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Highlights: AB 1207 Proposes Offset Usage Quota at 6% but Offsets now “Under the Cap”, Free Allocation Divert to EDU from Natural Gas, Open for CARB to Adjust APCR/Ceiling Triggers; SB 840 Updated with Language Around Usage of GGRF; Votes Still to come and Legislative Activity Likely to Extend into Saturday
Following our earlier update for clients on the Cap-and-Trade extension deal being reached by California’s lawmakers, as of Wednesday afternoon the original spot extension bills—AB 1207 and SB 840—have had their language updated on the California Legislative Website. This indicates that both have been “printed” and will be put to a vote during the current legislative session. Although the session officially ends on Friday, 12 September, legislative rules allow for votes to spill over into Saturday, allowing both bills to be put to a vote by legislators. The bills require a 2/3 majority vote. Therefore, the printing of the bills is a positive sign for completing the program’s legislative extension this session, but the amended language has to be approved by both chambers, so significant milestones remain on the way to legislative certainty.
AB 1207
The main language on post-2030 program amendments is contained within AB 1207. The language of the bill is similar to previous versions circulated in mid-August and the amended AB 710. Nonetheless, the officially printed AB 1207 contains further provisions aimed at promoting affordability, while officially changing the name of the program to Cap-and-Invest.
Offsets
On offsets, AB 1207 would maintain the current offset usage quota at 6% between 2026 and 2045, along with maintaining the current DEBS requirement. But crucially, offsets will now be under the cap, with “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 the same as the current rules in the Washington Cap-and-Invest program and was not included in the previous versions of AB 1207.
Furthermore, the official AB 1207 dropped previously floated increase in offset usage quota via tribal and carbon-dioxide removal (CDR) projects. Though AB 1207 do call for CARB to develop new offset CDR protocols, and support development of tribal DEBS offset projects.
Offsets was one of the major sticking points between the negotiating parties. Maintaining the usage quota at 6%, while making offset usage being under the cap reflect a compromise between the two chambers.
Cost Containment: APCR and Price Ceiling
The official AB 1207 maintains the current APCR and Price Ceiling structure, rejecting the Senate proposal to significantly lower the Price Ceiling trigger price.
But crucially, in the case CARB “finds the price containment reserve or the price ceiling do not adequately protect California consumers, the state board shall consider additional actions to ensure consumers are protected”. These actions may include “adjustment to the allowance price containment reserve or the price ceiling”. This provision seemingly allows for CARB regulatory discretion to adjust the APCR and Price Ceiling triggers if they feel prices are rising too fast. This was similar to actions taken by the Washington State Legislators to lower their Cap-and-Invest ceiling triggers.
Also, the bill directs any funds raised through Price Ceiling sale into the “California Climate Mitigation Fund”, instead of into the Greenhouse Gas Reduction Fund (GGRF). The mitigation funds will be use by the Legislature to “providing direct rebates and investments to reduce household energy costs”.
This language again points to a compromise between the two chambers, while continuing to promote affordability to consumers.
Allowance Allocations
The official AB 1207 language maintains the previous AB 1207 version language on diverting free allowance allocations from natural gas corporations to electrical distribution utilities. The bill also emphasis that free allocation changes should not be “constructed to impact distribution of emissions allowances to emissions-intensive, trade-exposed (EITEs) sectors”.
The Legislators are also trying to draw a direct connection between the Cap-and-Invest, and savings on their utilities bills. Specifically, AB 1207 calls for utility bill to include the amount of savings generated by the climate credit and the California Cap-and-Invest program.
The bill also calls for CARB to provide recommendations to make changes to the program to minimize leakage risks, while providing the “potential for a border carbon adjustment”.
For industrial free allocations, the language removes references to the declining cap adjustment factor after 2030 and instead gives discretion to CARB to minimizes emissions leakage risk.
Potential Impact on Balances and Prices
Overall, the language within the official AB 1207 provides bullish support for allowance demand, especially the inclusion of offsets under the cap. We estimate offset use for California entities to be around 203 million between 2031 and 2045 compliance years. Under the proposed rules, this would result in a reduction to the allowance supply instead. This is a significant amount, as in comparison, the current estimate allowance bank stands at 370 million allowances (for California and Quebec), the change in offset rules would result in a significant depletion of the bank.
AB 1207 is not descriptive on many aspects of the program, allowing the CARB to fill in the gap of the many post-2030 program designs.
However, the amendments seem to be designed with affordability at the forefront, allowing for the regulators to curtail containment prices. Thus, price appreciation could be limited by levels that the regulators feel is appropriate to not have a major impact on consumers.
SB 840
Meanwhile, the Senate's extension bill's official language instead contains proposals on how the funds raised via the GGRF should be distributed. Throughout the extension discussions, the Legislature has expressed its desire to have more control over how the GGRF is spent. The distribution proposed in SB 840 would then reflect a compromise in negotiations between the Legislature and the Governor—who put out a GGRF spending proposal in May.
SB 840 includes a continuous distribution of USD 1 billion from the GGRF to the California High-Speed Rail (HSR) project. This was part of the Governor’s GGRF spending proposal and continues the trend of HSR receiving the most funding from the GGRF. The Legislature is also earmarking USD 1 billion for direct appropriations by the Legislature in the annual budget, while USD 200 million goes to fire protection programs. Other funding targets include fire-fighting operations, low-carbon transit programs, climate research programs, and other programs. Funding for these other programs is based on a percentage of the funds raised annually in the GGRF. SB 840 also contains provisions on offsets, with the bill requiring CARB, by the end of 2026, to conduct a study and report to the Legislature evaluating and making recommendations on the use of offsets. CARB would also be required to update all existing compliance offset protocols to reflect the available science.
Market Reactions and Next Steps
Market participants have reacted very positively to the extension deal, with the December-2025 CCA contract reportedly trading above USD 30, a level not seen since February.
However, we want to stress that the extension process is not yet complete. While the bills' publication allows them to go to a vote in the current session, there is still uncertainty over the ultimate outcome and vote. Thus, we advise clients to proceed with caution until the final vote is cast on the extension. We expect the vote to occur late Friday or early Saturday morning California time.
Assuming the extension bills are approved by both chambers, we would expect CCAs to remain elevated above USD 30 for the remainder of the year, with an increase in the November auction settlement price compared to the May and August settlements.
If the extension is completed by the end of this week, attention would turn back to CARB and its long-delayed Program Review. CCA price appreciation post-extension would likely be limited if CARB does not proceed with the Program Review this year. The Program Review would implement changes to the program design up to 2030, while post-2030 amendments would be part of the Program Review that will presumably be launched as part of the 2027 Scoping Plan. Thus, depending on when the Program Review continues and what it contains, CCAs could still remain volatile for the remainder of the year.
We will continue to update our clients with all available information on both the extension and Program Review processes.