Ontario’s exit exacerbates allowance overallocation in the Western Climate Initiative cap-and-trade program
New data show that the net result of Ontario’s brief participation in California and Québec’s Western Climate Initiative (WCI) cap-and-trade program was to inflate the program’s supply by 13.2 million allowances, adding to concerns about allowance overallocation.
This result assumes that Ontario allowances held by California and Québec entities continue to remain valid for compliance purposes following Ontario’s revocation of its cap-and-trade program. Despite indications that California and Québec policymakers prefer this outcome, the legal mechanics of recognizing allowances from a non-existent cap-and-trade program are still somewhat uncertain.
The new data also provide clear evidence of cross-border trading in secondary markets by market participants, increasing the number of allowances held by entities in California and Québec compared with what was purchased at quarterly auctions or otherwise directly allocated by governments. The evidence strongly suggests that California and Québec entities have purchased a substantial net number of allowances from Ontario entities on the secondary market.
If policymakers designing reforms to address Ontario’s exit wish to distinguish between entities that were forced to purchase Ontario allowances at auction and those that voluntarily accepted the risks of acquiring Ontario allowances on the open market, they will need more data than what is publicly available at present. Regulators in California and Québec have complete data that is capable of distinguishing between these purchase types on an allowance-by-allowance basis. Reporting data on aggregate cross-border allowance flows should be possible without disclosing sensitive market information or individual entities’ trading positions.