On 19 September, Governor Newsom signed the Cap-and-Invest extension legislation. Based on comments from California regulators at the Monterey conference this week, the signing will pave the way for a Program Review workshop, likely in October. Also detailed in ClearBlue’s prior Live Update from the conference, the aim is to conclude the rulemaking in 2026 before 2027 free allowance allocation deadlines in fall 2026. Then, the process to link to Washington will begin. Linkage is expected to be implemented at some point in 2027 at the earliest.
With the last Program Review workshop over one year ago, CARB today released a new Market Notice on the Cap-and-Invest. The notice indicated CARB will consider the new legislative direction and will build on the public process that already started on a regulation update going back to early 2023.
The following items are specifically flagged as expected update topics:
- A workshop on the draft AB 398 leakage risk assessment report due in the coming months. This work will inform industrial allowance allocation changes such as cap adjustment factors as needed, to minimize the risk of leakage to protect California businesses and jobs, and to reflect updated data.
- Updates to annual allowance budgets to reflect inventory adjustments and retirements to implement offsets used for compliance beginning with those used to comply with 2026 emissions, and to support achievement of the state’s 2030 and 2045 climate targets while considering affordability.
- A path to transition gas utility allowances to electricity utilities while considering affordability for gas customers as reflected through residential bill climate credits. Updates to electricity distribution utility allocations to reflect updated data.
- Updates to triggers for a corporate association group among registered entities to deter and reduce opportunities for market manipulation.
- Updates to reflect the Extended Day Ahead Market being developed by CAISO.
- Additional changes as needed to support continued linkage with Quebec.
CARB will also begin work on evaluating existing compliance offset protocols to reflect the best available science by 2029 and a report to the Legislature on the use of offsets and recommendations to increase in-state offset projects as required by the new legislation.
Of course, the second bullet point on the annual allowance budgets and retirement of allowances to implement offsets used for compliance beginning with those used for 2026 emissions is of keen interest to market participants. The reference to inventory adjustments would be aligned to removing 118 million allowances consistent with the updated GHG Inventory showing lower historical emissions. This is what ClearBlue has been referring to as a “Compromise Cap” scenario. Other cap scenarios under consideration, “Option 1” and “Option 2,” that would remove at least 180 million allowances from 2026-2030 annual budgets, were highlighted in the October 2024 Market Notice. The October 2024 Market Notice also flagged a one-time increase in the prices of the cost-containment provisions to better align with the most-recent federal assessment of the social cost of carbon.
Accounting for the provisions to implement retirements of allowances for offsets usage are still unclear. What does appear to be clear is that this new design element is not intended to run counter to affordability and cost containment - offsets should remain a mechanism for cost containment. Also, regulators have stated that offsets usage is already under the cap. Therefore, the regulatory amendments will likely attempt to smooth the effects of the new legislative direction for offsets retirements and in relation to the allowance budgets.
On the whole, with the new legislative direction, a pullback of federal climate support, acknowledgement emissions are likely coming in higher than expected, the Program Review outcome is expected to reflect the focus on affordability. CARB will use all the levers at its discretion to balance the need to tighten the program to meet the state’s climate targets with the desire to have strong cost containment. It is not easy for the state to meet its statutory climate targets, and CARB Deputy Executive Officer Rajinder Sahota mentioned in Monterey that the 2027 Scoping Plan would contain a gap analysis on how actual emissions are looking and referenced uncertainty analysis from the 2022 Scoping Plan.
An allowance shave, even one that is smaller than expected, particularly with Washington entering the program as a net buyer, will still put upward pressure on allowance prices in the near to medium term as bank draws are expected to begin in 2027.
The ClearBlue team will continue to monitor and assess the US carbon markets and provide updates to clients as needed in timely Live Updates available via Vantage, our carbon intelligence platform. Contact us to discuss subscription options.