Québec, California, and Washington State announce climate agreement for market-based GHG reduction programs

Overview

Québec, California, and Washington released a draft agreement to align and link their cap-and-invest programs for reducing greenhouse gas (GHG) emissions. According to a Washington Department of Ecology news release, linkage between the programs could be completed in 2027. The announcement follows earlier coordination efforts between Québec and California – whose mandatory carbon market programs have been linked since 2014 – and coincides with Washington’s efforts to join a cross-border carbon market. The draft agreement is non-binding, and each jurisdiction would need to authorize linkage of their cap-and-invest programs to complete the process. Each jurisdiction’s regulations require that programs align reporting and market-based reductions for GHG emissions to link and enable effective operations. Under the draft agreement, businesses operating in any of these three jurisdictions would be able to trade emissions allowances in a single marketplace.

California’s program, which was the first cap-and-trade program for GHGs in North America, was developed with regulations that specifically provide for linkage with other jurisdictions. Québec, which launched its cap-and-trade program in 2013, the year after California, also developed its program with linkage specifically in mind, and the programs were linked the following year in 2014.

Unified compliance instruments and trading

A key feature of the draft agreement is that Québec, California, and Washington would accept one another’s allowances, each of which is a “permit” to emit one metric ton of carbon dioxide (CO2) or an equivalent amount of other covered GHGs. Allowances issued by California, Québec, or Washington would be interchangeable, so businesses could use them in any of the three markets. Program participants would not be able to identify the issuing jurisdiction of the allowances they hold, because identifying serial numbers would be visible only to regulators. Companies in all three jurisdictions would be able to transfer and exchange allowances through a single online system called the Compliance Instrument Tracking System Service, or CITSS. Each market regulator, however, could still take action on allowances held by participants registered in its jurisdiction if it determines that the allowance should not have been issued or must be voided. The draft agreement provides that the market taking such action would notify the others in a timely manner.

Joint auctions and technical infrastructure

According to the draft agreement, Québec, California, and Washington would hold quarterly joint auctions where businesses could bid to purchase allowances under shared rules prescribing who can participate, purchase limits, bidding procedures, and applicable financial conditions. Common online platforms would host auctions, track allowances, and support program compliance. These platforms would be available in English and French and would trade in American and Canadian dollars. The Western Climate Initiative, Inc., a nonprofit established in 2011, would continue to provide technical support.

Offset credits and environmental standards

The draft agreement seeks to align quality standards for offset credits, which would let businesses meet part of their obligations by funding verified projects that reduce emissions elsewhere. Offset projects would still be required to show that their emission reductions are real, additional (i.e., would not have happened otherwise), measurable, permanent, and verifiable. These provisions may be intended to address environmental integrity and market participant considerations. Under the draft agreement, Québec, California, and Washington would identify differences in their respective programs and coordinate on a harmonized approach. They would also collaborate on proposed changes and approve offset projects that meet the applicable standards.

Accounting for emission reductions

To avoid double counting, the draft agreement requires all three jurisdictions to apply the transparent accounting mechanism that California and Québec adopted in 2022 and that “is based on the proportional method of the net flows of surrendered and retired compliance instruments.” Offset credits differ, however, because each jurisdiction would independently limit the percentage of compliance obligations that can be met with offsets. Instead, the jurisdiction where the offset credit originates, as opposed to where it is surrendered or retired, would be used to calculate net flows. This accounting mechanism would follow international standards and support emissions reporting by jurisdiction. After each compliance period, aggregated accounting results would be made public by each jurisdiction to provide transparency and allow for necessary adjustments to fulfill compliance obligations.

Governance and enforcement

A new Consultation Committee, with one representative from each jurisdiction, would monitor the program and recommend improvements. The participants would also cooperate in preventing fraud, abuse, and market manipulation. To this end, jurisdictional authorities would coordinate regarding investigations and enforcement actions of any registered participants under their respective programs.

Any disputes about the interpretation or application of the draft agreement would be resolved initially through good-faith discussions among market authorities rather than litigation. The agreement is a voluntary initiative and creates no legal rights that could be enforced in court, preserving each participant’s control over its own climate policies.

Potential expansion

The draft agreement allows for additional members to join if they have adopted similar emissions programs. Any state or region wishing to join would need to sign on to the agreement and be approved by the other parties. While this approach would allow flexibility to expand the market to include other states, provinces, or countries, it would also allow participating jurisdictions to withdraw. Ontario, for instance, launched its own cap-and-trade program on January 1, 2017, linked the program with California and Québec on January 1, 2018, and then repealed the program on July 2, 2018.

Oregon has also developed its own emissions reduction program, called the Climate Protection Program, which took effect on January 1, 2025. Like the programs in California, Québec, and Washington, Oregon uses allowances that allow businesses to emit a set volume of GHGs, with the number of allowances declining over time as limits are progressively reduced. Unlike Washington, however, Oregon has not announced plans to link its program with other markets.

Considerations for businesses

The draft agreement raises a number of considerations for businesses operating in Québec, California, and Washington, including:

• Potential implications of a linked market across Québec, California, and Washington. The draft agreement contemplates a linked market across Québec, California, and Washington. Businesses operating in these jurisdictions may wish to consider how such a structure could affect compliance planning, including the availability and use of allowances across jurisdictions.
  
  
• Regulatory alignment across jurisdictions. Each jurisdiction would need to adopt regulatory changes to support potential linkage and program harmonization. While elements of California’s program have informed Washington’s framework, the draft agreement contemplates coordination that could result in adjustments across all three jurisdictions’ programs.
  
  
• Auction rules and procedures. The draft agreement provides for joint auctions conducted on common platforms and subject to shared rules governing participation, bidding procedures, purchase limits, and applicable financial conditions. In a linked program, auction volumes and related limits would reflect the combined allowance budgets of the participating jurisdictions.
  
  
• Allowance pricing considerations. Washington allowances currently trade at a significant premium to California–Québec allowances. Under a linked program, allowances would be treated equivalently for compliance purposes across jurisdictions, which could potentially affect pricing dynamics over time.
  
  
• Use of offset credits. Businesses that rely on offset credits for compliance may wish to review how the draft agreement’s offset eligibility criteria and harmonized standards could affect the availability and use of offsets across jurisdictions.
  
  
• Ongoing regulatory developments and potential expansion. The draft agreement is subject to public comment and further regulatory action. The framework also allows for the possibility that additional jurisdictions with comparable emissions programs could seek to join in the future, subject to approval by existing participants.

Next steps

The draft agreement reflects a recent step toward interlinking Washington’s new carbon market with the existing markets in California and Québec. The window to provide public comment on the draft agreement ends May 1, 2026. Companies operating in any of the three jurisdictions and engaging in emissions allowance transfers may wish to begin evaluating potential implications for their compliance strategies.

For further information or assistance in preparing public comments or developing compliance strategies, please contact the authors or your DLA Piper relationship attorney.