Canada’s province of Quebec, a member of the Western Climate Initiative, introduced its cap and trade system in 2012 to target emissions reductions of 20% below 1990 levels. In 2013, it became the second active carbon market in Canada, following Alberta that introduced its GHG emissions regulation and trading program in 2007. Quebec’s 1st compliance period commenced in January 2013 and runs to December 31, 2014. During this period, only the industrial and electricity generation sector, representing approximately 80 facilities, will be covered. Facilities in these sectors whose annual emissions exceed 25,000 tonnes will be subject to compliance. Regulated emitters have until November 1, 2015 to acquire Emission Allowances to cover their GHG emissions for the 2013 – 2014 period. Emission Allowances include free allowances issued by the Province that take into account emitters’ historical levels of emissions, auctioned allowances, early action credits and emission offsets generated by emission reductions from non-regulated entities.

Quebec’s compliance periods mirror those of California, with the second and third compliance periods of the program being three years each in duration, running from 2015 – 2017 and 2018 – 2020. During the second compliance period, fuel distributors and importers who import for their own consumption will become subject to the program, increasing the covered annual emissions from approximately 23 million to 65.3 million tonnes of CO2e. The fact that fuel distributors will not be allocated any free Emission Allowances is expected to impact allowance pricing and interest in offsets.

The system requires that regulated emitters acquire and submit Emission Allowances sufficient to cover their emissions during the compliance period. Emitters whose emissions exceed the number of allowances initially allocated will be required to either reduce their emissions through technology or better practices or purchase additional Emission Allowances via auctions or on the emission offsets market. Beginning in 2015, the number of free allowances will be reduced by 1-2% annually.

Quebec’s first auction of permits occurred on December 3, 2013 and bidders purchased 1,025,000 of the 2.97 million vintage 2013 emission allowances offered at the floor price of $10.75 per tonne. The low sale price was the result of low demand. Approximately 27% or 1.7 million of the 6.3 million 2016 vintage emission allowances were also sold at the $10.75 price. The combined 2013 and 2016 vintage sales reportedly brought in approximately CAD $29 million for Québec. It is expected that the future auctions will attract emitters that did not participate in the initial auction and result in higher demand and the sale of the balance of the 2013 units.

Quebec and California have agreed to integrate their programs commencing this year, which will allow participants in both jurisdictions to buy and sell emission allowances and offsets from each other’s jurisdiction. The California emissions market is approximately six times larger than Quebec’s. California held an auction on November 19, 2013 at which 16.6 million tons of carbon allowances were sold at a price of $11.48 each. It is expected that future auctions will be conducted jointly between Quebec and California.

Under Quebec’s system, emitters are allowed to satisfy 8% of their compliance obligations with emission offsets. According to ÉcoRessources, a Quebec based environmental and natural resource consulting firm specializing in GHG projects and policy, this represents a maximum demand for offsets of approximately 35 megatonnes from 2013-2020. Contrast this with the 201 megatonnes of Offsets that are projected in the California market by Evolution Markets, an international environmental markets firm. ÉcoRessources estimates the current approved protocols will only be able to provide approximately 20% of this maximum demand. As such, additional protocols will be required to satisfy the offset demand if it reaches its maximum. Thus far, there are only 3 offset protocols approved in Quebec. Due to the fact that 95% of Quebec’s electricity is generated by hydro, and its largest GHG emitting sector is transportation, there are a limited number of large single source emitters and fewer opportunities for immediate dramatic emission reductions. As such, it is expected that Quebec emitters will be purchasing offsets and allowances from California in at least the early years of the program in order to meet their compliance obligations.

All Emission Allowances that have not been retired may be traded between registered emitters and market participants. In California, Emission Allowances may be traded on a bilateral basis or through an authorized exchange such as the Carbon Trade Exchange. In the last quarter, 2013 Vintage California Carbon Allowances have traded in the $11.70 - $12.15 range on the spot market. 2013 Offsets have traded in the California market in the $9 - $11 range, depending on the type of offset and the delivery period. In Canada, the North American Climate Exchange plans to seek authorization to facilitate trading of Emission Allowances on the spot market. The California and Quebec markets are expected to grow over the course of their programs, as free allowance allocations are reduced and more offset protocols and projects are brought on.