California’s multi-year overhaul of its carbon market is no longer a proposal. On Monday, August 31, the state’s Office of Administrative Law (OAL) approved the amended Cap-and-Invest regulation, the final procedural step in a rulemaking that began in April, was adopted by the Air Resources Board on May 29, and now takes effect with the September 1 date CARB had requested. For compliance entities, offset developers and investors across the Western Climate Initiative, the significance goes beyond Sacramento: with Quebec’s updated regulation already published in its official gazette on August 26, both anchor jurisdictions of the linked market now operate under finalized rules.
What the Approval Locks In
The package OAL approved is the most substantial rewrite of the program since its reauthorization. It extends the system through 2045, sets a tighter emissions cap trajectory starting in 2027, and moves offsets “under the cap”, meaning offset usage will count within the declining allowance budget rather than alongside it. Free allowance allocations remain high through 2030, and the regulation introduces a new, and contested, Manufacturing Decarbonization Incentive.
The road to approval had one last procedural turn. CARB first submitted its Final Statement of Reasons to OAL on July 14. On August 20 it withdrew that filing and resubmitted it, not because of any disapproval, but to align the review timeline with the interrelated Mandatory Reporting of GHG Emissions regulation, which OAL had received separately on July 31. The resubmittal briefly rattled the market, but CARB held its requested September 1 effective date, and OAL completed the review of both matters on schedule. The timing is not cosmetic: an early effective date lets the amended rules govern the 2027 free allowance allocations that CARB runs in October 2026.
Quebec Got There First, and Tightened the Offset Tap
Quebec’s final rule, published August 26 as Order in Council 1252-2026 and in force from September 10, closes the other half of the WCI regulatory picture. The province left its cap trajectory and free allocation framework untouched through 2030, but moved on offsets: the usage limit falls from 8 percent to 6 percent of covered emissions starting with the 2027 compliance period, and a quota now caps offsets not issued by Quebec at five-sixths of the total usage limit in 2027, tightening to two-thirds from 2029. Compliance periods are also restructured, from three-year blocks into a two-year period covering 2027-28, followed by alternating three- and two-year cycles from 2031.
Read together with California’s offsets-under-the-cap design, the direction of travel in both jurisdictions is the same: offsets remain usable, but the space they occupy is being deliberately compressed. For project developers selling into WCI compliance demand, that is a structural signal about where the marginal tonne of supply will come from in the next decade.
The Market Priced the Outcome at the August Auction
Traders did not wait for OAL’s signature. The August 19 joint auction, whose results were released August 26, cleared current-vintage allowances at USD 32.48, up 12.7 percent from May’s USD 28.81 and the strongest settlement since November 2024’s USD 31.91. The cover ratio reached 1.31, and the clearing price sat USD 4.54 above the 2026 floor of USD 27.94.
The contrast with the recent past is stark. As recently as February 2026 the auction cleared at the floor, and the May 2025 sale went undersold, leaving 7.5 million allowances unsold across California and Quebec. The advance auction for 2029 vintages settled even higher, at USD 32.75 on a 1.86 cover ratio, with compliance entities taking 78.8 percent of that volume, their highest share in several auctions.
One detail deserves attention. The compliance share of the current-vintage auction slipped to 77.8 percent, from 81.3 percent in May, meaning a larger slice of supply went to entities without compliance obligations. Financial participants are building positions in a market whose supply trajectory just became legally tighter.
What It Means for Buyers, Developers and Investors
For covered entities, the planning uncertainty that has hung over WCI procurement since spring is resolved. The cap trajectory through 2045, the 2027 tightening, and the October 2026 allocation round are now fixed parameters, and hedging programs built around a possible slip past September 1 should be updated to the rules as finalized.
For offset developers, the calculus is harder. California’s under-the-cap treatment and Quebec’s 6 percent limit with domestic quotas both narrow the channel for external offsets, while Quebec-issued units gain a protected share of a smaller market. Positioning now depends on registry geography as much as on methodology quality.
For investors, the auction data says the repricing has already started. The open question is how much of the move reflects one-off relief at regulatory clarity versus the beginning of a structurally higher price path as the 2027 cap tightening approaches.
What to Watch
Three markers will test the new equilibrium. First, the October 2026 free allocation round, the first operational exercise of the amended California rules. Second, Quebec’s fall elections and California’s gubernatorial race, which ClearBlue notes are the next political risks now that the rulemakings are closed. Third, the timeline for linking Washington’s Cap-and-Invest program with WCI, expected at some point in 2027, potentially in time for Washington’s large Compliance Period 1 allowance surrender in November 2027. The regulatory map of North American carbon is now drawn; the next moves are political and, soon, continental.
