Quebec Premier Philippe Couillard, second from left, pictured in 2015 joining the Under2 Coalition, a first-of-its-kind agreement among states and provinces around the world to limit the increase in global average temperature to below 2 degrees Celsius – the warming threshold at which scientists say there will likely be catastrophic climate disruptions. Photo: Jenna Muirhead via Office of Governor Edmund G. Brown Jr.
In late September California, Québec, and Ontario signed a linking agreement that officially welcomes Ontario into the Western Climate Initiative (WCI) cap-and-trade market.
The announcement came after an inspiring Climate Week in New York where states, businesses, and individuals showed that despite Washington D.C going backwards, the U.S. will continue to make progress on our commitment to help avert catastrophic climate change. This linkage announcement provides a concrete example of how motivated governments can work together and accomplish more through partnership than they could apart.
Why linkage matters
The agreement will allow participants from all three locations to use carbon “allowances” issued by any of the three governments interchangeably and to hold joint carbon auctions.
This full linkage can have a number of benefits.
- The concrete benefits that economists often point to include “liquidity” from a larger market, meaning that if participants need to purchase or want to sell an allowance, it is easier to find a trading partner.
- There are also significant administrative benefits to joining an existing market and to working together, including sharing the administration of auctions.
- A larger market can also provide access to lower cost reduction opportunities, which lower the overall cost of compliance for the whole market, allowing governments to maintain and strengthen the ambition of their commitments.
- The less tangible benefits of having partners that are equally committed to addressing the challenge of climate change can’t be ignored. California may not have a willing climate partner in Washington D.C. but the state is finding the partners it needs in Québec and Ontario and together they can prove that cap and trade provides an effective model for international collaboration and a cost-effective way to keep harmful climate pollution at acceptable levels.
Choosing the right partners
To ensure any carbon market linkage is strong, partners must be carefully selected by evaluating the compatibility of each program. California, Québec, and Ontario started this process early by working together (along with several other states and provinces) in 2009 to develop best practices for establishing cap-and-trade programs.
This carbon club model is one that EDF has identified as a powerful potential driver of climate action
When full linkage is being considered, one of the most important threshold questions is how ambitious each potential partner’s cap is; the cap is the key feature of each program that ensures the environmental goals of each government are met, and a weak cap would impact all participants. Ontario, California and Québec have all cemented into law ambitious and world-leading climate targets for 2020 and 2030. Beyond that, there are some design elements which should be aligned among all programs and others that can differ and outlining these parameters is a negotiation among participants.
Ontario is demonstrating that the WCI carbon market model is an accessible one for ambitious governments to consider joining. This carbon club model is one that EDF has identified as a powerful potential driver of climate action. Hopefully other states and provinces will take Ontario’s lead. Here are some locations to watch:
- Several Canadian provinces are actively developing cap-and-trade programs that could link with WCI one day.
- State legislators in Oregon may have a chance to vote during their short session in early 2018 on a “cap and invest” program that is being designed with WCI linkage in mind.
- Momentum on carbon markets is also growing elsewhere in the Americas. Mexico is in the process of developing its own national emission trading system and has expressed an interest in linking such a system with the California-Québec-Ontario market.
- And just this past June, in the Cali Declaration, the heads of state of the Pacific Alliance countries of Mexico, Colombia, Chile, and Peru embraced the vision of a voluntary regional carbon market in agreeing to strengthen monitoring, reporting, and verification frameworks for greenhouse gas emissions.
California, Québec and Ontario are creating a model for action that is ripe for others to adopt as is or adapt as needed. This type of bottom-up partnership that matures into real and ambitious collective action is the future of international climate policy.
Note: More details on the linkage concepts discussed in this blog can be found in chapter 9 of the EDF co-authored report Emissions Trading in Practice: A Handbook on Design and Implementation.
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