Canada: California Launches Cap And Trade – Will Other WCI Jurisdictions Follow?

Last Updated: December 12 2011
Article by David E. Thring

On October 20, 2011, the California Air Resources Board ("CARB") adopted regulations to implement a state-wide cap and trade program to regulate greenhouse gas ("GHG") emissions commencing January 1, 2013. California and five other U.S. states are members of the Western Climate Initiative ("WCI"), together with the provinces of Ontario, Quebec, British Columbia and Manitoba. On July 7, 2011, Quebec published for comment draft regulations to implement its own provincial cap and trade program, also expected to commence on January 1, 2013. British Columbia and Ontario continue to support the WCI, but have not made a decision on their respective start dates. The California program is designed to link in the future with similar programs in other WCI jurisdictions, so the features of the California program should be of interest to GHG emitters in Canada.

The California program will be phased in between 2013 and 2017, and will cap emissions from approximately 350 large emitters, representing about 600 facilities, in the utility, industrial and transportation fuel sectors. Large emitters are those which emit at least 25,000 metric tonnes of carbon dioxide equivalent of GHG emissions annually. The program will not apply to small businesses. Large emitters account for approximately 85% of the state's GHG emissions. In 2013 the "cap" will be set at 2% below the level of GHG emissions forecasted for 2012 and the "cap" will decline thereafter by a further 2% in 2014 and 3% annually from 2015 to 2020. California, like other jurisdictions, has for some time had mandatory emission reporting rules which allow annual GHG emissions to be tracked by source for purposes of setting appropriate cap levels.

Businesses in California which are subject to the regulation will acquire "allowances" which may be surrendered for each metric tonne of carbon dioxide equivalent of GHG emissions. Initially CARB will issue allowances at no cost to emitters equivalent to 90% of their average emissions. The number of "free" allowances issued each year will decline, and an increasing number of allowances will be auctioned. Once issued, allowances may be traded and may be "banked" for use in future years. The program is set up with three-year compliance periods. An emitter may submit a smaller quantity of allowances during the first two years of a given compliance period, with the balance of its three-year total obligation due at the end of year three.

Emitters may also use "offset credits" to meet up to 8% of their compliance obligations. The program anticipates two types of offset credits: those issued by CARB and those issued by entities recognized by and registered with CARB. Although the regulation anticipates that in future offset credits may be generated from projects located elsewhere in North America, initially only U.S. based projects are eligible. The regulation currently has four approved protocols for offset credits generated from (a) livestock projects, (b) urban forest projects, (c) U.S. forest projects and (d) ozone depleting substances projects. More protocols are expected to be announced. Offset credits must be independently verified and CARB will retain rights to invalidate credits retroactively which may have been issued in error. All projects will be subject to detailed monitoring and reporting obligations.

Every market participant will be required to register with CARB, and allowances and offsets will be tracked. The regulation sets a reserve price for allowances to be auctioned at US$10 per metric tonne of carbon dioxide equivalent of GHG emissions. To deal with the risk of unexpected high prices, 4% of total allowances will be set aside in a strategic reserve to be released if prices for allowances rise above thresholds (starting at US$40 per metric tonne in 2013). There will be a limit imposed by CARB on the total amount of allowances and offsets which may be held by any person, company or group.

In Quebec, the draft regulation published for discussion is similar to the California regulation. However, emitters in Quebec may apply for "early reduction credits" for activities undertaken between January 1, 2008 and December 31, 2011 which made permanent decreases in emissions. Compliance obligations under the Quebec regulation may be satisfied with (a) emission units (i.e. allowances) issued without charge or auctioned, (b) offset credits (up to 8%) or (c) early reduction credits. The Quebec government has not yet issued draft regulations which define eligible offset credits or the protocols under which they may be created. It is possible that the Quebec government may be considering modifications to the California protocols to make them suitable for the Quebec context.

By comparison, Alberta has approximately 30 protocols for recognizing carbon offsets which may be acquired by GHG emitters to meet emission reduction targets imposed by the Alberta government. The Alberta program is an intensity-based system without a hard cap and has been operating since 2007. Eligible carbon offsets must originate from Alberta-based projects. In November 2011, the Auditor General of Alberta criticized the program stating that some of the carbon offsets were not real, measurable or provable. The government is taking steps to improve the program.

In British Columbia, there is already a carbon tax which in 2013 is expected to increase to C$30 per metric tonne. It is not clear how the carbon tax will co-exist with a cap and trade system if B.C. goes ahead and follows the lead of its WCI partners to implement a cap and trade program.

In a separate development, in August 2011, the Chicago Climate Futures Exchange announced that it will close in the first quarter of 2012 due to low trading volumes. Regional Greenhouse Gas Initiative ("RGGI") futures will continue to trade over the counter. RGGI is an existing cap and trade program regulating GHG emissions in the power sector in New York and nine other participating states in the northeastern U.S. RGGI is currently studying whether to tighten its GHG emissions caps which will apply from 2012 to 2014.

On November 8, 2011, the Australian government passed legislation to impose a carbon tax on Australia's large emitters commencing July 1, 2012. The tax requires large emitters to purchase carbon units from a government agency at a cost of AUS $23/per metric tonne of GHG emissions. The businesses affected are in the mining, utilities and industrial sectors. The carbon tax will be in place for 3 years, increasing to AUS $25.40 in the third and final year. After 3 years, Australia will transition into a cap and trade system to be known as the Emissions Trading System ("ETS"). Under the ETS, large emitters may purchase carbon units by auction or on the open market, thereby setting a market price. Carbon units may also be generated by renewable energy projects, such as wind, geothermal and solar. The government has set a floor price for carbon units under the ETS of AUS $15 commencing July 1, 2015.

The California cap and trade program was originally scheduled to commence January 1, 2012, but in June 2011 CARB announced a delay to January 1, 2013. Climate change policies at the federal level have lagged in both the US and Canada. In the US, attempts by the Obama administration to introduce a federal cap and trade program failed to receive approval in Congress. In Canada, the Conservative government has not endorsed cap and trade. However the California state government has persevered. California is the world's eighth largest emitter of GHGs. It is appropriate that California is showing leadership by introducing North America's first cap and trade program as an integral part of the state's plan to reduce carbon emissions causing climate change.

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

© Copyright 2011 McMillan LLP

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions