Logo
Contact

California's Carbon Market, Explained

A Guide for Policymakers, Investors, and Market Participants

California’s Cap-and-Invest Program sets a declining limit on carbon pollution and uses a market to help businesses reduce pollution as cost-effectively as possible while generating billions of dollars for the public. 

The Program in 1 minute

  • California sets a limit on carbon pollution called a cap.
  • That limit declines over time.
  • Covered businesses must hold allowances for each ton of pollution above the limit.
  • Allowances can be purchased, sold and traded within the program rules.
  • Auction proceeds support community investments that cut pollution and benefit consumers.

Who Participates

Covered Companies

Oil and gas companies, utilities, fuel suppliers, electricity importers, and large industrial facilities choose to implement strategies to cut their carbon emissions or purchase credits to cover them. 

Investors

Pension funds, endowments, climate-focused funds, foundations, and individuals who provide liquidity and price discovery.

Why Investors Matter

  • Reduce market volatility by buying excess supply.
  • Provide liquidity so compliance entities can transact efficiently.
  • Help reveal long-term price expectations through market participation.
  • Support market stability during periods of oversupply.

Public Benefits

$2 BILLION

The directly yearly investment in households through Climate Credit utility rebates since 2014.

$4 BILLION 

Yearly reinvestment in California — clean transit, wildfire resilience, and programs for disadvantaged communities since 2020.

What's Next

Program Linkage: A North American Carbon Market

California’s market is linked with Québec under the Western Climate Initiative, allowing allowances to be traded across both jurisdictions through joint auctions. This larger shared market improves liquidity, reduces compliance costs, and strengthens market stability.

  • Washington operates its own Cap-and-Invest program and is actively evaluating linkage with the California–Québec market.
  • A future linkage would create a larger, more efficient West Coast carbon market with greater liquidity and harmonized carbon pricing.
  • Other Canadian provinces have previously participated in linked carbon markets, demonstrating that cross-border compliance markets can operate successfully.