California lawmakers may consider extending the state’s landmark cap-and-trade program, following a request from Gov. Gavin Newsom in his 2025/26 budget proposal released Jan. 10.

“Although the current cap-and-trade program does not expire until 2030, considering extension sooner could provide greater certainty and attract stable investment,” according to the Climate Change and Environment chapter of the 2025/26 budget summary.

Cap-and-trade is considered a key piece of the state’s greenhouse gas reduction strategy and will be needed beyond 2030 to reach the state’s goal of carbon neutrality in 2045, Newsom’s budget said.

And discussions of an extension must include how cap-and-trade proceeds will be spent. The proceeds must support programs “that deliver effective pollution reduction results, support clean transportation and communities, and help address energy affordability,” the governor’s budget summary stated.

California launched its cap‑and‑trade program in 2012 and reauthorized it in 2017. The program sets a cap on GHG emissions that decreases over time. Carbon allowances are sold through government auctions, and purchasers can use the allowances to cover their own emissions or trade them to others.

In the first 10 years of cap-and-trade in California, proceeds provided $28 billion in funding to more than half a million GHG reduction projects through the California Climate Investments program.

In 2014, the California program was linked to that of Quebec.

Last year, Washington Gov. Jay Inslee signed Senate Bill 6058, which allows the state’s cap-and-invest program to link with the California-and-Quebec carbon market. (See Bill to Link Wash. Cap-and-trade with Calif.-Quebec Passes Both Houses.)

Climate Bond Spending

Newsom’s 2025/26 budget also proposes spending $2.7 billion from Proposition 4, a $10 billion climate bond measure that California voters approved in November.

The proposal includes $325 million for wildfire mitigation and forest resilience in 2025/26, at a time when wildfires are ravaging the Los Angeles area.

The budget allocates another $228 million in climate bond proceeds to prepare ports for offshore wind. And $50 million is earmarked for load reduction and backup generation to enhance electric grid reliability during extreme weather events.

In a separate proposal, Newsom wants to spend $2.3 million from special funds for the California Air Resources Board to develop regulations authorizing the use of E15 — a gasoline blend that contains 15% ethanol rather than the 10% ethanol in commonly used E10 blends. Newsom’s budget said the strategy could potentially increase existing gasoline supplies and lower gas prices.

The governor’s $322.2 billion budget, which Newsom described as balanced, now heads to the state legislature for review. However, the impact on the budget of the Los Angeles wildfires is not yet known. On Jan. 13, Newsom proposed providing at least $2.5 billion in additional funding for emergency response and to “jumpstart” recovery efforts.

Cap-and-trade Amendments

In addition to a potential legislative extension of California’s cap-and-trade program, the state Air Resources Board is working on amendments to the regulation.

CARB held a series of informal stakeholder workshops on potential regulatory updates in 2023 and 2024. The agency expects to release a regulatory package for public comment early this year.

One goal of an update is to increase the program’s stringency, “supporting a long-term carbon price signal aligned with the state’s 2045 climate targets,” CARB said in a workshop presentation.

According to an Oct. 15 market notice, the amendments are expected to include the removal of at least 180 million allowances from 2026-2030 to align with GHG reduction goals. A one-time cost increase for cost-containment provisions is also expected, to better align with the federal assessment of the social cost of carbon.

Among other possible revisions, regulatory updates will also reflect CAISO’s Extended Day-Ahead Market (EDAM).