Carbon markets are often discussed without regard to geographic or jurisdictional compliance boundaries, implying that emissions in one location can universally be offset through a credit or allowance issued in another location. While that may be the case in the context of global voluntary carbon market transactions, compliance markets are fragmented by geography, regulated sector, and the rules governing which instruments can be used for compliance. Thin or isolated markets can make price discovery harder and leave companies with fewer ways to manage compliance costs.
California, Washington, and Québec are pursuing one solution to that problem. Their June 2026 linkage agreement lays the groundwork for Washington’s Cap-and-Invest Program to join the market California and Québec have operated together since 2014. If completed, linkage would expand the pool of participants and eligible instruments, permit cross-jurisdiction trading, and support joint auctions. A larger market could improve liquidity and produce more useful pricing signals. However, it would not establish a universal carbon price or make voluntary carbon credits generally interchangeable with regulated compliance instruments.
Who Is Affected?
The immediate legal obligations fall on covered entities, not on every company that operates in these jurisdictions. California’s Cap-and-Invest Program generally covers large industrial facilities and electricity generators, as well as regulated fuel and natural gas suppliers and electricity importers. A threshold of 25,000 metric tons of carbon dioxide equivalent per year applies to many facilities and suppliers, but the rules for electricity importers differ. As such, a company based outside California can have California obligations through electricity imports or fuel supply.
Washington generally covers businesses with at least 25,000 metric tons of covered annual emissions, including industrial sources, fuel suppliers, and natural gas and electric utilities. The precise calculation, exemptions, and rules for particular electricity transactions matter. Washington says waste-to-energy facilities enter coverage in 2027 and railroads in 2031. Smaller businesses ordinarily have no allowance-surrender obligation, although some may opt in and separate emissions-reporting requirements may still apply.
Québec’s program covers qualifying industrial emitters at the 25,000-metric-ton threshold, certain electricity acquirers, and fuel distributors meeting the program’s fuel-volume rule. Eligible facilities with at least 10,000 metric tons may also opt in. Companies without a surrender obligation can participate as registered market participants, subject to the applicable account and trading rules. Corporate headquarters alone is therefore not an accurate test of applicability; companies should examine facilities, fuel distribution, electricity transactions, and voluntary market activity in each jurisdiction.
Agreement, Procedure, and Timing
The agreement calls for the jurisdictions to harmonize reporting and trading rules, recognize eligible compliance instruments, enable transfers through a common registry, coordinate auctions, and account for emissions reductions without double counting them. It is a framework for government cooperation, not a regulation that itself authorizes cross-market compliance. It preserves each government’s ability to change its own laws and provides no enforceable rights to a company holding an allowance or offset.
Washington has completed an important regulatory step. Its Department of Ecology adopted amendments to its Cap-and-Invest and emissions-reporting rules on September 23, 2026, after a proposal and public comment process. The amendments address, among other matters, compliance periods, price-containment measures, registration, corporate associations, and auction procedures. They are scheduled to take effect on October 24, 2026; provisions conditioned on linkage await the linkage effective date.
California Governor Gavin Newsom made the findings required for California to pursue linkage on September 21, 2026. The California Air Resources Board must now conduct public rulemaking and adopt amendments allowing recognition of Washington instruments. Québec must complete its own rulemaking, obtain National Assembly approval of the agreement, and ratify it by Order in Council. When all three have completed their internal requirements, they must notify one another and agree in writing on an effective date. Washington expects the shared market to begin in 2027 and says it will provide at least 90 days’ notice before linkage takes effect. Neither the October 2026 effective date of Washington’s amendments nor the signing of the agreement permits cross-jurisdiction trading today.
Could Other States Follow?
The Regional Greenhouse Gas Initiative (RGGI) provides an existing example of interstate carbon-market cooperation. Its participating states, which currently include New York and New Jersey, operate a regional market for allowances covering power-sector carbon dioxide emissions. RGGI supports the proposition that states can use a larger trading pool rather than confining allowance trading within individual borders. Its scope is narrower than the proposed California–Washington–Québec linkage, and a RGGI allowance does not thereby become eligible for compliance in the western programs.
New York has separately been developing a broader New York Cap-and-Invest program. Its existing RGGI participation should not be confused with adoption of that proposed program. A future New York program could, in principle, be designed to link with another compatible market, but no such linkage has been announced. It would require choices and approvals concerning coverage, allowance recognition, emissions accounting, auctions, price controls, and enforcement.
New Jersey’s future RGGI participation is also under discussion. A pending bill would require the state to withdraw, but New Jersey has not left RGGI. Its agencies have also proposed amendments aligning the state’s trading rules with an updated RGGI model rule. A separate New York–New Jersey market is therefore a hypothetical possibility, not a current proposal or a likely next step that companies can rely upon.
Legal and Commercial Considerations
Instrument eligibility requires more than a common price. Linkage is intended to make qualifying compliance instruments transferable and usable across programs and does not admit voluntary credits generally into the linked market. Buyers should identify the instrument’s issuer, type, vintage, registry status, and permitted use under the rules of the jurisdiction where the instrument will be surrendered. Contracts for future delivery should address delayed linkage, a change in eligibility, failed registry transfer, and replacement instruments.
Offsets warrant particular care. An allowance represents authorization under a capped program; an offset credit depends on an eligible project, protocol, verification, issuance, and continuing validity. Linkage does not erase jurisdiction-specific limits on offset use. Washington, for example, describes requirements concerning the share of offsets that must provide direct environmental benefits to Washington and the circumstances in which credits from a linked jurisdiction may count. Its rules also address invalidation and reversal risks.
A purchaser should perform due diligence on project location, protocol, environmental-benefit status, quantitative use limits, and the allocation of invalidation or reversal risk in the sale contract. The eventual linkage rules should be checked before assuming a credit issued in one jurisdiction can satisfy an obligation in another.
A larger market calls for coordinated controls. Registered companies should review affiliate relationships, account access, auction purchase and holding limits, trading authority, and recordkeeping across jurisdictions. The agreement anticipates cooperation among regulators on fraud, abuse, and market manipulation, including information sharing where law permits. Companies should also retain flexibility in longer-term procurement contracts: each government retains authority to amend its program or leave the linkage.
Companies based outside California, Washington, and Québec should not assume the linkage is irrelevant to them. A company that supplies fuel or imports electricity into one of these jurisdictions may already have obligations under its existing program. Companies with no such activities will not acquire a new compliance obligation merely because the markets link. They can nevertheless draw a practical lesson from the agreement: before buying carbon instruments for use in any regulated market, confirm that the governing rules permit their transfer and use for the intended purpose.