California's carbon market overhaul leaves climate targets in doubt as governor's race ignores the issue

Newsom's Washington state link announced amid warnings that reauthorization will halve auction revenue

By LineZotpaper

Published23 October 2026

Read Time3 min

California's cap-and-invest program faces a turbulent handover to the state's next governor, after a year of regulatory changes that critics say put the state's climate targets out of reach and a gubernatorial race in which neither leading candidate has made the program a priority.

In September, Governor Gavin Newsom announced California would move forward with linking its decade-old carbon market with a newly formed market in Washington state, aiming to merge with the market California already shares with Quebec. Newsom said California was "choosing certainty, partnership, and clean energy" amid a stream of federal climate policy rollbacks.

The announcement did not ease advocates' concerns over a difficult year for the program. In May, the legislature reauthorized the cap-and-invest program under a controversial agreement that the Legislative Analyst's Office projects will roughly halve annual auction revenue, cutting about $2 billion from funding for priority environmental programs while creating a separate pool of free permits for polluters that pledge to invest in decarbonization, valued at as much as $4 billion.

Oil companies fought the initial reauthorization proposal, arguing it would encourage companies to leave the state or further increase fuel prices. The California Air Resources Board, which manages the program, said the increased allowances it eventually approved were meant to balance affordability and economic uncertainty alongside emissions targets, and a board spokesperson said the new incentives would have no impact on auction revenue.

The program, which provides billions of dollars for job training, clean energy and affordable housing, is expected to keep the state on track for its 2030 target of reducing emissions 40% below 1990 levels. Experts are now doubtful. "This is not a question anymore of whether or not we'll reach the target. This is a guarantee that we won't," said Katie Valenzuela, a consultant for Communities for a Better Environment. Danny Cullenward, an economist on a market advisory committee, said it will become "very difficult for us to say we are a climate leader when we are visibly missing our targets."

Others remain more optimistic. Meredith Fowlie, an economist at UC Berkeley, said the program is not optimal but has done the basics of its job: sending a price signal to drive down emissions while raising revenue. Air Resources Board Chair Lauren Sanchez wrote to Newsom that linking with Washington will strengthen California's program overall, and regulators expect the joint market to begin operating next year.

In the governor's race, Republican Steve Hilton told CalMatters he would move to suspend the carbon market, calling it "a disaster of a program." Democrat Xavier Becerra's campaign did not respond to multiple emailed requests for comment; his website emphasizes affordability in climate policy, though as attorney general he defended the state's carbon program in court. "I think it's fair to say that climate probably isn't the top priority of either one," said Barry Vesser, chief operating officer of the Climate Center, which opposed this year's changes to the market.

The winner in November will appoint new members to the Air Resources Board, which must finish writing the linkage rules, and will help decide how aggressively California leads on climate. Cullenward said the politics of the issue have been "tossed like a live grenade into the lap of the next governor."

Analysis

Why This Matters

The carbon market supplies billions of dollars for job training, clean energy and affordable housing, so its revenue trajectory affects programs well beyond emissions policy.
The next governor will appoint members to the Air Resources Board, which must finish writing the market linkage rules and will propose budgets that lean on carbon revenue.
California is approaching its 2030 target of cutting emissions 40% below 1990 levels, and expert projections suggest the adjusted program will fall short.

Background

Twenty years ago, AB 32 made California the first state to mandate broad cuts in greenhouse gas emissions and authorized the creation of a carbon market. The cap-and-invest program has long been framed as a backstop that keeps the state on track by ratcheting down the emissions limit even if other programs fall short, while its revenue funds a wide range of priorities. California already shares a market with Quebec and is now moving to link with Washington state, a process regulators expect to take effect next year.

Key Perspectives

Steve Hilton: The Republican candidate would suspend the carbon market, calling it "a disaster of a program," and says he would de-bloat the bureaucracy guiding the state's climate work. Xavier Becerra: The Democratic candidate has not said what he would do with the market. His campaign emphasizes affordability, and as attorney general he defended the program in court, arguing "carbon pollution knows no borders," though he has faced criticism over oil and gas donations. Environmental advocates: Groups such as Communities for a Better Environment and the Climate Center warn the changes guarantee California will miss its 2030 target and make it harder to claim climate leadership. Regulators and industry: The Air Resources Board says increased allowances balance affordability and economic uncertainty with emissions goals, while oil companies argued the original proposal would drive firms out of the state or raise fuel prices. Optimists: Economists and policy groups say the program still sends a price signal, and the Washington link is expected to raise low carbon credit prices in California and strengthen the program overall.

What to Watch

The November election result and the new governor's appointments to the Air Resources Board.
The rulemaking timeline for the California-Washington market link, which regulators say could begin operating next year.
Auction revenue and carbon credit prices in California, where recent auctions have yielded prices at state minimums.

Sources

California’s carbon market changed this year, and the next governor will inherit the fallout · CalMatters

Checked

11 claims in this story checked against 1 source: 6 supported.

Show each claim

SupportedCalifornia’s carbon-market changes have put its climate targets in doubt.CalMatters: “As Newsom leaves his post, many policy and climate experts say the adjustments to the program put California’s climate goals further out of reach.”
Partly supportedThe governor’s race is ignoring climate policy.CalMatters: “In the governor’s race, neither candidate has centered climate in his campaign. In their one debate, both candidates steered a question about climate change’s impacts toward affordability concerns”
Partly supportedNeither leading candidate has made California’s carbon-market program a priority.CalMatters: “In the governor’s race, neither candidate has centered climate in his campaign.”
SupportedNewsom announced in September that California would move forward with linking its carbon market to Washington state’s market.CalMatters: “In September, Gov. Gavin Newsom unveiled what is likely one of the last large climate announcements of his tenure: California will move forward with linking its decade-old carbon market with a newly formed market in Washington state”
Partly supportedThe reauthorization will halve auction revenue.CalMatters: “the Legislative Analyst’s Office projects will roughly halve annual auction revenue”
SupportedNewsom said California was “choosing certainty, partnership, and clean energy.”CalMatters: “Newsom said California was “choosing certainty, partnership, and clean energy” amid a stream of federal climate policy rollbacks.”
SupportedThe LAO projects the agreement will roughly halve annual auction revenue, leaving about $2 billion less for priority environmental programs.CalMatters: “the Legislative Analyst’s Office projects will roughly halve annual auction revenue, offering about $2 billion less in funding for priority environmental programs”
SupportedThe agreement creates a separate pool of free permits for polluters that pledge to invest in decarbonization, valued at up to $4 billion.CalMatters: “opening a separate pool of free permits for polluters that pledge to invest in decarbonization, valued at as much as $4 billion.”
Partly supportedThe program is expected to keep California on track for its 2030 emissions target.CalMatters: “State officials have long framed cap-and-invest as a backstop, keeping the state on track for its climate targets by ratcheting down the emissions limit even if other programs fall short.”
SupportedValenzuela said, “This is not a question anymore of whether or not we'll reach the target. This is a guarantee that we won't.”CalMatters: ““This is not a question anymore of whether or not we’ll reach the target. This is a guarantee that we won’t,” said Katie Valenzuela”
Partly supportedCullenward said the politics of the issue had been “tossed like a live grenade into the lap of the next governor.”CalMatters: “and that is the problem that is being tossed like a live grenade into the lap of the next governor,” said Danny Cullenward”