Last week, amidst the fervour surrounding tariff announcements, President Trump issued three Executive Orders related to energy. One of these orders threatens state-wide climate programs by calling for the removal of what it describes as "unlawful and burdensome state-level impediments to domestic energy production." This raises uncertainty in carbon markets as states will have to navigate increased regulatory ambiguity, complicating the predictability and consistency that is necessary for these markets to drive emissions reductions.
The Executive Order, titled “Protecting American Energy from State Overreach,” highlights the California Cap-and-Trade program and climate superfund laws (which hold energy companies financially accountable for damages linked to their emissions) enacted in New York and Vermont in 2024 as key examples of overreach. The Trump administration considers this to be at odds with their energy dominance priority by discriminating against out-of-state producers and imposing barriers to interstate and international trade.
California has imposed a Cap-and-Trade obligation since 2013, and the Regional Greenhouse Gas Initiative (RGGI) states have operated their linked program on the power sector since 2009. Washington has been operating a state-wide program since 2023, and similar programs are in development in New York and Oregon. Note that while California and Quebec operate a joint market through the Western Climate Initiative and are undergoing linkage discussions with Washington, Quebec still has the agency to operate its provincial carbon program. Shortly after the Executive Order was issued, the Quebec National Assembly voted unanimously to keep the province’s Cap-and-Trade program in place.
This Executive Order goes beyond the efforts made in Trump’s first term, which unsuccessfully challenged the linkage of California's Cap-and-Trade to Quebec but did not attempt to derail the integrity of the program itself. Past challenges to the constitutionality of California's Low Carbon Fuels Standard program have also failed.
Additional Executive Orders
The other two Executive Orders issued by the President are related to coal and electricity. The first, “Reinvigorating America’s Beautiful Clean Coal Industry and Amending Executive Order 14241,” promotes coal mining, exports, and coal-based power for AI while easing EPA air toxicity rules, and the second, “Strengthening the Reliability and Security of the United States Electric Grid” emphasizes bolstering grid reliability to support rising electricity demand from AI data centers and manufacturing. If acted on, this could drive pricing in carbon programs, such as RGGI, by increasing emissions from the power sector.
Next Steps
As next steps, the Executive Order calls for the Attorney General to:
- Identify and take action against state laws and policies that burden domestic energy resources and that are unconstitutional, preempted by federal law, or otherwise unenforceable.
- Prioritize laws and policies that address “climate change” or involve “environmental, social, and governance” initiatives, “environmental justice,” carbon or “greenhouse gas” emissions, and funds to collect carbon penalties or carbon taxes.
- Submit a report to the President on the actions taken and recommendations to protect American energy pursuant to the Order within 60 days.
Efforts undertaken in accordance with the Executive Orders will most likely be challenged by the states, and the effectiveness of the order may be limited without judicial support.
Industry Response
This Executive Order does not eliminate state-level Cap-and-Trade programs or other climate policies and must be defined by the US Attorney General over the coming months. However, amid continued fallout from Trump's tariffs, the Executive Order and associated uncertainty weighed heavily on market sentiment, with immediate bearish pricing implications observed following the announcement. California’s Cap-and-Trade allowance pricing experienced intra-day volatility, with the Front-December contract finally settling around USD 26 compared to USD 29 before the Executive Order was announced, and RGGI allowances declining to the USD 17 range. Allowances in Washington’s Cap-and-Invest program, which was not specifically mentioned in the Executive Order, were less affected, as this less liquid program is experiencing very tight near-term balances.
While stakeholders have opposed the Executive Order and reiterated their commitment to carbon markets, regulators will likely focus near-term efforts on contending with this legal and regulatory disruption. This may further compound delays in implementing and strengthening carbon markets. California's Initial Statement of Reasons (ISOR) for its updated Cap-and-Trade rules have already been delayed for months, and New York's draft regulations for its Cap-and-Invest program have also been postponed. On the other end, New York is also facing lawsuits from environmental groups accusing the state of failing to meet its commitments by not releasing the draft regulations on schedule.
Democratic governors, notably Gavin Newsom of California and Kathy Hochul of New York, have indicated their resistance to the federal directive and intent to continue their climate initiatives. Hochul and New Mexico Governor Michelle Lujan Grisham, Co-Chairs of the United States Climate Alliance bipartisan coalition of 24 governors, issued a statement asserting states' rights to keep advancing climate solutions.
ClearBlue will continue to monitor any developments and keep clients updated.