00 for the auction in 2012, and it increases annually by 5% plus inflation, as measured by the Consumer Price Index. The auction reserve price for each joint auction with Québec is determined using the minimum prices set annually by California in USD in accordance with Section 95911 of the Regulation and by Québec in CAD in accordance with Article 49 of the “Regulation respecting a cap-and-trade system for greenhouse gas emission allowances” (Québec Regulation). To manage multiple currencies, an Auction Exchange Rate is determined prior to each joint auction. The Auction Reserve Price for a joint auction is then determined as the higher of the Annual Auction Reserve Prices established in USD and CAD after applying the established Auction Exchange Rate (USD to CAD FX Rate).
ALLOWANCE PRICE CONTAINMENT RESERVE (APCR)
Instrument type: Price-based instrument
Functioning: In 2026, the two APCR tiers are set at USD 65.31 and USD 83.92 per allowance. Tier prices increase each year by 5% plus inflation, as measured by the Consumer Price Index.
At the start of the program, about 4.9% of allowances from the 2013 to 2020 budgets were placed in an APCR. Prior to amendments mandated by AB 398 in 2017, these allowances were spread across three tiers. Pursuant to AB 398, from 2021 onward, these allowances have been moved into two price tiers and a price ceiling. Currently, there are approximately 66.8 million and 89.5 million allowances in the Tier 1 and 2 reserves, respectively.
Although no APCR sale has been held so far, CARB will offer one if auction settlement prices from the preceding quarter are greater than or equal to 60% of the lowest APCR price tier. CARB also always offers the third quarter APCR sale before the November compliance obligation deadline.
ALLOWANCE PRICE CEILING
Instrument type: Price-based instrument
Functioning: In 2026, the price ceiling is set at USD 102.52. The price ceiling increases each year by 5% plus inflation, as measured by the Consumer Price Index.
At the price ceiling, a covered entity can purchase allowances (or, if no allowances remain, “price ceiling units”) up to the amount of its current unfulfilled emissions obligation. The revenues from the sale of price ceiling units will be used to purchase real, permanent, quantifiable, verifiable, enforceable, and additional emissions reductions on at least a tonne for tonne basis. Sales at the price ceiling will only be conducted if no allowances remain at the two lower APCR tiers and a covered entity has demonstrated that it does not have sufficient compliance instruments in its accounts for that year’s compliance event. Currently, there are approximately 77.7 million allowances in the Price Ceiling Account.
Other Information
California Air Resources Board: Responsible for the design and implementation of the Cap-and-Invest Program.
Western Climate Initiative, Inc.: Non-profit organization that provides cost-effective administrative and technical solutions for supporting the coordinated development and implementation of participating jurisdictions’ GHG emissions trading programs, such as administering auctions and maintaining the system registry (CITSS).
Pursuant to requirements in existing legislation (AB 32, AB 197, and AB 398), CARB must update the “California Climate Change Scoping Plan” at least every five years and must provide annual reports to various committees of the Legislature and the Board. The Scoping Plan provides updates on progress toward climate targets and lays out strategies to achieve them, including the role and level of effort accorded to different programs in the state’s portfolio approach to climate mitigation. The latest update to the Scoping Plan was adopted in December 2022.
Global Warming Solutions Act of 2006 (AB 32)
Current Cap-and-Invest regulation can be found on the dedicated CARB website.
Current MRV regulation can be found on the dedicated CARB website.