Unpacking the WCI: Hangin’ tough

Climate and Energy

Over the past couple of months our summer blog series Unpacking the Western Climate Initiative has taken a look under the hood of California, Québec and Ontario’s integrated cap-and-trade system. In this final installment, we review what we’ve learned and take a look at some recent developments that have been in the headlines. Overall, we find that the WCI system is well-designed and probably a lot tougher than it looks. Let’s recap the highlights.

The more the merrier

California and Québec linked their systems in 2014, and Ontario is planning to link in 2018. As we outlined in our ’thinking linking’ blog , the benefits of linking are real. As the California Air Resources Board puts it: “linking benefits each jurisdiction – the direct result of lower costs of abatement and expanded reduction opportunities.”

California has lower abatement costs and an emissions cap that doesn’t look to be as tight as Québec or Ontario’s. This means that Californian emitters will mainly benefit by selling permits, while Ontario and Quebec will benefit through access to cheaper mitigation than they could get on their own. Each jurisdiction benefits, just in different ways.

California, Québec and Ontario: better off together
California, Québec and Ontario: better off together

Any new entrants to the WCI system (Mexico?) get the benefit of joining an already established scheme that has learned from the mistakes of earlier ones like the EU ETS. And the more that join, the better off everyone is.

Nobody’s perfect

But the WCI system is not without its flaws. As we discussed in our ‘hot air ain’t cool’ blog, a major concern is the presence of ‘hot air’—emissions reductions in the system that are exaggerated or false. While the risk of hot air looks to be pretty marginal in terms of offsets, the problem of resource shuffling in California electricity markets is a genuine concern. Resource shuffling could be undermining the integrity of California’s permits, and policy-makers both inside and outside California should be working to limit it.

Admittedly, mistakes were made
Admittedly, mistakes were made

Another issue, which we discuss in our ‘backhanded complements?’ blog, is whether ‘complementary’ climate policies are undermining the effectiveness of the WCI system. California, Québec and Ontario all have these types of policies in place, but it’s not clear whether they’re a feature or a bug. We’ll have more to say on this topic in the coming months. As is often the case, the answer is ‘it depends.’

I read the news today, oh boy

Some commentators have recently been pointing to weak demand in the May and August auctions and legal trouble in California as evidence that the WCI system is flailing and failing. But we think these concerns are probably overblown.  After his obituary appeared in a major newspaper, Mark Twain famously quipped that “rumors of my death have been greatly exaggerated.” We suspect that the WCI would say the same.

First off, as we argued in our ’balance’ blog, weak auction demand does not equal system failure. For one, the price of permits in the secondary market still look quite healthy: they were recently trading at $12.84 U.S., which is above the auction price floor of $12.73. And demand has in fact been going up: August’s auction was 34% subscribed, compared to May’s 11%. So with stable prices and rising demand, it’s premature to say that the WCI is in trouble. And besides, the last two auctions are still only a short term trend. As Dave Sawyer of EnviroEconomics puts it: “Does it indicate an underlying structural problem? I don’t think one can conclude that. There’s all kinds of reasons you could find to explain it.”

The WCI is tougher than it looks
The WCI is tougher than it might look

Second, concerns that legal uncertainty will tank the WCI might be a bit alarmist. As we described in our ‘storm clouds’ blog, a lawsuit over the legality of California’s cap-and-trade is making its way through the courts, and it probably will continue to cast a shadow until it’s resolved (it’s likely one of the reasons that auction demand has been so weak). But it’s premature to say it’s the WCI’s death rattle. First, the lawsuit is far from a foregone conclusion. Second, last week the state legislature approved aggressive 2030 climate targets that will be tough to hit without a cap-and-trade. And third, even if the courts rule against cap-and-trade, there’s always the option of taking it to voters as a ballot question.

Still kicking

The WCI’s problems of weak auction demand and legal uncertainty shouldn’t be dismissed. However, it’s also important to keep context in mind. A cap-and-trade system gives you the GHG reduction certainty that a carbon tax can’t. The catch is that cap-and-trade systems can be complex to administer. Overall, the WCI has met this challenge with a sophisticated, resilient design. Don’t count it out yet.

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