Tuesday, 1st September 2026

California Air Resources Board

The California Air Resources Board’s (CARB) major amendments to the Regulation for the California Cap on Greenhouse Gas Emissions and Market-Based Compliance Mechanisms have received final approval from the Office of Administrative Law (OAL). The amendments were approved by the Board at its May 28-29, 2026 public hearing and submitted to OAL in July. OAL approved the rulemaking and filed it with the Secretary of State on August 31, confirming an effective date of September 1, 2026.

The Final Regulation Order formally updates California’s Cap-and-Invest Program, formerly known as the Cap-and-Trade Program, and establishes a regulatory framework extending through 2045. CARB describes Cap-and-Invest as a key part of California’s strategy to reduce greenhouse gas emissions through an aggregate greenhouse gas allowance budget for covered entities and a trading mechanism for compliance instruments. The final order amends requirements covering allowance budgets, allocation, auctions, trading, compliance obligations, offsets, market participation and other program provisions.

One of the most significant changes is the establishment of more stringent allowance budgets to align the program with California’s 2030 and 2045 climate targets. CARB said the amendments guarantee the removal of 118 million allowances from allowance budgets, resulting in an 11% year-over-year cap decline during this decade. From 2031 through 2045, the cap is designed to decline by an average of approximately 7% annually. The tighter budgets are intended to provide incentives for emissions reductions while supporting the state’s statutory climate targets.

The amendments also address the role of compliance offsets within the overall allowance supply. CARB’s regulatory analysis states that allowances are removed from annual budgets to reflect offset usage, alongside changes to holding limits, corporate association disclosures, allowance trading provisions and cost-containment mechanisms. These measures are intended to support market liquidity, oversight and cost-effective greenhouse gas emissions reductions as the overall cap becomes more stringent.

CARB has also incorporated measures intended to support affordability and California businesses. Approximately 80% of allowances are expected to directly benefit Californians, including around $10 billion for electricity bill credits, while an estimated $8 billion will continue to support the Greenhouse Gas Reduction Fund. The amendments also update future allowance allocation to electrical distribution utilities and natural gas suppliers and clarify the permitted use of allocated allowance value.

Another major component is expanded support for industrial decarbonization. CARB doubled the Manufacturing Decarbonization Incentive Fund to approximately $4 billion. The program is designed to support eligible manufacturers, including food processors, cement plants and refiners, undertaking major investments that reduce emissions at their facilities and lower future compliance costs. The Final Regulation Order allows eligible facilities to use the value of manufacturing decarbonization incentive allocation allowances for measures including electrified equipment and qualifying low-carbon hydrogen.

The broader regulatory package also updates industrial product definitions and allowance allocation benchmarks, electricity market and imported electricity provisions, treatment of certain biomass-derived fuels, market participant requirements, and compliance offset provisions. The amendments include changes to disclosure of corporate associations, Know-Your-Customer requirements, trading rules, banking and voluntary retirement, allowance auctions and reserve sales, as well as requirements affecting offset project registration, monitoring, verification and issuance.

CARB adopted the amendments following the extension of the program through 2045 under Assembly Bill 1207 and Senate Bill 840. CARB said the changes are intended to balance legislative direction, affordability, jobs and economic concerns while providing a long-term signal for investment in clean energy and technology. SB 840 also requires CARB to study the Compliance Offsets Program by December 2026 and update all offset protocols by January 2029 to reflect the best available science.

With OAL approval completed on August 31, the amended California Cap-and-Invest Regulation is effective September 1, 2026, providing regulatory certainty ahead of vintage 2027 allowance allocation and establishing the updated market framework through 2045. Fore more information: https://ww2.arb.ca.gov/sites/default/files/barcu/regact/2026/cap_invest/att_a-1%20finalregorder.pdf