Written by: Chloe Stoneburgh
Edited by: Othmane Oukrid
Quebec’s Cap-and-Trade (C&T) system stands out as one of Canada’s most successful examples of market-based climate policy, covering approximately 80% of the province's emissions (Centre for Public Impact, 2016). The potential for expansion through interprovincial collaboration holds promise, as demonstrated by the success of the European Union’s Emissions Trading System.
On January 1st, 2012, Quebec established its regulation around a C&T system under the Environment Quality Act as a key action towards curbing provincial greenhouse gas emissions (Yuan, 2023). The C&T system sets a maximum limit (cap) on the total greenhouse gas emissions allowed within an industry. Emissions allowances are then allocated to individual firms within the industry, ensuring that the combined allowances equal the overall cap. Firms can buy or sell these allowances (trade), which creates a financial incentive to reduce emissions: companies that cut emissions below their allowance can sell excess permits to others, rewarding them for their reductions and encouraging further emission-cutting efforts (Centre for Public Impact, 2016).
The system applies primarily to high-emitting sectors, such as energy, heavy industry, and electricity production. Each year, the cap is reduced, tightening the limit on allowable emissions and driving businesses to innovate cleaner technologies to stay within their assigned allowances or face purchasing more on the market. This market-driven approach to carbon pricing enhances cost-effectiveness by ensuring that reductions occur in firms and industries where they are cheapest, as it incentivizes those with the lowest reduction costs to reduce their emissions and sell their excess permits. This helps minimize the overall economic impact of reaching the emissions cap, unlike a fixed-price carbon tax that does not leverage such market flexibility.
Notably, since January 1st, 2014, Quebec’s carbon market has been linked with the California Air Resources Board which manages the state’s C&T program, forming the largest carbon market in North America (Yuan, 2023).
Strengths and Barriers to Interprovincial Participation
Expanding Quebec’s C&T model to other provinces could support Canada’s goal of reaching net-zero emissions by 2050 by providing a more flexible, cost-effective alternative to the flat carbon taxes found in other provinces. Examining the current approaches of other provinces reveals how each could benefit from a C&T system.
Alberta’s Technology Innovation and Emissions Reduction system focuses on limiting emissions per unit of production rather than capping total emissions, allowing companies to meet standards relative to their output rather than facing a strict emissions cap (Government of Alberta). Given Alberta's reliance on energy industries with high emissions per output, the province is cautious about climate policies that might reduce its competitiveness in the global energy market. A C&T system, however, offers flexibility, allowing industries to buy carbon allowances across provinces rather than imposing a hard cap. For instance, an Alberta oil sands producer could purchase allowances from Quebec's renewable energy sector, which would support emissions reduction goals without undermining international competitiveness in oil pricing.
Ontario used to be involved in the collaboration between Quebec and California creating a Western Climate Initiative (WCI), however, Ontario withdrew in 2018. They moved to a flat carbon pricing model with a gradual increase in the tax level. Being one of Canada’s largest manufacturing hubs and supporting some of the most energy-intensive industries, Ontario’s flat carbon tax disproportionately affects industries with high costs in reductions whereas a C&T system could offer more flexibility. For instance, Ontario’s steel manufacturing industry, a major energy consumer, faces higher compliance costs under a flat carbon tax model which could benefit from increased flexibility in addressing their environmental impacts.
Similarly, British Columbia began placing a gradually increasing tax on the purchase of fossil fuels in 2008 (Government of British Columbia, 2024). While the tax has helped reduce emissions, they have faced similar challenges for certain industries, like heavy manufacturing and transportation, where cutting emissions is more expensive and difficult which like Ontario could benefit from increased flexibility. A C&T system could offer both Ontario and British Columbia a more adaptable approach, allowing high-emitting industries to manage emissions costs by trading allowances while still encouraging overall emissions reductions across sectors.
Atlantic Canada, with its strong reliance on fossil fuels and slower transition to renewable energy, faces distinct challenges in reducing emissions. By linking to Quebec’s C&T system, the region could gain flexibility in meeting emissions targets through access to a larger, market-based system. Revenue from allowance auctions would help fund its renewable energy shift, while the C&T framework would allow industries to manage costs effectively, while still offsetting emissions without immediate heavy compliance burdens.
Despite the potential benefits of a national C&T system, varied provincial policies, economic structures, and political landscapes pose challenges. Effective interprovincial cooperation would require harmonizing policies, navigating regional economic interests, and establishing a clear framework for trading carbon allowances across provinces.
An Example of Collaboration by the EU ETS
The integration of Quebec's C&T system with California and other provinces can be modeled after the European Union’s Emissions Trading System (EU ETS). The EU ETS, the largest carbon market in the world, includes over 30 countries, encompassing diverse economies with different carbon profiles (European Commission). By integrating a broad array of industries and countries, the EU ETS ensures that emissions reductions occur where they are cheapest, leading to more efficient and cost-effective outcomes.
In 2023, the EU ETS–serving as the primary policy instrument for decarbonizing the European economy–contributed to a 15.5% reduction of the EU’s emissions from 2022 levels, compared to only a 1% reduction in Canada (European Commission, 2024; Tunnacliffe, 2024). Although we cannot attribute the significant difference in reduction in emissions entirely to C&T, the success of the EU ETS illustrates the benefits of a well-coordinated, cross-jurisdictional carbon market and could serve as a model for Canada.
Expanding Quebec’s cap-and-trade system across Canadian provinces could support national emissions targets and create a flexible, market-driven approach to emissions reduction within the pre-established policy choices across provinces, leveraging the proven success of cross-jurisdictional models like the EU ETS.
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References:
Centre for Public Impact. (2016, June 13). The cap-and-trade system in Québec. https://www.centreforpublicimpact.org/case-study/cap-and-trade-system
European Commission. (n.d.). EU Emissions Trading Systems (EU ETS). https://climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets_en
Government of Alberta. (n.d.). Technology Innovation and Emissions Reduction Regulation. https://www.alberta.ca/technology-innovation-and-emissions-reduction-regulation
Government of British Columbia. (2024, April 2). British Columbia’s carbon tax. https://www2.gov.bc.ca/gov/content/environment/climate-change/clean-economy/carbon-tax
Government of Canada. (2024, May 3). Carbon pollution pricing systems across Canada. https://www.canada.ca/en/environment-climate-change/services/climate-change/pricing-pollution-how-it-will-work.html
Tunnacliffe, C. (2024, September 19). Experts estimate modest drop in 2023 emissions with big differences across sectors. Climate Institute. https://climateinstitute.ca/news/experts-estimate-modest-drop-in-2023-emissions/
Von Kursk, H. (2023, June 27). Quebec, California review joint carbon cap-and-trade program. Sustainable Biz Canada. https://sustainablebiz.ca/quebec-california-review-carbon-cap-and-trade-program
Yuan, J. (2023, October 2). Understanding Québec’s cap-and-trade system for carbon. Dentons. https://www.dentons.com/en/insights/articles/2023/october/2/understanding-quebecs-cap-and-trade-system-for-carbon
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