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The markets are not yet linked. California and Québec must complete further steps before a three-jurisdiction market can begin operating. Washington expects linkage could take effect in 2027.

Governor clears statutory requirement

SB 1018 of 2012 requires the governor to make specified findings about a potential partner’s carbon market before CARB can link California’s program to it. CARB requested the findings in early September. Newsom made them September 21 and announced the action two days later.

California and Québec have operated a linked carbon market since 2014. The three jurisdictions released a draft linkage agreement in March and signed the agreement in June. The agreement does not itself put linkage into effect; each jurisdiction must complete its own legal and regulatory process.

Linkage would expand allowance trading

Under the proposed linkage, regulated entities could use eligible allowances issued by any of the three jurisdictions to meet their compliance obligations. The governments would conduct joint allowance auctions, and market participants could trade allowances across jurisdictions, according to the Washington Department of Ecology.

California’s Cap-and-Invest program covers large industrial facilities, energy companies, fuel suppliers, and other major emitters. The Newsom administration says covered emissions account for approximately 80% of the state’s greenhouse-gas emissions. Allowance costs can therefore matter to businesses beyond the utilities and oil companies that are directly associated with energy policy.

A larger market could give covered businesses more options for obtaining allowances. Washington’s Department of Ecology concluded that linkage should reduce compliance costs for Washington businesses and make prices more stable. The effect on California allowance prices is less certain and will depend in part on allowance supply and demand across the three programs.

Washington files linkage rules

Washington’s Department of Ecology signed its rule adoption order September 17 and filed it September 23. The rules are scheduled to take effect October 24. California and Québec still must complete their remaining regulatory and statutory steps.

Washington says it will give market participants at least 90 days’ notice before linkage takes effect. Until then, businesses cannot trade compliance instruments between Washington and the existing California–Québec market.

CARB rulemaking is next for California

California lawmakers extended Cap-and-Invest last year with the passage of AB 1207 and directed regulators to address affordability, employment, and industrial competitiveness as the program evolves. The Newsom administration estimates that the program has generated $37 billion for state climate investments.

CARB’s linkage rulemaking will determine how California adds Washington to the existing market. For covered businesses, the effect on compliance costs will become clearer as regulators finalize the rules and the three jurisdictions establish a date for trading to begin.

The case concerns whether an EPA decision allowing California to enforce an emissions standard can be submitted to Congress as an agency rule. California argues that waivers are adjudicatory approvals rather than rules. The EPA states that the CRA requires it to submit them for congressional review.

Court ordered EPA to reverse four reclassifications

On September 2, 2026, U.S. District Judge Beryl Howell’s blocked the Trump administration from reclassifying four California Clean Air Act waivers as federal rules subject to expedited congressional repeal, preserving California’s authority to enforce emissions standards affecting vehicles and small off-road engines.

The order requires the EPA to withdraw or correct its reclassifications and prevents the agency from giving effect to those or other reclassifications of waiver orders as rules while the injunction remains in place.

The four waivers at issue allow California to enforce emissions requirements for cars and small off-road engines. The EPA later sought to reclassify two additional waivers covering ocean-going vessels in port and commercial harbor craft, according to the Attorney General’s office. The waivers do not include Advanced Clean Cars II.

Congress and President Trump acted separately in 2025 to disapprove waivers associated with that program and two other vehicle programs.

California is challenging those actions in separate litigation.

Dispute extends to marine standards

After transmitting the four waivers in June, EPA submitted two additional waivers to Congress in July. They concern California emissions standards for ocean-going vessels at berth and commercial harbor craft. EPA says those approvals are also rules under the CRA.

The distinction could affect future California programs. The Clean Air Act allows California to seek EPA approval to enforce certain emissions standards that differ from federal requirements. If waiver approvals are subject to the CRA, Congress could use its expedited procedures to attempt to overturn them after EPA grants them.

Howell’s preliminary injunction remains in effect unless a court changes it. The appeal will determine whether that restriction continues while the courts consider EPA’s authority to classify the waivers as rules.

The distinction matters beyond the six waivers. Under the Clean Air Act, California may seek EPA approval to enforce certain emissions standards that differ from federal requirements. Treating those approvals as CRA rules would give Congress an additional route to challenge future waivers after EPA grants them.

