Washington, California and Québec’s Carbon Market Linkage Agreement

Three jurisdictions prepare North America’s largest emissions trading system

Washington state, California, and Québec have published a draft agreement to link their carbon markets. If finalised, the arrangement would create the continent’s largest emissions trading system by 2027. For UK businesses with North American operations or supply chains, the move signals growing alignment of carbon pricing across major trading partners.

The draft appeared on 3 March 2026 and remains open for public comment until 1 May. It sets out how the three jurisdictions would run joint auctions, allow cross-border trading of emissions allowances, and align their offset policies. Each government would retain control over its own programme while opening access to a much larger pool of compliance instruments.

Washington Governor Bob Ferguson described the proposal as a practical response to climate risk. He noted that no single state or province can address emissions alone, and working together would create greater certainty for businesses. Casey Sixkiller, director of Washington’s Department of Ecology, emphasised the potential for job creation and sustained investment in communities alongside emissions cuts.

For businesses watching carbon policy development, this represents a significant test of market-based approaches at scale. It also demonstrates how subnational governments are moving ahead with climate action regardless of shifting federal policy positions.

How carbon cap-and-trade systems function in practice

Carbon markets operate by setting a legal limit on total greenhouse gas emissions across covered sectors. Governments then issue or auction allowances that represent the right to emit one metric tonne of carbon dioxide equivalent. Companies must surrender enough allowances to match their actual emissions each year.

The cap declines over time, creating scarcity. As allowances become harder to obtain, their price rises. This gives businesses a financial incentive to reduce emissions rather than buy permits. The mechanism drives investment toward cleaner processes and renewable energy without mandating specific technologies.

California launched its programme in 2012, followed by Québec in 2013. The two jurisdictions linked their systems in 2014 through the Western Climate Initiative, forming what became the largest carbon market in the Americas. Their combined approach now covers roughly 600 entities responsible for about 80% of emissions in both regions.

Washington passed its Climate Commitment Act in 2021 and began operating its cap-and-invest programme on 1 January 2023. The legislation explicitly required the state to explore linkage with California and Québec. Joint statements affirming mutual interest followed in March and September 2024, building on years of technical cooperation through shared membership in the Western Climate Initiative.

California recently extended its programme through 2045 via Assembly Bill 1207, signed in September 2025. The legislation tightened offset rules to reduce supply and support targets of 40% emissions cuts from 1990 levels by 2030, with net-zero by 2045. Washington maintains a more aggressive 2030 decarbonisation target than its partners.

Sharp price differences reveal market imbalances

Washington’s December 2025 auction cleared at over $70 per tonne. Meanwhile, allowances in the California-Québec market traded at approximately $31 per tonne. This gap reflects Washington’s young, smaller market and limited allowance supply during a period of high demand.

Several factors contributed to Washington’s elevated prices. Hydropower shortages forced greater reliance on natural gas generation, increasing fuel consumption and emissions from the power sector. The state’s ambitious emissions cap left little room for unexpected demand spikes. With fewer allowances available and no access to external markets, prices rose sharply.

California and Québec benefit from a decade of market operation and a larger pool of compliance instruments. Their mature trading infrastructure absorbs shocks more effectively. Prices have remained relatively stable, though forecasts predict increases to $87 per tonne by 2030 and $230 per tonne by 2045 as caps tighten further.

Linking the markets would allow Washington businesses to purchase allowances from California and Québec when local prices spike. Conversely, California and Québec would gain access to Washington’s allowances, potentially pushing their prices modestly higher. Over time, prices across all three jurisdictions would converge toward a single equilibrium level.

For businesses operating in Washington, this matters considerably. Current price volatility makes long-term capital planning difficult. Energy-intensive manufacturers, refineries, and transport operators face unpredictable compliance costs that complicate investment decisions. Access to a larger market would moderate those swings.

Regulatory alignment determines implementation speed

Each jurisdiction must update its regulations before linkage can proceed. California’s Air Resources Board needs to amend its cap-and-trade rules to recognise Washington allowances and integrate the state into joint auctions. Québec’s Ministry of Environment must do likewise, navigating its own legislative procedures and stakeholder consultation requirements.

Washington’s Department of Ecology faces similar tasks. The state must modify its rules to accept California and Québec allowances for compliance, adjust auction procedures, and align monitoring and enforcement protocols. Public comment periods and formal rulemaking processes will extend into 2026 and possibly 2027.

Political factors add complexity. Québec has proposed new restrictions on offset credits that could limit supply within the linked market. These provisions remain under negotiation. In Washington, the Climate Commitment Act survived a ballot challenge in November 2024, but future initiatives could revive attempts to repeal or modify the programme.

