Key Takeaways
- As the federal government steps back from climate regulation, multiple states are expanding cap-and-trade or cap-and-invest programs to regulate greenhouse gas (GHG) emissions and tighten emissions caps.
- California, New York, Oregon, and Washington are all developing, expanding, or tightening their programs; the northeastern Regional Greenhouse Gas Initiative (RGGI) also is tightening caps following its third program review and has expanded to include Virginia, which will soon rejoin RGGI. California, Washington, and Québec also are moving toward broader regional integration.
- With rising energy costs and tightening emissions caps, some sectors and companies are growing concerned about the economic impacts of GHG regulation and potential competitive impacts.
- In response, some businesses are pushing back on GHG program changes, and New York has slowed its own cap-and-invest rollout, with Governor Hochul citing affordability and cost concerns.
- The Trump administration has repeatedly argued that states have limited authority to regulate GHGs. Although state cap-and-trade programs have not yet been in the administration’s crosshairs, action by the administration to block them remains possible and was foreshadowed in an early 2025 Trump administration Executive Order (EO), “Protecting American Energy From State Overreach.” The EO directs the Attorney General to identify and challenge state laws addressing climate change, GHG emissions, carbon penalties, and related measures. The administration has brought suits against certain state climate laws outside the cap-and-trade context, but cap-and-trade programs could be next.
Regional Greenhouse Gas Initiative & Virginia
Virginia is returning to the Regional Greenhouse Gas Initiative, the multi-state East Coast carbon market. Virginia participated from 2021 through 2023, then left under former Governor Glenn Youngkin, citing increased energy costs. During the years of its membership, Virginia generated about $827.7 million in allowance proceeds. However, in November 2024, a Virginia state court found the withdrawal unlawful because the state’s participation in RGGI is mandated by statute.
Virginia is now focused on rejoining the market. Governor Abigail Spanberger approved 2024–2026 budget amendments on February 20, 2026, directing the Virginia Department of Environmental Quality (Virginia DEQ) to take actions needed to rejoin RGGI by May 21, 2026. Virginia DEQ’s carbon-trading page states that Virginia plans to resume participation effective July 1, 2026, and take part in September and December auctions. Separately, Governor Spanberger approved HB 397/SB 802 on April 13, 2026, which directs Virginia DEQ and the State Air Pollution Control Board to establish and maintain a market-based trading program consistent with RGGI. In response, RGGI allowance prices more than doubled, jumping from a January 2026 auction price of about $25 to about $60 in early May, then dropping by $10 this week. These market fluctuations are the result of 1) tighter upcoming caps under the new RGGI model rules approved as part of the recent third program review and 2) Virginia’s joining, which creates a scenario in which Virginia’s current covered GHG emissions will exceed Virginia’s allowance allocations for the remainder of 2026. Market confusion or investment mechanisms also play a role. While these pricing issues may correct somewhat in 2027, RGGI market participants currently face tight supply and higher-than-typical allowance prices.
It’s also worth noting that the RGGI Q1 auction was over-subscribed and cleared above the trigger price for the cost containment reserve (CCR), causing the release and sale of the full 2026 CCR, which exceeded 7.8 million RGGI allowances. Strong demand and higher prices may frustrate some generators or power providers subject to RGGI and could further increase program scrutiny by the power sector and/or the Trump administration.
California
California’s proposed cap-and-trade updates are intended to strengthen the program in the long term and align it with the state’s 2045 climate goals. Rulemaking has been fraught. The California Air Resources Board (CARB) released its initial proposal in January, with significantly tighter emissions caps to get to the 2030 emissions target. In March, CARB released its updated proposal, including a Manufacturing Decarbonization Incentive that sets aside additional allowances for certain industries that make qualifying decarbonization investments; the proposal also allocates more allowances to certain trade-exposed sectors. These changes are intended to help ease the pain of tighter annual caps, but certain industries still face pressure.
Among other updates, CARB’s latest proposal would revise the treatment of offsets, as required by AB 1207, by removing and retiring allowances from circulation on a 1:1 basis when offsets are used for compliance. The program will also continue to bolster cost-containment mechanisms designed to limit price volatility. At the same time, CARB’s modifications indicate that certain post-2030 allocation decisions will be deferred to a future rulemaking, even as the program’s increasingly stringent emissions caps will continue through 2045.
The recent updates also focus on affordability, market integrity, and industrial competitiveness. To address electricity affordability concerns and encourage electrification, the proposal would implement a new legislative requirement to transfer free allowances from natural gas utilities to electric utilities, while continuing to provide utilities with free allowances intended to cover all compliance costs, to protect utility ratepayers from higher prices. The amendments would also tighten reporting requirements for business relationships to further guard against market manipulation. CARB further proposes to maintain the current level of free allowances for industry, with the stated goals of encouraging continued manufacturing in California, protecting jobs, and helping ensure that drivers do not face additional pass-through costs at the gas pump.
Assembly members are urging CARB to revise portions of the proposed cap-and-invest update, contending that it would impose disproportionate compliance costs on trade-exposed sectors such as fuels, gas, and electricity. They argue that California’s energy transition is moving faster than existing infrastructure, market conditions, and available technology can support, creating heightened risks for fuel supply, energy reliability, and consumer affordability, while also further discouraging in-state refineries from continuing to operate in California. Meanwhile, Democratic lawmakers raised concerns that the new proposal could cause a $2 billion decline in revenue for clean transportation, high-speed rail, utility bill rebates, and other programs.
