Cap and trade is in the new kid in town as far as carbon pricing goes in Canada. In April, just before the Premiers' Climate Summit, Ontario made headlines by announcing it will join Quebec’s cap and trade system, which is linked to cap and trade in California.
So just how does it work? Here's our short primer.
The system was first adopted by Quebec in 2013 (although it’s worth noting the province did impose a tax on gas and diesel fuel back in 2007).
“The benefits of emissions trading, beyond ensuring the climate goal is reached in a measurable manner, is that business has flexible compliance options and ‘carrots’ — incentives for making smart, economic business decisions,” Katie Sullivan, director for North America and Climate Finance at the International Emissions Trading Association, said.
Like Alberta’s carbon levy, Quebec’s system puts a price on emissions above a certain level.[view:in_this_series=block_1]
The limit in Quebec is 25,000 tonnes of carbon pollution annually — an amount significantly lower than the limit in Alberta. Emitters unable to keep their emissions productions below this level must either buy allowances (also referred to as credits or units) or offsets to cover all emissions they produce, not just those emissions over the 25,000 limit.
A flexible and critical tool for keeping costs in check is the ‘offset,’ Sullivan explained.
“[The offset] allows an economy’s non-regulated players, such as farmers, foresters and other clean project developers, to join the climate solution while generating new revenue streams associated with eligible low-carbon — ‘offset’ — projects.”
Carbon offsets are investments in projects that either reduce GHG emissions or draw carbon pollution out of the atmosphere. Planting trees is an example.
Offsets are meant to be like emissions reductions because in theory they cancel out carbon pollution.
There is some dispute about whether offsets actually reduce emissions or simply are a cover to produce more carbon pollution.
“Offsets are probably one of the most contentious parts of a cap and trade. In Quebec and California's system, offsets can only make up to eight per cent of total compliance obligations,” Sarah Petrevan, a senior policy advisor at Clean Energy Canada, said.
The other 92 per cent must be paid for in the form of allowances and this is where the price on carbon comes in.
Allowances can be purchased from the Quebec government or traded for with another company that is below the GHG limit and has allowances to spare. Quebec ‘caps’ the amount of allowances available for purchase and the cap is lowered gradually each year.
Where cap and trade significantly differs from B.C.’s carbon tax and Alberta’s carbon levy is in the price of allowances. These prices actually fluctuate based on supply and demand in an auction-style system.
In order to keep that fluctuation in check, Quebec imposed a “price floor” at $12 per tonne of GHG emissions but increases that floor by five per cent each year, adjusted for inflation.
“One of the things [Quebec] did learn from the EU program was having that price floor, which is very important,” Sullivan wrote in a report. “The safety valve at the top end also gave comfort to industry that prices wouldn’t go skyrocketing in the near-term.”
Although it’s administratively complex and at times difficult to understand, cap-and-trade is the world’s most popular carbon pricing system.
The European Union’s Emissions Trading System is the world’s largest cap and trade market — for now. China plans on introducing cap and trade next year.
“The biggest pro to cap and trade is the flexibility it presents to industry. There’s trading, offsets, etc., and this allows industry to meet their reductions in a number of ways,” Philip Gass from the International Institute for Sustainable Development told DeSmog Canada.
Quebec’s cap and trade system is still in its infancy, but it looks promising: more emissions are covered in Quebec’s system than the other provincial systems.
Eighty-five per cent of Quebec’s GHG emissions are subject to the system versus only 50 per cent in Alberta and 75 per cent in B.C.