Federal policy shifts also create uncertainty. Changes in U.S. administration could affect support for state-level carbon pricing, though legal authority rests primarily with state governments. Canadian federal climate policy provides a backstop but allows provincial programmes like Québec’s to substitute for national requirements.

If all regulatory steps proceed without major delays, linkage could become operational during 2027. Joint auctions would begin, with allowances from all three jurisdictions available in a single marketplace. Businesses could trade across borders and use any allowances for compliance regardless of origin.

Scale and scope of the proposed combined market

California’s 2022 emissions totalled 371.1 million tonnes of carbon dioxide equivalent. Québec and Washington add substantial additional coverage. The combined market would regulate emissions across jurisdictions representing more than 100 million people and a significant share of North American economic output.

Covered sectors include electricity generation, industrial facilities, fuel distributors, and natural gas suppliers. Large emitters must participate directly. Fuel distributors bring transportation and heating emissions into the system by surrendering allowances when they sell petrol, diesel, or natural gas.

This broad coverage creates compliance obligations throughout supply chains. Manufacturers sourcing materials from covered facilities face indirect cost increases as suppliers pass through carbon costs. Transport operators see fuel expenses rise as distributors include allowance costs in pricing. Building operators experience higher natural gas bills.

For UK companies with North American operations, understanding these cost structures becomes important. A manufacturing subsidiary in California competing with facilities in unregulated states must account for carbon compliance when pricing products. Supply chain partners in Washington may request cost-sharing arrangements as their expenses increase.

The linkage would also expand liquidity. More participants and higher trading volumes typically reduce transaction costs and improve price discovery. Companies gain more counterparties for allowance trades and better information about future price trends. This supports more efficient hedging and compliance strategies.

Investment requirements under tightening emissions caps

Washington requires 35% of auction revenue to benefit vulnerable communities and populations disproportionately affected by pollution. California and Québec direct significant portions of their revenue toward clean energy projects, public transport, energy efficiency programmes, and similar initiatives.

As caps decline through 2030 and beyond, auction revenues will rise alongside allowance prices. This generates substantial public funding for decarbonisation investments. However, it also means higher compliance costs for regulated businesses that fail to reduce emissions quickly enough.

Companies face a choice: invest in emissions reduction now, or purchase allowances at increasing prices later. Many will do both, implementing efficiency measures and process changes while buying permits to cover remaining emissions. The economic calculus favours early action, particularly for capital-intensive projects with long payback periods.

Energy-intensive sectors feel this pressure most acutely. Cement manufacturers must evaluate carbon capture technology or alternative binder chemistry. Refineries consider hydrogen production and electrification of process heat. Steel producers explore electric arc furnaces and direct reduced iron processes.

For UK businesses assessing North American expansion, these investment requirements affect site selection decisions. Locating production in jurisdictions with carbon pricing means factoring compliance costs and potential capital expenditure into financial models. It also means evaluating whether current processes meet future regulatory expectations or require modification.

Essential facts about the linkage proposal

• The draft agreement published on 3 March 2026 enables joint auctions and cross-jurisdictional allowance trading among Washington, California, and Québec.
• Public comment closes on 1 May 2026, with linkage potentially operational during 2027 pending regulatory updates in all three jurisdictions.
• Washington’s allowances traded above $70 per tonne in December 2025, while California-Québec allowances traded near $31 per tonne.
• Forecasts project linked market prices reaching $87 per tonne by 2030 and $230 per tonne by 2045 as emissions caps decline.
• The combined market would cover emissions across jurisdictions representing more than 100 million people, making it North America’s largest carbon trading system.
• Each jurisdiction retains sovereignty over its own programme rules, revenue allocation, and emissions reduction targets.
• California requires 40% emissions cuts from 1990 levels by 2030, while Washington maintains more aggressive near-term decarbonisation goals.

Risk assessment for businesses in covered sectors

Price convergence creates winners and losers. Washington companies would likely see compliance costs fall as they access cheaper allowances from California and Québec. However, businesses in those jurisdictions might experience modest price increases as Washington demand enters their market.

The magnitude of these effects depends on supply-demand dynamics after linkage. If Washington’s emissions run consistently high relative to its cap, the state would become a net importer of allowances. This would push prices upward across the entire linked market. Conversely, if Washington reduces emissions faster than required, it could supply allowances to other participants.

Supply chain impacts extend beyond covered entities. Manufacturers purchasing electricity, natural gas, or transport fuel see costs affected by their suppliers’ compliance obligations. These indirect costs flow through to product pricing, potentially affecting competitiveness against rivals in unregulated jurisdictions.

Businesses should model various price scenarios. Sensitivity analysis helps identify exposure levels and breakpoints where investments in emissions reduction become economically justified. This work informs capital planning and operational strategy over the medium term.

