The cap-and-trade system in Québec

As part of its response to climate change, the Canadian province of Québec aimed to cut its greenhouse gas emissions significantly. To reach their self-imposed GHG reduction targets, one of the central measures of the government of Québec was to introduce a cap-and-trade system in 2012. Basing their approach on the EU Emissions Trading System and the US Regional Greenhouse Gas Initiative of eastern seaboard states, the cap-and-trade system limits the amount of greenhouse gases industries can emit and allocates emission allowances which can be bought or sold. The aim is to incentivise industrial organisations to reduce their emissions gradually but effectively.

Evidence suggests that the system has been effectively implemented despite some industry resistance and that significant progress is being made towards the ambitious long-term targets that are written into the system.

The challenge

In 2013 Québec emitted 82.6 megatonnes of CO₂ equivalent (MtCO₂e), or 11.4 percent of Canada’s overall emissions (726 MtCO₂e). A 2011 measurement indicated that the main sectors responsible for these emissions in the city of Quebec were the transport sector (44.7 %) and the industrial sector (31.6 %). The province needed to focus its greenhouse gas (GHG) emission reduction strategy on these high-polluting urban sectors while also ensuring that GHG emissions throughout the entire province were reduced.[1]

The initiative

Since 2008 Québec has been a member of the Western Climate Initiative Inc (WCI) alongside British Columbia, Ontario and the US state of California. The WCI is a “sub-national policy collaborative of independent jurisdictions” with the aim of “reducing regional GHG emissions”. In 2010 the WCI published a set of guidelines to help each region implement a cap-and-trade system.[1] Québec introduced its own cap-and-trade system in 2012 and the enforceable compliance obligation began on 1 January 2013. The objective of the policy is to reduce GHG emissions significantly, using 1990 levels as the point of comparison. The system is a central tool to reach the following GHG reduction targets:

  • by 2020 – 20% reduction from 1990 levels;
  • by 2030 – 37.5% reduction from 1990 levels;
  • by 2050 – 80–95% reduction from 1990 levels.[2]

A cap-and-trade system means that “there is a ‘cap’ or limit set on the total GHG emissions allowed by all participants covered by the system and this cap is converted into tradable emission allowances”.[3] The tradable element means that by “using market forces to encourage the cheapest reductions, the cap-and-trade system for GHG emission allowances provides flexibility to emitters with respect to the means of complying with requirements, thereby reducing overall mitigation costs”.[4]

The public impact

In 1990, Québec emitted 86.6 MtCO₂e. By 2016, emissions had dropped by 11% (or 9.4 MtCO₂e) to 77.3 MtCO₂e.[5] The province, which relies on “abundant hydroelectric resources for their electricity production, show[s] more stable emission patterns over time and a decreasing pattern since 2005”.[5]

The WCI partners California and Québec were the online two of Canada’s twelve provinces, that reduced their emissions between 1990 and 2016. At the same time, the provinces “estimate that the price of gas has increased between 2 and 3.5 cents a litre due to their cap-and-trade programme”. [11] However, in 2018, Ontario’s newly instated government introduced legislation to cancel the state’s cap-and-trade programme. This will most likely “have far-reaching implications on the future of the cap and trade market in North America” [12]."

What did and didn't work

All cases in our Public Impact Observatory have been evaluated for performance against the elements of our Public Impact Fundamentals.

Legitimacy

Public Confidence Good

Addressing issues of climate change are of high interest and importance to the Québecois public. However, at its outset there was low public awareness of the cap-and-trade initiative.

In Québec, there is strong public consensus in favour of taking action against climate change. For Québecois citizens, it is government inaction that is unfavourable in the fight against climate change. This attitude explains why carbon-pricing initiatives have not been a contentious issue in elections. By being the first to develop proactive climate change policies, many in Québec feel that the cap-and-trade system was the city’s opportunity to demonstrate leadership in the field.[9] Despite support for government action on climate change, there was little public awareness of the cap-and-trade policy itself. Oil companies, who were unhappy with the new regulations, tried to create negative public opinion by warning of increases in petrol prices. [7]

Stakeholder Engagement Strong

The cap-and-trade system had valuable input from a wide variety of stakeholders in the planning process. The Québec provincial government opened a 60-day public consultation to allow relevant industry actors to engage in the discussion and contribute feedback. In addition, the government worked closely with the Western Climate Initiative (WCI), a sub-national policy collaborative, to develop the scheme.

