Overallocation in the California-Québec carbon market: a non-constraining cap until 2030

Noémie Vert Martin () and Pierre-Olivier Pineau
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Noémie Vert Martin: Université de Montréal
Pierre-Olivier Pineau: HEC Montréal

Environmental Economics and Policy Studies, 2024, vol. 26, issue 4, No 1, 715-740

Abstract: Abstract The Western Climate Initiative cap-and-trade program is presented as a substantial contributor to reach the climate targets set by the governments in California and Québec, by constraining emissions through declining caps. Some doubts have however been cast on the effectiveness of this program. Using a supply–demand model and published data for the third compliance period (2018–2020), we estimate five scenarios for future emissions and changes in the program’s features, and we analyse the resulting price path for compliance instruments. Our key contribution rests in the identification of the key drivers of the existing overallocation. Caps were set too high, and less emissions are actually covered compared to what is officially announced (76% in California, against a claimed 80%). Offset credits also contribute to the availability of compliance instruments. These drivers result in an excess of available instruments until 2030, preventing the cap-and-trade program to play its constraining role: caps will be exceeded and emission targets missed, while fully complying with the cap-and-trade requirements. However, putting an end to overallocation would not be sufficient to reach climate targets. Governments should either reduce the level of existing allowance caps by 19–24%, or about 385 Mt, or increase the amount of covered emissions without changing the level of current caps.

Keywords: Cap-and-trade; Carbon markets; California; Québec; Western Climate Initiative (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10018-024-00396-2

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