Quebec to make slow entry into North American carbon trading

Canada’s largest province approved rules last month enabling it to link its carbon market with the one launched in California at the start of the year, but with the province waiting until May to hand out allowances, trading is expected to take months to ramp up.

The owners of the 80 large facilities facing mandatory limits on their greenhouse gas output will not try to get a head-start in early trade the way California did before the official launch, experts said.

“For Quebec, linking is a necessary step (for emitters) to start trading. They are waiting for definitive certainty,” said Jeff King, head of environmental markets at Scotia Bank.
King added that there is currently no contract in the secondary market solely for Quebec carbon allowances, discouraging any pre-compliance trading.

The province will not allocate allowances until May, and has no plans to issue Quebec-only permits, according to  Alain Olivier, director of the Quebec Government Office in Washington DC.

He said Quebec plans to run a mock auction to allow companies to practice “sometime this winter” and instead of having its own allowance auction, will wait to participate in a joint auction with California in August if Governor Brown approves it.

Brown may approve the linkage as soon as next month, according to California regulators.

Jean Nolet, president of Montreal-based carbon market consultancy EcoRessources, said no Quebec firms are currently snapping up California permits, which cleared close to the minimum bid price of $10.09/tonne at the first auction and currently trade in the $14-$15 range.


While buying early could provide Quebec firms a cheaper compliance option, Nolet said that some of the firms based in the province may prefer to wait, especially since they won’t have to surrender permits until 2015.

"Apparently this kind of risk management strategy is seen as speculative behavior by many Quebec companies. This might be due to a more conservative approach to risk management in Quebec," Nolet said.

He added that some companies were cautious because the federal government had announced plans to launch a national carbon market a few years ago but never implemented it.

Quebec set a more stringent carbon reduction goal than California. The province aims to reduce emissions by 20 percent below 1990 levels by 2020, while California plans to bring its emissions down to 1990 levels by the same year.

Covered facilities in Quebec range from oil refineries to cement plants to pulp and paper mills while power producers and their affiliates face the first wave of emissions limits for the 2013-2015 phase under California’s cap-and-trade system.

Nolet said unlike the companies facing caps in California’s first phase, most of the 60 Quebec companies covered by the law have less experience with energy and commodity trading.

Samantha Katz, managing director at BGC Environmental Brokerage Services, added that Quebec is now playing catch-up to California, which approved its carbon rules in Oct 2011.

“I think it’s just very new. The rules were only approved in December. Quebec is now a quarter or two behind where California is,” she said.

In California, the first trade of a carbon contract cleared on the IntercontinentalExchange (ICE) in August 2011 before the rules were adopted, sparking slow but incremental growth in pre-compliance trading.

She said its too early to tell when she expects to see the first Quebec entities entering

Elisabeth DeMarco, a Tornoto-based partner at law firm Norton Rose, said she expects to see some sporadic trading emerging in Quebec anytime between May, when companies are allocated their first batch of free permits, and the first auction in August.

In these early days, she expects California and Quebec to exist as “fragmented markets for a period of time.”

She added that it is also unclear how Quebec’s cross-border power trading with the higher carbon-intensity electric grids in the northeastern and mid-Atlantic U.S. will affect allowance buying in the low-emission hydroelectric-reliant province.

DeMarco said it is too early to tell whether there will be any attempts to “greenwash” power sales without having to buy carbon permits.

(Source: Thompson Reuters)