California and Quebec announces their second joint carbon dioxide allowance auction through a cap-and-trade system

California and Quebec have announced the completion of their second joint carbon dioxide allowance auction through a cap-and-trade system. Despite geographical distance and economic differences, California and Quebec have worked to align their CO2 emissions markets and policies.

Previous auctions sold emissions allowances for electric generators and large industrial sources. The most recent auction, held in February 2015, also included allowances for the transportation sector, covering wholesale gasoline suppliers.

Three factors widely cited as driving expectations among participants in the joint auction are: Persistent carbon allowance surpluses in both the California and Quebec markets; the likelihood that, given the divergence between the two economies, Quebec will be a perennial buyer from California; Coverage of both programs widens in 2015 to include the transport fuels under the cap, creating additional uncertainty as to which way falling oil prices will affect carbon demand.

The results from the auctions conducted in 2014 suggest how perceptions of linked markets have converged in the most recent auction.

California will likely have more low-cost CO2 reduction opportunities than Quebec. In the electric power sector, nearly 95% of Quebec’s generation is from nonemitting sources (almost all hydropower), while only 39% of California’s generation is from nonemitting sources (including about 9% from hydropower). While both programs have similar targets (15% reduction from 2005 CO2 levels by 2020), California is seeking just one-third of that total from its cap-and-trade program, with the remainder from complementary measures such as renewable portfolio and low-carbon fuel standards. Quebec intends to meet its goals relying purely on the cap-and-trade program.