This article was previously published in The Hub.
The recent Memo of Understanding (MOU) between Alberta and Canada includes several clear retreats on climate change policy, including a delay in methane regulations and an apparent carve-out for Alberta on clean electricity regulations, which is likely to encourage other provinces to seek the same.
It also includes a potential step forward on Canada’s most important climate policy, industrial carbon pricing.
Yet the details matter. How the MOU is implemented will be a major determinant of how well industrial carbon pricing in Alberta—and the rest of Canada—can drive investment and emissions reductions.
First, some basics. What exactly is industrial carbon pricing?
Industrial carbon pricing—also known as large-emitter trading systems, or LETS—is a market-based policy designed to deliver least-cost emissions reductions in heavy industry like cement, steel, and oil and gas. At the same time, it’s also designed to protect the competitiveness of those sectors, given they compete in international markets. It’s an approach that was actually pioneered in Alberta with Canada’s first industrial carbon pricing system all the way back in 2007.
LETS deliver both of those goals by setting performance standards for heavy industry, defined in terms of emissions per unit of production. If firms do better than the standard, they can generate credits that they can sell on a credit market. If they do worse, they can either buy credits on that market or pay the carbon price on excess emissions. But critically, it’s only the excess emissions above the performance standard that they pay for. When the system is working (more on that in a minute) that adds up to big incentives to reduce emissions but low overall costs, and low incentives to shift production, investment, and emissions to other jurisdictions.
(A brief sidebar: LETS also don’t materially increase prices of consumer goods. Costs are low by design in the first place, and firms can’t pass those low costs to consumers through higher prices, because they compete in global markets.)
Creating incentives to reduce emissions—but not production—through LETS isn’t just a win for heavy industry. It’s also a smart way to drive private investment into emissions-reducing projects like the Pathways carbon capture and storage project. Without an effective carbon credit market, Pathways doesn’t generate revenue. But when LETS works properly, carbon credit sales can generate cash. Mobilizing private dollars using markets is a much more cost-effective and more fiscally-sound approach to unlocking carbon capture than straight-up government subsidies.
All of this, however, is contingent on credit markets working. And right now, they aren’t. Credit prices in Alberta’s carbon market, TIER, were trading at below $20 per tonne last week, prior to the MOU. Those markets are thoroughly in oversupply, gutting incentives to invest in low-carbon projects. Worse, political uncertainty about the future of industrial carbon pricing has added more risk and further hobbled investment—especially after Alberta further weakened its credit market last week.
The MOU—and the policy changes it requires—could fix all of that. Maybe.
Critically, it notes an agreement to ramp up the effective credit price in TIER to $130 per tonne. That’s lower than the $170 per tonne that is the current schedule for the aspirational “headline price” defined federally. But it’s far higher than the $20 that markets are actually experiencing.
And if Alberta and Canada are in agreement, it’s also far more certain, which matters for capital markets. A predictable $130 per tonne credit price makes carbon capture look economic. It makes clean steel much more attractive. Industrial energy efficiency projects become much more profitable. Renewable electricity projects have a stable new revenue stream.
How can Alberta and Canada make that fix? The answer is a price floor for carbon markets.
Alberta can establish $130 per tonne as a minimum effective credit price. This isn’t at all analogous to the much-discussed $170 per tonne by 2030 price established by current federal requirements. That price is a ceiling, not a floor. The price ceiling still matters; it sets the maximum price for firms, containing costs, but it’s only part of the price corridor necessary to send strong signals to the market. Alberta can deliver a floor price by a combination of tightening credit supply over time, limiting offset and banking use, and buying back credits. It can even use revenue currently generated by the system to help fund those credit purchases.
To bring certainty to this market, a $130 price floor can’t be a distant future number. Canada and Alberta both commit to net zero emissions by 2050 in the MOU. Given how long-lived big investments like power plants, cement factories, or carbon dioxide pipelines are, delivering on a 2050 goal still requires steady progress between now and then. An effective minimum credit price of $130 by 2030 would drive investment in low-carbon facilities.
While the MOU is a bilateral agreement, it also has ramifications for the rest of Canada. Industrial carbon pricing minimizes costs of emissions reductions specifically because it sends a consistent incentive across all emissions.
That means price floors should apply across all provinces, not just in Alberta. After all, other provinces—hello B.C., Saskatchewan, and Ontario, for example—also have credit markets that look dangerously out of balance, creating precisely the same investment risks.
The solution then, is a minimum effective carbon price in all provinces. The federal government can establish exactly this by amending its carbon pricing “benchmark,” the minimum standard it sets for provincial and territorial LETS. Provinces would have flexibility in how they create their minimum price, but would be accountable for delivering a clear, harmonized price floor to bring certainty to investment across the country.
From a climate perspective, the MOU between Alberta and Canada is far from perfect. Amidst the clear flaws, however, there is an opportunity to fix industrial carbon pricing in Canada, bringing much-needed policy certainty.
Fixing industrial carbon pricing makes sense for heavy industry. It makes sense for low-carbon projects. It makes sense for investment and competitiveness, and for emissions reductions. It makes sense for Alberta. And it makes sense for Canada.
