Amendments proposed to California’s cap-and-trade program could spell the end of the carbon market that currently links California and Quebec and that Ontario is expected to join in 2018.
The amendments would establish an escalator on the floor price of emissions in California, put an end to the distribution of free allowances and all offsets, retire the glut of unsold allowances and require that all jurisdictions linking with the California market have a greenhouse gas reduction program at least as strict.
There is no certainty that the Bill will pass, but if it doesn’t, Dale Beugin, Executive Director and Research Director at Canada’s Ecofiscal Commission tells EcoLog News that something like it will. The state’s cap-and-trade legislation expires at the end of 2020, and there are specific issues California must address.
Foremost is the glut of allowances. This is often framed as representing a failure of the cap-and-trade market, but it is more a reflection of the success of the state’s other greenhouse gas reduction efforts. Carbon pricing is just one of the tools in the state’s greenhouse gas reduction toolkit, and the other tools have proven very effective. As a result, the state has issued more allowances than it needs, and the oversupply has depressed prices.
If California wants to continue on the path of greenhouse gas reduction, and all indications are that it does, it is likely to rely more heavily on carbon pricing, says Beugin, and that could mean cancelling excess allowances, raising the carbon price and making certain that linked jurisdictions do not undercut its objectives.
Quebec and Ontario knew something was bound to happen, explains Selina Lee-Andersen, Partner in the law firm McCarthy Tétrault. The 2020 sunset clause in the California legislation made some form of renegotiation practically inevitable.
However, the extent of the changes now before the California legislature may make the system unpalatable to its Canadian partners.
Ontario, for instance, has been banking on the glut of inexpensive allowances to lower the initial compliance cost for its own industries. In addition to retiring all remaining allowances, the amended California model would set a floor price of US$20 per ton in 2021 and a ceiling of US$30. The floor price would perpetually escalate by US$1.25 per quarter, and the ceiling by US$2.50 per quarter, plus inflation. At those rates, it would not take long for California’s price to surpass the federally-mandated national carbon price. Ontario and Quebec may have to choose between an agreement that they know will last only a short while, or a longer-term program that will lead to an ever-rising carbon price.
“There is a place for Ontario and Quebec in that new system if they want to play by the rules of that new system,” says Beugin. “If they don’t play by the same rules, California is not going to be interested in linking.”
There would remain the possibility of a smaller, Canada-only market to take its place. Most of the Canadian provinces without a price on carbon appear to be leaning toward a carbon tax, says Lee-Andersen, but not all. Nova Scotia will be developing a cap-and-trade program, and though it has stated a strong preference for a Nova Scotia-only market, it has not shut the door to a larger market if the conditions are right.