California cap-and-invest explained: auctions, allowance prices and the 2045 extension

California's carbon market is now called Cap-and-Invest. It places a declining limit on emissions from major sources, distributes allowances through auctions and free allocation, and lets covered businesses trade the instruments they need for compliance. The programme is linked with Quebec and has been extended through 2045.

The May 2026 joint auction produced a settlement price of $28.81 per allowance. That number is useful, but it does not explain the market by itself.

California combines the price signal with a shrinking emissions cap, quarterly auctions, an allowance reserve, a price ceiling, limited use of offsets and rules for returning auction value to households and public investment. A business can face a carbon price while still receiving some allowances. A low auction price can coexist with a binding emissions limit. Auction proceeds can lower energy bills or finance cleaner technology without changing the obligation to surrender compliance instruments.

The result is less like a simple tax and more like a managed market: the cap sets scarcity, the auction reveals a price, and the surrounding rules decide how quickly that cost reaches factories, fuel suppliers and households.

How California cap-and-invest works

The cap creates the obligation

The California Air Resources Board (CARB) sets the programme rules and the supply of allowances. Major sources covered by the market must report their greenhouse gas emissions and surrender eligible compliance instruments for the tonnes they emit.

An allowance is not a voluntary carbon credit. It is a regulated instrument created under the cap. If the state issues fewer allowances over time, covered emissions have to fall or businesses have to compete more strongly for the remaining supply.

California says the programme covers roughly 80% of the state's greenhouse gas emissions and about 400 facilities. Coverage includes large industrial facilities, electricity supplied in the state and fuel suppliers. Other California policies, including vehicle, electricity and fuel standards, work alongside the market. Emissions reductions produced by those policies reduce demand for allowances inside the cap.

This overlap is deliberate. Cap-and-invest supplies the economy-wide limit and price signal, while sector rules can remove practical barriers or push specific technologies. It also makes attribution difficult. A fall in emissions may reflect the allowance price, another regulation, economic conditions or all three.

California and Quebec hold joint auctions

California's programme is linked with Quebec's cap-and-trade system. Allowances issued by either jurisdiction can be accepted for compliance under the linked rules, and the two governments hold joint auctions.

The auction offers current-vintage allowances, which can be used for nearer compliance obligations, and advance-vintage allowances for future years. Registered participants submit bids subject to purchase limits, holding limits and financial guarantees. The auction clears at a single settlement price for successful bids.

In Joint Auction 47 on 20 May 2026, the current auction settled at $28.81 per allowance. The figure is a dated auction result, not a live exchange quote. It also should not be compared directly with the average price of a forestry credit, renewable-energy credit or engineered carbon removal. Those units sit under different rules and meet different obligations.

The Carbon Market Intelligence Dashboard keeps the California-Quebec result beside other compliance-market references, including the European Union and United Kingdom emissions trading systems. The comparison is useful for scale, but it does not make the instruments interchangeable.

The reserve price is a floor, not a forecast

Each annual auction notice sets a reserve price. Allowances are not sold below that minimum. The auction settlement can finish above the reserve when bids support a higher price, but the floor should not be read as a forecast of where allowances will trade.

California also holds allowances in an Allowance Price Containment Reserve. For 2026, the two reserve-sale tiers are $65.31 and $83.92 per allowance, while a separate price ceiling is $102.52.

Together, those values form an escalation ladder above the regular auction. Reserve supply can become available under defined conditions when market prices are high, and the ceiling provides a final cost-containment mechanism if an eligible entity still lacks enough compliance instruments and reserve allowances have been exhausted.

Cost controls do not remove the cap, but they affect when additional supply can reach covered entities and at what price. Reading the settlement price alongside reserve inventory and the regulatory release rules shows how much extra supply could become available if prices rise.

Free allowances do not cancel the carbon price

CARB distributes allowances through both auctions and direct allocation. Electrical utilities, natural gas suppliers, industrial facilities and some public-service entities can receive allowances under programme rules.

Utilities must use allowance value for specified ratepayer and decarbonisation purposes. These can include climate credits on bills, energy efficiency, renewable energy, transport electrification and building decarbonisation.

