In our latest blog piece covering Ontario's planned adoption of a cap-and-trade system that will be linked with the existing systems in Quebec and California, we described some of the major recent developments in Ontario and the United States to help put the province's cap-and-trade efforts in context. These developments include: the successful implementation of legislation and market mechanisms to curb sulfur dioxide and nitrogen oxide emissions in the 1990s and early 2000s, the development of the Western Climate Initiative, the signing of a Memorandum of Understanding with respect to a provincial and territorial cap-and-trade initiative between Ontario and Quebec, and the introduction of enabling cap-and-trade legislation in Ontario. In this piece, we illustrate the key elements of Quebec and California's linked cap-and-trade regime with a view towards anticipating how Ontario may choose to design its system over the coming months.
While the content, scope and design of Ontario's cap-and-trade system has yet to be determined, there is already a significant congruence between the California and Quebec regimes. For example, both systems cover the same greenhouse gases and sectors, set the same emissions thresholds and have virtually identical allocation methods. Several other similarities are also evident when comparing Quebec's relative population size and gross regional product to those of California (21% and 16%, respectively). For example, Quebec's Allowance Budget, Maximum Emissions Covered, Emissions Target and Offset Use Limit (as illustrated in the table below) are all between 15% and 16% of California's, closely mirroring their differences in population size and economic activity. On this basis, with a population of 13.6 million (35% of California) and a gross regional product of US $570 billion (30% of California), Ontario's cap-and-trade system may well yield similar relative results. Naturally, however, other factors will come into play as Ontario implements cap-and-trade, and we will follow these developments closely.
The significant parallels between Quebec and California's cap-and-trade systems have enabled both markets to integrate quickly and seamlessly. Despite only officially linking carbon markets in 2014, Quebec and California have already successfully held two joint auctions of greenhouse gas allowances in December, 2014 and March, 2015, respectively. The third joint auction of greenhouse gas allowances between the two jurisdictions was recently held on May 21, 2015.
Given Ontario's desire to link with the cap-and-trade markets in Quebec and California, their systems will likely play a significant role in dictating the approach Ontario takes. Below is a chart that summarizes the main features of California and Quebec's cap-and-trade systems as it relates to several key criteria the Ontario government will have to consider in the coming months.
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