AB 1207 Locks in CA Cap and Invest Program Extension to 2045: But All Eyes on CARB and Fed Admin

Key Takeaways

• cCarbon hosted a webinar on 23^rd September 2025; charting the future course of CCAs in the light of recent legislation passed by the CA legislature. The discussion featured Jon Costantino from Tradesman Advisors and Kevin Poloncarz from Covington & Burling LLP.
• Across the legislation that passed, AB 1207 and SB840 were probably the highlights, locking in program extension till 2045, and resulting in a CCA rally. SB 840 expands offset review, requires revisiting definition of DEBs, and makes changes to GGRF funding.
• One major takeaway from the panel discussion was that CARB likely to conduct multiple workshops starting Q4 2025, with possible new SRIA and ISOR in Q1 2026.
• These workshops would concern budget adjustments, WA linkage among several other priorities that CARB must tackle now.
• On stringency: cCarbon’s likely scenario: 40% reduction by 2030 with 115M inventory adjustment as per previous workshops.
• Washington linkage remains uncertain: likely 2028, but 2027 possible if CARB hits all milestones.
• Potential Federal action looms over the market, with April EO largely headline risk, but more EOs/lawsuits are likely upcoming elections.

On September 23, 2025, cCarbon hosted a webinar to discuss the future of California’s Cap-and-Trade program (CCA), focusing on the key provisions in the recently passed legislation AB 1207 and SB 840, and their likely impact on carbon prices. The discussion featured Jon Costantino from Tradesman Advisors and Kevin Poloncarz from Covington & Burling LLP, both of whom have contributed extensively to C&T rulemaking in the past.

AB 1207: Locked in Extension to 2045; Providing a Long-Term Market Signal, and Bringing Significant Changes to Allocations

One of the most significant outcomes of last week’s legislative session was AB 1207, which the extends California’s Cap-and-Trade (now Invest) program through 2045. Among the bill’s notable changes:

• The bill transitions most free allowances from gas corporations to electrical distribution utilities. Additionally, CARB (California Air Resources Board) now has greater flexibility in distributing free allowances, especially with the removal of the declining Cap Adjustment Factor (CAF) post-2030. This shift allows CARB with more flexibility on how it gives out these free allocations to the industries which are more sensitive to the risk of emissions leakage.  Lastly, they have decided to fix the Assistance Factors (Afs) at 100% through 2030.
• AB 1207 also introduces significant changes to offset accounting, stipulating that offsets used for compliance will now be retired from the allowance budget for the following. This adjustment aligns California’s offset mechanism with similar systems, like Washington’s.

 SB 840: Requires CARB to Review Offsets

• SB 840 focuses on offsets. The offset usage limit of 6% remains unchanged till 2045. SB 840 mandates CARB to conduct a study by the end of 2026, requiring an analysis of existing rules to explore opportunities for expanding in-state projects. According to cCarbon, a key area to watch will be the evaluation of the definition of DEBs.
• Moreover, the bill introduces greater legislative oversight over the Greenhouse Gas Reduction Fund (GGRF) money, by fixing specific nominal amounts rather than percentages.

Other Notable Legislative Changes Focus on West Coast Electricity Alignment, Oil and Gas, and CDR

In addition to AB 1207 and SB 840, three other bills were passed:

• AB 825 sets out to create an independent Regional Organization (RO) for West Coast electricity market and transmission planning. The RO would result in any investments in power to be monetized across a larger market, creating a larger demand pool and renewable sources can be optimized better and more efficiently, reducing the cost of serving electricity to multiple states theoretically. This could also have a positive third order effect on the potential linkage between WCI and Washington’s Cap and Invest market.
• SB 237: This bill relates to the clearance of Kern County’s Environmental Impact Report concerning oil and gas production. The bill is likely to ease business operations for oil and gas production in Kern County, potentially expanding oil and gas production, and, consequently, increasing emissions and compliance demand will go up.
• SB 643 establishes a $50 million funding for Carbon Dioxide Removal Purchase Program, requiring CARB to fund verified long-duration CDR projects (e.g., direct air capture, bio-storage) with strict eligibility, storage permanence, and reporting rules

CARB’s Notice from 19^th Stresses on Upcoming Rulemaking on Inventory Adjustment and Allowance Transition Among Others

As per CARB’s notice from 19^th Sept, CARB is preparing for significant regulatory changes, particularly budget changes and inventory adjustment. The 40% reduction target, which is in statute already by way of the scoping plan, is likely to be considered more achievable than the previously proposed 48% (Smoothened Option 1 from 2023/24 workshops) given recent conversations about affordability. Other items that CARB stressed were on its priority list consist of the CAG changes, offset accounting, AB 398 leakage risk assessment. Read their announcement here.

California Cap-and-Trade 2025 Extension: A Clean Extension Amid Affordability Pressures

Jon and Kevin stressed how AB 1207 extension legislative negotiations for California’s Cap-and-Trade program focused heavily on maintaining program stability considering growing affordability concerns. Unlike the more contentious 2017 extension discussions, the 2025 process was seen as a “clean extension,” with minimal changes to the program’s core structure. The affordability narrative, particularly related to rising energy prices and concerns from communities in areas like the Central Valley, was a driving factor. While the legislative process had some transparency issues, the extension offers regulatory certainty through 2045, with CARB given discretion to adjust allowance price containment reserves if affordability concerns arise.

Legislature Seemed to Have Focused on Affordability Amid Current Geopolitical Environment

Our panelists opined that Environmental Justice (EJ) groups have raised concerns about the potentially scaling back reduction targets, with the focus on affordability and market stability, and were generally against the concept of a “clean extension”.

In conclusion, while the future of California’s carbon market remains dynamic, the overarching message is one of stability and continuity. With a clear price signal through 2045, the Cap-and-Trade program offers a solid foundation for market participants, and as the panelists noted, one big question mark in the future is the likelihood of more federal action, in line with the 8^{th of} April EO earlier this year.

cC.Info Reader’s Digest

• Pessimism On Regulatory Action Dampening North American Carbon Market Prices, Even As Fundamentals Remain Strong – CCarbon
  Analysis: AB 1207 Locks In CA Cap And Invest Program Extension To 2045 : What’s Next For CCAs? [Updated] – CCarbon
• CCAs Rally 7.17% As Senate And Assembly Advance Cap And Trade (Invest) Bills To A Final Vote On Friday – CCarbon
• Valero Intends to Pause Benicia Refinery Operations: Potentially Reducing CA Emissions by 2.93 Million tCO2e Annually | cCarbon
• Post-2035 EITEs Allocations: Ecology Weighs Cap Adjustment Factors, New Benchmarks & Consigning Requirements That Are Similar To CA-QC Program | CCarbon
• Core Market Dashboard Washington | Washington CaI | cCarbon
• Forecast Dashboard | Washington CaI | cCarbon
• Emissions Focus | Deep Dive Dashboard | Washington CaI | cCarbon
• Pessimism on Regulatory Action Dampening North American Carbon Market Prices, Even as Fundamentals Remain Strong | cCarbon
• Great Expectations: What to Watch in Carbon Markets in 2025 and Q1 WCI/WCA Auction Expectations | cCarbon

Analyst Contact

• Vanshika Goyal (vgoyal@ckinetics.com)
• Mitul Kaushal (mkaushal@ckinetics.com)