North American Systems: California, RGGI, and Canada
North America showcases diverse approaches to carbon pricing: California's economy-wide cap-and-trade, RGGI's regional power sector focus, and Canada's hybrid federal-provincial system. Each offers lessons for carbon pricing design.
California Cap-and-Trade
Overview:
| Feature | Details |
|---|---|
| Launch | 2013 |
| Coverage | ~85% of state emissions |
| Sectors | Power, industry, transport fuels, natural gas |
| Linked with | Quebec since 2014 |
| 2024 price | ~$35-40 |
| Cap trajectory | -4% per year |
Key design features:
Broad scope: California covers not just power and industry but also transport fuels and natural gas through upstream regulation.
Auction reserve price: A price floor (rising annually at 5% plus inflation) prevents price collapse.
Price containment: Tiered price containment reserves provide additional allowances at high prices.
Limited offsets: 4-6% of compliance can come from domestic offsets.
Revenue use: Auction revenue (~$4 billion annually) funds Greenhouse Gas Reduction Fund programs targeting climate and disadvantaged communities.
California's environmental justice provisions:
California integrates environmental justice into its cap-and-trade:
- 35% minimum of climate investments benefit disadvantaged communities
- Environmental justice advisory committee advises on implementation
- Specific programs target pollution reduction in impacted areas
- Community air monitoring programs funded
This integration demonstrates how carbon pricing can address equity concerns explicitly.
RGGI: Regional Greenhouse Gas Initiative
Overview:
| Feature | Details |
|---|---|
| Launch | 2009 |
| Coverage | Power sector only |
| Participating states | 12 Northeastern states (currently) |
| Emissions covered | ~100 million tons CO2 |
| 2024 price | ~$15 |
Key design features:
Power sector focus: RGGI covers only electricity generation, not transportation or buildings.
100% auctioning: All allowances are auctioned from the start, no free allocation.
Revenue for efficiency: States use auction revenue for energy efficiency programs, renewable energy, and bill assistance.
State flexibility: Each state decides how to use its share of revenue.
Declining cap: Cap has declined significantly, with emissions reductions exceeding cap tightening.
RGGI demonstrates that carbon pricing can start simply (one sector, one approach) and achieve significant reductions. Power sector emissions in RGGI states have fallen over 50% since 2005.
Canada's Carbon Pricing System
Canada uses a federal-provincial hybrid approach:
The federal backstop:
The federal government sets minimum carbon pricing requirements. Provinces can either:
- Implement their own systems meeting federal standards
- Fall under the federal backstop system
Federal carbon charge:
| Year | Rate (CAD/ton) |
|---|---|
| 2019 | $20 |
| 2022 | $50 |
| 2025 | $95 |
| 2030 | $170 |
Output-based pricing system (OBPS):
For large industrial emitters:
- Benchmark-based free allocation
- Emitters above benchmark pay; below receive credits
- Maintains competitiveness for trade-exposed industry
Provincial systems:
- British Columbia: Carbon tax (original revenue-neutral approach)
- Quebec: Cap-and-trade linked with California
- Alberta: Large emitter system
- Ontario: Under federal backstop after provincial system cancelled
Canada's Climate Action Incentive demonstrates how revenue recycling can make carbon pricing progressive:
How it works: About 90% of federal carbon charge revenue returns to households as quarterly payments.
2024-2025 payments (family of four):
- Alberta: CAD $1,800
- Saskatchewan: CAD $1,504
- Ontario: CAD $1,120
- Rural supplement: 20% additional
Distributional outcome: Analysis shows 80% of households receive more in payments than they pay in carbon costs. The policy is net-positive for most Canadians.
Political impact: Despite heated debate about carbon pricing, direct payments create visible benefits that partly offset political attacks.
Comparing North American Approaches
| Feature | California | RGGI | Canada |
|---|---|---|---|
| Coverage | Economy-wide | Power only | Economy-wide |
| Mechanism | Cap-and-trade | Cap-and-trade | Hybrid tax/trade |
| Price | ~$35-40 | ~$15 | ~$50+ |
| Allocation | Auction + free | 100% auction | Tax + OBP |
| Offsets | Limited domestic | Very limited | Limited |
| Revenue use | Climate programs | Efficiency | Household rebates |
| Linkage | Quebec | Interstate | Provincial variation |
Lessons from North America
Diversity works:
Different approaches can coexist and achieve results. There is no single "right" way.
Subnational action matters:
In the absence of federal US carbon pricing, states and provinces have led.
Revenue use is key:
How revenue is used significantly affects political sustainability.
Linkage is possible:
California-Quebec linkage shows systems can connect across borders.
Evolution continues:
All systems continue to evolve in coverage, ambition, and design.
Looking Ahead
While North America and the EU have led on cap-and-trade, carbon taxes have been equally important in some jurisdictions. The next lesson examines carbon tax leaders: British Columbia, Sweden, and others.