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Ontario plans to join California's cap-and-trade program, but the U.S. state faces challenges that could undermine the governor's plan to renew the program when it expires in 2020.Kevin Frayer/Getty Images

California is facing major questions about the future of its cap-and-trade program, even as Ontario and Quebec count on linkage with the state's carbon market to meet their aggressive climate targets over the next 15 years.

Ontario, Quebec and California environment ministers met in Toronto Thursday and discussed Ontario's plan to join the Western Climate Initiative, which is dominated by the U.S. state whose population is double that of the two provinces.

However, after launching the cross-border cap-and-trade market with Quebec two years ago, California is embroiled in a political debate and legal challenges that could thwart Governor Jerry Brown's plan to renew the state's program when it expires in 2020.

"As of right now, there is a lot of uncertainty hanging over the future of the market past 2020," James Bushnell, an economist at University of California, Davis, said in an interview. "And that does put Ontario in a rather curious position."

At issue is whether California's program is effectively an illegal tax. Business groups launched a lawsuit to invalidate the existing program. And many observers argue that an extension of the plan would require either the two-thirds vote in the legislature that is required to pass new taxes, or a proposition vote in a state-wide ballot.

In a telephone interview from Toronto, California's Secretary for Environmental Protection, Matt Rodriquez, expressed optimism that cap and trade will remain a cornerstone of the state's U.S.-leading climate policy, and said Mr. Brown will work to get legislative support for the program.

"Cap and trade was identified early on as one of the primary means for reducing greenhouse gas emissions," Mr. Rodriquez said. "The Governor has made it clear he is committed to continuing the cap-and-trade program and that is the commitment we've made and we're going to continue working on it."

Ontario and Quebec are depending on the California market to keep down the cost of its cap-and-trade program as they aim to meet aggressive greenhouse gas (GHG) reduction targets. Quebec has committed to reducing GHG emissions by 37.5 per cent below 1990 levels by 2030, while Ontario has a target of 37 per cent below 1990 levels.

Those commitments are crucial to Ottawa's own pledge to cut emissions by 30 per cent below 2005 levels by 2030, particularly as the emissions from British Columbia and Alberta are expected to climb despite the adoption of carbon taxes.

An analysis done for the Ontario government found that a cap-and-trade program linked with the Western Climate Initiative would have an effective carbon price of $18 a tonne of carbon dioxide in 2020 and cost the average household $13 a month on their energy bills. To get the same GHG reductions in an "Ontario alone" cap-and-trade program would require an effective carbon price of $157 a tonne at an average per-household cost of $107 a month, according to an analysis by economist Dave Sawyer.

In California, the Chamber of Commerce launched a legal challenge against the cap-and-trade program, arguing that it is an illegal tax. The lower court rejected that argument but it is now waiting a hearing at the court of appeal. After the cap-and-trade program was introduced, Californians voted for a proposition that broadened the definition of what would be considered a "tax" and hence require two-thirds vote in the legislature.

Dr. Bushnell said the proposition vote will make it more risky legally to extend the program beyond 2020 without the support of the legislature. In August, the Democrat-controlled legislature approved a new target to reduce emissions by 40 per cent below 1990 levels by 2030, but did not include approval for the post-2020 cap-and-trade plan.

The uncertainty in the market – along with other factors – has contributed to weak demand for allowances that Quebec and California auction on a regular basis and which industrial emitters and distributors of gasoline and natural gas must purchase to meet their compliance obligations. California has also introduced other measures to cut emissions that have resulted in less demand for allowances than had been anticipated.

Ontario Environment Minister Glen Murray said the provincial government remains confident that California will be a reliable partner in the cross-border carbon market and an important source of low-price emission credits that will keep Ontario costs down.

"There is a very high degree of confidence in California continuing on with it," he said in an interview. "I don't feel a lot of doubt about it. … One way or the other, the Governor said he is pushing forward with this, whether it's by a ballot or going back to the legislature."

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