This article was previously published in the National Observer.
Industrial carbon pricing is the most powerful tool Canada has to cut enormous amounts of climate-harming emissions while keeping costs low for businesses and maintaining competitiveness. It costs consumers virtually nothing. And it can help the country diversify exports to places like Europe, where carbon tariffs are punishing products not already subject to carbon pricing in their home jurisdiction.
Those are significant selling features in a world focused on new economic opportunities in light of trade and security threats from the U.S., as well as bread-and-butter affordability issues.
However, there is a catch. Industrial carbon pricing—which is actually a mix of different provincial and federal systems—is not working properly. Currently, there is a hodgepodge of rules in place across these systems, which has led to broken markets that aren’t able to drive big investments into low-carbon projects.
Alberta is the elephant in the room. Alberta’s provincial system is the most significant in the country, covering roughly a quarter of national emissions, and is currently tied up in negotiations as part of the recent Canada-Alberta Memorandum of Understanding (MOU).
The federal government has set out to fix these issues, as part of its review of minimum national standards, otherwise called the federal benchmark. Simply put, the benchmark sets the conditions the federal government uses to assess whether provincial and territorial systems are roughly equivalent to the federal system. Those rules include which large emitters are covered and whether system rules deliver incentives consistent with the federal standard.
Getting the benchmark rules right will be critical for the proper functioning of industrial carbon pricing systems and delivering the benefits mentioned earlier. In light of that, our team at the Canadian Climate Institute took a closer look at the federal proposal to update the benchmark using new modelling and research.
We found that the current federal proposal is insufficient. If implemented, the proposed changes could allow industrial carbon pricing systems to pass federal benchmark tests but fail to deliver on the emissions and investment outcomes the federal government is counting on.
To understand why and how the government can fix the situation, you need to know a bit about how carbon markets work. Industrial carbon pricing offers so many benefits, largely because it creates markets where large emitters buy and sell credits for reducing emissions. These carbon credit markets set a price for each tonne of emissions reduced that fluctuates with supply and demand. That produces a powerful incentive to invest in technologies that drive emissions down.
However, these markets only deliver the outcomes they promise if the rules of the game are designed properly and transparently.
The good news is that the federal government can improve their current proposal with a few select changes.
First, the federal benchmark should make sure that systems deliver a minimum effective carbon credit price of $130 per tonne by 2030. That’s consistent with the Canada-Alberta MOU and it reflects the price that large emitters actually face in practice, rather than what’s known as the headline price, which only applies in limited circumstances.
That sounds like a technical detail, but it will make all the difference in the world.
For example, the current headline price in Alberta is set at $95 per tonne, but credit prices have traded below $20 per tonne. Those are starkly different incentives facing businesses considering whether or not to invest in clean technologies that will cut emissions.
Second, the federal government should make sure provinces and territories retain flexibility in how their systems reach that minimum credit price, but that should be subject to a small set of non-negotiable conditions. That includes making sure emissions performance standards increase over time, as well establishing a carbon price floor and ceiling that similarly ratchets up in the years ahead. And compliance options that dilute incentives for emission-reducing technologies should be limited.
Finally, the federal government should ensure its assessments of whether provincial systems are meeting the benchmark are based on transparent and credible data on how emitters actually comply, which compliance paths they have used, and the carbon prices they have paid. This type of transparent performance tracking should be ongoing to ensure these systems continue to conform with minimum national standards.
These points are crucial because this type of transparent, public information simply doesn’t exist. That requires governments to mandate disclosure so that market and emissions performance can be independently verified. Industrial carbon pricing is a critically important policy lever, but as it stands this tool is broken and needs immediate attention. Changes to the federal government’s backstop can allow provinces and territories to tailor their industrial carbon pricing systems to their own contexts while ensuring they deliver strong—and consistent—incentives across the country.
