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Ontario Environment Minister Glen Murray, shown in this 2013 file photo, said the bill tabled in the state Senate this week represents just one view among California Democrats regarding the structure of a post-2020 cap-and-trade planFred Lum/The Globe and Mail

California legislators are proposing sweeping changes to the state's cap-and-trade program that could raise the costs of greenhouse-gas emission reductions in Ontario and Quebec.

A bill put forward in California's senate this week proposes the creation of what amounts to an entirely new cap-and-trade program starting in 2021, with significantly higher minimum prices for carbon credits, a border-adjustment tax for carbon-intensive imports and the requirement that any region wanting to link up with California's carbon market set minimum prices that are the same or greater than those in the state.

The proposed bill, which is set for a legislative hearing next week, is seen by some as a potential sticking point in expanding the Western Climate Initiative, which allows the buying and selling of emissions allowances across jurisdictions. California and Quebec already hold quarterly joint auctions, while Ontario has proposed to join the program next year.

For both provinces, the advantage of linking to California is access to a deeper pool of carbon credits that can keep prices below what it could cost if the provinces separate cap-and-trade programs. Quebec and California have harmonized prices under the current system, with the most recent minimum price this year set at $13.57 (U.S.). That would rise to $20 by 2020 under California's proposed bill, and to more than $60 by 2030, compared with roughly $30 under the current system.

All three regions have similar 2030 emissions-reductions targets, but California is the first to offer aggressive plans on how to hit those targets, said Danny Cullenward, a Stanford University energy economist and lawyer who helped craft the Senate bill.

"In some respects, this is a really different program. It's a more ambitious program," he said.

Ontario Environment Minister Glen Murray said the bill tabled in the state Senate this week represents just one view among California Democrats regarding the structure of a post-2020 cap-and-trade plan, with other bills having been introduced in the assembly.

Ontario is still in the process of negotiating with California and Quebec on the terms of linking its carbon market with the other two jurisdictions under the Western Climate Initiative, and, while it intends to join, Mr. Murray said the ultimate decision will be made next year and will depend on terms and the status of the joint market.

The Ontario minister was recently in California and met with state Senator Kevin De Leon, one of the proponents of the bill and president pro tempore of the chamber.

"He assured me that nothing they were going to do would be outside the WCI rules; well some of the things in the bill are outside the WCI rules," he said. "So we're not reacting at all to these various pieces of legislation. We'll wait and see … what consensus emerges from the Democrats, which I think will look substantially different from a series of contradictory measures that are on the table right now."

David Sawyer, an Ottawa-based environmental economist, said California's carbon market has an oversupply of emission allowances, and therefore there is downward pressure on prices, which are bumping along the regulated floor level.

The state government faces a choice of whether to use the cap-and-trade as the primary vehicle to drive down emissions, or focus on complementary subsidies and regulations that exist outside the pricing system, such as its low-carbon fuel standard. The state Senate bill – with its tighter allocation of allowances and higher prices – would restore the importance of the cap-and-trade plan.

As a result, Ontario and Quebec would face higher prices in the Western Climate Initiative, Mr. Sawyer said. The two provinces would have little incentive to trade with California if the state's minimum carbon price is close to or exceeds the federal minimum levy. Under Ottawa's plan, provinces that use a carbon tax would have to meet a minimum price of $50 a tonne by 2022, while provinces that adopt cap-and-trade systems and allow purchase of cheaper, foreign allowances could have lower prices so long as they are on track to meet tough emission-reduction targets.

If it is approved, California's bill may ultimately push Canadian provinces away from cap-and-trade, said Dan McGraw, an analyst with ICIS, a global news and analytics firm focused on the petrochemical industry. "You wouldn't really have the big star in the market any more."

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