California's cap and trade program, part of the AB 32 program to reduce greenhouse gas ("GHG") emissions, took effect on January 1, 2012. On January 1st of this year, the first cap and trade compliance period began. Now, the California Air Resources Board ("CARB") is moving forward with its effort to link California's cap and trade program to the cap and trade program of the Canadian Province of Quebec: last week, CARB provided a supplemental 15-day notice seeking public comment on the regulation to link with Quebec. Comments on the linkage regulation are due to CARB by January 23, 2013.
Quebec is situated in eastern Canada and its largest cities are Montreal and Quebec City. Although Quebec is Canada's largest province by size and has a population of about eight million people (second only to Ontario among provinces), its economy is not nearly as large as that of California: Quebec has a GDP of about $300 billion compared to California's GDP of about $1.9 trillion.
Quebec may seem a bit curious as the first partner for California's cap and trade program (for those keeping tabs, this would be the most interaction California has had with Quebec since the LA Dodgers played the Montreal Expos for the National League Pennant in 1981). However, both California and Quebec have been active in the Western Climate Initiative and, while other participants slowed down climate efforts during the economic recession, California and Quebec moved forward to establish cap and trade programs based on the model developed by the Western Climate Initiative.
Linkage Would Create Integrated Cap and Trade Programs
By linking to Quebec, CARB would create an integrated market where allowances (i.e., permits to emit regulated GHGs) and offset credits (credits for GHG emission reductions from approved offset projects) could be used interchangeably in California and Quebec's cap and trade programs to comply with compliance obligations.
Also, if the two jurisdictions become linked, auctions of allowances would be done jointly by California and Quebec (California's upcoming February 19, 2013 auction will not be joint with Quebec). Both California and Quebec require that compliance instruments be tracked by the Compliance Instrument Tracking Services System (CITSS).
As with California, Quebec's cap and trade program provides for offset credits. Quebec's program recognizes offset credits under three protocols: (1) livestock waste digesters, (2) small landfill gas recovery, and (3) destruction of ozone-depleting substances. These are slightly different from the offset protocols approved to date in California. California does not have an offset protocol for landfill gas recovery, but does have protocols for U.S. Forests and Urban Forests (which Quebec does not have). Both programs provide that a covered entity may use offset credits to comply with only a maximum of 8% of its compliance obligation.
Quebec's administrative lead on its cap and trade program (analogous to CARB in California) is the Ministre du Développement Durable, de l'Environnement, de la Faune et des Parcs, referred to as "the Ministre." With regard to Quebec's cap and trade program, the Ministre approves the registration requests in the system, creation and distribution of emission allowances, transactions, auction results, and reserve sales results. The Ministre also enforces the requirements of the Quebec cap and trade program. As with California, many responsibilities of Quebec's cap and trade program are delegated to Western Climate Initiative, Inc.
Linkage Is Not Expected to Have a Substantial Impact on California's Cap and Trade Program
About 75 companies representing 110 facilities (referred to as "establishments" in Quebec's program) are subject to Quebec's cap and trade regulations. In comparison, California's cap and trade program covers about 350 entities representing 600 facilities. Also, Quebec's allowable GHG emissions are substantially lower than those of California: Quebec's cap starts at about 23.2 million tons of GHG emissions (CO2e) in 2013 and ends at about 54.7 million tons in 2020, while California's cap starts at about 162 million tons of GHG emissions (CO2e) in 2013 and ends at about 334 million tons in 2020. (Note that the increase reflects the addition of transportation fuels and natural gas in 2015; over time the cap will go down—become more stringent—for all covered sectors.)
CARB staff is of the view that linkage with Quebec will decrease overall GHG emissions and will provide greater compliance flexibility to California businesses by offering a wider range of emissions reduction opportunities. CARB staff predicts that linkage with Quebec would not have a significant effect on the price of allowances in California, with an estimated increase in cost in the range of 5% to 15%. Additionally, an analysis by American Carbon Registry found that linkage with Quebec would result in only a small increase in the supply of offsets.
Opportunity for Comment
The supplemental notice picks up from CARB's initial public comment period on linkage with Quebec that occurred in May to July of 2012. Before CARB could approve the linkage regulation, the California Legislature passed a bill (now codified at Government Code section 12894) that prohibits CARB from approving any cap and trade linkage until the Governor has made four specific findings with the advice of the Attorney General. The four findings are:
The linking jurisdiction (e.g., Quebec) has a program for GHG reductions that is equivalent to or stricter than California's AB 32 program.
California is able to implement enforcement provisions of its AB 32 program (and related statutes) against any entity located within the linking jurisdiction to the maximum extent permitted by the United States and California Constitutions.
The program of the linking jurisdiction provides for enforcement of applicable laws by CARB or the linking jurisdiction that are equivalent to or stricter than those of California's AB 32 program.
The proposed linkage will not impose any significant liability on California or a state agency for any failure associated with the linkage.
In its supplemental 15-day notice, CARB staff provided an overview of the proposed linkage and a discussion of the findings required by Government Code section 12894. CARB staff's discussion indicates that, in its view, the required findings can be made.
CARB staff has indicated that, following this supplemental notice period, CARB intends to submit its package (administrative record) for the Governor to consider whether to make the four required findings. The Governor has 45 days in which to make the required findings. If the Governor makes the findings (which are not subject to judicial review), CARB indicates that it might consider adoption of the proposed linkage regulation at its February 2013 Board hearing. (It should be noted that, in July 2012, CARB prepared a Final Statement of Reasons on the linkage regulation that contains a significant amount of information on the linkage issue; CARB will prepare a new Final Statement of Reasons following this public comment period.)
Notwithstanding that CARB staff does not anticipate substantial impacts from linkage with Quebec, a number of concerns were raised during the initial public comment period. Also, the Emissions Market Assessment Committee, which provides advice to CARB, expressed some reservations when evaluating Quebec linkage in September 2012 (including questions about coordination of legal frameworks, transparency, consistency of market rules, and consistency of enforcement) and recommended delaying linkage. It is not clear that all of these concerns have been addressed by CARB.