The Political Economy of California and Québec’s Cap-and-Trade Systems

This report aims to improve understanding of the political and economic factors that have led to the adoption of a linked cap-and-trade system in California and Québec. California has committed to reducing its emissions to 1990 levels by 2020 while Québec has committed to reducing emissions 20% below 1990 levels in the same time period. In their electoral programme the Parti québécois, which has formed a minority government in Québec since the 2012 provincial election, expressed a commitment to a 25% reduction. Though very much the product of state and provincial legislation, the cap-and-trade systems of California and Québec operate under guidelines of the Western Climate Initiative (WCI), a voluntary subnational intergovernmental organization initiated in 2007. There is hope that if the linked cap-and-trade system being established between California and Québec is demonstrated to be effective in allowing these jurisdictions to reduce their aggregate emissions more cost-effectively, other states and provinces will commit to the WCI. Successful implementation of a linked cap-and-trade system in California and Québec could also provide a blueprint for an eventual federal or even continental carbon pricing mechanism.

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About the Project

The goal of this project is to shed light on the relationship between economic activity and the environment by exploring the linkages between changes in our natural capital and our measures of productivity generally, and through the construction of an environmentally adjusted measure of productivity specifically.

While it is now commonly accepted that economic activity and the state of our environment are linked, many economic measures still fail to incorporate the environment – both the things we draw from it and the pollution we release into it. By developing and calculating measures of productivity that include natural capital, Canada may be able to better understand these linkages. This, in turn, may lead to the identification of strategies that can help Canada become more efficient and innovative in the use and protection of natural capital, and thus more productive and more prosperous.

Using the forestry sector as a case study, this project aims to construct an environmentally adjusted measure of multifactor productivity. In doing so, we aim to add another layer of understanding to the environmental and economic performance of this sector. The proposed measure will have relevance to the Canadian economy as a whole.