Taking Stock of Climate Change Efforts: As European Carbon Market Falters, CA Expands Cap and Trade to Canada

May 20, 2013 Unlike many environmental problems, which can be addressed at a local or regional scale, climate change is inherently global in nature: greenhouse gas (“GHG”) emissions from any source join with historic and contemporary GHG emissions from other sources globally to contribute to the total store of GHGs in the atmosphere.  The global nature of the issue is a key reason why, from the onset of climate change efforts, policymakers and environmentalists have attempted to address GHG emissions at an international scale. Failure of Kyoto Protocol Leaves Void in International Climate Change Efforts The primary effort to address climate change at an international scale is the Kyoto Protocol, adopted in 1997 in connection with the United Nations Framework Convention on Climate Change.  Unfortunately, through the first “commitment period” (which ended in 2012), the Kyoto Protocol has not achieved expectations, as the two largest GHG emitting countries—China and the United States—never signed the Protocol.  The sense that the Kyoto Protocol will ultimately fail as a climate program was compounded by the inability of negotiators at the 2009 Copenhagen Summit to agree on a framework for climate change mitigation for the period following the end of the first commitment period in 2012.  Since Copenhagen, climate policymakers have looked for a regional model to lead the way to a new international climate framework. European Trading System in Disarray With the Kyoto Protocol faltering, hopes have been pinned on the European Union’s climate change program—the Emissions Trading Scheme (“ETS”).  These hopes are rapidly fading.  In the past few months, the ETS has experience significant growing pains, with the price of carbon allowances having dropped from about € 25 per ton in 2008 to below € 3 per ton in April.  Although reductions in GHG emissions in the EU are still on pace to meet the target of the Europe 2020 Strategy (20% lower than 1990 emissions), most analysts believe that carbon prices at this level are too low to spur investment.  The severe drop in carbon allowance prices has led many, including The Economist , to question whether the ETS has any future. California Expanding its Cap and Trade Program to Canadian Province of Quebec In the midst of Europe’s difficulties, California has moved forward to link its cap and trade system with that of the Canadian Province of Quebec. On April 19, 2013, the California Air Resources Board (“CARB”) approved a plan to formally link with Quebec beginning on January 1, 2014.  Linkage will create a relatively seamless cap and trade market, with compliance instruments—carbon allowances and offset credits—being interchangeable in the two systems.  California and Quebec will also hold joint auctions of carbon allowances. The linkage of the California and Quebec cap and trade systems is a modest first step towards a robust North American cap and trade system.  Although Quebec is Canada’s largest province by size and has a population of about eight million people (second only to Ontario among provinces), its economy is not nearly as large as that of California: Quebec has a GDP of about $300 billion compared to California’s GDP of about $1.9 trillion.  About 80 entities (referred to as “establishments” in Quebec’s program) are subject to Quebec’s cap and trade regulations.  In comparison, California’s cap and trade program covers about 350 entities representing 600 facilities.  Also, Quebec’s allowable GHG emissions are substantially lower than those of California: Quebec’s cap starts at about 23.2 million tons of GHG emissions (CO 2 e) in 2013 and ends at about 54.7 million tons in 2020, while California’s cap starts at about 162 million tons of GHG emissions (CO 2 e) in 2013 and ends at about 334 million tons in 2020.  (Note that the increase reflects the addition of transportation fuels and natural gas in 2015; over time, the cap will go down — become more stringent —for all covered sectors.) Testing the New Model CARB recognizes that a key aspect of linkage with Quebec is that it may establish a new template for climate change efforts globally.  As stated by CARB in its response to comments: “[T]he experience gained now in demonstrating that two separate governments, in two separate countries, with two separate economies, can effectively partner to put a price on carbon and reduce greenhouse gas emissions is invaluable to accelerating national and international efforts to address climate change.” However, California’s cap and trade program is less than a year old and already several lawsuits have been filed challenging various aspects of the program.  So the jury is still out as to whether California’s program will succeed.  Moreover, the addition of Quebec will make the cap and trade program more complicated (and mistake prone) without offering a meaningful test run that could be expected of a larger, more complex regional program. Nonetheless, given the problems with the Kyoto Protocol and the ETS, the need for a successful model is certainly there, and California and Quebec may be the start of such a model.  In the interim, California and Quebec will undoubtedly have to iron out a number of issues (ranging from the integrity of offsets to the logistics of operating a linked market in two languages). In the event that the California-Quebec market sets the tone for a revamped European system or a new Kyoto, monitoring the developments of the North American effort will be a key task for businesses and governments (not only within California and Quebec, but in other states and provinces as well), as they may be incorporated into the system at some point in the future. Marc Luesebrink is of counsel in the Los Angeles office of Manatt, Phelps & Phillips. He has extensive experience advising both private industry and public sector clients on environmental and land use matters. Earlier in his career, he served as a Senior Attorney at Southern California Edison and Deputy Attorney General in the Office of the California Attorney General. Mr. Luesebrink can be reached at (310) 312-4261 or mluesebrink@manatt.com . This column is part of a series of articles by law firm Manatt, Phelps & Phillips, LLP’s Energy, Environment & Natural Resources practice. The first column in the third edition of this series discussed What the Sequester Means for Environmental Regulation . Taylor Scott International