On August 31, the California Office of Administrative Law (OAL) approved CARB’s amendments to both the Cap-and-Invest Regulation and the Mandatory Reporting Regulation (MRR), completing the final step in the rulemaking process. CARB requested expedited effectiveness, and the regulations became effective on September 1, 2026. The amendments represent a significant update to California’s carbon market program and are intended to align the program with the State’s GHG emissions reduction targets for 2030 and 2045.

Key Cap-and-Invest Changes

The approved amendments include:

• Extension of the program through 2045, providing long-term regulatory certainty and aligning the program with California’s carbon neutrality goals.
• More stringent allowance budgets and a steeper cap decline, including the removal of 118 million allowances from the program budget to align with the state’s emissions reduction targets.
• Creation of the Manufacturing Decarbonization Incentive (MDI) Program, a new allowance funded mechanism designed to support emissions-reduction projects at California manufacturing and industrial facilities. Eligible projects may include electrification, low-carbon hydrogen, carbon capture and sequestration, renewable energy, methane reduction, and other decarbonization technologies. Eligible sectors include food processing, cement, steel, refining, and other emissions-intensive, trade-exposed industries.
• Updates to offset provisions, including changes to account for offset usage within the overall allowance supply, i.e. “offsets under the cap.”
• Revisions to industrial and utility allowance allocation and affordability provisions, including additional free allocation to many industrial sectors, as well as updates affecting utilities and the continued use of allowance value to benefit ratepayers.
• Changes to market oversight and cost containment provisions, including updates to holding limits, disclosure requirements, allowance reserves, and other market mechanisms.

Key Mandatory Reporting Regulation Changes

The accompanying MRR amendments support implementation of the updated Cap-and-Invest Program and improve emissions reporting and verification requirements. The approved amendments include:

• Updated greenhouse gas reporting requirements.
• Enhanced verification and data quality provisions.
• Conforming amendments needed to support the revised Cap-and-Invest framework through 2045.
• Updates to reporting provisions addressing evolving emissions sources and market mechanisms.

The MDI Debate

One of the most controversial elements of the Cap-and-Invest rulemaking was CARB’s new Manufacturing Decarbonization Incentive (MDI) Program, which could provide up to $4 billion in support for qualifying industrial decarbonization projects.

Supporters of the new mechanism argued that California’s industrial sector will require significant capital investment to achieve the state’s long-term climate goals and that the MDI will help deploy technologies that may otherwise be difficult to finance. Industry groups also viewed the program as an important tool to reduce emissions leakage, preserve manufacturing jobs, and encourage companies to continue investing in California rather than shifting production and associated emissions to other states or countries. Critics raised concerns about how incentive allowances will be distributed, how project benefits will be measured, and whether the program provides too much value to regulated industrial facilities, in particular to refiners.

The proposal generated extensive discussion throughout the rulemaking process and underwent substantial revisions before CARB ultimately adopted the mechanism. As part of the final package approval, the CARB Board directed staff to return to the Board with additional implementation details, transparency measures, public reporting requirements, and program accountability provisions before incentive allowances are awarded.

However, the more political and far-reaching debate centered on the MDI’s potential impact on revenues available for the Greenhouse Gas Reduction Fund (GGRF), which receives proceeds from the state’s carbon market auctions to fund a wide range of legislative and Administration priorities.

Earlier this year, the Legislative Analyst’s Office warned that the MDI could reduce GGRF revenues by approximately $2 billion over time, potentially limiting future funding available for climate, transportation, housing, transit, and environmental justice programs. The issue gained additional prominence because legislative leaders spent much of this year’s budget negotiations seeking additional resources for the GGRF. While the final budget included some supplemental funding, concerns are ongoing about the long-term adequacy of GGRF resources and the potential tradeoff between funding industrial decarbonization projects and other climate-related priorities.

Looking Ahead

With OAL approval now complete, regulated entities and market participants will begin implementing the revised requirements. Click here for more information.