The governors of California, Oregon, and Washington and the premier of British Columbia signed a climate pact on Monday that announced the intent of two new carbon prices: a cap-and-trade system in Washington and, likely, a carbon tax in Oregon.
Prices on carbon in these states would add to pre-existing ones in California and British Columbia—in effect pricing carbon emissions between Alaska and the Mexican border. But these carbon prices will not necessarily mean that a Pacific Coast carbon market will emerge, despite the pact stating that “where possible” the four jurisdictions “will link programs for consistency and predictability and to expand opportunities to grow the region’s low-carbon economy.” We believe the governors used the word “link” to mean the incremental alignment of program elements (a process we have named “linking by degrees”). This does not refer to the trade of allowances and tax credits between California, Oregon, Washington and British Columbia—what we call a “formal link.”
A formal link between jurisdictions with a cap-and-trade program could cause problems that we anticipate governors would want to avoid. As an example, a comparatively low carbon tax would mean that polluters in the cap-and-trade jurisdiction buy up as many tax credits as they could and therefore erode the cap in their home jurisdiction. On the other hand, a comparatively high carbon tax would lead to increased demand for allowances and higher prices in the cap-and-trade jurisdiction. Although not all academics think they are necessarily insurmountable, these examples could explain why British Columbia and California haven’t (and why Washington and Oregon likely wouldn’t) formally linked their carbon prices.
The jurisdictions have already started providing consistency and predictability by committing to a carbon price. Any non-zero carbon price in Washington and Oregon would start to mitigate a problem facing both California and British Columbia: emissions leakage. Emissions leakage occurs when sources outside of a carbon pricing system increase economic activity and associated emissions as a result of that system. In the context of California, regulators worry that a carbon price will induce the further import of carbon intensive electricity from surrounding states (which do not currently carry a carbon price) thereby increasing the carbon emissions of those states and eroding a portion of the reductions achieved in California. Washington and Oregon would to some extent level the playing field and reduce leakage, should they actually implement carbon prices. In fact, Oregon could virtually eliminate any emissions leakage from California by pegging its carbon price to California’s allowance price—a strategy of aligning program elements we point out in our “linking by degrees” discussion paper.
However, the main significance of the climate pact is the signal it provides to other jurisdictions and especially to Washington DC. Subnational jurisdictions have taken the lead in crafting climate policy. The pact describes the desire to harmonize climate and energy policies across jurisdictions. This expressed intent to align policies means that California, Oregon and Washington are more likely to influence the U.S. Environmental Protection Agency as it moves to craft regulations under the Clean Air Act.