In January 2026, the California Air Resources Board (CARB) issued a set of proposed regulatory amendments to the rules governing California’s greenhouse gas trading program, now referred to as Cap-and-Invest. The proposal is designed to realign the program with California’s long-term climate objectives, including the statutory goal of achieving economy-wide carbon neutrality by 2045.
The amendments build on legislation enacted in 2025, most notably AB 1207, signed by Governor Gavin Newsom in September 2025. That law extended the Cap-and-Invest program through 2045 and directed CARB to revise several core program elements, including the overall emissions limit, allowance distribution, and the role of offsets in compliance.
Proposed Cap Adjustments
CARB’s proposal would significantly tighten the supply of emissions allowances in future years. Staff estimates indicate that the revised cap trajectory would remove roughly 118 million allowances from circulation during the 2027–2030 period, reflecting a more aggressive emissions-reduction pathway consistent with state climate policy.
Use of Offsets
The proposed amendments also incorporate statutory limits on offset usage. Under the proposal, regulated entities would be allowed to meet no more than 6% of their compliance obligation using offsets through 2045. In addition, CARB proposes to treat offsets as part of the capped system, such that offset use would be reflected in adjustments to future allowance supply.
Revisions to Allowance Distribution
The amendments would modify how free allowances are allocated among covered entities. By 2030, allowances previously directed to certain fossil fuel-related entities would be progressively reallocated to electric distribution utilities, a shift intended to support electrification and broader decarbonization efforts. CARB would continue to refine allocation methodologies through subsequent regulatory proceedings.
Program Oversight and Transparency
CARB is also proposing new reporting and evaluation requirements aimed at improving program transparency and strengthening legislative oversight. These measures are intended to allow policymakers and the public to better assess program performance over time.
Investment of Auction Proceeds
Consistent with existing practice, revenues generated from allowance auctions would continue to be invested in climate-related programs. CARB identifies transportation, housing, emissions-reduction projects, and environmental justice initiatives as ongoing priorities for the use of these funds.
The public comment period is January 23, 2026 to March 9, 2026, with a targeted effective date of September 1, 2026.