All provincial systems are supposed to be reviewed next year, but there will be indications before then of how determined Prime Minister Mark Carney is to improve them.Jack Taylor/Reuters
An inherited policy likely to be at the heart of Prime Minister Mark Carney’s new “climate competitiveness” strategy is in a state of severe disrepair.
And whether his government proves able to fix it, starting this fall, will go a long way toward establishing not only Mr. Carney’s environmental credibility, but the viability of his intended grand bargain with the country’s fossil-fuel industry and the provinces that are home to it.
Canada’s carbon pricing system for heavy industrial emitters is projected by the Canadian Climate Institute to be by far the most impactful national policy for decreasing greenhouse gas emissions. It is also, by virtue of tradeable credits that can be earned under it, nearly the only plausible revenue source – and thus a prerequisite for financial viability – for the carbon-capture projects Mr. Carney has called a necessary condition for oil and gas expansion.
But the industrial-pricing regime, put in place by former prime minister Justin Trudeau at the same time as the now-abandoned carbon price paid by most consumers, was barely a system at all by the time Mr. Carney took office. And since then, the nationwide patchwork – in which provinces can administer their own pricing mechanisms but are supposed to meet standards set by Ottawa – has only gotten patchier.
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Alberta has twice this year taken major steps to weaken its approach, to the point that it may no longer provide companies with much impetus or incentive to make clean-technology investments. And Saskatchewan has suspended industrial pricing altogether, with no known consequence – raising the question of whether other provinces with systems that are weak or unstable, including Ontario, need to worry about the federal requirements at all.
Technically, all provincial systems are to be reviewed next year, under a formal process put in place by Mr. Trudeau.
But there will be indications before then of how determined Mr. Carney is to improve them – and perhaps his ability to bring provinces along.
Some of those signs may come from the climate competitiveness strategy, which the government is aiming to release in October. That will be an attempt to reframe the Trudeau-era focus on emission-reduction targets to finding economic advantage during the global energy transition. Beyond recommitting to industrial pricing as a pillar, there should be hints of what Mr. Carney wants the system to look like.
But negotiations with Alberta toward finding common ground on energy and environmental policy stand to be the real near-term test – and not just because that province’s industrial emissions dwarf those of any other.
It’s also because the outcome of the talks could show whether Mr. Carney is willing to settle for pyrrhic victories or is really pushing to get carbon markets functioning to the point that they spur major investments.
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Getting Premier Danielle Smith to publicly recommit in some form to Alberta’s industrial pricing system, the Technology Innovation and Emissions Reduction regulation, is a presumptive component of any compromise. TIER was not a great source of strife before Ms. Smith started weakening it – and in fact was put in place by a previous Alberta government before it was federally required, so it would hardly be a huge leap.
In return, Mr. Carney could drop Mr. Trudeau’s planned cap on oil and gas sector emissions, about which he has been non-committal, and perhaps one or two other regulations that have been bigger irritants to Alberta than Ottawa’s industrial-pricing expectations.
The most obvious way Alberta could signal that recommitment – and give Mr. Carney an ostensibly straightforward win – would be to resume annual increases to the so-called headline price, theoretically the amount charged per tonne of emissions. It’s supposed to rise by $15 annually, but Ms. Smith froze it at $95 in the most high-profile of this year’s weakening moves.
But restarting those increases wouldn’t actually achieve that much, because the headline price refers only to the amount polluters can pay into a government fund to meet their obligations. In reality, the system revolves primarily around its credit market.
The headline price, which is the amount charged per tonne of emissions, is supposed to rise by $15 annually, but Alberta Premier Danielle Smith froze it at $95.Jeff McIntosh/The Canadian Press
Although complex, the basic premise is that each facility is allowed a certain level of emissions each year; companies that exceed their limit can purchase credits from those below theirs. Ideally, credits are traded sufficiently below the headline price to make them attractive, but high enough to still attach strong value to each reduced tonne.
The fundamental problem is that, because it’s been too easy for companies to meet their obligations, credit supply far exceeds demand. As a result, credits have recently been trading for less than $30.
Nobody around the industry believes major carbon-capture projects – including the Pathways Alliance megaproject in the oil sands, to which Mr. Carney is largely pinning his grand-bargain hopes – will be viable unless credits ultimately trade for well north of $100.
So the imperative is to tighten the system in ways that better align supply and demand – which, because they would meaningfully increase polluters’ obligations, are likely to meet more resistance.
Atop that list is more rapidly lowering the share of emissions that industrial facilities are currently permitted without being subject to the price – which on average is currently around 85 per cent and per current policies tightens by just 2 per cent annually.
While that approach has been in the interest of protecting international cost competitiveness, it’s evidently been too lenient for the system to work properly and probably needs to be more like 3 or 4 per cent to get credit values rising again.
Not that even that contentious step would likely be enough.
There are plenty of other moves Mr. Carney could demand as Ms. Smith’s end of the bargain. They include reversing another recent TIER weakening in which her government made it easier for companies to earn credits through capital investments, expanding the system to include more relatively small industrial emitters and bringing transparency to a credit market that currently lacks public data on each transaction.
But Ottawa may also need Alberta to somehow demonstrate long-term commitment.
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As veterans of Mr. Trudeau’s government are fond of pointing out, they once reached a grand bargain with Alberta – carbon pricing in return for the Trans Mountain oil pipeline expansion – only for the province to successfully push for scrapping the consumer-facing fuel charge once the pipeline was built.
So Mr. Carney could, for instance, follow the advice of Clean Prosperity, an advocacy group largely devoted to industrial pricing, by pushing Alberta to put some skin in the game by joining Ottawa in offering carbon contracts for differences, in which governments essentially take on revenue risk for decarbonization projects by guaranteeing a minimal credit value.
Not that it all begins and ends with Alberta.
At some point, Mr. Carney will have to impose the federal backstop industrial pricing system – which is supposed to take effect whenever a province’s system isn’t up to snuff, but which he’s avoided amid his effort to reset federal-provincial relations – if Saskatchewan continues having no system at all.
And national standards generally need to be applied more consistently, which would open the door to linking multiple provinces’ carbon markets, creating greater and stabler credit demand.
But from where the dominoes will fall is no great mystery.
The province where industrial carbon pricing began, and where its incentives are most needed, is where the future of the system will be set.
And if Mr. Carney and Ms. Smith reach a deal, anyone familiar with the challenges of making nationwide heavy industry more sustainable – and more competitive in a world that, outside North America, is still aggressively decarbonizing – will be looking closely at the fine print.