California takes step toward linking CO2 market to Quebec

California on Wednesday released an updated draft of its cap-and-trade regulations that for the first time includes language that would link its carbon market to a similar scheme in the Canadian province of Quebec. The draft language called for the mutual acceptance of compliance instruments like allowances and offset credits between the two jurisdictions. It also called for a common allowance registry and auction, and included provisions for tracking allowances which are designed to enhance market security. California Air Resources Board (ARB) Chair Mary Nichols said California's cap-and-trade program was always designed to link with other systems, and said a bigger market would benefit the state. "The sheer fact that we're adding to the number of allowances that are tradable, that there are more regulated parties to trade with, a larger pool of offsets potentially available... all of those things are benefits as far as California is concerned," Nichols said during a phone interview on Wednesday. She said that linking to Quebec also lays the groundwork for other regional and even national partners to join the effort to combat climate change and promote clean energy. "This sends a strong message to two national governments that now is the time to support innovation, energy efficiency and the development of clean technologies," she said. PRICE IMPACT It's unclear what impact linking with Quebec, which has roughly one-sixth the amount of GHG emissions as California, will mean for carbon prices. An analysis by Barclays in February found that California carbon allowance (CCA) prices would actually increase if the jurisdictions are linked since Quebec is expected to be a net buyer of allowances. But Nichols said ARB's own analysis showed that linking would have no discernible effect on prices so long as covered entities use all of the offsets allowed under the program. California will allow covered entities to surrender offset credits to meet 8 percent of their compliance obligation. "Even if under the worst case scenario there was a small difference in price, what that would mean is that investors outside California would be coming in and spending the money to make reductions here in order to get the allowances," she said. "So California benefits either way from the cash flow," she said. OFFSETS Quebec has yet to release its regulations on offset credits, and some in the market are nervous that they may not accept credits from California's four approved project types - forestry, urban forestry, ozone depleting substances and agricultural methane. Nichols downplayed those concerns and said the Quebec offset regulations were on track to be released before a June 28 vote on the linking language. She said she did not share the concerns of some that the state could be short offset credits during the first compliance period. "We're not concerned for the first compliance period (2013-2014), we're quite confident there is an adequate supply for that," she said. "After 2015 we've indicated we do have some concerns but I don't think anyone is going to go out and develop projects until we get this first auction going, so that's on the backburner right now." She said she couldn't say for certain whether additional offset protocols would be approved for compliance with the program this year. ARB has suggested that protocols that reduce emissions from rice farm management as well as those that would reduce fugitive methane emissions from natural gas pipelines could be adopted by the state. "There's a couple (project types) that have been worked on and are being reviewed to the point where there's hope that they could come before the board before the end of the year. But we're trying not to stick to an arbitrary schedule," she said. California will take comments on Wednesday's proposal for the next 45 days before regulators will vote on a final version on June 28.