Governor Newsom takes step to link carbon markets with Washington State
Two US states have moved closer to creating North America's largest carbon market. California and Washington are now preparing to merge their emissions trading systems with Québec's existing market. The combined program could start operating in 2027.
This matters because carbon markets set a price on pollution. Companies that emit greenhouse gases must buy allowances for each tonne they produce. Linking three separate markets creates a larger trading system. Larger markets typically offer more stable prices and lower compliance costs.
For UK businesses, the development shows how carbon pricing continues to expand internationally. Markets in California and Washington cover similar sectors to those regulated under the UK Emissions Trading Scheme. Understanding how these systems evolve helps UK companies prepare for tighter carbon rules and rising allowance prices at home.
The procedural steps involved also matter. Linking carbon markets requires careful legal and technical alignment. California's governor had to make specific findings under state law before regulators could proceed. Washington had to rewrite its rules to match auction formats and compliance periods used by California and Québec. These details determine whether the combined market will function properly.
California's governor approves regulatory pathway for market linkage
California Governor Gavin Newsom made the required legal findings on 21 September 2026. He announced the decision publicly two days later during Climate Week NYC. The findings allow the California Air Resources Board to begin its formal rulemaking process.
Under California law, the governor must assess whether a partner jurisdiction's carbon market meets certain standards before linkage can proceed. Newsom concluded that Washington's program satisfied those requirements. The Air Resources Board had requested the findings earlier in September.
Newsom's statement described the step as allowing California to "formally begin the process to link its Cap-and-Invest program with Washington's carbon market." His office called the policy "smart economics" as well as good climate strategy. Officials said a larger market would reduce emissions and lower the cost of clean technology.
The announcement came after months of preparation. California, Washington, and Québec signed a linkage agreement on 25 June 2026. That agreement set out the framework for combining the three markets. However, each jurisdiction still needed to complete its own legal and regulatory procedures.
Washington finished its regulatory changes first. Governor Bob Ferguson said the state had finalized the rule amendments needed to make its market compatible with California and Québec. The Washington Department of Ecology signed the regulatory adoption on 17 September 2026, four days before Newsom's findings.
California's Air Resources Board now enters a public rulemaking process. That process will include consultation, impact assessment, and formal approval steps. If completed on schedule, the three jurisdictions expect to hold their first joint auctions in 2027.
Washington aligns auction rules and compliance periods with existing markets
Washington's rule changes focused on technical alignment. The state had to match the auction processes, registration requirements, and compliance periods already used by California and Québec. Without that alignment, entities could not trade allowances across jurisdictions.
The Washington Department of Ecology explained that entities in Washington will only be able to trade with California and Québec after linkage becomes effective in all three jurisdictions. The rules create the legal framework for that trading, but do not activate it immediately.
Washington launched its own cap-and-invest program in 2023. The program requires major emitters to buy allowances for their greenhouse gas pollution. Revenue from allowance auctions funds climate investments, including transport electrification and building efficiency projects.
Linking with California and Québec expands Washington's market significantly. California's Cap-and-Invest program has operated since 2012. It covers power generators, industrial facilities, and fuel suppliers. The state linked with Québec in 2014, creating a cross-border market that has now operated for more than a decade.
Québec's carbon market uses the same allowance currency as California. Businesses in either jurisdiction can buy and use allowances issued by the other. The same principle will apply when Washington joins. An allowance issued in Sacramento will be valid for compliance in Seattle, and vice versa.
The combined market will become North America's largest multi-jurisdiction emissions trading system. It will cover major emitters across three regions with a combined population of more than 50 million people. That scale matters because it increases liquidity and reduces the risk of price spikes.
Larger carbon markets reduce price volatility and compliance costs
Linking carbon markets creates a bigger pool of buyers and sellers. More participants mean more trading volume. Higher trading volume typically leads to more stable prices. That stability helps businesses plan investments and manage compliance costs.
Price volatility has been a problem in smaller carbon markets. When demand for allowances suddenly increases, prices can spike if supply is limited. A larger market smooths out those fluctuations. Companies can buy allowances from a wider range of sources, reducing the impact of local shocks.
Lower compliance costs matter for competitiveness. Businesses covered by carbon pricing face a direct cost for each tonne of emissions. If allowance prices are high or unpredictable, companies struggle to budget for compliance. A more liquid market with stable prices makes that planning easier.
The linkage also creates more opportunities for emissions reductions. Companies can invest in abatement projects across all three jurisdictions, not just their home market. If cutting emissions is cheaper in one region, businesses can focus investment there and buy allowances to cover remaining pollution elsewhere.
For UK companies, these dynamics are familiar. The UK Emissions Trading Scheme operates on similar principles. Allowance prices in the UK ETS have fluctuated since the scheme launched in 2021. Prices reached highs above £80 per tonne in 2023 before falling back. Understanding how larger linked markets manage volatility offers lessons for the UK system.
There are also implications for international competitiveness. UK manufacturers competing with US counterparts need to understand the carbon costs those competitors face. If allowance prices in the California-Washington-Québec market remain lower than UK ETS prices, that creates a cost differential.
