How Startups, Labor, and Industry Reimagined California’s Cap-and-Trade

By Vikrum Aiyer, Senior Fellow, University of California at Berkeley, Center for Law & Business

California’s Cap-and-Trade reauthorization wasn’t just about extending an emissions program. It was about reimagining how markets can balance the twin imperatives of climate progress and economic security. By ensuring that emitters can cut pollution while also accessing cost-containing tools like allowances, offsets, and now carbon removal, the program keeps energy and goods affordable for families and businesses — while driving us toward net zero. Extending Cap-and-Trade through 2030 was essential not only to California’s statutory climate targets but to the nation’s credibility on meeting its climate goals. And by updating our carbon markets, California is sending a powerful signal: we don’t have to choose between being pro-energy or pro-environment. We can be both. This program is a model of how to protect energy security, advance ambitious climate action, and expand good-paying jobs — proving that climate resilience and economic affordability are not opposing forces, but mutually reinforcing goals. With two historic provisions, SB 840 and AB 1207, California has positioned itself to anchor the global carbon removal economy while creating union jobs and strengthening communities here at home.

Coalition Effort Establishes Innovation Fund to Scale Climate Technologies 

The challenge we set out to solve is one every clean energy revolution has faced: how to finance first-of-a-kind technologies that serve the public good, but require extraordinary upfront capital to get off the ground. Solar, wind, and even geothermal were once “unbankable” until governments stepped in to help derisk projects, catalyze private investment, and prove commercial viability. Carbon removal, green hydrogen, and long-duration storage are no different. These technologies provide reliable, affordable, and clean ways to manage both our energy abundance and our emissions — but they cannot be financed by Silicon Valley alone. They are private sector–led innovations, yes, but they must also be government-enabled. When governments act as the early-stage “angel investor,” allocating capital to cover upfront costs, they don’t just fund projects — they launch industries.

That is why SB 840 is such a breakthrough. In an unprecedented move, it establishes an Advanced Climate Innovation Fund with $85 million from a continuous annual appropriation to the legislature — the first time California has guaranteed capital for carbon removal and other frontier climate technologies. At a moment when federal budgets are being scaled back, California stepped in to ensure that projects here have the stability to move forward, which in turn shores up investor confidence and crowds in additional private capital. This creates the flywheel we’ve seen time and again in American innovation: government enablement leading to private sector deployment, which then grows into self-sustaining markets. It’s how we scaled semiconductors, clean cars, and renewable energy. Now it’s how we’ll build carbon removal into a real industry. And the statutory intent of the fund prioritizes not just those that are technologically or commercially viable, but also those advanced climate technologies that do not result in net-new pollutants, to ensure we unrelentingly safeguard the air quality and water quality impacts to all neighborhoods, including front-line communities.

What makes this win extraordinary is not just the funding mechanism but the coalition that made it possible. A cohort of small startups partnered with organized labor, hard-to-abate industries like cement, green hydrogen pioneers, and trade groups like Ceres — representing everyone from Apple to Microsoft. NGOs, academics, and carbon removal companies stood shoulder-to-shoulder with unions. Together, we proved that climate innovation is not the domain of one sector, one ideology, or one political camp. In an era of polarization, this alliance showed that climate action, energy security, and economic justice are not competing priorities. They are mutually reinforcing — and with SB 840, California has demonstrated what it looks like to build markets and movements at the same time.

Building a Flywheel of Supply, Demand, and First-of-a-Kind Climate Innovation 

But building supply is only half the equation. Without demand, even the best technologies stall. That’s where AB 1207 comes in. By requiring the Air Resources Board to develop protocols for high-quality, durable carbon removal and integrate them into the compliance market, California is creating the demand-side pull that complements SB 840’s supply-side push. Together, these bills form a comprehensive strategy: reliable capital to finance first-of-a-kind projects, and a guaranteed market that ensures those projects can thrive.

Voluntary purchases in the carbon markets alone cannot deliver the necessary scale of carbon removal to stop climate change, nor can they alone sustain an industry at the speed & scale we need. Embedding carbon removal into Cap-and-Trade creates a predictable, regulated demand stream that stabilizes financing, keeps compliance costs manageable for emitters, and ensures California still hits its statutory climate targets. This is how we balance the dual imperatives of affordability and ambition: giving businesses cost-containment tools while building the world’s first compliance-grade carbon removal market. It is a model of how government and industry can work in tandem to secure energy, stabilize prices, and advance climate goals.

And ultimately, it was the coalition that made the difference. Small California startups partnered with labor unions, NGOs, academics, climate tech companies, and hard-to-abate sectors to carry this vision forward. From cement manufacturers to green hydrogen entrepreneurs, from unions to Fortune 100 companies, the breadth of support underscored a simple truth: we don’t have to choose between pro-energy and pro-environment, between affordability and ambition. With AB 1207, California proved that both are possible — and in fact, essential.