North America’s cap-and-trade markets: ClearBlue’s expectations for 2025

North America’s cap-and-trade markets are facing a pivotal year, shaped by regulatory shifts, market dynamics, and the growing urgency of climate action. From the volatility of California’s market under the Western Climate Initiative (WCI) to the strengthening foundations of Washington’s Cap-and-Invest program and the evolving challenges within the Regional Greenhouse Gas Initiative (RGGI), these programs remain key mechanisms in driving emissions reductions across the continent. Against this backdrop, New York is preparing to launch its own cap-and-invest program, which promises to add a new dimension to North America’s carbon markets.

Western Climate Initiative

WCI prices started 2025 under USD 35 for prompt month delivery—lower than levels close to USD 40 at the start of 2024. Throughout 2024, multiple regulatory delays translated into price volatility. The start of the formal Cap-and-Trade rulemaking process, expected to result in materially tighter supply and demand balances and higher prices, has been postponed to early 2025.

Still, ClearBlue expects California and Quebec to propose program changes in line with prior informal workshops and the October Market Notices. Once California initiates the formal rulemaking with the Initial Statement of Reasons (ISOR) and 45-day public comment period, the regulations must be finalized within one year. Regulators have indicated the tighter caps will take effect in 2026. They have also stated they will raise the prices of the cost-containment provisions, though the first signals on how this may be implemented will wait for the ISOR.

Additionally, California is looking to update certain offset protocols, while Quebec is considering reducing offset usage limits by 2030 and transforming the offset credit component into a reduction purchase mechanism starting in 2031. The California legislature is also expected to begin examining a program extension in the 2025 session. CARB has noted that long-term modeling work and cap trajectories will help inform future legislative direction. The next Scoping Plan is on the horizon for 2027.

Regional Greenhouse Gas Initiative

RGGI allowance prices traded up significantly in 2024, despite the absence of news from the Program Review. In contrast to WCI, the RGGI price run was driven by compliance buying and reflected power market dynamics and favorable spark spreads. Prices at the start of 2025 are above USD 20—far above the 2025 soft price ceiling of USD 17.03. This suggests the entire annual CCR could once again be emptied at the first auction of the year.

Looking ahead, the Program Review process should result in a proposal. With uncertainty over loads, particularly in light of AI and electrification initiatives, plus the pace of clean energy additions and offshore wind procurements, cost containment will be critical for the program design. The September 2024 Program Review scenario looked to ease near-term stringency compared to prior modeling scenarios and to firm up cost containment. Meanwhile, a court decision in Virginia suggests Governor Youngkin’s withdrawal from RGGI was illegal, though it will be appealed, and the Governor is not expected to re-enter RGGI during his term.

Washington’s Cap-and-Invest Program

Launched in 2023, Washington’s Cap-and-Invest program saw voters in November 2024 decisively reject a ballot initiative aimed at repealing the system. This result underscored public support for the program, particularly its focus on investing proceeds into projects that enhance air quality and benefit local communities. 

Washington’s allowance prices reflect the market’s tight conditions. Starting 2025 at USD 53 for prompt month delivery, prices are substantially higher than those in the Western Climate Initiative (WCI), highlighting the program’s aggressive cap trajectory to 2030. Regulators have emphasized the importance of cost containment and have aligned Washington’s cost containment triggers with WCI’s framework to facilitate potential future linkage. The first-tier cost containment price for 2025 is USD 60.43, and Washington has committed to offering reserve allowances at this level until a decision on linkage with WCI is finalized.

The state’s linkage ambitions are centered on long-term program durability and market efficiency. Although formal linkage with WCI is unlikely before the conclusion of California’s current rulemaking process, Washington’s design positions it well for eventual integration. The state’s website notes that allowances from Washington, California, and Quebec could be used interchangeably for compliance in the first compliance period if linkage occurs before November 1, 2027.

New York’s Cap-and-Invest Program

Now expected to launch in 2026, with a regulatory proposal expected any day, New York’s Cap-and-Invest program aligns with the Climate Leadership and Community Protection Act (CLCPA) and ranks among the nation’s most ambitious climate initiatives. The program’s design is informed by extensive stakeholder input and lessons learned from other Cap-and-Invest systems, such as California’s WCI and RGGI. Drawing on early analyses and the latest available data, ClearBlue anticipates several key features that could shape the program’s implementation and market impacts.

In terms of market structure, New York plans to implement a steadily declining cap on greenhouse gas emissions from major sectors, including power generation, transportation, and industry. All of the state’s emissions will be included under the cap and offsets will not be a part of the program. Not all sectors will be included under the “traded” portion of the cap. A significant portion of proceeds will be directed toward disadvantaged communities disproportionately affected by air pollution and climate change. 

The cap decline is expected to be gentler at first, before accelerating. Pre-compliance auctions could begin in 2025. To manage price volatility, New York’s program is expected to feature robust cost containment mechanisms, such as a price ceiling and a reserve of allowances triggered by market conditions. 

A critical area of focus will be linkage opportunities. New York has not yet announced whether it will seek to join an existing market, such as RGGI or WCI, or operate as a standalone system. Linkage with RGGI appears more likely in the near term, given the regional alignment on power sector emissions and New York’s role as a RGGI member state. Decisions around the interaction of the New York Cap-and-Invest and RGGI will be important for both markets. It is possible that RGGI could be the lead program for New York’s in-state power emissions.

Looking Ahead

With New York’s cap-and-invest program on the horizon, 2025 will be a crucial year for finalizing program details and preparing the market for launch. ClearBlue will continue to monitor these developments and provide insights to help clients navigate the opportunities and challenges of this evolving landscape.

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