Political risk remains present. Ballot initiatives, legislative changes, or legal challenges could modify or eliminate any of the three programmes. Washington’s Climate Commitment Act faced a repeal attempt in 2024, though voters rejected it. Similar efforts may emerge in future election cycles, particularly if energy prices rise or economic conditions deteriorate.

For UK companies, these risks mirror challenges familiar from the UK Emissions Trading Scheme and European Union ETS. Political durability of carbon pricing depends on public acceptance, economic performance, and perceived fairness of cost distribution. Businesses operating in multiple carbon markets should track these factors across all jurisdictions.

Strategic considerations for companies with North American exposure

Organisations with facilities, supply chains, or customers in the three jurisdictions should evaluate their carbon exposure now. Waiting until linkage occurs means less time to implement cost-effective reduction measures before prices potentially rise further.

Start with emissions footprinting across operations in California, Québec, and Washington. Identify which facilities or activities generate covered emissions, either directly or through energy and fuel purchases. Quantify current exposure in tonnes and estimate costs at various allowance price levels.

Next, assess reduction opportunities. Energy efficiency retrofits, fuel switching, process optimisation, and renewable energy procurement all merit evaluation. Compare implementation costs against projected allowance expenses over relevant time horizons. Projects with payback periods under five years deserve serious consideration given price trajectory forecasts.

Consider contractual arrangements with suppliers and customers. Long-term agreements may need adjustment to reflect carbon costs. Pricing mechanisms might include pass-through provisions that allocate cost increases explicitly. For businesses in competitive markets, this requires careful negotiation to avoid losing business to unregulated competitors.

Companies should also monitor regulatory developments closely. Subscribe to updates from California’s Air Resources Board, Québec’s Ministry of Environment, and Washington’s Department of Ecology. These agencies will publish proposed rule amendments, conduct stakeholder workshops, and issue guidance documents during the linkage implementation process.

For organisations subject to UK carbon reporting requirements or participating in the UK ETS, the North American developments provide useful comparison points. Regulatory approaches, market design choices, and business responses offer lessons applicable in UK contexts. Furthermore, some UK businesses may face carbon costs in multiple jurisdictions, requiring integrated compliance strategies.

The SBS compliance team assists businesses in navigating overlapping carbon reporting and trading scheme obligations across jurisdictions. Our ESG compliance support includes footprinting, reduction planning, and regulatory tracking for companies operating internationally.

Where subnational carbon markets fit within global climate action

The proposed linkage demonstrates that ambitious climate policy continues at regional level regardless of national political direction. California, Québec, and Washington represent significant economies acting independently of federal governments. Their combined approach shows how subnational jurisdictions can coordinate effectively on complex policy areas.

This matters for UK businesses because it signals growing carbon price coverage across major trading partners. North American operations increasingly face explicit carbon costs similar to those in the UK and EU. Companies need consistent approaches to carbon management that work across multiple regulatory frameworks.

Several other U.S. states have expressed interest in carbon pricing. The Regional Greenhouse Gas Initiative covers power sector emissions in northeastern states. If additional states adopt economy-wide programmes and pursue linkage, covered emissions could expand significantly.

International linkage between carbon markets remains an objective within climate policy communities. The Paris Agreement explicitly allows international transfer of emissions reductions. However, technical and political barriers have limited actual implementation. The California-Québec-Washington model provides practical experience in linking across borders with different legal systems.

UK businesses should track these developments as part of broader sustainability strategy. Understanding where carbon prices exist, how they compare in stringency, and whether they might link together helps inform location decisions, supply chain structure, and capital allocation.

Further information

The three jurisdictions provide detailed information through their environmental agencies. California’s Air Resources Board publishes programme rules, auction results, and compliance guidance at ww2.arb.ca.gov/our-work/programs/cap-and-trade-program. Québec’s Ministry of Environment maintains similar resources in French and English at www.environnement.gouv.qc.ca/changements/carbone/index-en.htm.

Washington’s Department of Ecology hosts information about the Climate Commitment Act, including auction schedules and market monitoring reports, at ecology.wa.gov/Air-Climate/Climate-change/Climate-Commitment-Act. The department also published the draft linkage agreement and public comment instructions at this location.

For broader context on carbon market design and performance, the International Carbon Action Partnership maintains a comprehensive database at icapcarbonaction.com. The organisation tracks emissions trading systems worldwide and publishes annual status reports comparing different approaches.

Businesses requiring support with carbon footprinting, compliance planning, or reduction strategies across multiple jurisdictions can explore our carbon reporting programme, which addresses UK and international requirements. For organisations building internal capability, SBS Academy training covers practical emissions management skills applicable across different regulatory frameworks.