Industrial allocation has a different purpose. It is intended to limit emissions leakage, where production and jobs move out of California without reducing global emissions, and to smooth the transition to carbon costs. Facilities do not automatically receive everything needed for compliance. They can still have to cut onsite emissions, buy additional instruments or combine the two.

The allocation factor declines with the cap. CARB's illustrative factor falls from 0.647 in 2026 to 0.511 in 2030. That keeps pressure on a facility whose output and emissions efficiency do not improve, even while some protection remains.

Offsets are limited and carry a different risk

Covered entities can use approved offset credits for part of their obligation. The quantitative limit is 6% for emissions from 2026 under the current cost-containment framework.

Offsets are generated under approved project protocols rather than issued directly beneath the emissions cap. They therefore need a separate quality check. Buyers need to know the protocol, project location, monitoring record, environmental-benefit classification and whether a credit is exposed to invalidation.

The distinction is easy to miss when both allowances and offsets are described in dollars per tonne. An allowance transfers permission to emit within the capped system. An offset represents an emissions reduction or removal outside the covered source. The compliance rules decide how much substitution is allowed.

For the broader distinction, read carbon credit prices in 2026 and the Carbon Market Integrity Map.

Auction money returns through bills and public investment

Allowances sold at auction create public revenue. CARB reported in April 2026 that the programme had generated $35 billion for the Greenhouse Gas Reduction Fund and delivered $16 billion in energy-bill credits for utility customers over its life to that point.

Revenue figures are not the same as measured emissions reductions. They show the financial scale of the programme and the choices created by auctioning a public asset. The stronger evaluation asks where the money went, who benefited and whether funded projects reduced emissions or exposure to higher energy costs.

The 2026 amendments increased planned electricity-bill support through 2030 and doubled a manufacturing decarbonisation incentive fund to $4 billion. CARB also described additional industry assistance intended to protect jobs and limit near-term fuel-cost pass-through.

That package exposes the political bargain inside the market. California has extended the emissions cap, but it is also recycling more value to households and industry as the programme enters a harder phase.

The programme now runs to 2045

California lawmakers extended cap-and-invest through 2045 in 2025. CARB adopted implementing updates in May 2026, with the changes expected to take effect on 1 September 2026.

The extension matters because a market cannot create a strong long-term investment signal if its legal authority ends before a new factory, grid asset or industrial retrofit pays back. Retaining emissions caps through 2045 gives businesses a clearer view of the policy direction.

It does not settle every post-2030 allocation decision. CARB moved some allowance-allocation choices into a future rulemaking while retaining the longer cap. That separates the core commitment to declining emissions from the unresolved question of how costs and free protection will be distributed after 2030.

The next phase will therefore be judged on two tracks. The first is environmental: whether the cap and supporting policies keep reducing covered emissions. The second is distributional: whether bill credits, industrial support and public investments prevent the market from placing disproportionate costs on households and communities already exposed to pollution.

What the allowance price can and cannot tell you

A rising allowance price can indicate tighter expected supply or stronger demand. A falling price can reflect weaker emissions, softer economic activity, plentiful banked allowances or expectations of future policy relief. Neither direction is a complete verdict on the programme.

For a useful market check, read the auction price alongside the cap, units sold, bid coverage, banked supply, reserve rules and reported emissions. Then separate those market indicators from project-level outcomes funded by auction proceeds.

The May 2026 settlement of $28.81 is the latest public joint-auction anchor used in TPB's dashboard. The next auction result can move that reference. The durable policy signal is the cap through 2045; the price shows how the market values scarcity at a particular point inside that framework.

Official sources

• California Air Resources Board: Cap-and-Invest Program
• California Air Resources Board: auction information and results
• California Air Resources Board: allowance allocation
• California Air Resources Board: cost containment, reserve tiers and price ceiling
• California Air Resources Board: May 2026 programme amendments
• California Air Resources Board: April 2026 Cap-and-Invest fact sheet
• Feature image: Martinez oil refinery by JPxG, Creative Commons Attribution-ShareAlike 4.0