Case said it was natural to incorporate in Delaware, because the state’s laws allow flexibility in how companies structure themselves. As he noted, “Delaware is going to give you as much as you’re going to get anywhere to set up your organization as you would like.” WCI, Inc., for example, was designed so all participants are equals—an essential element when doing something as complicated as creating a joint-international program. “We’re on the board, and so we have the ability to understand and weigh in as appropriate,” said Heather Pearson, the director of the Air Policy Instruments and Program Design branch at the Ontario Ministry of the Environment and Climate Change.
Before California and Quebec could share a market, they had identical homework to do: pass the legislation necessary to link up, standardize auction prices, and set the exchange rate for the auctions. Every word of every regulation had to be scrutinized and evaluated with an eye toward two different languages, two different constitutions, and two different sets of federal laws. “We define[d] those things that need to be identical, those that need to be harmonized but not identical, and those things that are not needed to be harmonized,” Gibbs said.
The market is otherwise fairly traditional. California and Quebec hold an auction for “allowances,” each of which permits its owner to emit one ton of carbon. The governments set their minimum, or reserve, price, and only sell a limited number of them to registered buyers, including members of the regulated industries. Each year, the number of allowances drops by about 3 percent while the reserve price rises, creating incentives for companies to cut down on emissions. At the same time, companies who have made additional cuts can sell their surplus allowances on the trading platform to others at market rates, which are often much higher than auction prices. They can then use those funds for bigger carbon cuts, leading to more sales of their surpluses and even more money.
California’s cap-and-trade program has had its setbacks. The state’s Chamber of Commerce filed a lawsuit four years ago alleging that it was an unconstitutional tax on businesses, as it was passed without a legislative supermajority. Until a state appeals-court victory for the program in June, the lawsuit had “been a cloud over the state’s efforts to fight global warming,” the Los Angeles Times reported. In part to prevent an unfavorable opinion from the California Supreme Court, the legislature just passed a new, sweeping authorization of the program, extending it to 2030. This latest authorization had a supermajority, and is thus insulated from those legal challenges.
That’s important, because the market has had growing pains in California. While it has been successful in lowering emissions, few allowances were sold for several years. For instance, in the May 2016 auction, a little more than 10 percent were sold, and the market price did not go above the floor price. This translated to less money than expected for the programs that cap-and-trade was supposed to fund. In part, the Chamber of Commerce lawsuit cast doubt on the future of the market, and made businesses wary of spending money on allowances for a program that could be considered unconstitutional. Indeed, when the most recent auction took place after a favorable oral argument in the lawsuit, current allowances sold out, and the average auction price climbed above the floor price.