On April 9, California Governor Jerry Brown gave the state's Air Resources Board the go-ahead to link its carbon market with that of Quebec. The state has been working with the Canadian province for five years to align their greenhouse gas emission-limiting market initiatives.

Linking the two cap-and-trade markets would allow carbon permit trading between the state and the Canadian province, making the overall market more liquid and stable. Stanley Young, a spokesman for the Air Resources Board, said in an email, “We are pleased with the Governor’s findings and will continue to work on all necessary additional steps to ensure California’s efforts to link with Quebec are successful.”

California’s climate policy, AB 32, passed in 2006 with the goal of reducing GHG emissions to 1990 levels by 2020. One measure within AB 32 is the cap and trade system which was implemented starting this year. This carbon market will eventually regulate 85 percent of emissions in the state. At the last California market auction on February 19, carbon permits sold out for 2013 at $13.20 per ton. According to an analysis by Chicago’s CME Group, Inc., prices in California have since climbed to $14.70 following approval of the link with Quebec, their highest level since late March.

Quebec has set its sights on lowering its emissions 20 percent below 1990 levels by 2020. Their cap and trade market currently covers 75 percent of the province’s companies. Both markets allow trade in permits worth one metric ton of carbon dioxide each. Companies with an excess of permits can trade or sell them to companies who need them in order to cover their respective carbon emissions.

In September 2012, a panel comprised of economics and markets professors recommended that California and Quebec put off linking their carbon markets until they are shown to be stable, which could take up to several years. Some of the challenges to linking the two markets are that Quebec’s economy is much smaller than California’s, and Quebec is already a big consumer of carbon-free hydroelectric power. This could limit the extent to which California can trade with the province.

The Air Resources Board is now scheduled to review all changes to the new transnational carbon plan by April 20, and the program is set to begin January 1, 2014. Until then, the California Air Board and the Quebecois Ministry of Environment will be testing their cap-and-trade programs to ensure they are compatible with one another.

This is the second instance of two major carbon markets linking. Last summer, Australia connected its cap and trade market with the European Union’s Emissions Trading System (ETS).

Author: Marguerite Suozzo-Gole