Analysis: AB 1207 Locks in CA Cap and Invest Program Extension to 2045 : What’s Next for CCAs? [Updated]

Key Takeaways

1.1 The CA Legislature Passed AB 1207 on Saturday; locking in long-awaited extension to the Cap and Trade (now Cap and Invest) program to 2045

1.2 The bill also makes changes to free allocations, by proposing transition of free allocations from gas corporations to electrical distribution utilities.

1.3 Offsets are now treated in a similar manner to WA cap and invest – with retired offset amounts being removed from next year’s allowance budget, (instead of removed from APCR pool as was previously the case).

1.4 Offset usage limits remain unchanged at 6% after 2030. The SB 840 bill expands offset review.

1.5 Likely to receive Governor’s assent.

1.6 Market Expects CCAs to Rally.

1.7 Two other bills that passed will also impact emissions in California: AB 825 to create of an independent Regional Organization for West Coast electricity market and transmission planning; and SB 237 that clears Kern County Environment Impact Report, relating to oil and gas production.

1.8 A 40% reduction target for 2030 along with Offsets changed treatment of offsets seems the most likely scenario. cCarbon hypothesizes clarity on 2030-45 path likely after Scoping Plan develops in 2026.

[This article has been updated with additional information, as indicated at the end. We will be conducting a webinar on 23rd September, 12 pm PT with our detailed analysis of the possible scenarios going forward. Please register here to book your spot.]

Long Awaited 2045 Extension Finally Comes Through; AB 1207 Passes Senate (29 in favor; 6 against)

California legislature has extended its cap-and-trade program, now rebranded as “Cap-and-Invest,” through 2045. This decision follows extensive negotiations among Governors office, the State, and the State Senate. AB 1207 was the primary vehicle for this extension and went through many changes.

Affordability has been a key theme in the present bill and the negotiations that led to it. Previous proposals included much broader changes to offset limits, free allocations, and even a state-level CBAM. The current version of the bill is comparatively leaner, containing the long-awaited program extension to 2045 and keeping the offset limit unchanged at 6% through 2045. However, there are two key changes that the program makes – (i) Transitioning free allocations from gas corporations to electrical distribution utilities, and (ii) changing offset treatment relative to the cap.

Change to Free Allocations: Gas Corp’s Share to be Transitioned to Electrical Distribution Utilities By 2030. CARB Given Discretion on Allocation Methodology Post 2030

AB 1207 will transition free allocations from gas corporations to electric distribution utilities by the end of 2030. This shift directs value to the power sector, aligning with California’s electrification goals. It may lower electricity bills for consumers while reducing a traditional source of value for gas customers, changing cost signals between fuels. However, the changes will not impact the distribution of emissions allowances to emissions-intensive, trade-exposed industrial sectors.

Another important amendment concerns free allocation methodology. CARB will not be required by statute to use Cap Adjustment Factors after 2030. Instead, the agency gains flexibility to decide whether to use CAFs, Industrial Assistance Factors, or potentially another mix of tools to set industrial allocations.

Offset Treatment: Rule Making Expected

AB 1207 makes a critical change to offsets. For every offset surrendered in a given year, the same number of allowances would be removed and retired from the next year’s budget. This provision is expected to kick in immediately after a rule making by CARB. As per the current understanding, offsets used for 2026 emissions would get adjusted against the 2027 cap.

CARB is expected to hold informal workshops on this front in Q4 2025 along with other changes. Rulemaking will subsequently follow on the quantitative impact of this adjustment.

Offset Usage Limit of 6% Remains Unchanged. SB 840 Passes (59 in favor; 15 against) in the Assembly and Directs Offsets Review.

The offset limit of 6%, which was in place till 2030, has been extended to 2045 with other rules remaining unchanged, such as the one-half limit for non-DEBs.

However SB 840 directs a review of offset rules by the end of 2026 with a clear emphasis on expanding opportunities for in-state projects. After 2030, offset projects are expected to be aligned with Article 6.4 methodologies. The bill also appears to expand legislative oversight of Greenhouse Gas Reduction Fund allocations, while also setting specific spending priorities and assigning defined amounts to programs and departments. An urgency clause would make the bill effective immediately upon enactment.

New Programs Set up to Fund Macro-Level Decarbonization

AB 1207 bolsters the California Climate Credit by requiring utilities to apply savings to ratepayer bills during peak months where costs are high. The bill also establishes a California Climate Mitigation Fund for incentives and rebates, and a Transmission Accelerator Revolving Fund for efficient electricity transmission infrastructure.

It also requires CARB to brief the Legislature before major program revisions and provide detailed assessment of end-consumer cost impacts as a result of the same. In practice, if CARB state board initiates a regulatory process, that is expected to be a “major regulation”, the chairperson would have to present its rationale for doing so to any legislative committee that may be deemed necessary.

Other bills with an impact on California emissions

Two other bills that have potential to impact California emissions were also passed:

1. AB 825 Independent System Operator: independent regional organization. This bill that creates an independent Regional Organization (RO) for West Coast electricity market and transmission planning. This is a forward-looking bill that would integrate the markets on the West Coast as the RO would oversee the Western Energy Imbalance Market (WEIM) and the Extended Day-Ahead Market (EDAM) set to launch in 2026. Investments can get monetized across a larger market and gives variable sources such as renewables can be optimized better (lower costs). In other words, this can accelerate the renewable portfolio build out and meeting the RPS goals. This could also (positively) impact the potential linkage between WCI and Washington’s Cap and Invest.

2. SB 237 which amongst other provisions clears Kern County’s Environment Impact Report (EIR) relating to oil and gas production. The bill is likely to ease business operations for oil and gas production in Kern County.

What is next?

– The bill is likely to be signed by the governor given his support for extension in the May budget proposal.

