California-Quebec Cap-and-Trade Link is a Major Step Forward for Both Markets

GLOBE-Net, April 26, 2013 – The decision this week by California’s Air Resources Board setting January 1, 2014 as the start date for the linking of California’s cap-and-trade program with that of Québec is a major step forward for both jurisdictions.

The new integrated system will be the largest cross-border carbon trading market since the launch of the European Union Emissions Trading Scheme (ETS) in 2005.

“The Board’s action today broadens the environmental impact of California’s cap-and-trade program and helps fight climate change by reducing greenhouse gases,” said Air Resources Board Chairman Mary D. Nichols.

California and Québec worked for over four years developing their respective cap-and-trade programs to provide for the eventual potential linkage. That joint effort and experience will help ensure that the two programs will complement one another and provide covered facilities in both jurisdictions with the benefits of a larger program.

Despite the significant difference in market sizes (Quebec’s carbon allowance budget will total 63.6 million metric tons CO2e in 2015, versus California’s 394.5 million metric tons), it is expected Quebec’s allowance prices will be higher than California’s.

Quebec’s cap is much tougher than California’s and seeks to reduce GHG emissions to 20 percent below 1990 levels by 2020, while California seeks to reduce its GHG emissions to 1990 levels by 2020.

Also, because Quebec draws much of its electricity from hydropower, it has fewer opportunities to obtain reductions through switching to lower- or no-carbon fuels, and instead must focus on emission reductions from low-carbon technologies in the transportation and industrial sectors, many of which have been developed in California.

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Maintaining reasonable prices for carbon offsets is a critical factor for success in carbon trading markets. Chronically low prices in the European Union’s ETS have seriously crippled the effectiveness of that market. (See GLOBE-net article “World Carbon Markets at a Turning Point“)

The linkage agreement also provides an opportunity to closely monitor and fine tune these first two programs, setting the stage for similar arrangements with other jurisdictions that are committed to reducing greenhouse gases. British Columbia could be one such candidate.

California’s Governor Brown recently supported the Board’s action when he formally indicated that the Québec program was as stringent as California’s, a finding required by legislation passed last year. The Governor’s decision to move forward was supported by a legal analysis of the linkage with Québec by Attorney General Kamala Harris.

In his letter, the Governor also noted that now “CARB and the Québec Ministry of Environment will test and evaluate their auction platforms and trading systems to ensure that they are fully compatible and ready to be implemented, and that linkage can be accomplished without disruption to California’s program.”

How it works:

•  Each jurisdiction will accept the other’s carbon allowances and approved offsets for compliance under their respective cap-and-trade program
• The two jurisdictions will share the Compliance Instrument Tracking System Service for tracking allowances and approved offsets
• California and Québec will share the online auction platform
• Jurisdictions will share market monitoring services and information
• Both will be supported by the Western Climate Initiative (WCI), Inc. for basic administrative functions
• Both will maintain control over their respective programs

Benefits to California and Québec

• Expands environmental impact of greenhouse gas emissions reduction effort
• Provides a larger pool of available allowances and approved offsets
• Provides additional opportunities for investments in both carbon markets
• Provides a template for possible future linkage with other programs.

ARB and the Quebec Ministry of Environment will now test their market auction platforms and trading systems to ensure full compatibility before the January 1, 2014 launch date.

No date has yet been set for the first California – Québec joint auction.

The ‘Changing Energy Landscape’ will be a major topic at GLOBE 2014, the next in the celebrated GLOBE Series Conferences on the business of the environment taking place in Vancouver Canada, March 26-28, 2014. Reserve your place now. Check here for more details.