Ontario Announces Linkage of Cap & Trade with Quebec and California

A number of provinces and states (including Ontario, Quebec and California) are members or participants in the Western Climate Initiative (WCI), a non-profit corporation which provides administrative and technical services in support of Cap and Trade Programs. Currently, Quebec and California have linked their Cap and Trade Programs. On September 22, 2017, Ontario announced the long-anticipated linkage of Ontario’s Cap and Trade Program with Quebec and California. A copy of the agreement on harmonization between the three governments was also released.

With the linkage, which is expected to be effective January 1, 2018, the quarterly allowance auctions will be held on a joint basis. In 2017, the allowance auctions in Ontario operated in only the Ontario market (our discussion of the most recent auction is found here). Starting in 2018, the availability of allowances will equal the aggregate of the allowances permitted in each of the three jurisdictions. While each of the jurisdictions will continue to set their own regulatory requirements, there is an obligation on the parties to harmonize to the extent reasonable and recognize the jurisdiction and determinations made by each of the jurisdictions. The agreement on harmonization further calls for the development of offset protocols that will be real, additional, quantifiable, permanent, verifiable and enforceable.

With the linkage, market participants in Ontario may now look to Quebec and California for the acquisition of compliance instruments, including those available on the secondary market, or offset credits approved in the other jurisdictions without risk that such instruments would not be accepted in Ontario. While it is always difficult to forecast market impacts, it is understood that there is currently an oversupply of compliance instruments in California which should, over the short term, result in a downward pressure on the cost of compliance instruments. However, given the formulaic manner in which the availability of allowances are reduced annually and the reserve or floor price is increased, it is expected that the cost of compliance instruments will rise over time.