The injunction remains in effect unless a court changes it. The appeal will test whether EPA may classify California’s waiver approvals as rules for congressional review, a question with consequences for how the state’s future emissions programs are approved and challenged.

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Under a linked system, regulated entities in each jurisdiction would be able to use emissions allowances issued by the others for compliance with their greenhouse-gas (GHG) limits. The programs would also coordinate emissions allowance auctions and maintain shared accounting systems for tracking emissions permits.

The proposed linkage agreement, published March 3, 2026 by the Washington Department of Ecology, sets out the legal and administrative framework for integrating the emissions trading programs of California, Washington, and Quebec. The release of the draft agreement begins a public review process during which state regulators must complete rulemakings and make formal findings before integrating the programs.

Expanding the existing California–Québec market

California and Québec have operated a joint cap-and-trade market since 2014 under an international linkage agreement authorized by California’s AB 32, known as the Global Warming Solutions Act of 2006. The program is part of the broader Western Climate Initiative carbon market. Washington launched its own carbon trading system in 2023 under the Climate Commitment Act, which established the state’s cap-and-invest program covering major industrial emitters, electricity suppliers, and fuel distributors.

Key provisions in the draft agreement

The draft agreement outlines governance rules and operational requirements that would apply if Washington joins the California–Québec market. Key goals of the agreement are:

• regulatory harmonization for reporting GHG emissions and for the market-based program;

• equivalence and interchangeability of compliance instruments to allow compliance with Québec’s, California’s, and Washington State’s own market-based program;

• a transparent and data-driven calculation that attributes to Québec, California, and Washington State their respective portion of the total greenhouse gas emission reduction;

• permit the transfer and exchange of compliance instruments between participants registered with each respective market-based programs using a common secure registry;

• compatible market requirements for Québec’s, California’s, and Washington State’s respective market-based programs to ensure no entities in any of the programs are disadvantaged relative to their counterparts in the other jurisdictions;

• joint auctions of compliance instruments;

• information sharing to support effective administration and enforcement of Québec, California, and Washington State statutes and regulations.

Potential market impact

California must complete a regulatory review and make formal findings that the linked program will maintain equivalent emissions reductions and enforcement standards under state law. The other parties would also need to complete their regulatory processes. Officials from the participating jurisdictions say the goal is to complete the regulatory process and implement the linked market as early as 2027, depending on the outcome of rulemaking and public review.

The integrated system would represent the largest carbon trading market in North America and one of the most significant subnational climate policy collaborations in the United States. Policymakers say a larger market could increase liquidity and stabilize allowance prices by increasing the number of participants trading emissions permits.

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The board’s action marks a major step toward implementing California’s corporate climate reporting regime. Companies subject to the laws must now begin preparing emissions inventories and climate-risk disclosures ahead of the first compliance deadline.

California’s Corporate Climate Disclosure Laws

The regulations implement two statutes enacted in 2023: SB 253, the Climate Corporate Data Accountability Act, and SB 261, the Climate-Related Financial Risk Act. Together, these laws create one of the most expansive climate transparency frameworks for businesses operating in the United States.

SB 253 requires companies with revenues of more than $1 billion doing business in California to report their greenhouse gas (GHG) emissions publicly. The required disclosures include direct emissions from a company’s operations (Scope 1), indirect emissions associated with purchased electricity and energy (Scope 2), and value-chain emissions tied to suppliers and product use (Scope 3).

SB 261 requires companies with more than $500 million in annual revenue doing business in California to report publicly the climate-related financial risks to their company and the strategies they will use to manage those risks.

Reporting Deadline and Procedures

Under the approved regulations, companies subject to SB 253 must submit their first emissions disclosures by August 10, 2026. The initial reporting year will require companies to disclose Scope 1 and Scope 2 emissions only, with Scope 3 reporting to be phased in later as companies and regulators develop more standardized data collection and verification processes.

The CARB approval also establishes the administrative structure for the program, including oversight of reporting requirements and verification procedures.

