One of the most consequential climate votes of the year just happened, not in Washington, D.C., but in Sacramento. On September 13, California lawmakers passed a suite of measures aimed at curbing high energy prices while sustaining the state’s climate leadership. Today, Governor Newsom signed this package of energy and climate bills into law. Among these measures was a bill to extend the state’s cap-and-trade program, rebranded as cap-and-invest, authorizing the program to operate through 2045. Despite tense, last-minute negotiations and no Republican support of the bill, California held firm on its cornerstone climate policy. At a moment when the federal government is retreating from climate action and as energy affordability dominates public discourse, the state has shown that decarbonization can remain a priority. 

Since it became operational in 2013, California’s cap-and-invest program has been central to the state’s efforts to cut greenhouse gas emissions—setting targets of 40 percent below 1990 levels by 2030 and net-zero by 2045. This policy is effective because it pairs environmental certainty with economic efficiency. A binding, declining cap guarantees that total emissions fall on schedule, while trading creates a price signal that lets firms determine the cheapest and fastest way to cut emissions.  

How does cap-and-invest work? First, the program sets a steadily declining, economy-wide limit (i.e., a cap) on greenhouse-gas emissions. Major emitters like fossil fuel power plants, large industrial facilities, and fuel suppliers are covered under this cap. These covered entities are required to hold tradable allowances for each ton of emissions they emit. They procure these allowances through direct allocation, (i.e., free allowances) or quarterly auctions. The proceeds from allowance auctions are a major funding source for the state, driving about $33 billion in climate investments since the program’s inception. In 2017, lawmakers reauthorized the program, extending it from 2020 through 2030. This year, the decision to take up reauthorization carried major implications not only for California’s climate goals, but for the role of market-based climate policy in the United States overall.   

So, why did California reauthorize now? Over the past year, uncertainty about the cap-and-invest program’s future has resulted in weaker auction outcomes, including the first undersubscribed sale since 2020; delays in rulemaking at the California Air Resources Board (CARB), the state agency that administers the program, were a major factor. CARB had been expected to finalize rulemaking on key decisions, such as pre-2030 allowance budgets and allocations, but the delays left participants without the clarity needed to plan compliance strategies and make long-term investments. That uncertainty carried real costs, depriving the state of an estimated three billion dollars in revenues this year that could have gone to clean energy, wildfire prevention, and lowering bills for ratepayers. Reauthorizing the program puts CARB on firmer footing to finalize these rules and restore market confidence.  

Beyond statewide concerns, the federal backdrop raised the stakes for reauthorization even further. In April, President Trump signed an executive order directing the Attorney General to stop the enforcement of state policies that address climate change and greenhouse gas emissions, explicitly including California’s program. The move spurred California Governor Newsom and legislative leaders to make reauthorization a priority.  

While market signals and climate action may be the focus for investors and regulators, affordability is what captures the public’s attention. Durable public support for the program relies on recognizing voter priorities, so the new legislation puts affordability front and center. It directs CARB to enhance affordability protections, including adjusting the program’s price containment reserve or its price ceiling, if needed to shield consumers from higher costs. It also establishes the California Climate Mitigation Fund, financed by the sale of additional allowances at the ceiling (in the event the ceiling is reached), to provide rebates and investments that lower household energy expenses. Finally, it reschedules household electricity bill reductions, known as the California Climate Credit, from April and October to four high-bill months, so relief arrives when bills peak due to higher energy use.  

California’s move is not the only sign that market-based climate policies remain resilient in the United States. The ten states participating in the Regional Greenhouse Gas Initiative recently agreed to tighten their power-sector emissions cap, make updates to provide additional certainty to market participants, and establish new mechanisms to protect energy affordability. Last year in Washington state, voters rejected a repeal of its cap-and-invest program and the state continues to pursue potential linkage with California—now a more likely move since reauthorization has been secured. While New York hit pause on its anticipated cap-and-invest program over affordability concerns, California offers a template for threading that needle. Taken together, these examples show that carbon markets are adapting rather than fading. Now is the time for jurisdictions to iterate on, not abandon, market-based approaches. 

California’s decision to extend its cap-and-invest program through 2045 demonstrates enduring commitment to climate action, even amid political and economic pressures. By adapting its program to address affordability concerns, the state preserved its ambitious targets and reaffirmed its role as a national climate leader. In the absence of federal action, California shows that states can keep driving progress, and that market-based approaches remain among the most effective and adaptable tools for cutting emissions in the United States.