California runs a market-based program that puts a declining limit on greenhouse gas emissions from major sources and raises money by selling the right to emit. The program was long called cap-and-trade and is now called cap-and-invest by the California Air Resources Board (CARB), the state agency that runs it.
What is the cap, and what is an allowance?
According to CARB, the Cap-and-Invest Regulation “establishes a declining limit on major sources of GHG emissions throughout California.” CARB creates allowances equal to the total amount of permissible emissions, which is the cap. One allowance equals one metric ton of carbon dioxide equivalent, a unit that converts different greenhouse gases into a common measure using their 100-year global warming potential.
Each year fewer allowances are created, so the annual cap declines. Companies covered by the program must hold enough allowances to match their reported emissions. Covered entities are also still subject to existing air quality permit limits for criteria and toxic pollutants, according to CARB, so the program does not replace conventional pollution rules.
Who is covered?
CARB says the program covers approximately 80 percent of the state’s greenhouse gas emissions. The Legislative Analyst’s Office (LAO), the Legislature’s nonpartisan fiscal adviser, described covered entities in a 2023 report as including oil refineries, electricity generators and importers, and manufacturers, and put their share at roughly 75 percent of state emissions. The two figures come from different years and methods, so treat them as “about three-quarters to four-fifths” rather than an exact share.
The LAO also noted that the program sets no individual caps for each facility. Only the statewide total is capped, which means one company can emit more if it buys allowances from another that emits less.
How do companies get allowances?
There are two routes, according to the LAO’s 2023 explanation.
- Free allocation. Some allowances go to utilities, natural gas suppliers and industrial facilities. The stated purposes are to protect consumers from significant rate increases and to prevent “leakage,” meaning companies moving operations out of California to avoid compliance costs.
- Auction. The remaining allowances are sold at auction. Companies can also trade allowances among themselves and bank unused ones for future years, the LAO said.
The total allowances sold and given away each year equal the statewide cap.
How do the auctions work?
The auctions are held jointly with Québec, which has a linked system. CARB’s auction page lists Joint Auction #48 on August 19, 2026, and Joint Auction #49 on November 18, 2026, from 10:00 a.m. to 1:00 p.m. Pacific time. The page says auction notices are posted 60 days before each auction.
CARB describes the auction reserve price as “a predetermined minimum price at which allowances will be sold to auction participants.” The reserve price rises each year. Combined with the shrinking supply, CARB says, this is meant to create a steady carbon price signal. The applicable dollar figure is set in CARB’s annual auction reserve price notice, and the current figure should be checked there.
For a sense of how prices relate to the floor, the LAO’s 2023 report gave one example: in August 2023 the floor was $22.21 and allowances sold for $35.22, which is $13.01 above the floor. That is a dated illustration, not a current price.
A worked example of the cap
Illustrative arithmetic, with invented round numbers: suppose a statewide cap of 100 million allowances in one year and a cap that falls by 3 million a year. The next year’s cap would be 97 million, and the year after that 94 million. A company that emitted 1 million tons in each year would need 1 million allowances each time, but because total supply shrinks, the allowances become scarcer. A company that cuts its emissions to 800,000 tons can sell the leftover 200,000 allowances or bank them. These figures are hypothetical and do not describe California’s actual cap schedule, which CARB publishes.
Two other design features matter. A reserve price keeps allowances from selling below a minimum, and, according to CARB’s description of its auction process, separate reserve sales from an allowance price containment reserve may also occur. This is a safety valve intended to limit price spikes. CARB’s pages describe it but this article does not give its price tiers.
What are offsets?
Offsets let a covered company meet part of its obligation by paying for greenhouse gas reductions elsewhere. The LAO’s 2023 report said offsets could cover up to 4 percent of a company’s compliance obligations, and that at least half of claimed offsets must provide direct environmental benefits in California. In a 2025 analysis of the governor’s proposal to extend the program, the LAO said current law sets the offset limit at 6 percent for 2026 through 2030. Because the limit has changed over time, check CARB’s offset page for the current rule.
Where does the auction money go?
Auction revenue is deposited into the Greenhouse Gas Reduction Fund. The Legislature directs it to California Climate Investments, a set of state programs. The LAO’s 2023 report said recent auctions raised between $3 billion and $4.3 billion a year, and that about 65 percent of annual revenue went to statutory commitments, mostly through continuous appropriations (spending that happens without a new annual vote). Those commitments included:
| Program | Share or amount (LAO, 2023) |
|---|---|
| High-Speed Rail Authority | 25 percent of annual revenue |
| Affordable Housing and Sustainable Communities | 20 percent |
| Transit and Intercity Rail Capital | 10 percent |
| Low Carbon Transit Operations | 5 percent |
| Healthy and Resilient Forests | $200 million |
| Safe and Affordable Drinking Water | $130 million |
The remainder is discretionary and allocated through the state budget. Statute also requires at least 35 percent of fund spending to benefit priority populations. For how that annual process runs, see how California’s state budget is built.
What has been spent so far?
In a July 20, 2026 release on its annual report to the Legislature, CARB said the program has generated $36.2 billion from auctions. Of that, $15.5 billion had been implemented across 122 programs, delivering work through more than 600,000 projects. CARB said $11.4 billion, or 76 percent of the implemented amount, went to disadvantaged and low-income communities. The arithmetic checks out: $11.4 billion divided by $15.5 billion is about 73.5 percent, so the 76 percent figure presumably rests on a slightly different base, such as the portion of funds with a determined location benefit. The release does not explain the difference.
CARB also reported, as its own estimates, 130.5 million metric tons of lifetime emission reductions, 16,386 affordable homes under contract and more than 143,000 jobs supported. Those are agency estimates and were not independently verified here.
Why is it debated, and what is changing?
The program has long drawn differing views. Supporters say a declining cap provides certainty about emissions and raises money for clean-energy projects. Critics have questioned whether the market raises costs for consumers, how revenue should be divided and whether the program reduces local pollution in the communities nearest to industrial sources. Those are characterizations by participants in the debate, not findings of this article.
On the policy side, the program’s legal authority was set to run through 2030 under the law the LAO described in 2025. In that analysis, the LAO described a governor’s proposal to extend the program through 2045 and to make the offset limit “up to 6 percent” rather than fixed. CARB’s July 2026 release also refers to program changes it estimates will provide $10 billion in direct bill credits to electricity customers and about $8 billion in additional proceeds through 2030. Readers should check CARB’s program page and the Legislature’s bill information for the exact current statute and rules.
Why does it matter in San Diego?
Local residents encounter the program in several ways. The electricity and gas bills of San Diego households are shaped by utilities that receive free allowances and by rules the California Public Utilities Commission oversees. Transit, housing and wildfire-related programs funded through the Greenhouse Gas Reduction Fund can reach the region, though this article did not trace specific San Diego awards. Budget decisions about the fund are analyzed each year by the Legislative Analyst’s Office, and any change to the program requires lawmakers to act through the process described in how the California Legislature makes law.
Reading the program for yourself
Three public pages answer most questions. CARB’s auction page lists dates, notices and results. CARB’s California Climate Investments materials report where money went. The LAO publishes independent analysis of both the program and the fund. The numbers above are dated, and the rules have been revised more than once, so the agency pages are the place for current figures.
This article is general information about how a public program works, not an endorsement of any policy and not personalized financial, investment, tax or legal advice.
Sources: California Air Resources Board; Legislative Analyst’s Office
