Days after Prime Minister Justin Trudeau was re-elected in a vote widely hailed as a climate victory, his American counterpart sued California to strike down an emissions-reduction agreement with Quebec.

The contrast was not lost on Chris Busch, research director for California’s energy and environmental policy firm Energy Innovation, who realized Trudeau’s second term indicated federal carbon pricing would be “significant and meaningful in the years to come,” making Canada a strong global partner in the fight against the climate crisis.

Meanwhile, U.S. President Donald Trump — who questions the science behind climate change and has announced his intentions to pull the United States out of the 2015 Paris agreement — was trying to subvert climate action in the Golden State for the umpteenth time.

On Wednesday, the Trump administration filed the lawsuit at the U.S. District Court for the Eastern District of California, arguing the state has “intruded into the federal space” by entering into a cap-and-trade agreement with the Canadian province, an agreement they deem to be an execution of foreign policy.

“This intrusion complexifies and burdens the United States’ task... of negotiating competitive international agreements,” the lawsuit says.

The agreement “could encourage other states to enter into similarly illegal arrangements,” it says, and “enhances” California’s political power.

“California’s unlawful cap-and-trade agreement with Quebec undermines the president’s ability to negotiate competitive agreements with other nations, as the president sees fit,” said Assistant Attorney General Jeffrey Bossert Clark of the U.S. Justice Department’s environment and natural resources division in a press release.

Quebec and California have had the cap-and-trade agreement, called the Western Climate Initiative, since 2013. Ontario was part of this agreement until June 2019 when Premier Doug Ford's government abruptly withdrew the province.

In such markets, governments agree to set an annual limit, or cap, on greenhouse gas emissions. Polluters governed by the agreement — usually large companies in the fossil fuel-based industries — adhere to this by either lowering their emissions or buying government-auctioned permits that allow them to pollute. These permits can be bought or sold by companies.

Money raised from this market is designated to go toward other emissions-reduction initiatives by the governments, such as tree planting or green-energy programs.

“The days of litigation fighting over who does what are detracting from real action" - Toronto environmental lawyer Lisa Demarco

The scheme is one of the centrepieces of both jurisdictions’ efforts to battle climate change, designed to produce an overall 15 per cent reduction from 2005 carbon-emissions levels by 2020 — and for the most part has been a success.

In 2018, California spent US$1.4 billion earned through this carbon market on electric cars, solar panels, green transit and other green programs. The program has made headway in reducing emissions in such a way that revenue is benefiting lower-income communities — a mandate by the agreement for the state. The cap-and-trade system has also spurred a clean-energy-export sector in California that has spilled into climate-positive policies in China’s car-manufacturing sectors.

The revenue has now reached close to US$12 billion, Busch said in an interview, proving this “fee-raising mechanism was making the market more efficient” both from economic and climate perspectives.

“There is a strong argument that (cap and trade) is not a treaty or an instrument of foreign policy, but a good economic decision, a carbon market,” Busch said. “There is a certain amount of spite and ill intention underlying Trump’s decision.”

But the Trump administration is asking the courts to deem this agreement "unlawful."

Lisa DeMarco, a Toronto environmental lawyer, said the lawsuit was “politics dressed up as litigation” that could have a negative effect on the ongoing viability of the carbon-market system by instilling undue regulatory uncertainty.

“This is a nuisance,” DeMarco said. “This is a definite challenge for a very successful, very economically efficient program... Its unduly punitive. It's entirely unnecessary.

“There's really no upside from taking this action,” she added. “It’s punch-the-bees-nest politics.”

Trudeau monitoring ‘very, very carefully’

The lawsuit has put Canadian leaders on alert, especially as it comes at a time when federal carbon pricing is also being challenged by provinces in the top courts later this year.

Speaking to reporters in Ottawa on Wednesday, at his first press conference since his re-election, Trudeau said his government would be closely monitoring the legal proceedings.

“I don’t know the details enough of what that challenge is and what impacts it will have — not on Ontario, but on Quebec now. But it is something we are going to look at very, very carefully,” Trudeau said.

“Quebec has long demonstrated leadership in the fight against climate change, like B.C., in Canada, and we are going to make sure we are continuing to fight climate change across this country in ways we can.”

In a statement to National Observer, Quebec Environment Minister Benoit Charette said the provincial government has “taken notice” of the lawsuit.

“We wish for California to remain Quebec’s partner within the Western Climate Initiative and in that regard, we are in contact with the government of California,” Charette said. “The Quebec government remains dedicated to fighting climate change, as does California.”

