- within Environment topic(s)
- within Energy and Natural Resources topic(s)
On Friday, September 19, 2025, Governor Gavin Newsom signed into law a package of bills adopted by the California Legislature. Key among these were AB 1207 and SB 840, which extend the state's Cap-and-Trade — now rebranded as the Cap-and-Invest — Program through 2045 while making modest changes to it.
By securing continuity for the next 20 years, the Legislature delivered greater certainty to the carbon market, a landscape that has been marked by unpredictability – a move critical for industrial participants that must plan long-term investments in emission reduction strategies. Although the legislative adjustments are measured, they have potentially significant long-term implications for compliance offsets.
Implications for Stakeholders
The combined legislative effects of AB 1207 and SB 840 result in:
- Greater regulatory certainty for market participants, fostering strategic planning and investment in emissions abatement technologies.
- A more transparent, but not necessarily more restrictive, offset environment, with explicit integration of offsets under the cap.
- Escalated scrutiny and potential tightening of offset protocols, reflecting best available science and international benchmarks.
Looking forward, CARB's rulemaking and offset protocol updates will determine the real-world efficacy and rigidity of California's Cap-and-Invest Program. The transition to new leadership and engagement with international standards introduce uncertainty, but also significant opportunities for innovation and alignment with global climate objectives.
Stakeholders should closely monitor CARB's rulemaking to implement the bills over the next year, as these will set precedents likely to influence both state and international climate policy architecture. They also provide a foundation to link California's program with Washington's Cap-and-Invest Program, in addition to the existing linkage with Québec's carbon market.
The passage of AB 1207 and SB 840 signals a mature, iterative approach to GHG regulation in California, prioritizing predictability for investors and environmental integrity in program design. While immediate changes to the offset program are modest, the groundwork is laid for significant regulatory evolution, contingent upon CARB's approach to rulemaking and international developments in the carbon markets. This legislative session thus represents both consolidation and a springboard for future advances in climate policy.
Read on to learn more about AB 1207 and SB 840.
AB 1207
AB 1207's primary contribution lies in its extension of the Cap-and-Invest Program through 2045, removing regulatory ambiguity and stabilizing market expectations for carbon allowance holders and emitters. The price for California Carbon Allowances ("CCAs") had steadily dropped this year due to the increasing uncertainty about the Program, which waspreviously authorized through 2030. While many did not believe it legally necessary to defend it against potential challenges under the State Constitution, the bill was adopted by a supermajority, which definitively protects it from such challenges — and underscores the State's commitment to addressing the climate crisis. Indeed, AB 1207 also expressly reaffirms the State's goal to be net zero by 2045.
AB 1207 also modified the Program in a number of relatively modest ways, including:
- Maintains 6% Limit on the Use of Offsets and 50% DEBs Requirement: The bill formalizes the existing 6% cap on the use of compliance offsets as well as the requirement that half of them must deliver direct environmental benefits ("DEBs") to the state. This was a compromise between factions advocating for restrictions as stringent as 4% (or outright elimination) and those wishing to raise the limit to 10%.
- Places Offsets Under the Cap: The bill stipulates that offsets now count towards the overall emissions cap, mirroring protocols established in the Washington carbon market (just as the bill's name-change was borrowed from Washington). Earlier this year, California Air Resources Board ("CARB") officials testified before the Legislature that they already accounted for offsets when establishing the cap. Thus, while this modification enhances transparency, its practical influence on emissions reductions and market dynamics may be modest. While in theory it will reduce the number of available CAAs and thereby force prices up, that impact appears likely to be minimal.
- Directs CARB to Consider Developing Additional Offset Protocols: The bill directs CARB to consider protocols for carbon removal and nature-based solutions. It also adds nature-based solutions as a priority when allocating funds generated by the Program.
Other Measures:
- AB 1207 directs CARB to develop regulations that transition the distribution of free allowances from gas corporations to electrical utilities by 2031.
- In an effort to prevent leakage, it expressly reaffirms the free allocation of allowances to emissions-intensive, trade-exposed industrial sectors, while also directing CARB to do so "in a manner that minimizes emissions leakage risk."
- AB 1207 directs CARB to evaluate the cost impact of the Program on consumers when conducting its rulemaking.
- AB 1207 includes provisions requiring CARB to brief the Joint Legislative Committee on Climate Change Policies. This merely reaffirms existing law. Indeed, CARB personnel have testified whenever bidden by the Legislature, as they know well where the agency's budget is set.
SB 840
SB 840's provisions fall into two categories: those requiring CARB to conduct review and update its offset protocols, and those that provide additional direction regarding how moneys generated by the Program are to be utilized. The second category sets forth a long list of programs now expressly favored by the Legislature. With regard to the first, SB 840 mandates that CARB update all existing compliance offset protocols by 2029. In doing so, it must ensure that the protocols (1) "reflect" the best available science; (2) "consider" the protocols in other carbon markets, including those "established under Article 6.4 of the Paris Agreement . . . also known as the Paris Agreement Crediting Mechanism" ("PACM"), and also (3) "consider . . . academic research, and industry best practices, that prioritize offset quality." The bill also directs CARB to repeat this update process every five years after 2029, andto evaluate and report to the Legislature regarding potential changes to the DEBs program.
While the operative verbs have a degree of ambiguity (e.g., what does it mean to "reflect" or "consider"?), by referencing standards that are themselves subject to ongoing policy development and debate, SB 840 opens the possibility for both substantive tightening of offset qualifying criteria and recalibration of California's program within the context of global carbon market trends. The inclusion of mechanisms such as PACM ensures alignment with international norms, but simultaneously introduces uncertainty as global standards evolve.
Transition to Rulemaking: CARB's Next Steps
Implementation of AB 1207's amendments delegates significant authority to CARB, which must now undertake a rigorous rulemaking process. The challenge lies in identifying and enforcing additional GHG mitigation measures, as most cost-effective abatement options (the "low-hanging fruit") have been exhausted. The agency must navigate complex trade-offs — scientific, economic, and social — within a divided stakeholder environment, and it now must do so under new leadership. CARB's current Chair, Lianne Randolph, stepped-down with over a year left on her term, citing exhaustion. Governor Newsom named his Chief Climate Advisor, Lauren Sanchez, as the new Chair. This has largely reassured stakeholders, as she has long been involved in State climate policymaking, having previously held senior positions at CalEPA in addition to advising the Governor, and she reportedly was a key player in the negotiations to get these bills adopted.
CARB's rulemaking may commence as early as late 2025; there may be an initial workshop as early as October and we may see a draft regulation introduced before year-end. The rulemaking is expected to be both robust and contentious, requiring careful calibration of regulatory objectives vis-à-vis technological feasibility and market realities. The stated objective is to have the rulemaking completed in 2026 to facilitate linkage of the overhauled Program with both Québec and Washington in 2027.
We will continue to monitor the implications of these bills on stakeholders. Please reach out for more information.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
