Offsets across the WCI markets: one credit, three supply treatments

A compliance offset retires one tonne of an emitter’s obligation in all three programs, while its effect on system supply differs by jurisdiction. In Québec, an offset surrendered for compliance remains additional to the cap. In California, beginning with the 2026 emissions year, offset use is matched by allowances withheld from a later auction. Washington has applied the same basic treatment since the program began.

These differences mattered less when offsets were abundant and inexpensive. They matter more as the market tightens. California reduced its usage limit in 2021 and set it at 6% from 2026, Québec has lowered its limit and introduced a sub-limit on credits issued outside the province, and the surplus allowance bank that previously absorbed these differences is declining.

CARB compliance reports and quarterly transfer summaries; MELCCFP compliance reports; Washington Ecology offset issuance table.

California’s usage limit has changed three times. Covered entities could meet up to 8% of their obligation with offsets through 2020, 4% in 2021–2025 and 6% from 2026. AB 1207 (2025) extends the 6% limit through 2045. Since 2021, no more than half of the allowed offset share may come from projects without direct environmental benefits in the state under the DEBS rule in §95854(e); AB 1207 extends that restriction through 2045 as well.

The more consequential change is §95871(j). Starting with budget year 2028, CARB withholds allowances from future auctions based on the full offset limit for the emissions year two years earlier. After each compliance period, beginning 31 December 2029, any difference between allowances withheld and offsets actually surrendered is returned to auction in equal amounts over three years. Offsets surrendered for emissions before 2026 are excluded.

The result is that offset use no longer creates a permanent addition to system supply. A surrendered offset replaces an allowance the state would otherwise have sold, with the adjustment occurring two to five years later. For the individual emitter the compliance function is unchanged, since one offset still settles one tonne at whatever discount the market provides. At the system level, the rule changes the timing and composition of supply.

Québec has no allowance-removal mechanism, so offsets surrendered by emitters remain compliance supply in addition to the cap. The usage limit was 8% of each emitter’s obligation through the 2024–2026 compliance period. O.C. 1252-2026, in force from 10 September 2026, lowers the limit to 6% beginning with the compliance period starting 1 January 2027.

The same order introduces a sub-limit on credits issued outside Québec. Non-Québec credits may cover no more than five-sixths of the total offset limit in the 2027–2028 period and two-thirds from the period beginning 1 January 2029. The balance must be met with credits issued by Québec’s Minister.

That restriction applies to a market that has relied overwhelmingly on California supply. By protocol, about 98% of the offsets surrendered by Québec emitters in both 2018–2020 and 2021–2023 came from California-issued projects, primarily U.S. forest credits. Québec’s own registry issued about 2.0 Mt in total between 2015 and 2025, averaging roughly 0.23 Mt a year over 2021–2025. Unless domestic issuance rises materially, the imported-credit sub-limit is likely to constrain offset use before the 6% headline limit does.

RCW 70A.65.170 allows offsets to cover up to 5% of an entity’s obligation in the 2023–2026 period and 4% in 2027–2030. At least half of that volume, rising to 75% in the second period, must come from projects with direct environmental benefits in Washington. WAC 173-446-250(1) then removes allowances from the following budget equal to offsets used for the prior year’s obligations. Washington offsets have therefore substituted for allowances from the program’s start.

In practice, available supply is the binding constraint. Ecology’s issuance table shows 2.05 Mt of credits issued net of the forest buffer: 0.25 Mt in 2023, 0.06 Mt in 2024, 1.17 Mt in 2025 and 0.57 Mt in 2026 through 20 July. Covered emissions are close to 60 Mt a year, so a fully used 5% limit would permit roughly 3 Mt annually. By the 2025 annual surrender deadline, entities had surrendered only 99,525 credits.

Compliance reports show how much of each jurisdiction’s permitted offset share emitters actually used.

CARB and MELCCFP compliance reports. Washington’s first compliance period ends in 2026 and is not shown.

Québec emitters moved from using 10% of their allowance in the first compliance period to more than 95% from 2018 onward. California entities used 87% of an 8% limit in 2018–2020 and 77% after the limit was cut to 4% and the DEBS rule took effect in 2021. Washington’s first compliance period ends in 2026; by the 2025 annual surrender deadline, 99,525 credits had been used.

Supply remains concentrated. CARB issued 288.5 Mt of offset credits between 2013 and 2025, with U.S. forest projects accounting for 79%. Credits qualifying as DEBS totalled 76.1 Mt and averaged 6.1 Mt a year over 2023–2025. Total issuance reached 20.8 Mt in 2025, the highest annual volume since 2020.

Applying one jurisdiction’s utilisation rate to another misstates the balance. We model offsets separately by programme, protocol and DEBS status.

From 2014 through 2020, California offsets traded as a single pool at roughly 80–87% of the allowance price. The 2021 rule change split that market into DEBS and non-DEBS segments.

Source: CARB compliance instrument transfer summaries, annual 2014–2025; allowance basis is the current-vintage transfer price, with 2014–2015 derived.

DEBS credits, which can fill the portion of the limit unavailable to non-DEBS supply, rose from 62% of the allowance price in 2021 to 90% in 2024 and 88% in 2025. Non-DEBS credits fell to 44% in 2024 and 48% in 2025. In 2025, the average transfer price was $25.75 for DEBS credits and $14.19 for non-DEBS credits, compared with $29.37 for a current-vintage allowance.

Québec-issued credits trade in much smaller volumes, about 0.1–0.3 Mt a year, and have cleared at 50–73% of the allowance price since 2021.

The three rulebooks produce materially different allowance-market effects from the same compliance instrument. In Québec, each offset surrendered adds one tonne of compliance capacity above the cap and reduces allowance demand one for one. California and Washington keep offset use inside the cap. California withholds allowances based on the full limit and later returns unused capacity, while allowances corresponding to offsets actually surrendered remain out of the market. Washington removes allowances based directly on observed offset use. Its effective offset supply is therefore constrained by what Ecology issues, which has reached about 1.2 Mt in its strongest year to date.

Timing is as important as volume. California’s withholding occurs two years after the emissions year used to size it, and any unused amount returns over the following three years. Québec’s sub-limit on non-Québec credits tightens from 2027, which is significant because nearly all offsets historically surrendered there were issued in California.

Observed use rates also matter. California entities have surrendered roughly 77–87% of their allowed offset share across recent compliance periods, while Québec has used more than 95% since 2018. Applying one jurisdiction’s utilization rate to another would misstate both the allowance balance and the timing of supply adjustments.

Climate Decode · Advisory

When does the bank stop absorbing the deficit?

Account balances, release rules and price backstops across California, Québec and Washington through 2045, with linkage scenarios.

Sources

CARB compliance reports and quarterly transfer summaries; CARB ARB Offset Credit issuance table; MELCCFP compliance reports; Washington Ecology offset issuance table; 17 CCR §95854 and §95871(j); RSPEDE (Québec) as amended by O.C. 1252-2026; RCW 70A.65.170; WAC 173-446-250.

This article is analytical research provided for information only and is not investment advice.