Are Subnational Carbon Markets Transformative? Pathways for Further Development David Houle, PhD (University of Toronto) SSHRC post-doctorate fellow, CLOSUP, University of Michigan Gerald R. Ford School of Public Policy

Key messages (1) Provincial carbon pricing instruments have still limited impacts on emissions and behavior. – More ambitious targets required. – Lack of engagement from societal actors in carbon market (eg. small businesses, financial sector, citizens in general). Uncertainties about how to further develop provincial carbon pricing, increasing after The challenge: increase resilience and effectiveness of provincial carbon pricing.

Key messages (2) Pathways for further development of provincial carbon pricing: – 1) linkages between current carbon pricing mechanisms – 2) institutions and complementary policies to support carbon pricing and encourage a broader involvement. – 3) federal climate policy that support subnational carbon pricing mechanisms

Gap between Canada’s INDC and Provincial Target

Current state of national and subnational carbon pricing As of 2015, 63 carbon pricing instruments implemented or scheduled, including – 39 at the national level: 21 emission trading systems (ETS), 4 carbon taxes (Chile, Japan, Mexico, and South Africa), and 14 ETS and carbon tax. – 24 at the subnational level: 22 ETS (including Alberta, California- Quebec, RGGI), 2 carbon taxes (British Columbia and Manitoba). In Canada-US: 13 implemented and 4 ETS under consideration (Ontario, Manitoba, Washington, and Oregon)

Regional, national and subnational carbon pricing instruments share of global GHG emissions covered Source: Kossoy et al., 2015

Observations Carbon pricing instruments (CPIs) started to increase their coverage in 2005 with the EU ETS. After 2011, subsequent increases in coverage and policy fragmentation. The Canadian problem of how to further develop and link different carbon pricing regimes is globally relevant.

Prov.TypeSectors coveredYear QCRevenue enhancing carbon tax Energy related emissions (in transportation and industries) Cap-and-trade (WCI)Industrial emissions (Phase I) and transportation (Phase II) (Phase I) (Phase II) ABIntensity-based emissions trading Industrial and electricity emissions New carbon pricing mechanism Industrial, electricity, and transportation (product-based) BCRevenue neutral carbon taxEnergy related emissions (in transportation and industries) Intensity-based emissions trading LNG projects2014- MBRevenue enhancing carbon tax Emissions related to coal only2012- CACap-and-trade (WCI)Industrial emissions and transportation (Phase II) (Phase I) (Phase II) RGGI States Cap-and-TradeElectricity sector only2008

1) Linkages between current carbon pricing mechanisms Formal and comprehensive – WCI and RGGI Formal but partial – Via carbon offset market integration (ex. California with other US states, including Arkansas, Michigan, Utah, Ohio, etc.) – Via flexible cooperative federalism arrangement (ex. US Clean Power Plan) Informal policy harmonization – BC and Alberta regulation for industrial emitters.

1.1) What provincial carbon pricing for 2020? Loosely harmonized BC-Alberta carbon pricing policies. QC-ON-MB carbon market with link to California. Linked offset markets, applying WCI emission protocols. Federal carbon pricing framework, with shared federal- provincial revenues, and exemptions for BC, Alberta, Quebec, Manitoba, and Ontario.

Would such patchwork of carbon pricing policies be enough to convince provincial governments to increase their ambition (both targets and carbon prices)? The answer could depend on the complementary policies, supporting institutions, and constituency created.

2) Institutions to support carbon pricing (especially the secondary market) Institutional deficit: Provincial governments have been less successful at creating institutions that support carbon pricing than at implementing these instruments. Climate exchanges and involvement of the financial sector, possible after the failure of the Chicago Climate Exchange? – Ex. European Energy Exchange Offset aggregators, link between offset producers and regulated industries (ex. former BC Pacific Carbon Trust, Coop Carbone).

2.1) Complementary policies and revenue recycling Creation of constituency support for carbon pricing system: – Linked to revenues recycling. – Three models among Canadian provinces BC : corporate and income tax cuts Alberta model: funding research and development Quebec (Green Fund) and Manitoba: government programs Trouble ahead for Quebec’s Green Fund? Vérificateur général reports on the Green Fund Attracted attention from media and opposition parties and promises of reforms.

3) Federal climate policy that support subnational carbon pricing mechanisms Single federal carbon pricing mechanism very unlikely. National carbon pricing with exemptions? The US Clean Power Plan, a model of cooperative federalism for Canada? – Emission targets on the basis of policy capacity as an alternative to a territorial or sector-by-sector approach. Federal regulation encouraging low carbon technologies and fiscal measures for innovation.

Conclusions Expansion of WCI model difficult due to regional economic differences. – Resistance from oil and gas industry to the WCI model perceived as a potential limit their growth (not only in AB but also in BC). Institution-building for secondary and offset market. Integration of regulatory offset markets, the first step toward harmonization.

Additional material

Carbon Pricing Instruments Coverage in Canada (in % provincial emissions) (source: Houle, 2015)

Carbon Price in North America (in CDN) (sources: RGGI, CARB, BCME, Alberta Environment, MDDELCC)

British Columbia liquefied natural gas sector Greenhouse Gas Industrial Reporting and Control Act, passed in November – Intensity target (0.16 tCO2e for each tonne of liquefied natural gas). – Emissions credits by contributing to a technology funds (at $25tCO2e). – Emissions offsets. Consultation on regulation July-August 2015.

Offset protocols (sources: CARB, Alberta Environment, MDDELCC, BCME)

Offsets issued - California and Quebec (sources: CARB and MDDELCC)

Where are the Quebec offsets coming from? Methane capture in landfills (4 on 5) –WSP Canada Inc., methane capture in landfills in Rivière- Rouge, Mont-Laurier, and Saint-Raymond (3 projects). –Terreau Biogaz S.E.C. methane capture in landfill in Cacouna (1 project). –Part of the of MDDLCC Biogas Program ($14.43-$83.50 per tCO2e reduction).

Comparisons of Provincial Corporate Rates, January 1, 2014 (source: KPMG, 2014) BCABSKMBONQCNBNSPENLAverage Minimal corporate rate * General corporate rate *Small-business tax rate was abolished in Manitoba in 2010.

WCI

RGGI