Fee Structure

As part of the implementation package, CARB also approved a fee structure designed to fund administration of the reporting system, including the development of emissions reporting infrastructure, verification systems, and compliance oversight. The fees will apply to companies required to report under the disclosure laws and will support CARB’s implementation and enforcement activities.

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The amendments build on legislation enacted in 2025, most notably AB 1207, signed by Governor Gavin Newsom in September 2025. That law extended the Cap-and-Invest program through 2045 and directed CARB to revise several core program elements, including the overall emissions limit, allowance distribution, and the role of offsets in compliance.

Proposed Cap Adjustments
CARB’s proposal would significantly tighten the supply of emissions allowances in future years. Staff estimates indicate that the revised cap trajectory would remove roughly 118 million allowances from circulation during the 2027–2030 period, reflecting a more aggressive emissions-reduction pathway consistent with state climate policy.

Use of Offsets
The proposed amendments also incorporate statutory limits on offset usage. Under the proposal, regulated entities would be allowed to meet no more than 6% of their compliance obligation using offsets through 2045. In addition, CARB proposes to treat offsets as part of the capped system, such that offset use would be reflected in adjustments to future allowance supply.

Revisions to Allowance Distribution

The amendments would modify how free allowances are allocated among covered entities. By 2030, allowances previously directed to certain fossil fuel-related entities would be progressively reallocated to electric distribution utilities, a shift intended to support electrification and broader decarbonization efforts. CARB would continue to refine allocation methodologies through subsequent regulatory proceedings.

Program Oversight and Transparency

CARB is also proposing new reporting and evaluation requirements aimed at improving program transparency and strengthening legislative oversight. These measures are intended to allow policymakers and the public to better assess program performance over time.

Investment of Auction Proceeds

Consistent with existing practice, revenues generated from allowance auctions would continue to be invested in climate-related programs. CARB identifies transportation, housing, emissions-reduction projects, and environmental justice initiatives as ongoing priorities for the use of these funds.

The public comment period is January 23, 2026 to March 9, 2026, with a targeted effective date of September 1, 2026.

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The regulatory text provides definitions, applicability criteria, deadlines, recordkeep­ing and fee structures, and reporting timelines. This is the first clear view of how California intends to operationalize these statutes.

The Legislative Framework

Governor Gavin Newsom signed into law SB 253 and SB 261, known as the Climate Accountability Package. SB 253 requires companies with revenues of more than $1 billion to report their greenhouse gas (GHG) emissions related to both operations and their supply chain starting in 2026. SB 261 requires companies with annual revenue of more than $500 million and that “do business” in California to disclose publicly their company’s climate-related financial risks and plan to address them.

Defining “Reporting” and “Covered” Entities

The proposed rules provide definitions that determine which businesses must report:

• A “reporting entity” for SB 253 is any corporation, partnership, LLC, or similar business formed under U.S. law with total annual revenues of more than $1 billion and that does “do business” in California, as defined by state tax code criteria.

• A “covered entity” under SB 261 includes similar business structures with annual revenues of more than $500 million doing business in California.

Importantly, the regulations exempt certain entities, including tax-exempt nonprofits, government bodies, and entities whose only California activity is wholesale electricity transactions.

Doing Business

The regulatory text applies the California Revenue and Taxation Code definitions of “doing business,” meaning many foreign-based companies with meaningful economic activity in California could fall within scope.

Reporting Requirements and Initial Deadlines

SB 253 — GHG Emissions: Under the draft regulations, Scope 1 and Scope 2 reporting for the first applicable year is due on or before August 10, 2026, covering the preceding fiscal year, with detailed rules on fiscal year alignment. Covered entities must calculate GHG emissions consistent with statutory definitions and report those metrics to CARB. Third-party assurance frameworks and data boundaries will be formalized as rulemaking progresses.

While the draft regulatory text includes only the initial reporting timeline for Scope 1 and 2, stakeholder commentary and CARB workshops indicate that Scope 3 disclosures will begin with the 2027 cycle, reflecting later implementation phases.

