By Alina Koch Lawrence
In this week’s Navigating the American Carbon World pre-conference workshop on California’s cap and trade, carbon experts discussed the potential linkage between California and Quebec. After linkage was delayed by nearly a year, due to concerns raised by the California legislature addressing the necessity for additional requirements, it appears that the time has finally come.
The proposal recently received the much-anticipated Governor’s sign-off. Today, Friday, April 19, the California Air Resources Board will meet and vote on the linkage. Experts anticipate the proposal to pass as the vote represents more or less a formality at this point. This would signify that beginning January 1, 2014, California and Quebec entities could start trading carbon allowances across borders.
Why do we need to link in the first place?
As its name indicates, a cap and trade system only works with an adequate cap and prospering trade. Enlarging the market helps increase trading opportunities and facilitates market stimulation. Furthermore, as Matt Rodriguez and Dirk Forrister, stated in the international plenary session at the Navigating the Carbon World conference, a regional cap and trade program can only sustain itself in the long term if other regions move along with similar mechanisms to curb emissions, otherwise the economic prospective in terms of global competitiveness may start to look grim down the road.
A good match?
After all of the Western Climate Initiative U.S. member states, except California, left the regional carbon-trading region, California was the “last man standing” in the United States. Therefore, the prospects of trading with Quebec are a glimmer of hope for advocates of market-based mechanisms.
Whereas some have argued that the disparity in market size (Quebec has about one fifth of the emission level of California), could be a concern, this in fact is not as important as the design of the cap and trade system. Unlike some other emissions trading systems (ETS), such as the EU ETS or the Regional Greenhouse Gas Initiative (RGGI), the California cap and trade system is designed more stringently, such as imposing holding limits, an aggressive target and offset limitation (8 percent of companies’ annual compliance obligation) as well as not allowing the Clean Development Mechanism (CDM).
Since Quebec has a similarly rigorous system in place, it represents a valuable and compatible linkage partner to California. Both markets will have three compliance periods (CP1: 2013-2014, CP2: 2015-2017, CP3: 2018-2020) and will be including the fuel sector simultaneously in 2015. Furthermore, both programs have the same auction reserve price of $10.71.
While both regions have a comparably high share of transportation emissions (40 percent), the electricity sectors are quite different. (California’s power sector accounts for 25 percent of GHG emissions vs. Quebec one percent of GHG emissions, due to a large share of low-carbon energy sources, such as hydro) However, it is expected that the two markets will have substantial trading opportunities due to cross-sectorial trade of allowances.
What does it mean for California?
Because Quebec subscribed to a very aggressive 2020 target (20 percent below 1990 levels) and limited supply of offsets, it will be a net buyer, i.e. increasing demand for California allowances and offsets. As a result, experts, including Four Twenty Seven Managing Director, Emilie Mazzacurati forecasts that the current price of $14-15/ton will increase due to the linkage.
Estimates of the new carbon price range from $50-73/ton in 2020 (Bloomberg projecting the lower end and Thomson Reuters predicting the higher end of the range). While this is still below California’s price containment reserve of $65-$82 projected for 2020, it may raise concerns for capped industries and consumers who end up paying the passed-through cost of carbon. At the same time, the higher price would generate additional auction revenue that would be allocated to the renewable energy sector and low-carbon transportation infrastructure.
The bigger picture
After a federal cap and trade bill failed in 2010, California’s cap and trade program assumed a leading role in shaping climate policy. Economist and environmentalists alike agree that a cap and trade program can effectively curb greenhouse gas emissions. The linkage with Quebec creates an intraregional market-based mechanism that could be linked to other regions in the future.
Expanding the California program to other regions has been applauded by organizations such as the Natural Resource Defense Council and International Emissions Trading Association. Simultaneously, the Australian government is planning to transition their current carbon tax system into a cap and trade scheme and link with the EU ETS starting in 2015.
Whereas linkages between California and regions outside of North America are uncertain at the moment, the message to the global community is clear. California is sincere about achieving its ambitious climate targets. As a federal carbon tax has been extremely challenging politically in the United States, a cap and trade system may be our best option for putting an adequate price on carbon.