The Alberta-Canada MOU cements a low level of stringency around industrial carbon pricing for the foreseeable future, the Canadian Climate Institute's Dale Beugin, Dave Sawyer and Rick Smith write.Jeff McIntosh/The Canadian Press
Dale Beugin is executive vice-president at the Canadian Climate Institute. Dave Sawyer is principal economist at the Canadian Climate Institute. Rick Smith is president of the Canadian Climate Institute.
The newly announced Alberta-Canada Memorandum of Understanding (MOU) implementation agreement locks in incremental climate progress for Canada. If that sounds like we’re damning it with faint praise, that’s because we are.
Yes, the MOU slightly improves industrial carbon pricing relative to its current status in Alberta – but goodness, that’s a low bar. The losses offset the gains, because the MOU cements a low level of stringency around industrial carbon pricing across Canada for the foreseeable future.
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Alberta’s industrial carbon pricing system – the largest in the country – is currently dysfunctional. Carbon-credit prices were already low thanks to overly generous performance standards. Then Alberta further weakened its own policy and added to the market glut by letting companies generate even more credits for investments they might have made anyway. The resulting crash in credit prices undermined incentives to invest now, as well as confidence in the system for the future.
The most disappointing aspect of the MOU’s deal on carbon pricing is how close it was to being great at fixing this problem. Instead, the final agreement misses the mark by a wide margin.
The MOU proposes smart policy architecture to fix credit markets. A minimum market price requires Alberta to tighten up the emissions standards that companies face to stabilize credit markets. It proposes joint carbon contracts for difference to create certainty for investors in credit markets in the long-term. That approach in Alberta will almost certainly serve as a template for carbon markets in other provinces.
But by setting the price floor at a very low level, the agreement leaves a huge number of emissions reductions on the table. The minimum credit price of $60 per tonne by 2030 is not far from the status quo. The price floor of $110 by 2040 is too low and comes too late to drive the scale of emission reductions Canada would need to achieve interim targets, let alone reach the country’s commitment of net zero by 2050. At these low prices, the Pathways carbon-capture-and-storage project is only likely to proceed with substantial additional taxpayer subsidies.
Industrial carbon pricing can be hugely powerful, both in reducing greenhouse-gas emissions and in making low-carbon projects investable. But carbon prices this low will drive very little investment.
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It isn’t just Alberta emissions at stake. The MOU also creates a de facto new minimum standard across the country. Other provinces are sure to demand the same minimum price, thus reducing the effectiveness of other provincial systems. Indeed, this unravelling has already begun.
Worst of all, the compromises the MOU makes in delaying and diluting industrial carbon pricing are unnecessary.
When it’s working as it’s supposed to, industrial carbon pricing explicitly keeps costs low and creates significant incentives to reduce emissions. Alberta knows this well, because it pioneered the approach beginning in 2007. Firms that reduce emissions below a given threshold can generate credits they can sell for cash. Firms that have higher emissions have to pay – but only for the emissions above the threshold, keeping overall costs low.
That also means that comparing the price of carbon across jurisdictions entirely misses the point: what matters for competitiveness is carbon costs, not prices. In fact, we’ve estimated that oil sands firms only pay around 9 cents per barrel on average under the current system. And if the system was strengthened to create minimum credit prices of $130 per tonne, that would still only add less than 50 cents per barrel, which is less than half of 1 per cent of the current price of Western Canada Select crude oil. Multiple firms actually see benefits on their balance sheets, given lower emissions intensity.
After many years of climate policy research, we understand that policy-in-practice isn’t quite as elegant as policy-on-paper. Yet the political compromises in the MOU just don’t make sense because they forgo large economic and environmental benefits.
A strong deal would have doubled down on the one policy designed to square the circle across investment, emissions reductions and competitiveness. By committing to weak improvements, Alberta and Canada have hobbled industrial carbon pricing across the country and in the long term, critically limiting the potential of the strongest and most cost-effective climate policy in their collective tool kit.