After a month-long summer recess, the California Legislature returns on 18 August with a tight window to finalize the extension of the state’s Cap-and-Trade program. Lawmakers have until 12 September to reconcile differences and vote on bills, setting the stage for negotiations that could influence market dynamics well into 2026.
California Carbon Allowance (CCA) spot prices remain wedged between the 2025 and 2026 auction floor levels as participants await clarity. August is poised to deliver another soft auction with lackluster revenue for the state coffers. The immediate threat to the market from federal action—most recently tied to an April Executive Order—has faded. But the hangover from a lack of policy certainty remains, with reduced speculative activity and muted secondary market trading.
Governor Newsom and legislative leaders have pledged to finalize an extension this year, but market players are looking for certainty that it will be sent to the Governor for signing in September. Momentum for the post-2030 extension picked up after the April 2025 Trump Executive Order, with both the Governor and Legislature pledging to finalize the extension before the session ends. Coming out of the summer recess, key questions remain over how technical the extension language will be and how it will interact with program design elements like offsets and free allocations. The Governor’s proposal for a straightforward extension, introduced in the May budget revision, failed to gain traction at that time. Meanwhile, two active spot bills have already advanced out of their chambers of origin, though neither contains concrete extension language as negotiations with stakeholders continue. Cost-of-living and environmental justice concerns are expected to shape the final framework, with legislators seeking a more significant role in program design than in previous extensions. Lawmakers appear more open to measures that temper gasoline price increases, suggesting any final deal could blend ambition with affordability. Failure to extend the program could lead to a loss of market confidence, limiting GGRF revenues. An extension, by contrast, would provide certainty that the program remains a priority beyond 2030. Though the program stringency in the near to medium term will hinge on regulatory program amendments under discussion with Quebec since 2023, making the upcoming formal Program Review process a critical companion to legislative action.
Once the legislative process wraps up, attention will turn to the formal regulatory Program Review. While the California legislative extension was not initially a prerequisite for the Program Review when the informal regulatory process was initiated in 2023, towards the end of 2024 and into early 2025, it became clear the formal process would be held to support legislative action. It was the regulatory momentum and not anticipated legislation that pushed WCI pricing to all-time highs in late 2023 and early 2024. With the Program Review timelines slipping, the rulemaking process could extend into 2026—delaying decisions on the cap trajectory, allocation rules, and other market-shaping mechanics. However, starting the formal rulemaking process with the release of the Initial Statement of Reasons (ISOR), and thereby starting the one-year clock to adopt the final program changes, will go a long way to firm up the market signals.
In Washington, moves to revoke the EPA’s Endangerment Finding are underway. While counterintuitive, this action could actually strengthen California’s legal footing to maintain its carbon market in the face of future federal challenges.
Note the RGGI Cap-and-Trade and the Washington Cap-and-Invest programs, both with tight near-term supply-demand balances, are trading at or above their respective regulatory soft price ceiling points. This underscores the key role of the regulatory process in California to implement an allowance shave to lift pricing materially above the floor.
In our latest supply and demand analysis, ClearBlue explored three demand scenarios—Low, Medium, and High—each shaped by differing assumptions on ZEV adoption, biomass-based diesel penetration, RPS uptake, and refinery closures. We evaluated these against two cap scenarios: the “Option 1 Cap” from regulatory discussions in the informal part of the rulemaking process to date and a “Compromise Cap” that removes fewer allowances from supply, aligned with a technical update to the program, and balances emissions reductions with affordability concerns. We now assume potential cap changes begin in 2027, underscoring how legislative and regulatory timelines will directly shape CCA price pathways.
Read the full ClearBlue report for our complete scenario modeling and market outlook. Market participants will be watching not just for the if of extension, but the how. The answers could ripple across compliance strategies, investment decisions, and price expectations for years to come. Please reach out to a member of our team for information on how this could impact your compliance strategy.