Essay by the Quebec government on its cap-and-trade system and the Western Climate Initiative regional carbon market: origins, strengths and advantages.

• Author: Benoit, Jean-Yves
• Position: The California-Quebec Adventure: Linking Cap and Trade as a Path to Global Climate Action

SYNOPSIS I. INTRODUCTION II. REDUCING QUEBEC'S GHG EMISSIONS III. JOINING THE WCI IV. WHY A C&T SYSTEM? A SURVEY OF ITS ADVANTAGES V. THE QUEBEC 2013-2020 CLIMATE CHANGE ACTION PLAN VI. A BRIEF HISTORY OF QUEBEC'S IMPLEMENTATION OF ITS CAP-AND-TRADE SYSTEM VII. LINKING WITH CALIFORNIA VIII. QUEBEC'S C&T SYSTEM--AN OVERVIEW IX. THE STRENGTHS OF QUEBEC'S C&T SYSTEM A. Accurate Data B. A Strong Price Signal Sent to the Economy Through a Floor Price. C. ... and a Ceiling Price D. Avoiding Carbon Leakage E. Avoiding Over-Allocation F. Avoiding Market Manipulation G. An Offset Credit System Based on Rigor and Environmental Integrity H. A Flexible System That Allows for Long-Term Planning. I. ... and For Covered Businesses to Grow J. Solid, Predictable Financing X. IN CONCLUSION I. INTRODUCTION

Climate change is one of the most important challenges facing the earth in the twenty-first century as it poses an important threat to human health, human settlements, biodiversity, the economy, and, of course, the environment. Climate change is mainly induced by human activity and the best way to tackle it is to put a price on the emissions of greenhouse gases (GHGs), which are the main pollutants responsible for the phenomenon. The Quebec population and its elected officials widely agree with these statements and have supported this position for several years.

Back in 1992, the Quebec government adopted an Order in Council declaring it was adhering to the objectives and principles of the united Nations Framework Convention on Climate Change. Three years later, Quebec got an early warning of what climate change could lead to as a massive rainstorm flooded the region of Saguenay for three consecutive days, destroying homes, bridges, and roads. This was followed in 1998 by an ice storm in the Montreal area that cut off power in the city for days and in its suburbs for weeks. These are examples of events that have increased the level of awareness in Quebec about the importance of acting on climate change and prompted successive governments to make this issue one of their top priorities.

The Quebec government's first strategic move was to try to better understand what impacts climate change would have in the medium- and long-term in Quebec. A research cluster on climate change, called The Ouranos Consortium, was then launched, which today assembles almost a hundred scholars.

Within a few years, these scientists were able to draw a picture of what Quebec would have to expect from climate change, such as heat waves and floods in summer, and less snow and frequent thaws in winter. For a Nordic territory, the news of lost economic activity in the wintertime was badly received.

With this picture in hand, the Quebec government decided that staying within its comfort zone was not an option. GHG emissions had to be reduced, and Quebec society had to prepare itself to tackle the impacts of climate change.

2. REDUCING QUEBEC'S GHG EMISSIONS

   On the mitigation track, Quebec had the advantage of starting on the right foot since it had already one of the lowest carbon footprints in North America thanks to early investments in hydroelectricity. (2) Today, ninety-eight percent of the electricity and about fifty percent of the total energy used in Quebec comes from renewable sources, mainly hydraulic and wind energy. (3) This means that Quebec needed to focus its attention on its highest GHG-emitting sectors where reductions are notoriously difficult to achieve, namely in industrial processes, buildings and mostly transport.

   To that end, the government devised its first Climate Change Action Plan covering the years 2006 to 2012 and, in order to finance it, began imposing a carbon levy on fossil fuels--a bold move that no one had yet dared to make in North America. (4) Quebec therefore became the first jurisdiction on the continent to send a carbon price signal throughout its whole economy. This levy raised 1.2 billion dollars in revenue over the life span of the plan; this revenue was exclusively earmarked for a Green Fund and was used to implement GHG mitigation and climate change adaptation measures contained in Quebec's 2006-2012 Climate Change Action Plan. Several of these measures provided incentives for businesses to be more energy efficient and to switch to less polluting sources of energy. Quebec also invested in public transit, cycling paths, electric vehicles, energy efficiency, clean energy, more efficient freight transport, and public awareness campaigns.

   According to the latest Canadian GHG inventory, Quebec surpassed its 2012 target of reducing its GHG emissions by six percent below 1990 levels. (5) During the same period, Quebec's GDP grew by fifty-four percent, which is testimony to the fact that Quebec has been successful in decoupling GHG emissions and economic growth. In addition, Quebec's industries have reduced their dependence on imported, high-priced foreign oil, lowered their operating costs, increased their profits, and become more competitive. Public transit usage has also increased significantly in the last few years.

3. JOINING THE WCI

   If Quebec were to reduce its GHG emissions even further, however, the government realized that a stronger, more robust tool than a carbon levy was needed to integrate the hidden economic, social, and environmental costs related to GHG emissions into the economy and business decision-making. The Western Climate Initiative (WCI), which intended to put in place an economy-wide market-based mechanism to tackle GHG emissions, was then deemed to be the best and the most attractive alternative. In 2008, Quebec joined the WCI and began working in close collaboration with its new partners to elaborate the design guidelines and operating rules for a regional cap-and-trade (C&T) system. This system would later become the centerpiece of Quebec's Climate Change Action Plan spanning the years 2013 to 2020.

4. WHY A C&T SYSTEM? A SURVEY OF ITS ADVANTAGES

   Several reasons motivated the choice of a C&T system over other possible climate solutions. First and foremost, a C&T system provides governments with the best guarantee of actually reducing GHG emissions, which is, after all, the main goal of this undertaking. A C&T system sends a strong carbon price signal to a wide range of economic stakeholders--a signal that makes them aware that GHG emissions now come with a price tag. In other words, the system tells them they cannot carry on as before and emit greenhouse gases into the atmosphere without consequences.

   A C&T system is a flexible economic tool that differs from the standards and criteria traditionally used to achieve environmental goals because it successfully addresses and joins environmental protection, environmental management, the fight against climate change, and economic development objectives such as growth, efficiency, modernization and competitiveness.

   While a C&T system requires major polluters to consider the costs of their GHG emissions when they make their business decisions, it provides them at the same time with incentives to improve their production methods, adopt energy efficiency measures, invest in new technologies, and turn to cleaner energy sources. In short, it encourages them to get a head start into the growth economy of the future that is the green economy.

   A C&T system's flexibility stems from the many options available to emitters in terms of regulatory compliance. For example:

   * covered emitters may choose to reduce their GHG emissions by improving their energy efficiency, relying on cleaner or renewable sources of energy, or enhancing their production methods, either by using the best technologies currently on the market or developing new ones;

   * covered emitters that have reduced their GHG emissions and have a surplus of emission allowances at their disposal may sell them on the carbon market and keep the revenues to pay for past investments or for new investments that will make them more competitive and more profitable; and

   * covered emitters that have to obtain emission allowances to meet...