California Amends Cap-and-Invest Program Reducing Cap on Utilities and Other Large Sources of GHG Emissions

The California Air Resources Board (CARB) has adopted amendments to California’s Cap-and-Invest Program following the state legislature’s 2025 extension of the program through 2045. The amendments tighten the state’s emissions cap to align with California’s 2030 and 2045 climate targets.

CARB is promoting the amendments as providing long-term regulatory certainty at a time of shifting federal climate and energy policy. At a minimum, CARB views these amendments as an important step in California’s efforts to lead the charge on carbon regulation and clean energy investment.

This LawFlash examines the key program changes and their implications for regulated entities, manufacturers, investors, and other stakeholders.

Key Takeaways

• California has reaffirmed its commitment to a market-based climate program through at least 2045.
• Regulated entities should prepare for a tighter carbon market in California as CARB seeks to facilitate the state's 2030 and 2045 climate goals.
• Manufacturers, refiners, and other industrial facilities may have expanded opportunities to secure state funding for emissions-reduction and facility modernization projects.
• Businesses with California operations, emissions obligations, or decarbonization strategies should evaluate the potential compliance, investment, and planning implications of the updated program.

BACKGROUND

California’s Cap-and-Invest Program establishes an annual declining statewide limit or “cap” on greenhouse gas emissions from major emitting sectors, including electric utilities, industrial facilities, fuel suppliers, and other large sources. CARB then creates credits or “allowances”—tradable permits to emit one metric ton of a carbon dioxide equivalent greenhouse gas emission—such that the total number of allowances provided each year add up to the prescribed statewide cap.  These allowances are then sold to companies at auctions held four times a year. 

 Covered entities must surrender allowances or other compliance instruments corresponding to their emissions, creating a market-based mechanism intended by the state to reduce emissions at a lower overall cost than command and control regulations.

The program was originally authorized under AB 32 in 2006 and was extended through 2030 by AB 398 in 2017. In 2025, California enacted AB 1207, extending the program through 2045 and directing CARB to update program requirements to support the state’s longer-term emissions reduction goals.

According to CARB, the program covers sources responsible for approximately 80% of California’s greenhouse gas emissions and has generated billions of dollars in funding for climate and infrastructure initiatives while contributing to the state’s emissions reductions goals.

KEY PROGRAM CHANGES

The most significant amendments involve the removal of a total of 118 million allowances from future allowance budgets, which is expected to result in an approximately 11% year-over-year reduction in the greenhouse gas emissions cap for the remainder of this decade and an average annual decline of approximately 7% between 2031 and 2045. The tighter allowance budgets are intended by CARB to keep California on track to achieve its statutory climate goals.

The amendments also direct a substantial share of program value toward consumers and climate-related investments. CARB estimates that approximately 80% of allowances will be used to directly benefit Californians, including roughly $10 billion in electricity bill credits and approximately $8 billion for the Greenhouse Gas Reduction Fund.

In addition, CARB doubled the Manufacturing Decarbonization Incentive Fund from $2 billion to $4 billion. This fund is intended to support emissions-reduction projects at industrial facilities, including manufacturers, refiners, cement plants, and food processors, particularly as businesses adjust to reduced availability of certain federal clean-energy incentives.

CARB also approved approximately $800 million in additional compliance support for industry, citing the need to provide near-term stability for California businesses and minimize cost impacts to consumers.

The amendments are expected to become effective September 1, 2026.

IMPLICATIONS FOR INDUSTRY

Energy Companies and Other Regulated Entities

For electric utilities, fuel suppliers, refiners, and other covered entities, the tighter allowance budgets suggest modifications to and/or additional planning for long-term compliance planning and carbon market strategies. Businesses may need to reassess allowance procurement, hedging, emissions-reduction investments, and compliance forecasting as California moves toward a more constrained carbon market.

The amendments should also provide some additional confidence in the stability of the longer-term regulatory framework that will govern emissions compliance through 2045, enabling companies to evaluate long-term capital investment decisions against a more predictable policy backdrop.

Manufacturers and Industrial Facilities

Industrial facilities may be among the most immediate beneficiaries of the expanded Manufacturing Decarbonization Incentive Fund. Companies evaluating facility upgrades, process improvements, electrification projects, fuel-switching initiatives, carbon-reduction technologies, or other emissions-reduction investments may find new opportunities to access state funding.

The expanded funding may be particularly significant for companies seeking alternative sources of support following recent reductions in certain federal climate and clean-energy incentives.

Businesses should monitor forthcoming guidance regarding eligibility requirements, application processes, and allowance allocation mechanisms associated with the program.

Infrastructure, Private Equity, and Clean Energy Investors

The amendments reinforce California’s commitment to a long-term market-based climate framework and may increase investment opportunities tied to decarbonization, energy infrastructure, industrial modernization, and clean technology deployment.

Investors evaluating projects with long development timelines may view the program’s extension through 2045 and the newly adopted allowance budgets as important indicators of future carbon pricing and regulatory expectations in the state.

Companies with California Climate and ESG Exposure

The rulemaking underscores the growing divergence between California climate policy and evolving federal priorities. Companies with operations, supply chains, emissions obligations, or sustainability commitments in California should continue planning for increasingly stringent state-level climate requirements.

The amendments signal that California intends to maintain aggressive emissions-reduction policies regardless of changes at the federal level, making state regulatory developments increasingly important for corporate climate strategy, compliance, and risk management.