Quebec to beat California in setting up first carbon market in North America

While a struggling economy and court challenges have stalled California’s plans to establish a cap-and-trade system, the Canadian province of Quebec is taking the lead on establishing a carbon market in North America.

The question for environmentalists is whether such a system represents a sincere government effort to reduce emissions, or political greenwash.

A cap-and-trade system sets a limit on emissions and then divides them up into permits, which it then issues to companies for their individual emissions. If they exceed their cap, companies must buy credits from companies with a surplus from lower emissions.

Under the scheme, around 100 facilities – the biggest emitters in the province, producing 25 Kt of greenhouse gases every year – will be brought under an emissions cap in 2013.

A one-year trial period will begin 1st January 2012, during which the companies will be able to buy and sell carbon credits without having to meet their cap until 2013.

The carbon market will initially only apply to the energy and manufacturing sectors, but it is due to be expanded to cover the transport and construction sectors from 2015.

Quebec officials say the system will help the province become a ‘leader in the new green economy.’

‘This system is known to be the most efficient and the least expensive, while stimulating the green economy,’ says Robert Noel de Tilly, from the Quebec environment department.

The minimum price for a carbon credit – equivalent to one tonne of CO2 – will be set at $15 (about £9), and will increase each year to about $25 (about £16) by 2020, with the emissions cap gradually decreasing each year until 2020.

Loopholes in system

While Greenpeace and others have welcomed the move as a ‘first step’ in tackling climate change, there are major limitations to the plan.

Christopher Green, an economics professor at McGill University in Montreal, identified two problems with the scheme. The first problem related to the fact that, since consumption will likely remain the same, a decrease in Quebec emissions only means an increase in emissions somewhere else.

‘It’s like pushing on a balloon and it just bulges out somewhere else,’ says Green.

Green’s second concern involved the regulation problems inherent with a cap-and-trade system, especially when dealing with major emitters.

‘The minute you get into a cap-and-trade and you fix a supply of emissions, you have created an enormous administrative, monitoring, enforcement problem,’ says Green.

‘There’s huge interest involved; people have made big investments and so on. So the next thing you know is that you have to deal with all sorts of lobbying and political pressures to help this particular industry out and so on.’

There are also known loopholes, such as the one that enables companies to carry unused credits into future trading years.

‘On a given year, say that you have a lot of companies that have banked and all of a sudden decide to use those credits, a lot of offsets come onto the markets at the same time, you can end up in a situation where you would surpass your cap,’ says Steven Guilbeault, deputy executive director of Quebec climate campaign group Equiterre.

Offsets also present a problem, says Guilbeault, in that companies will be able to purchase them from sectors uncovered by the cap, like landfill gas, making it far easier for a company to meet its cap regardless of how much carbon its facilities emit.

Mega-profits from Europe's carbon market

Looming over cap-and-trade developments in North America is the memory of the early failure of the EU Emissions Trading Scheme (ETS).

Launched in 2005, the ETS collapsed in 2006 after widespread over-allocation of carbon credits from governments (the initial cap was set above the starting emissions of the participating companies) created a vast surplus and lowered the carbon price to less than €1.

Although the ETS is being tightened up, with a lower cap and a standardised system for monitoring and regulation, Joris den Blanken, Climate and Energy Policy Director for Greenpeace Europe, says carbon surplus is still a major problem.

Steel giant ArcelorMittal is reported to have made more than £1 billion in profit by 2012 through carbon trading, with other companies in the sector also likely to have profited.

‘EU governments have a [history] of protectionism to old industries, and there has been a significant lobby from the steel and cement industry to keep handing out allowances for free,’ says den Blanken.

Den Blanken described the lobby as ‘scaremongering,’ saying ‘the steel and refinery sector threaten with re-location’ so they can remain competitive, although these have in the past been revealed as empty threats.

Carbon tax would 'never' be accepted

The major difference den Blanken identifies between the EU and Quebec systems is that Quebec will be auctioning the majority – 90 per cent – of its emission allowances, instead of handing them out.

‘Cap-and-trade, as you’re obviously seeing in Europe, won’t solve climate change, it’s not the solution, but it’s certainly a tool that can be used to try and reduce greenhouse gas emissions,’ says Guilbeault.

Éric Darier, Director of Greenpeace Quebec, agrees, saying the successful solutions ‘are probably a cocktail of legislative measures, market mechanism and promotion of energy saving, efficiency and renewable energies.’

The Quebec government has committed to reducing its emissions to 20 per cent below 1990 levels by 2020, and officials say a cap-and-trade system will help the province reach this target.

Green, however, calls the government’s commitment to the system ‘political grandstanding,’ suggesting that a cap-and-trade system might even be worse than doing nothing.

‘It makes people think that, “Oh, we are doing something. We’ve placed a cap,”’ he says.

‘In my view, cap and trade is sufficiently resource consuming, and in a way corrupting, that it is worse than doing nothing.’

Green considers a carbon tax a superior method, despite no guarantee that emissions are being reduced.

However, with government officials in Canada and the US unlikely to agree to bringing in a new tax, cap-and-trade remains the only option to reduce industrial emissions.

‘Right now in North America, it’s the only game in town,’ says Guilbeault, from the campaign group Equiterre.

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