AB 1207 (Irwin, 2025): Updates to California’s Cap-and-Trade Program
California enacted AB 1207 in 2025 to extend and update the state’s greenhouse gas cap-and-trade program, now referred to in statute as the California Cap-and-Invest Program. The bill was signed by Governor Gavin Newsom on September 19, 2025 and took effect immediately as an urgency statute. Its primary purpose is to extend the program and make several structural adjustments as California moves from early climate targets toward longer-term decarbonization goals.
The most significant change in AB 1207 is the extension of the state’s market-based compliance mechanism through December 31, 2045, with statutory provisions remaining in effect until January 1, 2046. By extending the program beyond the previous statutory sunset, the Legislature provides long-term regulatory certainty for the state’s carbon market and for investments in emissions-reduction technologies. The legislation also formally reflects the policy shift toward describing the program as “Cap-and-Invest,” highlighting that auction revenues are reinvested in climate and clean-energy initiatives across the state.
AB 1207 also updates the statutory framework to align the program with California’s longer-term greenhouse gas reduction targets, rather than focusing primarily on the earlier 2020 emissions goal established in the original Global Warming Solutions Act. The law directs the California Air Resources Board (CARB) to design emissions-reduction regulations and the market-based compliance program to achieve the requirements of more recent statutory targets, ensuring the carbon market continues to support California’s long-term decarbonization strategy.
In addition to extending the program, the legislation makes several targeted policy adjustments. It requires CARB to design regulations—including the distribution of emissions allowances—in a way that gradually transitions program support from natural gas corporations to electrical distribution utilities by 2031, reflecting the state’s broader push toward electrification and minimizing ratepayer impacts. The bill also reinforces environmental justice protections by requiring CARB to ensure that program compliance activities do not disproportionately impact low-income communities.
AB 1207 also modifies the rules governing the use of offset credits in the carbon market. Covered entities may continue to use offsets for a limited share of their compliance obligations, but the bill sets clear limits for future compliance periods and requires that at least half of offsets provide direct environmental benefits in California. In addition, allowances equivalent to the number of offsets used must be removed from the following year’s allowance budget, a mechanism intended to maintain the integrity of the emissions cap.
The legislation further establishes a new California Climate Mitigation Fund to receive revenues generated if additional allowances are sold at the program’s price ceiling. Funds may be used for measures that reduce household energy costs, including consumer rebates, incentives for zero-emission vehicles, and investments in energy-efficient housing. AB 1207 also modifies certain provisions governing the distribution of utility climate credits, including directing that residential bill credits be applied during the highest-billing months of the year to maximize affordability benefits for customers.
Overall, AB 1207 preserves the core structure of California’s carbon market while extending its time horizon and updating several program design elements. By aligning the program with the state’s long-term climate targets and refining how allowances, offsets, and revenues are managed, the legislation signals that a market-based compliance mechanism will remain a central component of California’s climate policy framework through mid-century.