In 2009, the Ministry for the Sustainable Development of the Environment and the Fight against Climate Change (Ministère du Développement durable, de l’Environnement et de la Lutte contre les changements climatiques) consulted each of the industries that would be affected by the new legislation, organising roundtable talks with representatives from each industry. The purpose of these talks was to provide information about the intended legislation and to get feedback.[6]

Although Québec had introduced a levy on fossil fuels in 2006, it wanted to implement further measures to reduce its greenhouse gas emissions. In order to do this it began working closely with the WCI, which suggested that Québec could achieve its aim through “an economy-wide market-based mechanism”.[6] Québec had joined the WCI in 2008 and the ongoing engagement of central actors within the Initiative helped to develop guidelines and operating rules for a cap-and-trade system that supports the reduction of greenhouse gas emission.[6]

Political Commitment Strong

The cap-and-trade system was an important priority for the Québec government under the leadership of Premier Jean Charest. Charest had a dedicated team of ministers and policymakers to enable the development and implementation of the legislation. Previous legislative commitments, such as the Climate Change Action Plan from 2006, also formed a useful platform from which to further legislate.

While Premier Charest was committed to developing effective cap-and-trade policies, the backing of other government ministries was also essential. Although they were not directly responsible for climate change policy, the Finance Ministry and the Ministry for Industry were both key in enabling the success of the legislation. In addition, the work of environmental ministers Claude Béchard, Line Beauchamp and Pierre Arcand was central. Associate professor Erick Lachapelle of the Université de Montréal commented the government “saw where the world was going in terms of carbon markets, knew they could reduce GHGs by becoming more efficient, and they wanted to get credit for it. Charest also perceived himself as a leader on the environment; he was a policy entrepreneur.”[7]

Reducing greenhouse gas emissions had been of central importance to the Québec government before the introduction of the cap-and-trade policy. The Climate Change Action Plan 2013–2020 was one such example: it introduced “a carbon levy on the carbon content of fossil fuels” and was the first of its kind in North America”.[7] Québec was making a clear statement that it took climate change seriously and was committed to acting proactively to dealing with it.

Policy

Clear Objectives Good

The cap-and-trade system has a clear objective: to reduce greenhouse gas emissions compared to 1990 levels. As detailed in the Climate Change Action Plan, the cap-and-trade system is a fundamental driver of the attainment of Quebec’s GHG reduction targets of 20% by 2020, 37.5% by 2030 and 80-95% by 2050 compared to 1990 levels.[2] The cap-and-trade system explicitly targets emitters, who are defined as “any person or municipality operating a business in a sector of activity covered by the regulation” with annual emissions higher than 25,000 tonnes of carbon-dioxide or its equivalent (tCO₂e). These industries include transport, industry, residential and commercial, agriculture, waste and electricity.

Implementation of the cap-and-trade system is broken down into three compliance periods, the first and shortest being 2013–2014. Each compliance period has explicit reduction targets and focus areas. The first compliance period targeted electricity and industry emitters and the annual cap was set at 23.20 MtCO₂e. The scheme was expanded in the second and third compliance periods (2015-2017 and 2018-2020 respectively) to include emitters involved in ”the distribution and importation of fuels used for consumption in the transport and building sectors, as well as in small and medium-sized businesses”.[2] Specific caps are set for each compliance period and, as of 2019, there will be voluntary opt-in for emitters of between 10,000 and 25,000 tCO₂e/year.[2]

Evidence Good

There was broadly positive evidence in favour of the cap-and-trade approach to reducing greenhouse gas emissions. The WCI provided valuable insights, as did the experience of the EU Emissions Trading System, which launched in 2005, and the Regional Greenhouse Gas Initiative in the United States, which became effective in 2009.

