California’s carbon market faces a key test: whether state lawmakers will tolerate the higher prices needed to drive emissions cuts at the same time there is continuing pressure to keep electricity affordable.

The current political environment around affordability raises questions about whether state lawmakers and regulators will put policies in place to keep carbon prices high, Brent Nelson, managing director of markets and strategy at Ascend Analytics, said.

When carbon prices are low, there is less incentive to reduce emissions, Nelson said.“Prices need to go up to create the right incentives,” he said in a telephone conversation with California Energy Markets.

Others argue that carbon markets are designed to work alongside—not re The current political environment around affordability place—other policies.

Carbon prices are “a tool in the toolkit for decarbonization, as long as they are structured correctly,” Jo Gardias, Ralph Cavanagh Climate Solutions fellow for climate and energy with the Natural Resources Defense Council, told California Energy Markets via phone. The California and Washington carbon-trading programs, she said, serve as “a backstop for emissions reduction.” That is, they ensure economy wide continued decarbonization “in the face of uncertainty with other regulations.”

Proposed emissions policy changes in California’s cap-and-invest program are“mechanistic changes” in policy designed to “increase the ambitions of its program and increase consumer protections,” Gardias said.

“In general, carbon prices are a positive tool that can help hedge risks and drive decarbonization,” she said.

The cap-and-invest program addresses stationary emissions sources, not mobile sources, Gardias noted.

The California carbon cap-and-trade program was created in 2006 by Assembly Bill 32 and extended with the passage of AB 398 in 2017, according to the California Air Resources Board. It was linked with Quebec’s program in 2014.

The program has seen price variability. In California, the highest current carbon auction settlement price to date was $30.85 in May 2022. The lowest price—$11.48—occurred early in the market’s history, in November 2013 and February 2014. Advance auction settlement prices saw a low of $10.71 in May 2013 and a high of $34.01 in November 2021.

In the past two years, prices for current auctions have ranged from $25.87 in May 2025 to $41.76 in November and from $26.15 in May 2025 to $41 in February 2024.

As of late February, daily carbon prices were $74 in Washington and $29.71 in California/Quebec, according to Energy GPS. “Last year at this time, the former was pegged around the $55.00 mark while the latter sat between $31 and $32, ”Energy GPS Principal Jeff Richter said in an email to California Energy Markets. “The [Washington] Carbon markets have been rising in auction clears due to the supply-demand picture associated with all three components: industrial, transportation and energy—specifically gas-fired generators within the state. California oscillated in 2025 with a big decrease in early April only to recover by mid-September when [Washington] Carbon started escalating.”

Washington’s latest allowance price containment reserve auction, held Feb. 18 by the State Department of Ecology, featured allowances at a Tier 1 price of $60.43. All 3,641,334 vintage-less allowances were fully purchased. Since the beginning of the program, it has generated $2.6 billion in state revenue, or $3.3 billion including consigned auctions, according to the International Carbon Action Partnership.

Possible linkage of the Washington cap-and-invest program, which started in 2023, with the California and Quebec cap-and-trade programs was announced in September 2024. California, Quebec and Washington announced the intent to share information and collaborate with a goal of linking the markets.

California-Washington linkage can be “a tool to improve flexibility,” according to Gardias, and can also provide stability against market shocks or fluctuations.

But carbon pricing alone, Nelson said, cannot drive the next phase of decarbonization in California. Since the value of carbon increases as natural gas prices increase, according to Nelson, what would “move the needle” on decarbonization would be higher natural gas prices rather than carbon prices.

The California Independent System Operator “has done the easy stuff,” he said. “The next step is the hard stuff. … There are no incentives for load to align with supply.”

There currently aren’t resources able to compete with natural gas for supplying power overnight. Load-serving entities are willing to pay a premium for renewable energy, but there is not enough activity for geothermal, run-of-river hydroelectric, out-of-state wind or long-duration energy storage to make a difference. “There just aren’t options,” Nelson said.

The energy-resource planning process makes assumptions about resources such as pumped hydro and geothermal when they can’t be easily added to the market, Nelson said. A revitalization of demand response, which could include behind-the-meter storage, might be an option, and green hydrogen has long been considered an option for the last stage of decarbonization in California.

Simultaneously, shifting federal policies have increased the importance of carbon markets due to officials who have either “delayed or punted” on policy implementation. With incentives for renewable energy “no longer there,” Gardias said, the “market is performing a different function”—as a backstop for policies, not a driver of emissions reductions.

California carbon prices “are at the price floor. The lowest possible price you can be in the market,” Gardias said, adding that there is “room for more ambition in the market.” The proposed regulations aim to increase the market performance and make the price signal more effective, she said.

“The carbon price signal is important,” Gardias said. When structured appropriately with the correct tools applied, it can provide “options to protect electricity consumers from high bills for unrelated reasons. … The price signal can also reduce the price signals for electricity consumers.”

It is important, Gardias said, “to get that right,” since it can “reduce electricity bills or costs for low-income families, depending on how the state spends that revenue.”

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