Could Ontario and Quebec’s cap-and-trade get Trumped?

Could Ontario and Quebec’s cap-and-trade get Trumped?
Climate and Energy

The election of Donald Trump has provoked deep concern in climate policy circles. Reince Priebus, Trump’s White House chief of staff, recently stated that Trump’s ‘default’ position is that climate science is “a bunch of bunk.” This raises critical questions about the future of climate policy in the U.S. as well as internationally, due to the likely absence of U.S. leadership and climate finance. This blog is not about these global issues. Instead, I explore a more narrow—but critical—question for Canada: How might a Trump presidency affect Ontario, Quebec, and California’s linked cap-and-trade system?

Concerns for the Western Climate Initiative?

First, a reminder: California, Quebec, and (soon) Ontario share an emissions permit market—the Western Climate Initiative (WCI). Under the WCI, emitters can trade permits across borders. This type of permit trade makes economic sense: if emissions can be reduced at lower cost in California than Ontario or Quebec, then great. A tonne of CO2 has the same implications for climate wherever it is produced. But for it all to work, it needs a strong design and commitment from policy-makers.

Encouragingly, California’s Governor, Jerry Brown, has strongly signalled in the wake of Trump’s victory that the state has no intention of backing down on its climate policies. And, as of late November, his party has a supermajority in both houses of the state legislature. So Ontario and Quebec can rest assured that the state’s ruling party is committed to the WCI, and is in a relatively strong position. (Legal concerns in California are of course still a concern, but a separate issue).

But while there may not be much cause for concern at the state level, at the federal level, there are risks. Quebec and Ontario (when it joins) are likely to be net importers of permits from California. This means that, on a net basis, they effectively fund emissions mitigation in California that they credit against their own emissions. Implicit in this arrangement is the idea that both national governments would adjust the emissions that they report to the UNFCCC to reflect this emissions trading. But as of now, there is no agreement between the U.S. and Canada that would facilitate this. Ontario’s Auditor General highlighted this issue in her recent report.

This presents a significant risk. Given Trump’s stance on climate change (and trade in general), signing a bilateral agreement on emissions mitigation crediting with Canada probably isn’t at the top of his administration’s to-do list. Worse, the status quo would have the U.S. claiming credit for Canadian-funded mitigation in California, so the U.S. has less incentive to find a solution than Canada does. Canada risks not getting credit for the WCI mitigation that it funds, losing access to California’s cheaper GHG mitigation, or both.

Article 6 to the rescue?

There is, however, a scenario where Canada could still get credit for WCI mitigation without having to negotiate a comprehensive bilateral agreement. It hinges on Article 6 of the Paris Agreement.

A quick explainer: Last year in Paris, Canada and other countries pushed to include provisions for international carbon trade in the Paris Agreement. The result was Article 6 of the agreement. Its Paragraph 2 focuses on ‘Internationally Transferable Mitigation Outcomes’ (ITMOs). The idea is that countries could voluntarily transfer mitigation to each other (i.e. trade GHG emissions), subject to robust accounting guidelines that would avoid double counting.

The rules and guidelines required to put Article 6 into action are still being developed. The plan is to finalize them by late 2018, and to have Article 6’s mechanisms up and running when the Paris Agreement kicks in in 2020. Paris Agreement signatories discussed Article 6 in Marrakesh last month, and are now developing written reports on their positions that they will discuss at a meeting in Bonn in June 2017.

Canada is counting on Article 6. Paragraph 2’s ITMOs would allow it to take credit for the mitigation that Ontario and Quebec are funding in California. And Paragraph 4 focuses on creating a UN-level mechanism that would allow countries to fund and take credit for new and additional GHG mitigation abroad (i.e. international carbon offsets)—something Canada has said it will use to reach its 2030 targets.

The provisions in these two paragraphs are extremely important for Canada. Decarbonization Pathways Canada analysis estimates that Ontario/Quebec-funded WCI mitigation originating in California could amount to 84 MT by 2030, and the 68 MT gap between Canada’s target and current policy trajectory that it estimates will be closed in part by international offsets. Article 6 will help to make this mitigation possible.

Outcomes might hinge on the fate of the Paris agreement in the U.S.

During the campaign, Donald Trump made it clear that he’s no fan of the Paris Agreement. The agreement entered into force on November 4th, so the risk of him “cancelling” it has thankfully subsided. While he could still pull the U.S. out of it, it’s not clear that he would. After promising during the campaign that his administration would quit the agreement, Trump has recently said he was keeping an open mind on it. Since all mitigation under the agreement is voluntary, the U.S. could simply opt to stay in but ignore its mitigation pledges. This would be unambiguously bad for global emissions, but—possibly—good for Canada.

Under the Paris Agreement, any emissions trading between countries that occurs under Article 6 is strictly voluntary. So if the U.S. were to stay in the Paris agreement, an agreement would need to be signed between the U.S. and Canada to allow WCI emissions trading. However, this could prove to be a fairly easy hurdle: first, the mechanisms being developed under Article 6 would articulate clear rules and guidelines, so developing a bilateral agreement under Paris would be relatively straightforward; second, the Trump administration would recognize that signing an agreement with Canada would lead to net financial inflows, and that all it would have to give up in exchange would be GHG mitigation—a low priority for them. If the U.S. stays in the Paris Agreement, signing an ITMO agreement with Canada will likely be in the Trump administration’s interest.

However, if the U.S. pulls out of the Paris agreement, all bets are off. In this case, there would be no clear mechanism for Canada to take credit for WCI mitigation, and unless a comprehensive bilateral agreement could be reached (which is extremely unlikely in a scenario where the U.S. has pulled out of Paris), there would be little reason to maintain Quebec and Ontario’s link to California. This would be a significant loss. As we argue here, Ontario and Quebec benefit strongly from access to California’s cheap GHG mitigation. Without it, their GHG mitigation would come at a much higher economic cost.

Wait and see

As in so many other respects, we are in uncharted waters with a Trump presidency. Ontario and Quebec have hitched their wagon to California, but it’s not yet clear whether a Trump White House will threaten the viability of that link.

If Trump withdraws the U.S. from the Paris Agreement, it doesn’t look good. But if the U.S. stays in, the provisions under Article 6 might provide the plumbing necessary for WCI links to endure. But even here there are more questions than answers, especially while the ultimate form and requirements of Article 6 mechanisms are still up in the air.

Overall, whether or not the WCI will ultimately survive a Trump presidency is an open question. For Canadian policy-makers, the task is clear (but not easy)—keep pushing Article 6, and try to develop a working relationship with Trump that maximizes the chance his administration will sign an ITMO agreement. The rest of us will simply have to wait and see.

Comments are closed.