New York
New York’s cap-and-invest program grew out of the 2019 Climate Leadership and Community Protection Act (CLCPA), which requires statewide GHG emissions reductions of 40% by 2030 and at least 85% by 2050, measured against 1990 levels. Governor Kathy Hochul advanced the cap-and-invest program in 2023, and the New York State Department of Environmental Conservation (DEC) and New York State Energy Research and Development Authority released a December 20, 2023, outline describing three contemplated regulatory components: a Mandatory Greenhouse Gas Reporting Rule, a Cap-and-Invest Rule, and an Auction Rule.
When the state failed to implement regulations by the January 1, 2024, statutory deadline, a New York court directed DEC to issue regulations by February 6, 2026. Governor Hochul opposed that timeline, arguing that the court order was unrealistic in light of changed economic, federal, and energy-market conditions, and said she would appeal while also seeking legislative changes.
While DEC finalized the Mandatory Greenhouse Gas Reporting Program for certain in-state GHG emitters on December 1, 2025 (with first reports for covered entities due by June 1, 2027, for the 2026 calendar year), cap-and-invest rules remain in limbo. As of April 28, 2026, Hochul reportedly advanced a budget proposal to implement regulations in 2028, reflecting a push to revise the state’s CLCPA compliance timelines rather than promulgate cap-and-invest rules per court order.
Oregon
After Oregon’s legislature declined to adopt a cap-and-trade program, the Oregon Department of Environmental Quality (Oregon DEQ) adopted a Climate Protection Program (CPP) targeted at fuel suppliers and defined large stationary sources. An initial version of the CPP was struck down by the Oregon courts, and Oregon DEQ readopted the program. On April 16, 2026, a coalition of businesses and other groups filed suit in the Oregon Court of Appeals, arguing that the CPP exceeds Oregon DEQ’s authority, describing the CPP as an “unauthorized and unaffordable program.” (Oregon has a separate program aimed at electricity generators and suppliers, which requires continual GHG reductions.)
Washington
The Washington Department of Ecology (Ecology) has released a draft agreement to link Washington’s Climate Commitment Act (CCA) cap-and-invest program with the existing California-Québec carbon market. Ecology anticipates that a linked market could begin operating in 2027. In a linked market, Washington, California, and Québec allowances could be used for compliance across jurisdictions. The three jurisdictions would host joint auctions and share a common allowance price.
The goal of linkage is to create a larger, more stable market to make compliance obligations more predictable. Washington’s market is relatively new compared to California/Québec and has experienced significant volatility since its inception in 2023, with prices dropping when a measure to repeal the CCA was introduced in 2024 and spiking again when voters upheld the program.
Ecology states that Washington auction proceeds in a linked market will still fund Washington projects, including statutory funding requirements for vulnerable populations, overburdened communities, and Tribes.
Finally, Ecology is currently seeking input on “carbon management” within the cap-and-invest program. Carbon management includes measures that reduce emissions or remove them from the atmosphere, such as carbon capture and sequestration. Public meetings will be held on May 21 and 28, 2026, and Ecology is accepting comments from May 21 through June 26, 2026.
The Trump Administration and Cap-and-Trade
The Trump administration has taken the position that state climate programs exceed state authority when they regulate or penalize GHG emissions beyond their borders. In May 2025, in suits against New York and Vermont, the Department of Justice (DOJ) argued that state climate superfund laws are preempted by the Clean Air Act and federal foreign affairs powers. DOJ has made similar arguments in challenges to state climate-related lawsuits, including a suit filed on May 4, 2026, against Minnesota. Similarly, EO 14260, Protecting American Energy From State Overreach, targets California’s carbon market because it “punishes carbon use” by adopting “impossible caps” and requiring businesses to trade credits. Finally, Suncor Energy (U.S.A.) Inc. v. County Commissioners of Boulder County, is headed for the Supreme Court and will address whether federal law precludes state-law claims seeking relief for injuries allegedly caused by interstate and international GHG emissions.
Next Steps
In Virginia, DEQ states that RGGI reinstatement must be completed by May 21, 2026; participation is expected to resume on July 1, 2026, and Virginia plans to participate in September and December 2026 auctions. Allowance prices may continue to fluctuate.
In California, CARB’s cap-and-invest amendments remain pending, with final approval pending and a Board hearing scheduled for May 28, 2026.
New York should be tracked through both litigation developments and budget negotiations, as the court’s February 6, 2026, deadline to issue CLCPA compliance regulations has passed. Meanwhile, Governor Hochul has indicated she will appeal and seek legislative changes.
Oregon should be monitored for the pending Court of Appeals challenge filed April 16, 2026, in which business, utility, and labor groups seek to block the Climate Protection Program on the grounds that it exceeds Oregon DEQ’s authority.
In Washington, Ecology expects to issue final linkage findings before making a final decision on linkage of its market with California and Québec, and states that a linked market could begin operating in 2027. Public meetings to address “carbon management” measures within the cap-and-invest program will be held on May 21 and 28, 2026.
On the federal level, the Supreme Court is set to hear Suncor in fall 2026, with petitioners’ brief due May 14, 2026, and respondents’ brief due July 27, 2026.
State and regional GHG compliance programs remain active, but face headwinds as caps tighten, prices rise, and political forces intervene. Market participants should focus on pending program updates and legislation.
