Prime Minister Mark Carney and Alberta Premier Danielle Smith's announcement could be a potential breakthrough for decarbonization, writes Michael Bernstein.Jeff McIntosh/The Canadian Press
Michael Bernstein is president and chief executive of Clean Prosperity.
The memorandum of understanding signed last week between the federal and Alberta governments was promptly attacked by climate advocates as a betrayal of climate action in Canada.
Chief among them was MP Steven Guilbeault, formerly a Trudeau-era environment minister, who called the deal a “serious mistake” and resigned from cabinet.
Respectfully, critics of the agreement are wrong. The historic announcement is actually a potential breakthrough for decarbonization. Canada’s progress on emissions reduction was stuck in a ditch, and the Ottawa-Alberta “grand bargain” just put it back on the road.
That’s because the former stack of federal climate policies wasn’t working. Those policies became a Jenga tower of overlapping and uninvestable regulation that was destined to topple.
What’s worse is that policies such as the oil and gas emissions cap and Clean Electricity Regulations inflamed tensions with Western Canada. The result was political gridlock and little in the way of emissions reductions.
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Advocates suggest that the federal government should just impose its climate regulations on Alberta and other provinces, whether they are on-board or not. But some regulations, including those on clean electricity, for example, need to be in place for years to have their intended impact. With Alberta dead set against them, those rules were unlikely to last.
Instead, this MOU takes a smarter approach, relying on a policy that originated in Alberta and has the potential to attract support across regional and party lines: industrial carbon pricing.
Carbon pricing can do more at a lower cost than any other policy option to reduce Canada’s emissions – if we get the details right. So far, we’ve struggled.
What convinces me this time is different is that the MOU lays out proposed solutions to two key problems that are holding carbon pricing back. If Ottawa and Alberta turn their plans into reality, it could make the deal a watershed moment for decarbonization.
The first problem: While the headline carbon price is $95 a tonne, what really matters is the price of carbon credits. Companies earn them for reducing their emissions and sell them to other emitters. In Alberta, those credits are trading at around $20, because the market is oversupplied. There’s not enough juice to convince firms that big investments in decarbonization will be economic.
That was until last week. The federal and Alberta governments have agreed to reform the carbon market to increase credit prices – not the largely symbolic headline price – to at least $130 a tonne.
That can deliver both climate and economic benefits. At credit prices between $130 and $150, the Alberta carbon market can unlock $90-billion in low-carbon capital investment and reduce 70 megatonnes of annual emissions within the province, according to forthcoming research from my organization, Clean Prosperity. That’s more than triple the emissions that would have been reduced in Alberta by the Clean Electricity Regulations that were suspended in the MOU. Carbon pricing also slashes those emissions at a much lower cost to Albertans.
The second problem: In order to make multibillion-dollar decarbonization investments that span decades, investors have to believe that carbon pricing is going to stick around. Until now, they haven’t.
That’s why the linchpin of this agreement’s climate commitments is the “financial mechanism” that Alberta and Ottawa have agreed to adopt as a guarantee to investors that they will maintain their commitments to strong carbon markets over the long term.
This is the first time we’ve seen two orders of governments jointly offer to put their money where their mouths are to guarantee the durability of carbon pricing policy. It’s potentially a game changer.
Prime Minister Mark Carney says a memorandum of understanding with Alberta strengthens federal-provincial collaboration in the energy sector. Calgary business leaders responded to his speech with a standing ovation, while one environmentalist says the deal throws the climate 'under the bus.'
The Canadian Press
A financial mechanism to increase certainty for industry could take different forms. Carbon contracts for difference are the caviar of carbon-pricing guarantees, and that’s what the federal and Alberta governments should jointly serve up if they want to unlock a massive rush of low-carbon investment. As long as governments follow through on their promises to uphold the system, the contracts are never exercised and cost nothing to taxpayers.
What about the other side of the climate ledger: the new bitumen pipeline proposed in this deal? Climate advocates say it will raise emissions. But the key driver of oil emissions is global demand. I agree with the majority of Canadians who have been telling pollsters that any incremental emissions from a new pipeline would be outweighed by the significant economic and geopolitical benefits it would deliver.
I’m convinced that the best way to ensure that climate policy sticks is to balance it with other urgent public policy priorities: strengthening our economy, diversifying trade and bringing our country together.
The federal-Alberta MOU is a bold effort to rise to that challenge. No doubt, Alberta and Ottawa must be held to account for the commitments they’ve made – especially to respect Indigenous rights. But naysayers are clinging to a policy regime that could never succeed, and selling short a new approach that can.