California Air Resources Board

On January 13, 2026, the California Air Resources Board (CARB) released draft updates to the state’s Cap-and-Invest Program, a cornerstone of the state’s climate strategy. These updates follow the Legislature’s successful passage last year of new laws extending the program through 2045.  The updates are designed to ensure California stays on track to meet its climate targets for 2030 and 2045 while supporting affordability, cost-effectiveness, and regulatory and market certainty for program participants. 

What Is Cap-and-Invest? 

Formerly known as Cap-and-Trade, Cap-and-Invest is a proven, cost-effective policy tool that that makes polluters pay while reducing climate emissions over time. It’s one of many programs the state is using to reduce greenhouse gas emissions. 
It sets a declining limit on major sources of climate pollution, covering the largest polluters, including factories, energy companies, and oil and gas suppliers. These account for 80% of California’s climate emissions. The limit is an aggregate limit for all sources—there are no facility-specific caps. 
The program creates a powerful economic incentive to use cleaner, more efficient technologies, and it is 4–6 times less costly than alternative approaches to addressing climate pollution like a carbon tax or direct regulations. 
The Cap-and-Invest Program has been operating successfully for 13 years with nearly 100% compliance. For 13 years, Cap-and-Invest has operated with nearly 100% compliance.

A Track Record of Success

Cap-and-Invest has delivered significant measurable benefits for California:

• Helped the state meet its 2020 climate target six years early while growing the economy.
• Generated $34 billion for climate investments, funding 500,000+ projects and supporting 30,000 jobs.
• Directed 70% of investments to disadvantaged and low-income communities.
• Returned $15 billion in bill credits to household utility customers.

Key Updates in the Proposal

The proposed amendments:

• Ensure long-term allowance budgets beyond 2030 support achieving the state’s 2045 climate targets.
• Make changes from a previous process to remove allowances from circulation when offsets have been used for compliance, where allowances would now be removed on an ongoing basis.
• Implement a new legislative requirement to transfer free allowances from natural gas utilities to electric utilities to address electricity affordability concerns and to further incentivize the transition to electrification.
• Continue the ongoing protection for ratepayers on utility bills by providing free allowances that cover all the compliance costs that utilities have for this program.
•  Updates requirements related to reporting business relationships to further protect against market manipulation.
• Add post-2030 allowances to Allowance Price Containment Reserve to continue and strengthen that mechanism, which avoids price spikes and keeps costs low.
• Maintain the number of free allowances to industry to incentivize manufacturing in California, protect jobs, and make sure drivers won’t pay additional passthrough costs at the gas pump.

Why It Matters

The changes to the program are designed to support affordability, to strengthen cost-effectiveness features, and to send a clear and steady price signal that encourages investment in cleaner energy and more efficient technologies across the economy. They also aim to support doing business in California, provide market certainty to program participants, and protect against market manipulation.

Economic Analysis: Benefits Outweigh Costs

As required by law, staff completed an economic analysis of this proposal and found the overall benefits of the program outweigh its costs.  
The estimated total cost of compliance is $124 billion over a 20-year lifetime. This cost is negligible relative to California’s current annual $4 trillion economy, which is projected to grow to over $5 trillion by 2046.  
In being responsive to legislative direction and considering affordability, it’s important to note that the proposal is $20 billion less costly than the scenarios initially analyzed in April 2024.

The proposal delivers significant return on investment:

• Total statewide benefits of $180.7 billion, including $123 billion in avoided health costs resulting from improved local air quality, and
• Up to $485 billion in global savings due to avoided climate damages

The program is also projected to generate:

• $56 billion to benefit utility ratepayers, and
• $37 billion for climate investments

Next Steps

• Public comment period: January 23 – March 9.
• Board hearing: Q2 2026.
• Effective date: September 1, 2026.

Additional Legislative Requirements

In addition to the proposed updates, legislation passed in the Fall includes several other requirements. 
Assembly Bill 1207 requires CARB to:

• Present to relevant legislative subcommittees on rulemaking materials and expenditures of the program’s auction proceeds
• Report annually on the use of the value provided to the utilities through allocated allowances.
• Consider developing new offset protocols, including for carbon dioxide removal.

And Senate Bill 840 requires CARB to:

• Conduct a study of the Compliance Offsets Program by December 2026, including a study of the contribution of offset projects toward California’s climate goals.
• Update all offset protocols by January 2029 to reflect best available science, and re-evaluate protocols for potential updates every five years thereafter.

Bottom Line

Cap-and-Invest remains a cornerstone of California’s climate strategy. These updates strengthen affordability, market stability, and environmental integrity as the state moves toward carbon neutrality by 2045.