SB 261 — Climate-Related Financial Risks: For SB 261, the draft rules establish criteria for content and timing of risk reports. Enforcement has been stayed by federal court order pending appeal, meaning CARB has paused enforcement of the statutory January 1, 2026 deadline. When active, the requirement will obligate covered entities to provide a biennial public climate risk disclosure, including governance, strategy, material climate risks and mitigation strategies relevant to business operations.

Fees, Recordkeeping, and Administrative Provisions

CARB will assess annual fees on both reporting and covered entities to fund program implementation and administration, calculated using statutory formulas tied to required revenue and cost adjustments. Entities must remit fee payments by September 10 of each year and face late fees if payments are delinquent. Firms must also maintain records demonstrating revenue thresholds and California business activity for five years and provide them upon request.

Failing to pay fees or to comply with reporting requirements can trigger enforcement actions, penalties, and injunctive relief, consistent with the broader enforcement provisions of the California Health and Safety Code.

Definitional Clarity and Threshold Tests

One of the most consequential elements of the draft regulations is the precision in definitions. By anchoring revenue tests to the lesser of the previous two fiscal years and adopting statutory “doing business” language from tax code, CARB aims to reduce ambiguity about which companies fall under each regime.

The definitions of Scope 1, Scope 2 and other emissions metrics explicitly mirror statutory language, which in turn aligns with international GHG reporting norms — a critical point for multinational firms that may already compile similar data.

Implementation and Next Steps

CARB’s draft rules arrive amid ongoing legal and practical headwinds. Stakeholders have called for additional clarity on verification requirements, the cost burden on companies, and potential alignment with emerging federal and global standards. The public comment period and upcoming hearing in early 2026 represent a key phase for corporate stakeholders to influence the final contours of the rules.

If adopted largely as drafted, the regulations will make California home to one of the most robust state-level climate disclosure regimes in the United States, with implications for thousands of companies with significant revenues and California business ties. Even firms outside California with economic footprints in the state may find themselves subject to new reporting and transparency obligations.

In the broader context of climate policy, these rules signal California’s willingness to extend its climate leadership into corporate disclosure — a move that could ripple into national and global discussions on climate risk and emissions transparency.

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On August 18, 2025, the Ninth Circuit Court of Appeals granted a request from the Chamber of Commerce for an injunction against SB 261, known as the Climate-Related Financial Risk Act, but denied a request for an injunction against SB 253, known as known as the Climate Corporate Data Accountability Act.

SB 261 requires companies with annual revenue of more than $500 million and that do business in California to disclose publicly the climate-related financial risks to their company and how they will address them. (see Climate Reporting Laws: Comparison of Key Provisions.)

SB 261 was scheduled to take effect January 1, 2026. SB 253 is still in effect, and its scope 1 and scope 2 emissions reporting requirements are scheduled to take effect in June 2026.

Ongoing Challenge

The Ninth Circuit injunction is the latest legal development in an ongoing challenge that began in January 2024. A coalition of business groups contend that the laws violate the First Amendment by compelling speech on a “politically controversial” topic and that the Clean Air Act preempts California’s “de facto regulations of greenhouse-gas emissions nationwide.”

In November 2024, the court denied a motion for summary judgment from the groups on their claim that the laws violate the First Amendment. In February 2025, the court dismissed the claims that the Clean Air Act preempts the two laws and that the laws burden interstate commerce.

In August 2025, a U.S. district judge denied a motion for a preliminary injunction against the two laws on First Amendment grounds. More recently, on November 15, 2025, the groups filed an emergency appeal to the U.S. Supreme Court, requesting that it put California’s climate reporting laws on hold while legal challenges continue.

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SB 253, known as the Climate Corporate Data Accountability Act, requires companies with revenues of more than $1 billion to report their greenhouse gas (GHG) emissions related to both operations and their supply chain.

SB 261, known as the Climate-Related Financial Risk Act, requires companies with annual revenue of more than $500 million and that do business in California to disclose publicly the climate-related financial risks to their company and how they will address them. (see Climate Reporting Laws: Comparison of Key Provisions.)

In January 2025, the Chamber of Commerce and other business groups challenged SB 253 and SB 261 as compelled speech in violation of the First Amendment.

