The volume of allowances being retired under California’s Quebec-linked carbon market to cover outstanding emissions from imported electricity reached an all-time high in 2025, according to programme data published this week and reported by Carbon Pulse. The mechanism is obscure even by carbon market standards, but its effect is not: every allowance retired to cover imported-power leakage is an allowance that never reaches the market. For traders and compliance buyers in California Carbon Allowances (CCAs), the record figure is a supply-side tightening signal arriving just as the revamped Cap-and-Invest programme takes effect.
What the Data Shows
The retirement obligation tracks what the California Air Resources Board (CARB) calls EIM Outstanding Emissions: the gap between the greenhouse gas emissions actually caused by electricity imported through the California Independent System Operator’s Energy Imbalance Market and the emissions that the market’s design attributes to California. CARB concluded back in 2015 that the EIM design understates those emissions and creates leakage, and it has compensated with allowance retirements ever since.
The historical series, published by CARB, shows how the problem has grown. Outstanding emissions ran at 527,460 tonnes of CO2e in 2016 and stayed below 1.1 million tonnes through 2019. From 2020 onward the level shifted structurally higher: 977,520 tonnes in 2020, a peak of 1,283,597 tonnes in 2021, then 1,201,541 in 2022, 1,094,706 in 2023 and 1,067,067 in 2024. An all-time high in 2025 means the figure has now exceeded the 2021 peak of roughly 1.28 million tonnes.
That is not a market-moving volume on its own in a programme with an annual budget in the hundreds of millions of tonnes. But it is a steady, rule-bound drain that operates independently of the political cycle: the number is calculated annually from reported emissions data under the Mandatory Reporting Regulation and applied mechanically.
How the Retirement Mechanism Works
The design has two eras. From 2016 through March 2019, CARB retired allowances directly, drawing on volumes that had remained unsold at auction for more than 24 months. Since 1 April 2019, the obligation sits with electrical distribution utilities that both receive free allowance allocation and purchase electricity through the EIM: CARB retires a portion of their freely allocated allowances to cover the year’s outstanding emissions, under sections 95892(a)(3) and 95852(l)(3) of the Cap-and-Trade Regulation.
Two features matter for market participants. First, the retirements come out of free allocation, so they reduce the volume utilities can sell into the secondary market or use for their own compliance. Second, the calculation runs on a lag: outstanding emissions are computed from reported-year data and applied to later vintage budgets, which means the 2025 record will be felt in future allowance budgets, not in the one currently trading.
Positioning Was Already Shifting
The record retirement lands on a market where positioning was already diverging. The latest US Commodity Futures Trading Commission data, reported by Carbon Pulse, shows emitters expanding their net short position in CCAs while managed money grew its net length, largely through changes in holdings of Auction Clearing Price positions. Covered entities, in other words, were already leaning on future supply, while speculators were building exposure to scarcity.
A record leakage retirement pushes in the same direction as that speculative positioning. It does not create scarcity alone, but it adds a predictable, growing subtraction from utility-held supply at the same time as the programme’s redesigned cap trajectory, which removes roughly 118 million allowances from 2027 to 2030 budgets, begins to bite.
What It Means for Buyers and Traders
For compliance buyers, the practical takeaway is about free allocation flow. Utilities are a structural source of sell-side liquidity in the CCA market because they receive allowances they do not need. Every tonne retired for outstanding emissions shrinks that flow, and the series now sits persistently above one million tonnes a year, roughly double the average of the programme’s first four years.
For traders, the mechanism adds a fundamentally driven, publicly calculable tightening variable. Unlike auction reserve sales or policy interventions, EIM retirements are formula-based: they can be modelled from emissions reports well before they hit the budget. That makes them one of the more forecastable supply adjustments in any North American carbon market.
For investors watching linked markets, the signal extends to Quebec. The retirements occur within the joint Western Climate Initiative framework, so allowance supply dynamics in California feed directly into the linked auction and secondary market both jurisdictions share.
What to Watch
Three markers will determine whether the 2025 record is a plateau or a step change. First, the exact figure when CARB updates its outstanding emissions series: how far above the 2021 peak of 1.28 million tonnes the new number lands will set the scale of the additional drain. Second, the trajectory of EIM dispatch itself: outstanding emissions are a function of how imported power flows through the imbalance market, so anything that changes western grid dispatch patterns moves the retirement volume. Third, the interaction with the Cap-and-Invest redesign that took effect this month: if tighter annual budgets coincide with record leakage retirements, the combined effect on utility-held supply could show up in auction clearing prices faster than either factor would suggest alone.
Carbon markets spend most of their attention on the big design fights: caps, offsets, industry incentives. The EIM retirement line is a reminder that some of the most durable tightening comes from accounting rules running quietly in the background, and this year that background line set a record.
