The Carbon Market

Sales by Mutual Agreement by the Minister

Under the cap-and-trade system for greenhouse gas emission allowances (C&T System), the Minister of Environment, Fight against Climate Change, Wildlife and Parks may hold an emission units sale by mutual agreement by the Minister up to four times per year. There is no pre-set date for these sales, but it is planned that a sale by mutual agreement by the Minister will be announced at the following moments:

• at the end of a compliance period, before the deadline for surrendering the required allowances;
• following an auction where the settlement price for the current vintage units reaches or exceeds the price of the lower reserve category.

The Minister may, however, decide to hold a sale by mutual agreement at any other time. In any case, a notice is published at least 60 days before the scheduled date of a sale by mutual agreement by the Minister. The notice outlines the rules and conditions pertaining to the sale. Unlike an auction, GHG emission units are offered at a set price.

The Minister’s reserve account

GHG emission units made available to emitters during a sale by mutual agreement by the Minister come from the Minister’s reserve, which was created when the cap-and-trade system was implemented. To accomplish this, 1% was removed from the 2013 and 2014 emission unit budgets, 4% from the 2015, 2016 and 2017 emission unit budgets, 7% from the 2018, 2019 and 2020 emission unit budgets then 4% for 2021 and subsequent years. When the reserve was created, the GHG emission units made available to emitters were also equally distributed into three categories (A, B and C), as shown in the following table.

Category	Number of emission units
A	13,288,033
B	13,288,033
C	13,288,034
Total	39,864,100

Price of GHG emission units sold during a sale by mutual agreement by the Minister

In 2013, the price of emission units sold during a sale by mutual agreement by the Minister was pre-set: $40 for category A units, $45 for category B units and $50 for category C units. These prices were increased by 5% plus inflation annually from 2014 to 2020. Following the adoption of the Regulation to amend the Regulation respecting a cap-and-trade system for greenhouse gas emission allowances, new prices have been set for 2021. They were $41.40 for category A units, $53.20 for category B units and $65 for category C units. The prices have since been increased annually by 5% plus inflation.

To avoid the possibility of arbitration that could arise should Quebec and California set different prices for the reserve, and to prevent one partner's reserve from emptying before the other's, the selling price of each category been harmonized between Quebec and California.

Accordingly, if the price set is higher in one of the partner jurisdictions, the emission units will be sold at the higher price, based on the Bank of Canada's average daily exchange rate published on its website in effect on the day before the sale.

The following table provides a potential scenario of the annual effective reserve category price in Québec, in Canadian Dollars, from the current vintage to 2030. Prices for the year 2024 are based on the annual Reserve tier prices and Price Ceiling Unit prices published by California (higher than those in Québec), multiplied by the hypothetical exchange rate of 1.2500. The estimated reserve category prices in table 2 also assume that the highest prices remain California’s until 2030, an annual inflation rate of 2%, and an exchange rate of 1.2500 from 2024 through 2030.

Category	2024	2025	2026	2027	2028	2029	2030
Category A (CAD)	70.25	75.16	80.43	86.05	92.08	98.53	105.43
Category B (CAD)	90.26	96.58	103.34	110.58	118.31	126.60	135.46
Category C (CAD)	110.28	118.00	126.26	135.10	144.56	154.69	165.51

This example is provided for illustrative purposes only. Estimates depend on the underlying assumptions and should not be considered as market price forecast.

Procedure of sales by mutual agreement by the Minister

During a sale by mutual agreement by the Minister, an emitter cannot submit more than one bid indicating the number of units requested and the category corresponding to the maximum price per unit it is willing to pay for the units. This bid must be consistent with the amount covered by the bidder’s financial guarantee, and the bidder’s quantity of emission units required to meet the purchaser’s coverage obligation. All bids remain confidential. At the close of the sale by mutual agreement, the emission units from categories A, B and C are allocated in that order. Thus, if for example there are enough category A units to satisfy all bids received, all bidders whose bids meet their financial guarantee and emission unit requirements will receive units from category A, even if their bid was for category B or C units.

Winners are notified of the number of emission units they have been awarded and of the total amount they have to pay. Winners must complete financial settlement within the prescribed time period, failing which their financial guarantee will be used.

Note that sales by mutual agreement by the Minister are not joint sales and that the units put up for sale come from Québec’s reserve account.

Registering for sales by mutual agreement by the Minister

Participation in sales by mutual agreement by the Minister is reserved for emitters whose general accounts do not have enough GHG emission units that can be used to cover emissions for the compliance period for which the sale is being organized.

To participate in a sale by mutual agreement by the Minister, emitters must first open an account in the GHG emissions allowance Compliance Instrument Tracking System Service (CITSS). However, participation in sales by mutual agreement by the Minister is not automatic. Once the account has been opened, one of the emitter’s account representatives must indicate the emitter’s intention to participate in a government sale (auction or sale by mutual agreement by the Minister) at least 31 days before the event. To do so, the representative must click on the “Initiate Event Participation” button under the “Auction” tab in the CITSS system. This button only appears when registration is open for an upcoming event and enables the emitter’s representative to submit a new registration application for an event or to confirm its intention to participate in the event by resubmitting the registration information.

The sale by mutual agreement administrator

Under the Regulation respecting the delegation of management of certain parts of a cap-and-trade system for greenhouse gas emission allowances (PDF, 164 KB), some support services for the system’s implementation, including the administration of auctions and sales by mutual agreement by the Minister, have been delegated to the non-profit organization Western Climate Initiative, Inc.

The financial services administrator

Western Climate Initiative, Inc. signed a contract with Deutsche Bank, which provides financial services for auctions and sales by mutual agreement by the Minister carried out by the participating governments.

The financial services administrator provides the following services:

• Before the sale by mutual agreement by the Minister:
  • Process financial eligibility applications;
  • Opening and maintaining bank accounts for the deposit of financial guarantees;
  • Administering financial guarantees;
• After the sale by mutual agreement by the Minister:
  • Payments;
  • Returning unused financial guarantees.