For months now, California’s signature climate program, the market-based Cap-and-Trade, has been stuck in a holding pattern. Despite being one of the most ambitious emissions reduction tools in North America, the economy-wide program is facing a problem that’s both technical and political. The market is oversupplied, prices have plummeted, and the much-needed regulatory program review to tighten the program keeps getting delayed, amid political back-and-forth involving Governor Newsom and the legislature and a shifted federal narrative with regards to climate policy. The program may be facing a third legal challenge, via a Presidential Executive Order issued on 8 April, and the Trump administration has been targeting the state’s autonomy in setting its own climate mandate essentially since the president took office. This makes the path to the program amendments more complicated and delicate.
California's Carbon Market Struggles with Oversupply and Political Delays
California Carbon Allowance (CCA) prices, the tradeable commodities that represent the cost for polluters to emit, have fallen from prices in the $40s to close to the program’s auction floor price, around the mid-$20s. That steep drop means less incentive to reduce emissions and far less funding for climate programs, as the program appropriates revenue through the Greenhouse Gas Reduction Fund. Without swift action from lawmakers to extend the program beyond 2030 and action from regulators to reduce market oversupply, the state risks leaving further revenue on the table. The most recent auction in May 2025 was the first undersubscribed one in nearly 5 years (since COVID). Note Washington Cap-and-Invest prices have remained high, even with the threat to states’ climate programs from the Trump Administration. This is tied to very tight supply-demand balances in Washington, and suggests individual program dynamics are setting prices more so than a threat of federal lawsuits. Therefore, successful efforts in California on the legislative and regulatory sides to shore up the program should translate through to allowance price recovery. Prices in the RGGI Cap-and-Trade on the East coast have rebounded from April levels after the Executive Order, and the member states recently completed their program review.
The Dual Benefit of Carbon Markets: Emissions Reduction and Financial Gain
At the heart of it all is a core reality that can get drowned out in political back-and-forth: these carbon markets are designed to generate financial benefits. When the program maintains a robust price signal, it doesn’t just cut emissions, it brings in funding for climate initiatives, lowers utility bills, and supports vulnerable communities. But when the price signal weakens, like it has in California, those benefits fade. According to a recent report by Clean and Prosperous California, the state may have lost up to $3 billion in potential revenue over the past year alone due to weak auction results. Note that California is looking to rename the program from “Cap-and-Trade” to “Cap-and-Invest”, in line with Washington state’s program, to drive home this dual benefit. The ability to hand out free allowances and direct the program revenue for the benefit of consumers means Cap-and-Trade programs are aligned with and are tools to promote affordability, which is at the forefront of California Legislative discussions.
Pathways to Restoring Market Confidence: Extension and Regulatory Action
Market confidence, CCA prices, and the associated funding can be restored by two next steps: extending the program beyond the 2030 sunset date to instill longevity and market confidence, and initiating the formal rulemaking process to shave allowances from the supply pool to address oversupply. The Legislature and the Governor have pledged to complete the extension within the current legislative year, which ends on 12 September 2025. The Legislature will pursue the extension through the policy bill process, having introduced two spot bills earlier this year, which set the foundation to implement the program extension. Since their introduction, both bills have passed through their respective chambers and crossed over to the other chamber. California Air Resources Board (CARB) has indicated that their immediate priority is to cooperate with the Governor and Legislature to extend the program. Thereafter, it is expected CARB will begin the formal process of the program review, which has been in the informal phase since the kick-off workshop held jointly with Quebec in 2023.
As ClearBlue has been communicating to our clients, many of the key program design elements have been put forward for public comment through these informal program review workshops. Our Supply and Demand reports, released quarterly, contain analysis around possible regulatory supply scenarios, including “compromise “scenarios where regulators remove significant allowances from supply prior to 2030 tied to the GHG Inventory Update and take a less aggressive approach to changing the 2030 target. Moreover, with the changes to federal incentives and the revocation of California’s GHG waiver authority by the US Congress, emissions reductions from California’s complementary policies are less certain, making Cap-and-Trade compliance more difficult.
Broader Implications for Western Climate Initiative Partners
ClearBlue recently released a report, California Cap-and-Trade Extension: Crunch Time as Legislative Year-End Approaches, which examines how the extension efforts could play out based on historical Cap-and-Trade legislative action, considerations for extension negotiations, and the impacts on the allowance bank. Please reach out to a member of our team to access the report.
Quebec, which links its Cap-and-Trade program with California’s through the Western Climate Initiative (WCI), is affected by market instability and falling CCA prices, given the fungibility between both programs in the purchase and trading of these allowances. Quebec has stated its intention for its program review; however, the timing of this may be subject to California’s review process. Moreover, linkage with Washington, which is a stated intention of all three jurisdictions, will likely have to wait for its own rulemaking in California and Quebec after the program review is complete.
The next WCI auction is scheduled for 20 August 2025. ClearBlue will continue to monitor these developments and will provide updates as needed.