Governor Gavin Newsom announced September 23 that he had made the findings required for California to pursue linkage of its Cap-and-Invest program with Washington’s carbon market. The action allows the California Air Resources Board (CARB) to begin the public rulemaking needed to add Washington to the market California already shares with Québec.
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.