January 1st, 2014 marked not only the beginning of a new year, but also the beginning of a new era of carbon policy in North America. For the first time, Quebec and California committed to using market-based instruments to reduce GHG emissions by officially linking their cap-and-trade systems.

This Issue Summary examines the mutual economic benefits that can be gained from the adoption of linked systems between distinct jurisdictions.

Key Messages

• Research sponsored by Sustainable Prosperity shows that the linkage between Quebec and California’s emission trading systems is expected to be an economically efficient way to address greenhouse gas (GHG) emission reduction objectives in both jurisdictions.

• The research finds that allowing flexibility in the linked systems has been important - particularly given the substantial differences in the economies and emissions profiles, the design features of the cap-and-trade systems systems, and the use of revenue from allowance auctions.

• Early analysis suggests that both jurisdictions will gain as the linking of emissions trading systems will bring down total costs of reducing emissions. The benefits are expected to be higher for California, because firms in the state will receive net inflows of carbon finance as Quebec industries purchase relatively lower-cost California allowances while only slightly increasing California allowance prices. Linked cap-and-trade systems are not the silver bullet in climate change mitigation policy, but are important examples of market based instruments that can be very effective to both reduce emissions and create positive economic conditions.

• In the absence of a national climate change policy framework in either the U.S. or Canada, pursuing the linkage of emerging and future state and provincial emissions trading systems may be the most likely scenario for comprehensive climate policies in North America. The results of the first linked auction, to take place in June 2014, will provide an opportunity for further analysis of the economic and environmental benefits of linked cap-and-trade systems.