“We believe that our cap-and-trade program is a more efficient way to reduce greenhouse gas emissions than a carbon tax.”

DeMarco said Canada’s governments should be monitoring the lawsuit closely, especially as it is within the realm of the Paris Agreement construct “that contemplates, very actively, internationally transferred mitigation outcomes.”

“Given the proximity of the U.S. and the co-ordinated economies, we would think that actions like exactly what Quebec in California have done, should be encouraged by the national governments, not discouraged,” she said.

There are legal challenges in both countries making this difficult, DeMarco notes. On the one hand, the Trump administration is claiming the state of California is overreaching in its authority to regulate carbon emissions. In Canada, the opposite is in question: provinces are claiming the federal government is overstepping its reach in regulating carbon.

Both of these legal examples against climate action “emphasize the importance of the need for co-ordinated jurisdiction on climate,” DeMarco said.

“The days of litigation fighting over who does what are detracting from real action,” she said.

‘Uncharted territory’

The Trump administration has been in battle with California over its right to take actions to cut carbon pollution, announcing it would revoke California’s authority, enshrined in federal law for nearly half a century, to set air-pollution standards that are stricter than the country’s.

The administration also threatened to pull billions of dollars in federal highway funding from California because of the state’s chronic air-pollution problems.

In the Oct. 23 lawsuit, the administration is claiming that in creating a cap-and-trade agreement with a foreign jurisdiction, California violated the country’s constitution, which enables the federal government “to speak with one voice on behalf of the United States in matters of foreign policy.” It claims the agreement could interfere with the decision to pull out of the Paris Agreement.

"Defendants’ actions individually and collectively interfere with the United States’ foreign policy on greenhouse gas regulation, including but not limited to the United States’ announcement of its intention to withdraw from the accord, and are therefore pre-empted," the lawsuit said.

Nicolas Girod, managing director of the carbon consultancy Clear Blue Markets, said that, if successful, the lawsuit could result in a delinking of the Quebec-California markets, which will affect the prices of pollution permits.

But the outcome of this litigation remains uncertain at present — and uncertainty is never good for markets.

“This is uncharted territory,” Girod said of the lawsuit.

“When this kind of thing happens, companies become unsure if they can monetize from emissions reductions, so they take a step back and wait and see,” Girod said. “This means delayed investments.”

That happened when Ontario pulled out of the cap-and-trade agreement with California and Quebec in June — the business impact of which is still to be fully seen.

“This is not good for emissions reductions,” Girod said. “People invest and take advantage of incentives to reduce emissions. But if they have no certainty, they won’t do that.

“It’s never good when politics gets involved in markets.”

Busch was more optimistic. Irrespective of the outcome of the lawsuit, he says, the effect will be minimal, as California and Quebec are both on track to meet their emissions-reduction targets.

There’s also the fact that the state of California has defeated the Trump administration in court over a dozen times to date.

“The politics is difficult,” Busch said. “But over time, politicians are realizing (cap and trade) is an efficient way to make money for public goods and public investments at a time when that’s needed on all fronts.”

“The politics seems to be interfering with this window of opportunity we have to fight climate change with technology and sound policy.”

— with files from Carl Meyer

Editor's Note: This story was updated multiple times on Oct. 23, 2019, to include additional context and quotes.

While the motivation for the Trump Administration's compliant is clearly political, it is unfortunate that the "experts" referenced in this story didn't comment on the legal pith and substance of the complaint: i.e, whether California had the legal authorities to negotiate a bilateral agreement with Quebec to link cap and trade systems and what, specifically, those authorities were? I don't know the answer to that question but experts stepped in legislative history typically have the ability to opine.

It should be noted that the unfortunate position that Quebec finds itself in is a direct result of province-by-province approach to carbon regulation adopted by the Federal Liberals under the Pan Canadian Climate Plan. That approach - and the consequent balkanization of provincial climate regimes between cap and trade and carbon tax - is precisely why Quebec needed to find trading-friendly jurisdictions outside of Canada for linkages in order to enhance the liquidity of its carbon market.

Had the federal Liberals instead pursued a national cap and trade system (as they proposed over a decade ago to implement the Kyoto Protocol) then need for linkages with foreign systems like California, and the risk that those linkages are annulled, would be less.

In light of this development with California and its impact on Quebec's carbon market, it will be interesting to see whether the Bloc Quebecois uses its newfound federal influence to press for a national cap and trade program and thereby make the rest of Canada more like Quebec on carbon regulation.