OTTAWA—When you combine climate change, an unlikely partnership between Californians and French-speaking Canadians—and the prospect of an 8-cents-a-gallon rise in gasoline prices—what do you get?

The energy industry vs. California. And Quebec.

Last year, California and Quebec launched the Western Climate Initiative (WCI), a system that makes businesses pay for carbon pollution. When it comes to climate change, that puts California and Quebec well ahead of their national governments in Washington and Ottawa. It also puts California and Quebec squarely in the sights of the oil-and-gas industry, which strongly opposes action by sub-national governments enforcing polluter-pay regimes on their own.

The first phase of the system, now under way, covers large industrial facilities, but on Jan. 1, the cap-and-trade scheme will expand to cover pollution from companies that distribute oil, natural gas and gasoline. With that deadline less than six months away, energy companies are urging the two governments to pull back.

The lobbying spilled into Quebec's April 7 general election campaign, when fossil fuel interests publicly cast doubts and fears about the market-based system.

"We are seeing a big pushback by oil and gas distributors in Quebec regarding WCI," said Steven Guilbeault, co-founder of a Quebec-based conservation group called Equiterre. "I know that I and others were worried" during the election campaign.

Less than two weeks before voting day, Stephanie Trudeau, a vice-president of Gaz Metro, a Quebec fuel distribution company, called the carbon market a "tax that no one was talking about" in an interview with the Montreal newspaper La Presse. She said the "tax" would strike Gaz Metro's 192,000 residential and business clients. (Gaz Metro is 39 percent owned by Enbridge, an Alberta-based energy company that also operates pipelines in the United States.)

The WCI system works by setting caps on the total pollution of large industrial facilities and requiring them to purchase allowances or credits for each ton of pollution they release into the atmosphere. To launch the plan, the governments gave companies all or most of their allowances free and then allowed them to buy additional credits through a series of auctions.

At the end of each year, the companies are expected to pay for their pollution by returning enough allowances to the government to cover each ton of pollution and meet their cap. If they don't have enough, they can buy credits on the market, similar to trading and selling stocks, from companies that have a surplus of allowances. Companies can also generate and sell credits by adopting cleaner technologies.

Next year the governments will gradually reduce the free allowances by 1 to 2 percent, to force businesses to further reduce their emissions or buy more credits for activities that reduce emissions elsewhere in the economy.

Industry lobbyists say the plan will hurt Quebec and California businesses by imposing rules that won't apply in other states and provinces nearby.

Eleven state and provincial governments were part of the original WCI partnership, but nine members have either pulled out or delayed action because of economic concerns, lobbying or changes in governments.

"Quebec is going ahead with a carbon market as really an isolated jurisdiction," said Peter Boag, president of the Canadian Fuels Association, a lobbying group representing oil companies. "From our perspective, that does create a lot of uncertainty about competitiveness in the province of Quebec, about the cost of energy and uncertainty going forward."

A 2014 analysis by the California Chamber of Commerce criticized the state government for "arbitrarily" deciding how to allocate some of the free allowances. The business lobby group said the auction process "amounts to a multibillion dollar tax on carbon that would push jobs into other jurisdictions without real reductions in greenhouse gases."

The director of Quebec's cap-and-trade market, Jean-Yves Benoit, downplayed concerns that the WCI will hurt the 80 or so industrial and power-generating facilities in Quebec that are now subject to cap and trade.

"They accept the system and it seems to be working well," Benoit told InsideClimate News.

He also downplayed concerns that consumers will see abrupt increases in fuel prices. The Quebec government estimates the price of gasoline will rise about $0.02 per liter—or about $0.08 per gallon.

"It's a lot less than the weekly fluctuations in the price of gasoline," Benoit said. "So in relative terms, it really doesn't have an important impact on the price."

David Clegern, a spokesman for California's Air Resources Board, also dismissed industry criticism. He said the cap-and-trade system was designed to protect the approximately 350 businesses that are now covered while reducing their emissions by about 17 percent.

"We can't stop somebody from moving their business, but we're not aware that anyone has done that because of these regulations," Clegern said.

Unlikely Partners

In many ways, California and Quebec, which are on opposite sides of the continent, are unlikely partners.

