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January 25th, 2013

Quebec Joining California‚??s Carbon Market?

by Andrew Price, President & COO

Could the Province of Quebec give a boost to the State of California’s wilting carbon market? The California Air Resources Board (CARB) indicated this month that they will recommend that California join its Cap-And-Trade (CAP) program with a similar program in Quebec. The two jurisdictions, on opposite sides of North America, could be officially linked sometime this summer.

Governor Jerry Brown recently reduced his estimate of annual revenues he expects from California’s nascent CAP program to $200 million in FY2013 and $400 million in FY2014. This is a sharp drop from previous estimates of more than $1 billion during FY2013 and is a blow to the State’s ambitious plans for high speed rail, which was expected to receive a significant portion of the funds.

California’s CAP is designed to reduce greenhouse gas emissions down to 1990 levels by 2020. Quebec aims to go 25% below its 1990 emissions level by 2020. Each CAP program creates tradable allowances which are distributed and/or auctioned prior to each compliance period. Each source of emissions covered by the program must hold one allowance for each metric ton of CO2e it emits during a compliance period. The total pool of allowances is slowly reduced over time to achieve overall reduction goals. Governed sources choose whether to meet limits by reducing emissions in their operations or by purchasing allowances form those who can reduce emissions more cheaply. In this way, the market is allowed to determine how to achieve reductions at least cost.

Quebec has a population of about eight million people. Its economy is tiny compared to California, however, with about $300 billion in GDP compared to California's $1.9 trillion. As a result, Quebec’s emissions are only about 20% of California’s and the CARB may look to combine with other jurisdictions in the coming years to achieve critical mass. Likely candidates include the provinces of British Columbia and Ontario.

Quebec’s program initially covers about 75 companies with 100 facilities while California's program covers about 350 entities and 600 facilities. Over time, additional sectors of the economy are to be wrapped into the CAP programs (e.g. oil and natural gas production). For this reason, the overall emissions governed by the CAP programs increases over time, even while limits get more stringent within each sector.

January 1, 2013 marked the beginning of the first compliance period under both California’s and Quebec’s Cap and Trade Programs. If the CAP programs are combined, allowances will be freely tradable between the two jurisdictions. Increasing the number of participates may increase the liquidity and flexibility of regulated business within each jurisdiction. California Carbon Allowances (CCAs) are trading at less than $14 per metric ton for 2013 delivery. Quebec distributed allowances for free initially and it is unclear what impact the Canadian province might have on CCA prices.

 

 (Tags: California, Quebec, Carbon, Cap And Trade, Greenhouse Gas (GHG), CO2e)

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