North America's Carbon Market Gets Bigger

Washington State, California, and Quebec have taken a major step toward creating the continent's most expansive carbon pricing system, releasing a draft agreement this week that would formally link their cap-and-trade markets. The move would add Washington to the existing California-Quebec partnership, creating a unified emissions trading framework covering more than 60 million people and some of the most carbon-intensive industries in North America.

The agreement, if finalized, would allow companies to trade carbon allowances across all three jurisdictions, effectively creating a single market for greenhouse gas emissions permits. This means a power plant in Spokane and a refinery in Montreal would participate in the same auction system, competing for the same pool of emission allowances.

How Carbon Market Linkage Works

Cap-and-trade systems work by setting a declining cap on total emissions and requiring polluters to hold permits for each ton of carbon dioxide they release. Companies that reduce emissions below their allocation can sell surplus permits; those that exceed it must buy additional ones. The economic logic is straightforward: emissions reductions happen wherever they are cheapest.

Linking separate markets amplifies this effect. A larger trading pool increases liquidity, reduces price volatility, and broadens the range of abatement opportunities. It also makes it harder for individual jurisdictions to weaken their programs under industry pressure, since the market operates across borders.

What the Draft Agreement Covers

  • Mutual recognition of emission allowances across all three jurisdictions
  • Coordinated auction schedules for carbon permits
  • Harmonized reporting and verification standards
  • Mechanisms for resolving price discrepancies between markets
  • Joint oversight and governance structures

Washington's Path to Carbon Pricing

Washington's Climate Commitment Act, which established the state's cap-and-trade system, has had a turbulent political journey. The program faced a ballot initiative challenge in 2024, surviving by a narrow margin. Linking to the larger California-Quebec market could provide additional stability by embedding Washington's carbon pricing within a broader, more established framework.

For Washington businesses, the linkage could offer both opportunities and challenges. Access to the larger market may reduce compliance costs by providing more options for acquiring permits. However, it also means Washington's carbon price will be increasingly influenced by market dynamics in California and Quebec, reducing the state's ability to independently adjust its program.

International Climate Leadership Through Subnational Action

The three-way linkage represents a growing trend of subnational governments driving climate policy in the absence of national carbon pricing. While the federal governments of both the United States and Canada have pursued varying and sometimes contradictory approaches to climate regulation, state and provincial governments have built durable market-based systems that outlast individual administrations.

The combined market would cover a significant portion of North American GDP and could serve as a model for further expansion. Oregon, which has explored its own cap-and-trade program, could potentially join in the future, as could other Canadian provinces looking for alternatives to the federal carbon pricing system.

The draft agreement is now subject to public comment before finalization. If adopted, it would represent one of the most ambitious cross-border environmental agreements at the subnational level, demonstrating that meaningful climate action can proceed even when national politics remain gridlocked.

This article is based on reporting by Utility Dive. Read the original article.