California, which stretches about 840 miles up the Pacific coast, has a population of about 38 million, about 12.1 percent of the country's population. French-speaking Quebec is home to about 7.9 million, representing about 24 percent of the Canadian population. Its vast territory of more than 640,000 square miles is roughly three times the size of California, stretching all the way to the Arctic Ocean in the North, Ontario and the Great Lakes to the west, and eastern provinces along the Atlantic Ocean on the east.

Quebec gets almost all of its electricity from low-emissions hydropower. California estimates that about 45 percent of its in-state electricity is generated from natural gas and that 17 percent comes from renewables. The state wants to increase its renewable energy production to 33 percent of its total by 2020.

When it comes to climate change, however, most public opinion surveys show that Quebeckers and Californians have similar views and concerns.

A report released this year by Sustainable Prosperity, a think tank based at the University of Ottawa, noted that Quebeckers accept climate science, are concerned about it and want governments to act.

"As one interviewee explained, the need to act on climate policy runs deep amongst Quebeckers, to such an extent that it has become accepted truth in the political landscape," said the report, which was based on interviews with key representatives from the public, private and academic sectors. "In general, all political parties in Quebec, from right to left, have supported climate action, though not necessarily a cap-and-trade system."

The study noted that the fossil fuel industry has less influence on the politics of California and Quebec when compared to other North American governments. The research also recognized the leadership of former California governor Arnold Schwarzenegger and former Quebec premier Jean Charest for starting and sustaining the unique partnership.

California and Quebec have worked together before on emissions problems. In 2009 they pursued new fuel economy standards to reduce tailpipe emissions from new vehicles. Although automobile manufacturers objected, the Canadian and U.S. governments eventually adopted new North American-wide regulations.

Schwarzenegger praised Quebec prior to the Copenhagen climate change summit of 2009 after the French-speaking province unveiled its plan to tackle carbon pollution.

"Like California, Quebec is not waiting for national and international commitments," Schwarzenegger said in November 2009. "They are taking action now to reduce emissions and dependence on fossil fuels. This is another example of a subnational government leading the way and I look forward to more commitments and partnerships from all levels of government in the fight against global warming."

Quebec Gets Little Support from Harper Government

California and Quebec have had contrasting relationships with their respective federal governments in recent years.

New rules proposed last week by the Obama administration to crack down on greenhouse gases from coal-fired power plants—the largest source of heat-trapping emissions in the United States—were welcomed by California, in part because they might prompt other states to join the WCI.

"It's our understanding that EPA's guidelines will press states to work cooperatively and develop regional solutions to meet the [power plant] requirements," said Tom Lawler, who represents the International Emissions Trading Association in Washington. D.C. "This is the next best option [after a single cap-and-trade system]."

California Gov. Jerry Brown praised the Obama initiative.

"While others delay and deny, the Obama administration is confronting climate change head-on with these new standards," Brown said. "Clean energy policies are already working in California, generating billions of dollars in energy savings and more than a million jobs. Bold, sustained action will be required at every level and this is a major step forward."

Quebec is far less enthusiastic about Canadian Prime Minister Stephen Harper's climate change policies.

Harper's Conservative party had campaigned for a North American-wide cap-and-trade system in 2008, but it now describes the idea as a "carbon tax that will kill jobs and increase the cost of everything."

At a news conference on Monday, Harper downplayed the new U.S. proposal on coal, saying it wasn't as stringent as Canada's regulations for new coal plants and plants nearing the end of their useful lives. (The new U.S. regulations deal with existing plants—the Obama administration dealt with new coal plants in a previous proposal.)

Harper also defended his government's approach to dealing with climate change.

"It's not that we don't seek to deal with climate change," Harper said. "But we seek to deal with it in a way that will protect and enhance our ability to create jobs and growth, not destroy jobs and growth in our countries.

"Frankly, (for) every single country in the world, this is their position. ...No matter what they say, no country is going to take actions that are going to deliberately destroy jobs and growth in their country. We are just a little more frank about that, but that is the approach that every country is seeking."

Harper's comments contrast with the advice his government received in 2011 from an advisory panel on business and environmental issues, warning that Canada would pay an economic price if it failed to act on climate change and put a price on carbon pollution. A few months later, the government abolished the publicly funded panel, touting savings of about $5 million per year and saying the advice the panel provided was available elsewhere.

