As carbon tax goes into effect elsewhere, a closer look at Quebec's cap-and-trade system

This story was originally posted earlier this year. We are sharing it again as the federal government tax goes into effect April 1.

As some conservative-led provinces try to avoid the federal carbon tax, Quebec quietly passed the $3-billion mark in total revenues from its own approach to pricing pollution.

The province announced Feb. 27 it raised $215 million at last week's auction of greenhouse gas emission credits, the main currency of its carbon market, which is linked to California's.

In all, around 80.9 million vintage credits were sold at $20.82 each, and around $6 million in future credits were sold at $20.68 each.

On the Quebec side, most of the buying was done by the roughly 150 companies required by provincial law to purchase one credit for every tonne of carbon dioxide they emit. 

All the vintage units sold out, as they have for several consecutive auctions, and the cost of each unit continues to rise steadily, impressing observers of the market.

​When Ontario abruptly withdrew from the market last year, there were concerns demand would dry up. Europe's carbon market, for instance, suffered from years of low prices, due to an oversupply of credits.

But the Western Climate Initiative (WCI) — the name of the cap-and-trade system that allows Quebec and California companies to buy and sell emission credits on each other's carbon markets — has avoided similar volatility.

"The market has been really stable," said Jacques Papy, a law professor at the Université du Québec à Montréal who has studied the WCI since its inception.

Prices are stable both at the quarterly auctions and on the secondary market. That's remarkable, Papy said, given that Ontario's withdrawal violated agreed-upon protocols.

"That was a major shock to the market. But despite that shock, the market remained really stable."

The envy of the Europeans

This stability, in many ways, reflects the maturity of the Quebec-California market, which has been operating since 2014.

Officials in Quebec spent nearly five years studying other carbon markets, consulting stakeholders and fine-tuning regulations before bringing it online.

It was designed to be the central mechanism that would allow the province to meet its 2020 emission target — a 20 per cent reduction below levels in the 1990s.

At the time, cap-and-trade systems were thought to have a big weakness: While governments could cap total emissions output, they were letting market forces decide the price of carbon.

If prices were low, there would be little incentive for companies to reduce their carbon footprint.

To avoid this problem, Quebec and California gave themselves the power to set a minimum price for an emission unit (equivalent to one tonne of carbon dioxide). They also gave themselves the power to remove unsold units from the market, ensuring supply doesn't outstrip demand.  

"These are two very important design features," said Steven Guilbeault, a prominent Quebec environmentalist and adviser to the Canadian government.

"I know, from having spoken to politicians and bureaucrats in the European Union, that they're very envious we did this, and they didn't."

Many economists debate the efficiency of the cap-and-trade approach to pricing carbon, suggesting a carbon tax is simpler to implement, can generate more revenue and sends a clear signal to consumers about the cost of pollution.

British Columbia and Alberta opted for a carbon tax several years ago; P.E.I and Newfoundland and Labrador are in the process of implementing one.

And the federal government has imposed a carbon tax on Saskatchewan, Ontario, Manitoba and New Brunswick, though the provinces are challenging Ottawa's power to do so in court.

A good fit for Quebec

But cap-and-trade is a good fit for Quebec's rather atypical carbon profile, Papy said.

Unlike most places in North America, energy and industry count for a relatively small percentage of the province's overall emissions, thanks mainly to its reliance on carbon-free hydroelectricity.

It is the transport sector that is the main culprit in Quebec, responsible for more than 40 per cent of carbon dioxide emissions, according to the most recent figures available.

If a carbon tax was the province's primary mechanism for reducing emissions, Quebec drivers would be the ones shouldering the burden.

"If you wanted to have a carbon tax that makes a meaningful difference, it would have to be a huge — and that would be very unpopular," Papy said.

Moreover, the provinces that have opted for a carbon tax made them revenue neutral to ease public concerns about higher prices.

Quebec, on the other hand, banks the revenues from its carbon market in a fund dedicated to financing low-carbon infrastructure projects — another advantage, according to Papy.

"When we talk about carbon pricing, what we mean, really, is preparing the economy, and society as well, for a big shift, for a transition to a low-carbon economy," he said.  

"That kind of transition cannot be done over five or 10 years. It has to be done over a longer period of time, say, between 20 and 40 years."

The cap-and-trade model, Papy said, has proven it can help that transition while at the same time limiting the social outcry that accompanied carbon tax hikes in France, and to a lesser extent in Western Canada.

Is slow and steady good enough?

The problem is time is no longer a luxury when it comes to dealing with climate change.

Climate scientists estimated recently that only 12 years remain to limit global warming to 1.5 degrees, beyond which damage to the environment is expected to become exponentially worse, taking the form of more droughts and flooding, among other natural disasters.

But the UN's Intergovernmental Panel on Climate Change also noted the price of carbon needs to reach $184 a tonne by 2030 to shake enough consumers from their carbon-heavy lifestyles. That's well above current levels in Canada.

The federal carbon tax will be $20 per tonne this year, rising to $50 per tonne in 2022. B.C.'s 2019 rate is $40 per tonne; Alberta's is $30.

In Quebec, where the cap-and-trade system gives the government less control over the price of carbon, polluting currently costs $20.82 per tonne. 

"The question is: Can you get from zero to $150 overnight? Or does it take a little while to ramp up so there is no profound shock to the economy and to society?" said Guilbeault.

"How can we move fast without creating social backlash or even social unrest? That's the question everybody is struggling with."

There is also the question of how much the carbon market has lowered emissions in Quebec. That won't be known until 2020, when the next compliance period ends and a more complete accounting of how efficient it has been will be available.

But early data indicates the industrial companies taking part in the market have lowered their emissions by 3.7 per cent since 2013.

"And that's despite GDP growing at a healthy rate over that time," said Onil Bergeron, a carbon market adviser for Quebec's Environment Ministry.

"We've shown you can reduce emissions and grow your economy at the same time."

In some ways, the finer details of how the market operates is besides the point, said Guilbeault: It meets the more pressing need of putting a price on carbon.

"We can't wait to find the perfect mechanism," he said. "Let's get this show on the road."