Climate Solutions Group

Ontario Joins the Western Climate Initiative

WCI linkage signing

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Sep 2017

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Ontario, is now officially linked with the Western Climate Initiative (WCI). On September 22, 2017, Ontario signed the “Agreement on the Harmonization and Integration of Cap-and-Trade Programs for Reducing Greenhouse Gas Emissions” with Quebec and California. The linkage shows that subnational jurisdictions can take action on climate without federal government level oversight or support – something evidently lacking in the US under the Trump administration.

Benefits of linkage

Joint cap-and-trade auctions allow regulated emitters to trade emission allowances across borders. The benefits of this larger, linked market include:

  • Increased Liquidity and Flexibility

    Liquidity refers to the ease in which an asset can be bought or sold. The larger market increases the number of buyers and sellers of emission allowances. Access to a larger market emission allowances also gives emitters more flexibility in meeting their compliance obligations[1]. Compliance strategies may shift due towards utilization of creative allowance strategies and offsets to lower costs.

  • Lower Volatility 

    More market participants reduce the potential volatility of the market. Economic shocks can be more easily absorbed when the market base is larger.

  • Cost-effective Emission Reductions 

    The larger market will expose Ontario emitters to low cost emission reductions. California has significant potential for low-cost emission reductions and this will free up emission allowances that will be available to Ontario emitters. This increases the “Pareto Efficiency” as Ontario will benefit, without negatively affecting California or Quebec. Think free-trade for emission reductions.

  • Lower administrative costs

    The joint auctions will lower the administrative costs of Ontario’s cap and trade program. The Quebec and California markets integrated seamlessly as their systems were closely aligned[2]. We can expect the same for Ontario as the system has been intentionally designed for linkage.

  • Increased Innovation 

    The larger market can further incentivize innovation in low-carbon technology and financing strategies which will help to keep industry competitive in the long term[3].

  • Political Cooperation 

    International cooperation is critical for addressing climate change. Linking cap-and-trade markets can serve as a strong signal of commitment of international and political cooperation for climate change action[4].

Growing the Western Climate Initiative

All Canadian provinces are required to implement carbon pricing strategies by 2018, based on the Federal Government’s Pan-Canadian Framework. Other provinces may follow Ontario and Quebec’s lead into the already-established WCI cap-and-trade system. Integrating Canadian jurisdictions into one shared policy framework can help Canada meet its overall climate targets in a cost-effective way.

Other US states also have potential for joining the WCI. In Oregon, which has a similar GHG profile to Quebec, there is a bill that intends to establish a cap-and-trade system linkable with the WCI. Washington State also has a political environment that may be becoming more open towards implementing a linkable cap-and-trade system.

Elsewhere, Mexico kicked off a cap-and-trade system which includes more than 80 companies in a pilot program that simulates trading. The system is intended to begin fully by late 2018 and there is potential for joining the WCI as Mexico has emulated California’s program[5].

Conclusion 

The growth of the Western Climate Initiative is an example of effective international climate cooperation. Ontario’s WCI linkage is a big win for the province and climate action. The Climate Solutions Group is confident that Ontario’s linkage will benefit our stakeholders and partners.

 

References

[1] https://www.competeprosper.ca/work/working_papers/toward-a-low-carbon_economy-the-costs-and-benefits-of-cap-and-trade

[2] https://www.stikeman.com/en-ca/kh/canadian-energy-law/examining-california-and-quebec-cap-and-trade-systems

[3] https://esemag.com/air-pollution/industry-competitive-cap-trade-program/

[4] https://www.mcc-berlin.net/fileadmin/data/pdf/Publikationen/Flachsland_Marschinski_Edenhofer_2009_To_link_or_not_to_link.pdf

[5] https://www.scientificamerican.com/article/mexico-looks-to-curb-carbon-with-a-new-cap-and-trade-system/

 

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