– Any announcement from CARB on next steps will likely come only after the bill has been signed into law in Q4 2025.

– CARB will also be coordinating with Quebec’s MELCCFP to harmonize regulation.

– AB 825 points to a broader West Coast alignment being driven by the legislature, and a possibility that a linkage with Washington’s Cap and Invest could happen by 2027.

– cCarbon expects CCAs to rally over the next few weeks to oscillate between USD 31 and USD 35/ ton till CARB shares next steps.

– The market is not factoring any impact of the current Federal Administration’s Executive Order from 8^th April; likely as the same represented headline risk. The deadline for the Attorney General’s report referenced in the EO has passed, and no updates or actions have been communicated by the administration. Read cCarbon’s detailed breakdown on the EO here.

CCAs Expected to Rally; Stakeholders Raise Concerns About Opaque Legislative Process

cCarbon spoke to several of its advisors and partners after the passage of these bills. Largely, the market is expected to rally following this news, as long term program certainty is finally guaranteed; likely to result in the return of investors, who had heavily scaled back in recent months.

There was general sentiment that the process for the bills were messy, and several stakeholders were not consulted before this last minute consensus was finalized.

CARB Likely to Target 40% Reduction Target for 2030

One big unknown weighing on everyone’s mind has been the expected Initial Statement of Reasons (ISOR) to amend the cap trajectory, for which CARB had held numerous workshops in 2023 and 2024. In end of 2024, the market had widely anticipated the ISOR to be introduced by Q1 2025 with an implementation date of Jan 1, 2026. Read our piece for more details here: CARB Presents A New 2030 Allowance Budget

In light of the program extension and other provisions of AB1207 and SB 840, it is apparent that CARB will announce updates and rules to factor in these provisions. CARB is also obligated to release a revised scoping plan by 2027, for which it would have to begin the process in 2026.

cCarbon hypothesizes that CARB may have three separate processes:

(i) one to update and/or confirm the cap reduction trajectory till 2030 that also addresses new treatment of offsets relative to the cap.

(ii) a second process to define the cap reduction trajectory and offsets from 2031 to 2045, which will likely be tied into the Scoping plan discussions/modelling.

(iii) a potential linkage with Washington Cap and invest that kicks in before 2030. This is likely to require legislative approval in California and in Quebec.

As far as the trajectory till 2030 is concerned, cCarbon believes it to be likely that CARB will keep the 40% reduction. Our assessment is that CARB will not return to the 48% cap reduction scenario they had workshopped in 2024 – due to the tightened timeline and emphasis on cost containment from stakeholders, Gov’s office and CA Legislature.

Another option that was introduced during CARB workshops in 2023/24 is a 40% scenario that includes an inventory adjustment of 115 million tons from 2021-2030. This would align the cap trajectory with CARB’s statutory target under AB398. cCarbon hypothesizes that the earliest a cap adjustment could go into effect is  January 2027, since this will require a fresh set of consultations. Such consultations could kick off in Q4 2025 with an ISOR possible by Q1 of 2026. (A possible open question is whether a fresh Standardized Regulatory Impact Assessment (SRIA) would be required?).

Clarity on the available allowance scenarios as well as timelines are expected in the coming weeks.

Credit Bank Reduction Likely to Start from 2027

cCarbon has taken a hypothetical scenario of 40% Cap reduction by 2030 and the inventory adjustment. Plugging in this supply scenario into our WCI.CarbonOutlook model (with our baseline emissions forecast) suggests that emissions start eating into the accumulated bank of allowances from 2027.

The current bank of allowances in the WCI system is estimated to be at 433.70 M as on July 2025 (from cCarbon tracking of monthly estimates). Annual net surpluses over the last few years have been estimated by cCarbon as -7.48 M million allowances for 2023, and 39.23 M for 2024. This was after factoring in a certain amount of offset usage based on historical trends.

With this hypothetical scenario, 2026 is forecasted to witness a deficit of -1.85 million tons based on the current modeling and current prices.

Figure 1: Annual and Cumulative Program Net Surplus. Source: cCarbon Research

Figure 2: cCarbon Bank Coverage Index, Source: cCarbon Research

The cCarbon Bank Coverage Index, built upon the analysis of banked allowances and emissions is an index defined as the surplus bank of allowances in the market over the trailing 12 months’ emissions. The index is used to determine the level of allowance surplus in the market in relation to its annual emissions. An index of 1 indicates that the market has enough surplus allowances to cover 1 year of emissions. Similarly, the bank index goes negative in the mid 2030s – when emissions demand starts to outpace the available supply.

cCarbon Modeling Outlook

Members will be receiving an Analyst Note with the possible scenarios. For any particular scenario, to be modelled, please write to InSights@cCarbon.info

To quickly evaluate custom scenarios, members can access the WCI Scenario Simulator

For additional analysis please join our webinar on September 23^rd.

cC.Info Reader’s Digest

CCA Weekly Commentary – CCA Prices Surged by 10.91% WoW to Close at ~$31 as AB 1207 Passed by Legislature Extending the Cap & Trade (Now Cap and Invest) Program to 2045

CCAs Rally 7.17% As Senate And Assembly Advance Cap And Trade (Invest) Bills To A Final Vote On Friday – CCarbon

Signal Over Noise: Separating Headline Risk From Real Risk In Carbon And Clean Fuel Markets – CCarbon

Article Updated

This article originally published at 5.01 am PT on September 15th was updated on 10.53 pm PT on September 15th. The original article indicated a cCarbon estimate of 51 million tons of emissions that would have to be additionally reduced from Jan 2026 onwards. That part has been removed, given our incorrect interpretation of the statute. Inconvenience is regretted.

Analyst Contact

• Mitul Kaushal (mkaushal@cKinetics.com)