Yesterday, the California Air Resources Board (ARB) released amendments to the existing cap and trade regulations facilitating linkage between the California program and Quebec’s proposed cap and trade program. The release marks the start of a 45-day public comment period, leading to a Board meeting on June 28th. If approved by the Board, the changes would create a linked program between the two Western Climate Initiative (WCI) jurisdictions, expanding the regional carbon scheme to a US-Canadian cap and trade program. 
 
Subarticle 12 of the proposed regulation outlines provisions that will operationalize the link between the two jurisdictions. The link would enable fungibility between program compliance instruments. This means California allowances and offsets will be useable in Quebec’s program and vice versa. Similarly, both jurisdictions would recognize entities registered in the other’s program as eligible participants. Below you are some of the basics of the linkage regulation:

• Entities located in the United States must register with California. Entities located in Canada must register with Quebec, or another Canadian province that links under WCI.
• It is proposed that California and Quebec will hold joint quarterly auctions administered by a single auction operator. The regulation proposes to have a single auction in 2012 on November 14th. All 2015 Vintage allowances from Quebec and California would be offered. Additionally, one-third of 2013 Vintage allowances will be auctioned in the November auction. The estimated total auction volume from California in November is 65-70 million tons.
• California and Quebec regulations have the same auction reserve price and escalator, but apply different inflation rates since the price is set in different currencies. The proposal is to set the reserve price for each auction by using an exchange rate to convert to a common currency, then choosing the higher of the two values to set the reserve price.
• An auction window will be open for three hours on the day of the auction. Resolving bid ties will be through proportional awards. Reserve sales will be held in each jurisdictions, i.e. California entities can only purchase for California’s reserve.
• Purchase limit amendments state IOUs will be able to purchase 40% of auction volumes. The purchase limit for voluntary associated entities is 4% and 15% for industrials.
• Removing all provisions that allow for beneficial holdings. Allow for a five day cure period if an entity exceeds the holding limit.
• Utilities will receive allowance allocations on September 14th.

Overall, the market size will grow, thereby improving trading liquidity. California businesses are expected to realize economic benefits and more compliance options by linking. It is also expected that linking with Quebec will provide a strong signal to both federal governments that states and provinces are taking serious step to tackle climate change.

Highlights of Quebec’s Cap and Trade Program
Quebec’s cap and trade program will cover approximately 75 companies largely in the aluminum and mining sectors. The program was designed in conjunction with California through the WCI process. Therefore, much of the program is designed similarly to the California program, including the same compliance periods, quantitative limit on offsets (8%), banking, borrowing & trading rules and the scope of regulated sectors.

Annual Allowance Budget (million metric tons co2e)

A key difference between Quebec and California is the surrender obligations between the two programs. California entities are required to surrender 30% of the annual obligation each year leading up to a true up at the end of the compliance period. This will lead to a drawing down of supply from the market by California entities over the compliance period. In Quebec, entities have until the end of the compliance period to surrender their full obligations. Additionally, California’s offset system will retain provisions related to invalidation of offsets, whereby Quebec’s program will not. This could lead to differentiation of pricing across Quebec and California offsets in the bilateral markets.

If you have any questions on the current market conditions, please contact our US Carbon team at: +1 415.963.9137 or +1 914.323.0265.