This article recaps much of the information shared with ClearBlue Markets' clients in a recent, exclusive Market by Market analyst briefing. We’re publishing this summary to reach a broader audience given the critical importance and widespread interest in the issues discussed.
As lawmakers return from summer recess, the focus intensifies on the prospects for a legislative extension of California’s Cap-and-Trade program, with a deadline looming on September 12th.
ClearBlue Markets anticipates a soft result for the August 20th auction, reflecting secondary market pricing that has generally hovered between the 2025 and 2026 price floors. A successful legislative extension is seen as a positive development for allowance pricing, though a prompt start to formal rulemaking and subsequent implementation of an allowance supply shave would be essential to see market pricing at or above record highs from early 2024. The coming weeks are expected to bring numerous twists and turns as various stakeholders weigh in on the extension and float proposals. This week has already seen preliminary language begin to emerge from the legislature.
Market Update
In a recent briefing with ClearBlue clients, Jennifer McIsaac, Chief Market Intelligence Officer at ClearBlue Markets provided a comprehensive market update, highlighting current price weakness in the secondary market, where pricing has been trading between the 2025 and 2026 floor prices leading up to the August auction, with the 2026 floor expected to be around USD 28 per metric tonne. This weakness is evidenced by the May auction being the first current vintage auction not fully sold out since the pandemic, and August expected to be similarly lackluster. This translates to less revenue for the state’s Greenhouse Gas Reduction Fund.
McIsaac also recalled a period of past bullish momentum in early 2024, when prices reached all-time highs over $40 per metric ton, driven by strong regulatory signals. However, this momentum was lost in 2024 as these regulations failed to progress beyond the informal stage. Consequently, at the beginning of 2025, there was a distinct shift in focus from the rulemaking process to legislative extension in California. Two "spot bills," AB1207 and SB 840, are currently awaiting amendments with specific language on the extension, and while Governor Newsom is publicly supportive of the legislative extension of the “Cap-and-Invest,” competing priorities like redistricting and other affordability-minded bills exist.
External factors have also played a role in allowance price weakness; a Trump Executive Order in April 2025 targeting state climate programs temporarily pushed California Carbon Allowances (CCAs) to the floor price. The Executive Order also affected all environmental markets. While its immediate impact has alleviated, the future threat remains unclear. While WCI allowances continue to struggle, in contrast, other state carbon markets, such as RGGI and Washington, are experiencing high pricing tied to tight near-term supply and demand fundamentals.
McIsaac emphasized that if the extension passes, it is expected to unlock the formal rulemaking process in California, marked by the release of the "ISOR" (Initial Statement of Reasons), which triggers a one-year regulatory clock to finalize program amendments. A separate regulatory process would likely follow for any rulemaking to link with Washington.
Market Outlook
Anop Pandey, Senior Manager, Market Analysis at ClearBlue Markets presented ClearBlue’s balance scenarios, stating that the "biggest question mark" revolves around the future cap design for the immediate future, 2030, and then from 2031 to 2045. During the informal regulatory process, the California Air Resources Board (CARB) presented numerous cap scenarios, ultimately narrowing them down to "Option 1" and "Option 2" trajectories. Option 1 proposes removing 180 million allowances cumulatively through 2030, aligning the post-2030 cap with California's statutory carbon neutrality requirement by 2045. Option 2 suggests a more aggressive removal of 265 million allowances through 2030, which ClearBlue views as unlikely to be adopted.
ClearBlue perceives a compromise cap — specifically removing the 118 million allowances through 2030 — as a viable alternative that would still reduce the market surplus while remaining aligned with affordability concerns.
Pandey also detailed scenarios for balances without an extension: the current allowance bank for California and Quebec is a little over one year's worth of emissions. If no legislative extension passes by September 2025 and the program were to sunset after 2030 (which is considered unlikely), the bank would still begin to decline, but the supply overhang would keep prices at the floor.
In contrast, with an extension, ClearBlue expects bank draws even without an allowance shave, though the surplus might persist until the middle of the next decade. For Option 1 or the Compromise Cap, bank decline rates are much faster, potentially leading to a cumulative deficit much sooner.
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Policy Landscape
Clayton Munnings, Chairman of Elevate Climate, offered his perspective on the legislative front, assessing the odds of extension passing this session at around 80%. Munnings highlighted the emergence of unofficial language for Assembly Bill (AB) 1207 this week, which could be formally introduced by Assemblymember Irwin’s office.
A key provision in this unofficial language is a directive for CARB to establish an Emissions Containment Reserve (ECR), with an option for CARB not to implement it if it impacts linkage. Additionally, proposed changes for post-2030 offset usage limits include adding two new "buckets" to existing limits, which could potentially lead to a total of 10% offset usage if all buckets could be maximized. Other proposed changes include reducing natural gas allocations and considering a border carbon adjustment to address leakage.
Regarding the timeline for the formal regulatory process, Munnings indicated that if extension passes by September 12th, CARB could move into formal rulemaking anywhere between one and four months later. He also expressed the view that even if the extension fails, CARB would likely seek to move forward with rulemaking and supply cuts.
Crunch Time
The period leading up to September 12th truly represents "crunch time" for California's climate future. Additional language is expected to emerge as the bills are advanced. A legislative extension will provide market players certainty for the long term existence of the program. Regardless of the immediate legislative result, the expectation that CARB will pursue further rulemaking and supply cuts underscores the ongoing commitment to reducing the market surplus and strengthening the program.
The path forward will undoubtedly involve further twists and turns as California navigates the delicate interplay between legislative action and regulatory implementation, but the stakes are clear: ensuring the Cap-and-Trade program can deliver meaningful price signals and contribute effectively to the state's ambitious carbon neutrality targets.