The California Legislature passed Cap-and-Invest extension bills—AB 1207 and SB 840—September 13, the last day of the current Legislative session, with the required 2/3 majority. With the passage, the bills now head to the Governor desk for a signature. The Governor has until 13 October to sign the bills into law, with the bills going into effect on 1 January 2026.
Specifically, with a 2/3 majority required and therefore 27 votes needed in the Senate and 54 in the Assembly,
- AB 1207 passed the Senate Yes: 29 No: 6 before moving straight to the Assembly to pass Yes: 55 No: 10
- SB 840 passed the Assembly Yes: 54 No: 15 and the Senate just after 1pm PT Yes: 28 No: 6
Members of the legislature emphasized affordability for California consumers with the passage of the bill. The main affordability mechanisms in AB 1207 relate to keeping offsets in the program through 2045 with a 6% limit, giving CARB discretion on the cost containment ceiling and tiers, and maintaining allocations for the benefit of primarily electricity ratepayers.
Of course, the language moving offsets under the cap is directionally bullish – the language reads: “A number of allowances equal to the total number of offset credits used for compliance obligations in the prior year shall be removed from the next year’s annual allowance budget and retired.” This is similar to Washington's Cap-and-Invest. Implementation will be subject to interpretation by CARB as the Cap-and-Invest is evaluated as a whole for the rulemaking. Note that following the passage of AB 398 in 2017 that put in the 4% offsets limit for 2021 to 2025 and the 6% limit for 2026 to 2030 and imposed the DEBS requirement, regulators put allowances in the Cost Containment Reserve to account for the move from 4% to 6% - therefore, within the current cap structure to 2030, allowances equivalent to 2% offsets usage for 2026 to 2030 are in reserve and not in the auction/allocation pool.
The extension was an important milestone for 2025, anticipated since late 2024 and particularly in light of the pause in the California Cap-and-Invest regulatory process in order to support the extension efforts by the Governor and Legislature.
Stakeholders will now be looking for regulators to signal a re-start to the Cap-and-Invest rulemaking that California initiated with Quebec in 2023 following California’s 2022 Scoping Plan. With affordability key, CARB will need to balance the effects of moving offsets under the cap, the other legislative direction from the 2025 bills and the prior work done for the informal rulemaking process.
After news of a climate and energy bill deal reached by the Governor and Legislature on 10 September, CCA pricing reacted positively. The ICE V25 Sep-25 delivery contract settled at USD 28.32 on Friday 5 September, then gained over USD 2.00 on 10 September to settle at USD 30.26. The contract rose nearly USD 0.70 on 11 September to settle at 30.94.
The legislative outcome should restore investor confidence and be positive for pricing, but prospects for a return to allowance price highs just above USD 40 seen in early 2024, and tied to regulatory signals that a significant allowance supply shave would occur before 2030, will be contingent upon the regulatory process.
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