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CARB Walking a Tight Rope to Balance Affordability and Stringency: Approves Cap and Invest Extension

CARB Walking a Tight Rope to Balance Affordability and Stringency: Approves Cap and Invest Extension

Key Takeaways

CARB held its May 28 Board meeting where the board approved Resolution 26-7 adopting amendments to the California Cap on Greenhouse Gas Emissions and Market-Based Compliance Mechanisms Regulation.
This adoption means that the program finally has a long-term demand and price signal in the form of the new 2045 cap which will consist of 30.3 M allowances. Alongside the cap changes, free allocations are also going to be reworked across the board. This comes in the aftermath of the passage of AB 1207 which locked in program reauthorization and extension.
The market has reacted positively to these changes with the CCA v26 Front contract closing at $29.94 on Friday.
The Board has added several steps aimed at improving accountability and implementation of the MDI (Manufacturing Decarbonization Incentive) . The resolution requires staff to do another check-in with the board before the receipt of applications and issuance of allowances from the MDI. The board has also mandated several additional steps relating to MDI allowance tracking when they enter the market.
CARB’s presentation listed the main next steps as submission to OAL, a workshop on the process to update the compliance offset protocols as directed in SB 840, followed by September 1 implementation which covers changes to annual allowance budgets and allowance allocation. After this, staff intends to initiate evaluation for linkage with Washington’s program, and the undertaking of CPUC Phase 1B Climate credit proceeding.
cCarbon will host a webinar on 24th June, 2026,to discuss MDI, including eligible projects, possible decarbonization pathways for covered sectors, and other facets of the program.

CARB Approves Cap-and-Invest Amendments Through Resolution 26-7; Key Changes from ISOR, 15-Day to Take Effect in September

CARB held its May 28 Board meeting and approved amendments to the Cap-and-Invest Regulation and Mandatory Reporting Regulation as per Resolution 26-7. The Board approved for adoption; all staff proposals for amendments to the California Cap on Greenhouse Gas Emissions and Market-Based Compliance Mechanisms Regulation.

The approved package keeps CARB’s focus on aligning the Cap-and-Invest Program with AB 1207 (cCarbon’s Analysis and Webinar on AB 1207), SB 840, and California’s 2030 and 2045 GHG reduction targets.

Alongside this piece, we are also pleased to share a companion piece of analysis from cCarbon advisor and Founding Principal at Tradesman Advisors, Jon Costantino. Read here.

Primary Changes coming through include:

Updated program caps, aligned with statutory targets

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Figure 1: Cap Trajectory; Source: CARB

As per CARB – the updated package “Guarantees the removal of 118 million allowances from allowance budgets, resulting in an 11% cap decline year-over-year for this decade and an average of 7% from 2031 to 2045.”

Changes to Free Allocations

The 15-day notice (which is now statute in September 2026) reflects a much more scaled down EDU allocation schedule than the the current regulation. In 2030, EDU allocations are higher than current regulation. Note that this visualization does not account for the NG to EDU transition.

Screenshot 2026 06 01 231254

Figure 2: Proposed EDU Allocation Changes, Source: Pg 222, Proposed 15-Day Amendments & Attachment B

The newly adopted regulation increases CAFs in 2027 for standard activities. CARB states that this is a response to public comments. However, Natural Gas and Oil and Gas Extraction have been spun out into their own category with legacy contract generators and public facilities, with a CAF that is kept at the current/BAU level. Accordingly, allocations for other sectors, such as EDUs, refineries will increase. Post-2030 CAFs have been rescinded.

Table 1: Cap Adjustment Factor for Allowance Allocation; Source: Proposed 15-Day Amendments & Attachment B

To summarize: CAFs Increased for Industrial Activities; However, Oil and Gas Extraction + Natural Gas CAF Kept at ISOR Level; Post-2030 CAF Proposals Rescinded

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Figure 3(a): Cap Adjustment Factor for Standard Activities, Source : Table 1 Screenshot 2026 06 01 233906

Figure 3(b): Cap Adjustment Factor for Coke/Calcining Activities, Source : Table 1

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Figure 3(c): Cap Adjustment for O&G extraction, natural gas Source: Table 1

Market Reaction

CCA front prices increased by 6.09% MoM by Friday which coincided with the end of May to close at $29.94. Prices had been trading near the floor price of $27.94 since February 2026, following CARB’s release of the ISOR Proposal and 15 Day Package, but rebounded by the end of May to trade near $30 ahead of JA#47 and CARB’s Board Meeting.

