Long‑Awaited Reset: CARB’s Draft Cap-and-Invest and Mandatory Reporting Regulation Overhaul 

*This article, originally published January 16th, has been updated with additional information made available January 20th.* 

On January 13, 2026, the California Air Resources Board (CARB) posted regulatory text and staff materials for updates to two cornerstone climate programs: the Cap-and-Invest (C&I) Regulation (formerly Cap-and-Trade) and the Mandatory Reporting Regulation (MRR). On January 20th, CARB followed up with an official Notice of Public Hearing for each regulation, initiating a 45-day public comment period from January 23, 2026 through March 9, 2026. Per the notices, CARB’s Board is scheduled to consider both proposed regulations on May 28, 2026 with potential to extend into May 29th.  

Key Context and Background

Development of these amendments began in June 2023, following adoption of the 2022 Scoping Plan and prior to the passage of Senate Bill 840 and Assembly Bill 1207. These laws formally renamed the program Cap-and-Invest, extended it through 2045, and included new directives governing the use of auction proceeds and the integration of offset protocols. The proposed regulatory text reflects concepts that CARB has outlined in past workshops and provisions to comply with legislation. 

Notable Proposed Changes to Cap-and-Invest

CARB’s preliminary amendments include several major updates to program design and compliance structure:  

• Tighter Short-Term Emissions Budgets: The proposed 2027-2030 compliance period would lower the emissions budget by 118 million metric tons (a 13.3% reduction from current regulation) signaling a sharper near-term trajectory toward California’s 2030 statewide emissions target.  

• Extended Budgets Through 2045: CARB establishes new annual budgets for 2032-2045, reflecting a long-term emissions path consistent with the 2022 Scoping Plan. These additions provide more visibility into future allowance supply, which could influence both compliance planning and market price expectations.  

• Offset Adjustments: The proposed regulation addresses the AB 1207 requirement that the number of offsets used for compliance be removed from the following year’s budget. Since compliance is multiyear, without full surrender in the early years, the proposed provision includes a methodology to smooth the budget adjustment across the compliance years to reduce year-to-year variation to the auction budgets.  

• Carbon Capture, Utilization & Storage (CCUS): Incorporating SB 905, CARB’s proposed amendment text excludes CO₂ from compliance that is permanently sequestered or utilized under a Board-approved quantification methodology that is included in the C&I regulation, marking the formal integration of CCUS into the C&I compliance system.  

• Allocation Methodology Revisions: Refinery allocations would transition from the complexity-weighted barrel (CWB) benchmark to a liquid hydrocarbon fuel (LHF) framework based on total production signaling a continued shift toward production-based metrics rather than technology-specific methodologies across different industries. For crude oil production, a new benchmark is established, replacing a benchmark for enhanced and conventional production methods. 

Updates to the Mandatory Reporting Regulation

The proposed MRR updates are primarily ministerial, designed to harmonize reporting requirements with the Cap-and-Invest and Low Carbon Fuel Standard programs. CARB’s 2026 Initial Statement of Reasons (ISOR) indicates the MRR proposal will be considered alongside the Cap-and-Invest regulation at the May 28, 2026 Board meeting. No additional public workshops for either regulation have been scheduled at this stage.  

Stakeholder Considerations and Linkage Outlook

From a stakeholder perspective the proposed regulation and ISOR offer early insight into several key areas of regulatory focus. The tightened near-term budgets could influence allowance market dynamics, requiring covered entities to reassess long-term procurement strategies. Changes to allocation methods may significantly affect compliance costs for refineries and crude producers, while the integration of CCUS provisions could open new compliance pathways for emitters investing in carbon management technologies.  

Linkage remains a consideration. On September 19, 2025, CARB signaled that proposed updates support continued alignment with Quebec and prospectively with Washington.  

Curiously, CARB announced the initial posting of documents as “Preliminary Regulatory Text and Staff Reports” (emphasis ours), indicating that there will likely be changes to the draft regulation after the 45-day public comment period. The schedule is tight, but our analysis indicates there is sufficient time to revise, repost, and conduct a 15-day public comment period prior to the May 28th board hearing. We note that in every prior C&T rulemaking, there has been at least one 15-day public comment period except for a ministerial revision in 2018. If significant changes are required due to public comments, however, the targeted May 28th Board approval may not be feasible. Stakeholders should prepare for an active period of public engagement and technical analysis leading up to the CARB Board’s consideration in May.  

For ongoing coverage of the rulemaking process, allowance market dynamics, and emerging compliance insights, sign up for Stillwater’s California Cap & Trade Newsletter. Each issue delivers timely analysis of regulatory developments, auction results, and market trends – helping compliance entities, traders, and investors stay ahead of policy shifts and price movements in California’s carbon market.