AB 1207 and SB 840
At the end of its legislative session, the California legislature passed AB 1207 and SB 840 to extend and introduce new measures for California’s greenhouse gas (GHG) emissions Cap-and-Trade program, which has now been renamed “Cap-and-Invest.” Extension of the Cap-and-Invest program through 2045 may increase regulatory certainty for market participants while aligning the program with the state’s overall emission goals. The governor signed these bills on Sept. 19, 2025 as part of a package of California energy bills.
Background/Existing Law
California’s then-Cap-and-Trade program was initially established as part of the state’s strategy to combat climate change, requiring the California Air Resources Board (CARB) to ensure that statewide GHG emissions are reduced by at least 40% below 1990 levels by Dec. 31, 2030. Current law provides that CARB may adopt regulations, including market-based compliance mechanisms, to achieve these reductions, provided that the emissions reductions are real, permanent, quantifiable, verifiable, and enforceable. CARB is also authorized to establish declining annual emission limits for specific sources or categories of emissions sources to comply with statewide GHG reduction targets.
In addition to the 2030 goals, state policy directs California to achieve net zero GHG emissions by 2045 and maintain net negative emissions thereafter, but the Cap-and-Trade program was previously only authorized through 2030. Revenues generated through the Cap-and-Trade program, except fines and penalties, are deposited into the Greenhouse Gas Reduction Fund (GGRF), which CARB oversees. The board is also required to set a price ceiling on GHG emissions allowances and to manage and allocate allowances under specified conditions to ensure emission reductions are cost-effective and consistent with program goals.
Building on this foundation, AB 1207 and SB 840 seek to advance California’s renamed Cap-and-Invest program by extending it through 2045 and introducing new measures and programs designed to strengthen emissions reductions, manage costs, and enhance the effectiveness of the state’s market-based approach.
Stakeholders may expect significant regulatory and rulemaking activity at California agencies to implement these new bills, including at the CARB, California Energy Commission (CEC), and the California Public Utilities Commission (CPUC), over the coming months and years.
AB 1207
Overview: AB 1207 extends and renames California’s Cap-and-Trade Program as Cap-and-Invest through 2045 while reaffirming California’s 2045 net zero goal. The bill formalizes the 6% cap on compliance offsets, provides that offsets count towards the overall emissions cap, and directs CARB to consider additional protocols for carbon removal and nature-based carbon offsets.
This bill:
- Renames and extends the program through Dec. 31, 2045. CARB retains flexibility to implement Cap-and-Invest but must provide updates on emissions reduction progress, make recommendations regarding statutory changes to the legislature, and evaluate cost impacts. CARB remains subject to review by the Legislative Analyst’s Office and the Independent Emissions Market Advisory Committee.
- Maintains the offset credit cap at 6% of a covered entity’s compliance obligation from 2026–2045, with at least half providing direct environmental benefits in California.
- Creates the California Climate Mitigation Fund, where instead of using money from allowance sales hitting the price ceiling to buy carbon offsets, proceeds now support households, clean transportation, energy-efficient housing, and lower energy costs. CARB also gains flexibility to adjust the system if consumer costs rise too high.
- Continues to allocate free allowances for major industrial polluters at 100% until 2030. After 2030, CARB can adjust allocations based on leakage risk and climate goals.
- Adjusts utility allowance allocation and Climate Credits; 37% of allowances go to electric and natural gas utilities, which must sell them at auction to benefit ratepayers. Support may shift from gas to electricity bills to encourage electrification of home appliances, and credits will be issued in four high-billed months to maximize affordability. CPUC may decide whether industries continue to receive Climate Credits. Five percent of proceeds will go to a California Transmission Accelerator Revolving Fund.
- GGRF priorities: AB 1207 adds “nature-based climate solutions” to the list of programs eligible for discretionary GGRF funding, complementing the existing split where 65% of auction proceeds are automatically allocated to specified programs and 35% are discretionary.
- Establishes and funds the Legislative Counsel Climate Bureau to provide advice and investigation services to the Legislature on climate-related matters, including energy, environmental quality and safety, natural resources, and water.
- Requires CARB to report to the Legislature on offsets by Dec. 31, 2026, evaluating their role and potential changes.
- Directs CARB to update all existing compliance offset protocols to reflect the best available science by Jan. 1, 2029, and to continue updating them every five years thereafter.
- Expresses the legislature’s intent to allocate GGRF revenues to specific funds with multiyear spending plans for clean transportation, housing and community investment, clean air and water, wildfire prevention and resilience, agriculture, clean energy, and climate-focused innovation.
- Ends existing continuous appropriations at the end of the current fiscal year and establishes a new allocation order starting the next fiscal year.
- California Enacts New Electric Transmission Financing Programs and Adds to Its Wildfire Fund (Oct. 8, 2025)
- California Enacts SB 237 to Streamline New Oil Well Permits in Kern County and Increase Output (Oct. 7, 2025)
- California’s New Western Regional Electricity Market and Expanded Renewable Market (Sept. 29, 2025)
SB 840
Overview: SB 840 reconfigures the allocation of the GGRF, establishing new legislative guidelines for how these funds are spent. The bill also directs CARB to assess and update compliance offset protocols, ensuring they remain effective and current. Additionally, SB 840 establishes the Legislative Counsel Climate Bureau, a new unit within the Legislative Counsel Bureau dedicated to supporting climate and environmental policymaking efforts.
This bill:
Takeaways
AB 1207 and SB 840 seek to strengthen California’s Cap-and-Invest program and its supporting structures by extending program authority, creating new funds, refining compliance mechanisms, and improving oversight. These measures collectively aim to increase regulatory certainty, better align the program with the state’s climate policy goals, manage costs for consumers and businesses, and ensure that the state’s climate investments are targeted, effective, and aligned with long-term environmental and energy goals.
Stakeholders and interested parties should be mindful of the significant regulatory and other changes that may impact California businesses, consumers, and ratepayers over the coming years.
Read more about California’s climate and energy package:
* Special thanks to Law Clerk/JD Julia Lopez˘ for contributing to this GT Alert.
˘ Not admitted to the practice of law.