The Western Climate Initiative cap-and-trade program is expected to contribute substantially to the climate targets set by the governments in California and Québec by gradually constraining emissions through the decrease in the number of pollution rights. Using a supply-demand model and the latest published data for the third compliance period (2018-2020), we estimate seven scenarios for future emissions and changes in the program’s features, and we analyse the resulting price path for compliance instruments. We find that the observed overallocation of instruments in the past compliance periods will continue until 2030 in all the scenarios, except when covered emissions substantially increase. Only the consequent price increase induces small abatement, but it remains insufficient to reach climate targets. Our main findings show that overallocation is caused by caps being too high to foster sufficient emission reductions, and specific elements of
the program such as the issuance of offset credits do not account as the main source of oversupply. If the program were to close the existing gap between compliance instruments demand and supply, government should either reduce the level of the existing allowance caps, or increase the amount of covered emissions. However, the presence of a price ceiling acts as a carbon tax, and emissions are not efficiently constrained once it is reached, unless the price ceiling is set efficiently, which is not the case at the moment.
MARTIN, N., PINEAU, P.-O., 2022. Overallocation in the California-Québec Carbon Market: A Useless Cap Until 2030, CIRANO and HEC Montréal.