The Harper government signed the international 2009 agreement known as the Copenhagen Accord, committing Canada to achieve annual greenhouse gas emissions levels that are about 3 percent above 1990 levels by 2020. But estimates by Environment Canada indicate that Harper won't meet that target without new oil-and-gas industry regulations, which have been promised and then delayed by successive Canadian governments for more than a decade.

The delays appear to have left Quebec on its own.

In recent years, Quebec fired off a series of critical letters to Harper's government, describing national policies on climate change as "unacceptable" and "disappointing."

As if to underscore Quebec's commitment, the province's new premier, Philippe Couillard, modified the title of his new environment minister, David Heurtel, saying he will also be responsible for "the fight against climate change."

"I'm among those who believe that environmental protection, because it's a source of innovation and excellence, is totally compatible with economic growth," Couillard said in a speech after he was sworn in as premier on April 23.

Harper's environment minister, Leona Aglukkaq, has expressed different views.

In August 2013, staffers in her department, Environment Canada, recommended that she publicly state that Canada recognizes scientific evidence that humans are "mostly responsible for climate change" and that it takes this threat "seriously." But a few weeks later, when Aglukkaq addressed climate change in a television interview, she questioned whether ice is melting in the Canadian Arctic and said it is "debatable" whether the Arctic is getting warmer, contradicting the observed scientific evidence.

Aglukkaq declined to speak with InsideClimate News. Heurtel, who has held office less than three months, also declined to comment. A spokeswoman said he was still learning about his new portfolio.

Guilbeault, a veteran environmentalist, said he has met with Heurtel and was assured Quebec will "continue going full speed ahead" in its effort to deal with climate change.

"Basically right now, the Quebec government has no relationship with Ottawa on climate change," said Guilbeault. "Maybe bureaucrats will talk to each other from time to time, but as far as I know there's no joint working group and it's hard for me to [anticipate] this changing. We basically have a federal environment minister who doesn't believe in climate change. There's such a huge gap between the politicians [from the two governments], it's hard to find common ground."

Tar Sands Development Raises Canada's Emissions

Quebec has pledged to reduce its annual greenhouse gas emissions to 20 percent below 1990 levels by 2020. By 2012, a year before the launch of the cap-and-trade system, the province's annual emissions were already 6.8 percent below 1990 levels, according to Canada's latest report on greenhouse gases submitted to the United Nations in April.

In contrast, Canada's emissions in 2012 were 18.3 percent above 1990 levels. The increase was driven by the province of Alberta, the center of Canada's booming oil sands industry, which extracts bitumen, a tar-like heavy oil, from natural deposits of sand. The process requires massive amounts of energy and water. If the Obama administration approves the controversial Keystone XL pipeline, it will provide another route for Alberta's oil into the United States.

The Harper government has begun introducing regulations in some industries, one sector at a time, to reduce greenhouse gas emissions. For instance, new or retrofitted coal power plants must use the latest technologies to reduce their climate change footprint starting on Jan. 1, 2015. And Canada's fuel standards now require blended fuels, such as gasoline, to contain at least some renewable fuel such as ethanol.

Successive Quebec environment ministers have suggested that this sector-by-sector approach threatens the economic health of large provincial industries, such as aluminum and forestry companies, that were already moving to reduce their greenhouse gas emissions.

"For the government of Quebec, which has the most ambitious 2020 target in Canada, an eventual sector-by-sector approach by the federal government that would interfere with Quebec's [cap-and-trade market] isn't acceptable," wrote former Quebec environment minister Pierre Arcand—who is now the provincial energy minister—in a letter to former federal environment minister Peter Kent, on March 2, 2011. It was among several letters released this spring through Canada's freedom of information law.

California and Quebec have raised more than $1.5 billion recently in carbon market auctions. Most of the revenues were collected by California because its economy is larger and it has more emissions. Quebec has collected about $56 million in its auctions.

The analysis by Sustainable Prosperity says California could raise about $7.7 billion by 2020 through the auction. Quebec has estimated it will raise about $3 billion by then.

The analysis also found that the linked markets will likely allow Quebec companies to lower the cost of reducing their emissions through access to cheaper credits in the California market. And California could benefit from new investments from businesses in the French-speaking province.

So far the credits have been selling for about $11 per ton of carbon dioxide equivalent emissions. That price is expected to increase gradually as the governments lower the maximum allowable amount of greenhouse gases from industry.