The cap-and-trade method approach has been employed around the world “as one of the most efficient and least costly economic tools” for reducing greenhouse gas emissions.[8] While designing the cap-and-trade system for Québec, the Environment Ministry officials who were tasked with framing and drafting of the regulation also looked at two well-established models:

  • the EU Emissions Trading System, which applies a cap-and-trade system;
  • institutions such as Regional Greenhouse Gas Initiative (RGGI), a consortium of US states on the eastern seaboard, for ideas on other working models and mechanisms.

The Québecois government gained three particularly valuable insights from these models: firstly, the need to establish a price floor; secondly, the importance of including a large number of industries (a central lesson learned from the experiences of the American RGGI); and finally, the need to include ways to regulate offsets in the system.[7]

Feasibility Strong

There were several measures put in place to ensure the feasibility of the scheme. Experienced personnel managed the policy development while revenue generated by the sale of emission units was earmarked to finance research and development into environmental initiatives.

The cap-and-trade system was launched in 2013 under the WCI’s carbon market, ensuring that Québec was able to work alongside other provincial and state governments and share risks and expertise. Moreover, the staff was a “small but effective” group within the Ministry who “ate, slept, and breathed” the cap and trade policies.[7] This dedication and focus was key to getting the legislation right while learning from other models.

When Québec and California eventually merged their systems in 2014, they formed the largest carbon market in North America, “large enough to generate sufficient credit to ensure robust trading”.[8] For example, it is estimated that cap-and-trade will generate CAD3 billion dollars of the Climate Change Action Plan budget of CAD3.3 billion by 2020.[9] The CCAP helps the industries involved to “reduce their carbon footprint and make the transition towards more sustainable sources of energy”.[6]

Action

Management Good

The cap-and-trade system is managed by the Québec Environment Ministry, which is  responsible for the implementation and proper functioning of the system. Its other duties include approving “registration requests in the system, the creation and distribution of emission allowances, and the auction results".[9] Québec officials also trained the business representatives within targeted industries as part of the policy’s implementation.[6]

Under the instruction of the WCI, the market where emission allowances are bought and sold is apparently well regulated by “an independent firm to oversee the market and detect any evidence of wrongdoing”.[9]

Measurement Good

The success of the cap-and-trade system is measured by comparing current greenhouse gas emissions against the objective projections. The caps were set using up-to-date data on greenhouse gas emissions based on “business-as-usual scenarios”. [6] The regulation states that “covered entities must report their GHG emissions using specific and rigorous protocols”.[6]  The data from these reports is “verified independently by an accredited verifier in accordance with ISO standards”, which ensures the accuracy and reliability of the data.[9]

Alignment Fair

There was mixed alignment in relation to the cap-and-trade system. Certain groups opposed the regulation, fearing a harmful impact on their operations, particularly in the oil and gas industries. However, within the city government and across departments there was clear alignment of interests between legislators and stakeholders. The support and advice from the WCI collaborative also helped to bring actors together and align on objectives.

Key actors from Québec’s industrial community were less supportive of the new system. The oil and gas industry “strongly opposes action by sub-national governments enforcing polluter-pay regimes on their own”.[10] Steven Guilbeault, co-founder of Québec-based conservation group Equiterre said: "We are seeing a big pushback by oil and gas distributors in Quebec regarding WCI".[10] To address these concerns, the Québec government was determined to keep communication channels with businesses open before the launch of the system. Meetings were held on a weekly or monthly basis as needed to enable the government to respond to their concerns.[6]

Conversely, there was strong alignment of interests outside of Québec, particularly amongst WCI members seeking to reduce greenhouse gas emissions. In 2013 Québec and California signed a merger agreement which came into effect in January 2014. The merger of the Québecois and Californian systems required significant co-operation and planning efforts. While both systems had been drafted in line with the WCI guidelines, there were obstacles to overcome such as different languages, currencies and differing legal approaches. Québec and California worked together for two years to overcome these challenges before the Québec government and the California Air Resources Board signed the 2013 agreement confirming their commitment to completing the process.[7]  Individuals involved in the process on both sides affirmed that it was “intensely positive in terms of both learning and outcomes”.[8]