Linking North American carbon markets

Wednesday, March 27, 2013

As nations, states, and provinces establish carbon markets, there is considerable interest in establishing links between these markets.  Two of North America's leading carbon markets - one overseen by the California Air Resources Board (CARB), the other by the Canadian province of Quebec - appear to be on track to link their cap-and-trade systems by January 1, 2014.

A 2006 California law known as AB 32, the Global Warming Solutions Act, established a greenhouse gas cap-and-trade program.  The program covers major sources of greenhouse gas emissions in the California, including refineries, power plants, industrial facilities, and transportation fuels.  CARB established regulations which set an enforceable greenhouse gas emissions cap.  This cap will decline over time.  The law requires covered entities to acquire allowances issued by CARB to cover their carbon emissions.  These allowances are tradeable permits allowing the holder to emit a given amount of carbon dioxide or its equivalent.

Quebec joined the Western Climate Initiative (WCI) in April 2008, a group of American states and Canadian provinces that have decided to adopt a common approach toward addressing climate change.  WCI's goals include the creation of a North American market for trading carbon emission rights.  Each WCI member government first creates its own greenhouse gas emissions cap-and-trade system, then links to others through intergovernmental recognition agreements.

California and Quebec's programs are now in the process of linking up.  According to a recently-issued CARB document, California and Quebec have been working together to ensure that both systems' operations are compatible and will work together and without disruption to California-covered entities.

According to the notice, linkage between California and Quebec will need to be effective as of January 1, 2014.  In the interim, California and Quebec will hold a practice joint auction to test their auction platform, allow market participants to gain familiarity with the future procedures for a linked market, and to allow the jurisdictions to evaluate their readiness for the newly expanded market. 

This linkage would not directly affect other North American carbon markets, such as the Regional Greenhouse Gas Initiative or RGGI market.  RGGI represents an agreement by nine northeastern states to create a pooled carbon market.  Other jurisdictions could join the RGGI market, and it is possible that the RGGI market could one day merge with the CARB and Quebec markets to form a broader North American carbon market.  The linkage of the California and Quebec programs may serve as a test of the effectiveness of linking the various North American carbon markets.

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