In August, a U.S. district judge denied a motion for a preliminary injunction against the two laws on First Amendment grounds. In February, a U.S. district judge granted the state’s motion in dismissing claims that the Clean Air Act preempts the two laws and that the laws burden interstate commerce. This left remaining only the claim that the laws compel speech about climate change in violation of the First Amendment.

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Exxon argued that the laws require the company to “serve as a mouthpiece for ideas with which it disagrees” with the goal of the law to “embarrass” large companies that the state “believes are uniquely responsible for climate change into ‘tak[ing] meaningful steps to reduce GHG emissions.’”

Exxon also argued that the laws compel the company to “trumpet California’s preferred message even though ExxonMobil believes the speech is misleading and misguided.” The company said it already reports its global emissions and climate risks and “no California official has ever suggested those disclosures are misleading or incomplete.”

The suit also stated that SB 261 would require it to speculate “about unknowable future developments and to publicly disseminate that speculation on its website.”

SB 253 and SB 261, enacted in 2023, are know as the Climate Accountability Package. SB 253 requires companies with revenues of more than $1 billion to report their GHG emissions related to both operations and their supply chain starting in 2026. SB 261 requires companies with annual revenue of more than $500 million and that do business in California to disclose publicly their company’s climate-related financial risks and plan to address them.

In a separate legal challenge, a coalition of business groups filed a lawsuit challenging SB 253 and SB 261 in 2024.

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The list is preliminary, and CARB notes that “[e]ach potentially-regulated entity remains responsible for compliance with statutory requirements, regardless of whether it was included in staff’s preliminary list or outreach.”

SB 253, known as the Climate Corporate Data Accountability Act, requires companies with revenues of more than $1 billion to report their greenhouse gas (GHG) emissions related to both operations and their supply chain. SB 261 requires certain companies to disclose publicly their climate-related financial risks.

A coalition of business groups is challenging the laws , contenting that they violate the First Amendment by compelling speech on a “politically controversial” topic and that the Clean Air Act preempts California’s “de facto regulations of greenhouse-gas emissions nationwide.”

In August 2025, a federal judge denied a request from business groups for a preliminary injunction to block implementation of the laws while their lawsuit proceeds through the courts.

The California laws remain the key climate reporting laws in the country after the U.S. Securities and Exchange Commission (SEC) voted in March 2025 to end its defense of its emissions and climate- risk reporting rules.

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The proposal, officially titled Reconsideration of 2009 Endangerment Finding and Greenhouse Gas Vehicle Standards, would repeal all existing GHG emission standards for light-, medium-, and heavy-duty vehicles that rely on the finding.

In its rulemaking, the agency argues that Section 202(a) was not intended to authorize regulation based on global climate change impacts. EPA said the provision was designed to address air pollutants with localized or regional effects, not “well-mixed” GHGs that are globally dispersed. The agency also questioned whether the scientific and technological record supports continued federal regulation of vehicle greenhouse gas emissions.

If finalized, the repeal would eliminate the statutory predicate for nearly all federal GHG regulation for mobile sources and could spill into other regulatory domains, including stationary sources, power plants, and oil and gas facilities, where EPA has issued analogous findings.

The proposal could also leave a regulatory gap, shifting responsibility to states or creating a fragmented policy landscape if federal authority is curtailed. Legal observers expect that any final withdrawal of the finding would face immediate litigation, focusing on both EPA’s interpretation of the Clean Air Act and its justification for reversing a long-standing scientific conclusion.

Industry and environmental reaction

Industry groups, including automotive manufacturers, have urged EPA to revise or recalibrate greenhouse gas standards to reflect changing market conditions rather than eliminate the regulatory framework entirely.

Environmental and public health advocates argue that the EPA lacks new scientific evidence to justify overturning the original finding and that rescission would undermine protections for climate-vulnerable communities. Others have warned that removing the federal regulatory floor will erode long-term investment certainty and compound climate risk across sectors.

Next Steps

The public comment period on the proposal is scheduled to remain open through mid-September 2025. The agency will review comments before issuing a final rule, which is likely to become a focal point for litigation and possible Congressional intervention.

A final decision on the repeal has significant implications for California’s regulatory strategy, including the state’s coordination with federal mobile source standards and its broader climate targets under SB 32 and AB 197.