Persisting delays in the California cap-and-trade program reform process have made it highly unlikely that new supply caps will be implemented by 2026. Considering the series of regulatory and legislative processes that need to be completed for the draft regulation to become law, the Initial Statement of Reasons (ISOR) must be published by the first week of July for a 2026 implementation to be potentially feasible. Even so, the California Air Resources Board (CARB) would still face many challenges both meeting submission deadlines and compensating for its distribution of allocated allowances in October this year.
In 2023, CARB initiated a regulatory process intended to better align its cap-and-trade program with the accelerated climate targets adopted in the state’s 2022 Scoping Plan. Since beginning the reform process, regulators have presented a series of updates they are considering – namely reductions to future supply caps, updates to its offset protocols, and changes to its free allocation rules. Deeper insight into the reform considerations can be found here.
The updates to the cap-and-trade program were initially expected to be finalized at the beginning of 2025 and implemented by 2026. A series of regulatory delays and challenges from the Trump administration, however, have delayed the publication of the ISOR – the document outlining which program updates CARB has opted to implement. The delays are likely a result of regulators giving further consideration to their regulatory changes to ensure they effectively address affordability concerns and minimize any political backlash. Although the ISOR’s release would mark a significant milestone in the reform process, the series of regulatory and bureaucratic hurdles the draft regulation must then pass before implementation (see Figure 1), make a 2026 implementation improbable.
Figure 1 considers all the steps needed in order for the draft ETS regulation to become law and shows a “best-case scenario” outlining a possible timeline in which implementation happens by January 2026. Upon incorporating scheduled CARB board meetings as well as filing deadlines for the Office of Administrative Law (OAL) and the Secretary of State, our analysis concludes that the ISOR must be released by the first week of July for the changes to take effect by the start of 2026. The timeline is based on the 28 November deadline for a regulation to be filed with the Secretary of State and implemented by January next year. This means that CARB must vote to adopt the ISOR, release its Final Statement of Reasons (FSOR), and submit the final rulemaking to the OAL for a 30-day review no later than 16 October. The 45-day comment period that must follow the ISOR’s release means that the earliest CARB can vote to adopt the draft ruling is during its board meeting on the 28-29 August. The adopted ruling must, however, not include any significant changes from the ISOR so that a 15-day comment period following the adoption can be avoided. CARB must then promptly release and submit the FSOR in order to meet the OAL and Secretary of State’s filing deadlines.
Even if it meets these deadlines, CARB would not be able to conclude the process before having to distribute its initial allowance allocation to entities in October. Every October, CARB distributes freely allocated allowances to certain regulated entities for the following compliance year. This means that in October 2025, CARB will have to take a portion of the 2026 supply to distribute to compliance entities. So even if CARB is able to achieve this “base-case scenario”, it will have already distributed allowances to entities based off the cap established in the “old” regulation. CARB will, subsequently, either have to begin its new supply reductions from 2027 (the most likely scenario) or implement the new supply reductions from 2026 and figure out a way to account for the oversupply of directly allocated allowances. The latter option would have to be done by adjusting the “True-up” values in October 2027 or reducing allocation quantities for future years. The latter method would be met with several regulatory challenges and could face push-back from those receiving allocated supply. This would likely leave regulators to favor a 2027 implementation of the new supply caps. Beyond supply, however, changes to offsets, emission exemptions, and reporting requirements could still take effect from 2026.
Delays in the program reform process have already been built into allowances prices, which have been trading at three-year lows on the secondary market. The bearish reaction that would come from CARB postponing its new supply caps to 2027, would therefore be limited. Despite it being unlikely that allowance prices would face further significant drops, a one-year pushback in the implementation of the program updates would likely keep contract prices low through 2026. Without any immediate regulatory support, allowance prices are unlikely to see any significant gains for the time being. Upon approaching 2027, volatility and price will likely pick up as market participants begin positioning themselves ahead of the new emission caps.
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