It's Canada's $1-billion carbon dilemma.
Major energy distributors and consumers in Ontario and Quebec expect to spend more than $1-billion over four years on California greenhouse gas emission allowances. Without agreement with the United States, however, those international emission credits cannot be counted as part of Canada's international commitment to reduce greenhouse gases.
The provincial government recently introduced a cap-and-trade climate plan, joining Quebec and California in the Western Climate Initiative that allows emitters in one state or province to purchase allowances issued by another jurisdiction.
Ontario firms will spend $250-million a year to purchase allowances from California in order to drive down their costs in meeting the province's "cap" on emissions, according to economic modelling done for the province. The biggest buyers will likely be energy companies, Enbridge Gas Distribution and Union Gas, as well as wholesale fuel companies such as Imperial Oil Ltd. and Suncor Energy Corp.
Quebec-based firms are also expected to be buyers of California credits.
However, the federal government must negotiate an agreement with Washington so that Ottawa can count the GHG credits generated in the United States and purchased by Canadians as part of this country's international commitments to reduce GHGs, officials at Environment Canada and Climate Change said in an e-mail.
The two governments have signalled their intent to reach such an accord, and there is provision in December's Paris climate accord that would allow countries to claim credit for emission reductions in other countries that were purchased in international carbon markets. But much work needs to be done bilaterally and at the United Nations to put such intentions into operation.
The federal government has committed to working with the province to ensure international credits are properly accounted for, a spokesman for Ontario Environment Minister Glen Murray, David Mullock, said. Economic modelling indicated the linkage with Quebec and California markets represented "the lowest-cost option" for Ontario to achieve its targets and minimize the impact on industry, Mr. Mullock said.
U.S. President Barack Obama and Mexican President Enrique Pena Nieto arrive in Ottawa next week for a North America summit at which co-operation on climate change will be high on the agenda. Mexico is eager to join in carbon markets with its more affluent neighbours, confident it could attract American and Canadian capital to help reduce GHG emissions there.
But there is reputational risk for Canada as Ontario and Quebec permit companies to purchase California credits before there is agreement on how Ottawa can account for them, said Duncan Rotherham, a Toronto-based consultant who has worked with Ontario companies on climate issues.
In the absence of an accord, Canada will have a tougher time meeting its 2020 and 2030 emission targets since it won't be able to include the foreign emission credits used by Ontario and Quebec firms to meet provincial regulations. And while there is no enforcement mechanism in the Paris accord, failure to meet the national target can rebound on the country in various ways, including greater political opposition to the oil and gas industry.
Critics also worry California has issued far too many allowances, and that the credits purchased by Ontario and Quebec firms may not represent real emission reductions.
Proponents of emissions trading say there are teething pains in the industry that will be worked out as the international community embraces carbon markets. Mr. Obama's clean-power plan would expand those markets in the United States, while China plans to establish a national carbon market in 2017.
"I don't think it's actually rocket science to put that [cross-border accounting] together," said Dirk Forrister, president of the International Emissions Trading Association.
Mr. Forrister said international carbon markets will be an important part of the world's effort to dramatically drive down emissions in the most cost-effective manner.
Industry and energy consumers in Ontario and Quebec are likely to spend nearly $1-billion over the next four years on greenhouse gas emission allowances from California that currently would not count as part of Canada's international commitment to reduce GHGs.