It is highly probable that effective January 1, 2014, covered California or opt-in entities will have the possibility to use compliance instruments issued by the Government of Quebec to meet their compliance obligation.
However, linking may provide some regulatory mess as to which jurisdiction applies to entities trading in both: Quebec and California emission allowances.
Once a linkage is approved:
1) a compliance instrument issued by California may be used to meet a compliance obligation within the approved External Greenhouse Gas Emissions Trading System (External GHG ETS), and
2) a compliance instrument issued by the linked jurisdiction may be used to meet a compliance obligation in California.
Currently, all entities that have California compliance obligation must be registered with ARB. As part of that registration each entity must consent to be subject to California jurisdiction.
As is underlined in the California Attorney General stance in the communication of 5 March 2013 to the California Governor, normally, entity located outside California is not subject to jurisdiction in California or the application of California law unless the entity has 'certain minimum contacts' with California such as doing substantial business in California or causing some form of injury or negative effect directed at someone in California.
An entity can also explicitly consent to jurisdiction in California. Any Quebec entity with compliance obligation in California must register with the California program and explicitly consent to jurisdiction in California.
Pursuant to the above-mentioned California Attorney General communication of 5 March 2013, iif a Quebec entity, not registered with the California program, were to take actions aimed at entities in California (e.g. selling forged allowances to a California entity with compliance obligations) a court could find that the Quebec entity was subject to California's jurisdiction for such substantial conduct directed at California based on the specific facts of the case.
Registration based on the physical location
When California links to an external GHG ETS, each entity must register into a jurisdiction based on the physical location.
Pursuant to the newly published draft for the modified Regulation Order an entity located in California or in a jurisdiction operating an External GHG ETS, to which California has linked, must register with the jurisdiction in which they are located and California will recognize such registration and allow that entity to participate in the California Cap-and-Trade Program. The exception is that an entity located in the United States may only register with California.
In effect of linking entities that have compliance obligations under California law will remain subject to California jurisdiction.
The California Governor's letter to ARB of 8 April 2013 contains the following findings:
Entities in Qebec that sell allowances in California will remain subject to California's jurisdiction to the extent that this is permissible constitutionally; linkage will not diminish California's authority in that area.
Entities that register and participate solely in Quebec's program and do not participate in California's program cannot be subject to California's jurisdiction consistent with constitutional limits, but these entities will be subject to regulation by Quebec.
Some legal effects of the place of registration
If an entity registered in the California Cap-and-Trade Program has a direct corporate association with an entity(ies) registered in an External GHG ETS to which California has linked its Cap-and-Trade Program, the entity registered in the California Cap-and-Trade Program must opt out of consolidation with the entity(ies) registered in an External GHG ETS.
The auction bid guarantee must be in the currency used by the jurisdiction with which the entity has registered.
Entities registered in an External GHG ETS to which California has linked are not eligible to purchase from the California Allowance Price Containment Reserve.