Figure 4. CCA ICE Daily Price Change, Data Source: Intercontinental Exchange

Refer to cCarbon’s coverage on rulemaking for more details:

CARB released Regulatory Proposal on 14^th January 2026. (Analysis & Webinar)
45 Day Public Comment Period for ISOR ended. (Analysis)
CARB released 15 Day Amendment Package. (Analysis & Webinar)
15 Day Package Public Comment Period ends. (Analysis)

MDI Becomes a Core Implementation Workstream

The updated proposal states that the new MDI allocation for 2028 to 2035 provides no more than 118.3 million new allowances to covered industrial facilities. The Board directs the Executive Officer to develop implementation materials as necessary and appropriate for public transparency and hold at least one public workshop on the implementation of the MDI program prior to the issuance of any MDI allowances.

The Board directs CARB to develop implementation materials and hold at least one public workshop before any MDI allowances are issued. It also requires public summaries of approved MDI applications by facility, annual reporting of MDI applications and allowance movement, separate registry tracking, and inclusion of MDI allowances as their own category in the Quarterly Compliance Instrument Report.

One add-on from the board meeting specifically is wherein the board has added language to the draft resolution wherein staff is required to do another check-in with the board before the receipt of applications and issuance of allowances from the MDI.

cCarbon will also host a dedicated webinar on June 24, 2026, to discuss how the MDI can support decarbonization investments and impact the Cap and Invest Program. Register Here

MDI Review Triggers and Future Amendments

The resolution builds in review points for MDI. After each compliance period, CARB must report to the Board on the types of projects supported, the projects’ need for financial incentive, progress toward project GHG emissions reductions as third-party verified, unused MDI allowances still in circulation, and unused MDI allowances returned to CARB for retirement.

By July 1, 2028, CARB must evaluate and propose future amendments, as appropriate, to further align the MDI program with statutory climate targets, including cost-effectively achieving the methane reduction targets under SB 1383. CARB must also evaluate the impact of MDI on reducing covered facility emissions, the overall quantity of MDI allowances, compliance period limits, further award limits by sector, and eligible project types prioritizing both GHG and criteria and/or air toxics pollution benefits.

Other Follow-Up Items in Resolution

The resolution also directs CARB to evaluate and propose future amendments related to the definition of an independent merchant refiner, compliance flexibility for independent merchant refiners, supplementary cementitious materials for cement production in state, and alternative allocation approaches in situations of force majeure.

On utility allowance value, CARB must coordinate with the CPUC to ensure the remaining 30% of allowances allocated to natural gas utilities are focused on minimizing ratepayer impacts to low-income households through a Climate Credit after 2030. CARB must also report annually to the Board on the use of the value of allowances by utilities, including CPUC analyses and reports on the Climate Credit by the Investor-Owned Utilities.

The resolution further directs CARB to begin a public process no later than July 1, 2028 to evaluate and propose future amendments for industrial allocation for post-2030, including consideration of MDI investments and mechanisms to integrate emissions related to manufacturing of products entering the state to minimize leakage for sectors with imports of high carbon products.

MRR Implementation Timeline

For the Mandatory Reporting Regulation, CARB’s next step is tied to the reporting cycle. The amendments are effective January 1, 2027, to support reporting of 2027 data in calendar year 2028. EPE and verification amendments apply starting with 2026 data reported in 2027.

The MRR amendments support the Cap-and-Invest Program through accurate, rigorous, complete and consistent reported GHG emissions data. The MRR package includes clarifications on cessation, emissions and product data reporting requirements, reporting requirements for electricity imports from Energy Storage Systems, emissions from geologic carbon dioxide sequestration facilities, biorefineries, imported cement products and emissions, imported hydrogen and in-state producers of hydrogen utilizing electricity, along with verification changes.

The table below aims to summarize all major action points suggested by the resolution on top of the corresponding program amendments:

Future Steps

CARB’s presentation listed the main next steps as submission to OAL, a workshop on the process to update the compliance offset protocols as directed in SB 840, September 1 implementation, CPUC Phase 1B climate credit proceeding, changes to annual allowance budgets and allowance allocation, evaluation for linkage with Washington’s program, and implementation and monitoring.

Linkage with Washington

A key question is whether California and Québec will be able to complete the necessary procedural and regulatory steps in time to facilitate linkage with Washington before the start of the 2027 compliance period.

During the May 6, 2026, California Senate oversight hearing on the 15-day amendments, CARB’s “Next Steps” slide showed September 1, 2026, as the point when the agency would begin evaluating potential linkage with Washington. However, several procedural and regulatory steps remain before linkage can be finalized, meaning linkage by 2027 still appears unlikely unless the process moves faster than expected, as discussed in our earlier article here.

This view is also reflected in market sentiment. During cCarbon’s webinar on the HB1975 Implementation Notice, participants were polled on their expectations for Washington-CA linkage timing. Of the total respondents, 73% expected linkage to occur in 2028, 20% anticipated linkage in 2027, and 7% expected it to occur after 2029.