Conversely, businesses exporting to California or Washington should track how carbon costs affect customer pricing and procurement decisions. As carbon markets expand, they increasingly influence supply chain choices. Companies with lower emissions may gain a competitive advantage in tenders and contracts.
The policy also shows momentum behind carbon pricing as a regulatory tool. Despite political opposition to climate regulation in parts of the United States, California and Washington are expanding their market-based approach. That suggests carbon pricing will remain part of the global regulatory landscape.
How three jurisdictions prepare for a 2027 market launch
Several procedural steps remain before the linked market can operate. California's Air Resources Board must complete its rulemaking process. That includes drafting detailed regulations, publishing them for public comment, and holding hearings. The board must then vote to adopt the final rules.
Québec also has regulatory work to complete. The province must align its own rules with the changes made by California and Washington. Québec's carbon market operates under provincial law, which requires its own amendment process.
Technical systems must also be updated. The three jurisdictions need to integrate their allowance registries so that entities can hold and trade allowances issued anywhere in the linked market. Auction platforms must be configured to accept bids from all three regions. Compliance tracking systems must recognize allowances from partner jurisdictions.
Once those steps are finished, the first joint auctions can proceed. The states expect that to happen in 2027. Joint auctions will sell allowances on behalf of all three jurisdictions. Buyers will bid in a single auction rather than participating in three separate sales.
The timeline depends on regulatory schedules that can shift. However, officials in all three jurisdictions have committed to the 2027 target. That timeframe gives businesses roughly a year to prepare for the transition.
Five key facts about the California-Washington carbon market linkage
- California, Washington, and Québec signed a formal linkage agreement on 25 June 2026 setting out the framework for combining their carbon markets.
- Washington completed its regulatory changes on 17 September 2026, aligning auction processes and compliance periods with the existing California-Québec system.
- California Governor Gavin Newsom made the required legal findings on 21 September 2026, allowing the California Air Resources Board to proceed with rulemaking.
- The combined market will become North America's largest multi-jurisdiction emissions trading system, covering more than 50 million people across three regions.
- Officials expect the linked market to begin operating in 2027, with the first joint allowance auctions planned for that year.
What UK businesses should consider as carbon markets expand internationally
The California-Washington linkage demonstrates that carbon pricing continues to spread despite political headwinds. For UK companies, that trend has practical implications. More jurisdictions are putting a price on emissions. More supply chains will include carbon costs.
Businesses operating internationally should track carbon pricing developments in the markets where they sell or source goods. California's economy alone is larger than most countries. Adding Washington and Québec creates a significant trading bloc with mandatory carbon costs. Companies selling into those markets need to understand how carbon pricing affects their customers and competitors.
UK firms with US operations should assess whether those operations fall under Washington or California's cap-and-invest programs. Coverage thresholds vary by sector, but large industrial facilities, power generators, and fuel suppliers are typically included. Compliance obligations include registering with regulators, tracking emissions, and surrendering allowances annually.
There are also lessons for UK carbon policy. The UK Emissions Trading Scheme covers similar sectors to the California and Washington programs. However, the UK ETS operates as a single-jurisdiction market. The government has discussed potential linkage with the EU ETS or other international markets. The California-Washington-Québec model shows how that linkage might work in practice.
Carbon reporting requirements are tightening globally. Even businesses not directly covered by carbon markets face growing pressure to measure and disclose emissions. Large companies in the UK must report Scope 1, Scope 2, and increasingly Scope 3 emissions. Public sector suppliers need to demonstrate carbon reduction plans to meet Procurement Policy Note 06/21 requirements. Our net-zero program for carbon reporting compliance helps businesses meet those obligations.
Supply chain emissions are particularly important. As carbon markets expand, they create incentives for buyers to choose lower-carbon suppliers. UK exporters with strong emissions performance can use that as a commercial advantage. Conversely, businesses with high emissions may face questions from customers about their carbon management plans.
Training your team on carbon accounting and market mechanisms helps you stay ahead of regulatory changes. Understanding how carbon markets function, how allowances are priced, and how compliance works gives you a clearer view of where climate policy is heading. SBS Academy training on emissions reporting and carbon markets provides practical skills for navigating these requirements.
The political dimension also matters. California and Washington are expanding carbon pricing at a time when federal climate policy in the United States remains uncertain. That shows how regional and state-level regulation can drive climate action even without national mandates. UK businesses should expect similar dynamics, with devolved administrations and local authorities potentially introducing their own climate requirements.
Where to find official guidance and regulatory updates
The California Air Resources Board publishes detailed information about the state's Cap-and-Invest program, including regulatory updates, auction results, and compliance guidance. Visit the California Air Resources Board cap-and-trade program page for current information.
The Washington Department of Ecology oversees the state's cap-and-invest program. The department's Climate Commitment Act page provides updates on rulemaking, auction schedules, and linkage developments.
Québec's carbon market operates under the province's cap-and-trade regulation. The Ministry of the Environment publishes information in French and English. Official updates on linkage can be found through Québec's carbon market information portal.
For UK businesses, the UK Emissions Trading Scheme guidance on GOV.UK provides comparable regulatory information for the UK market. The guidance covers registration, monitoring, reporting, and compliance obligations under the UK ETS.