A Canadian Climate Institute report says focusing on a strengthened industrial carbon pricing system over the cap could be a more effective approach to meeting emissions-reduction commitments than trying to maintain both policies.ED JONES/AFP/Getty Images
Ottawa and the provinces are being prodded toward an obvious potential compromise, as they seek common ground on energy and environmental policy.
The nudge comes from the Canadian Climate Institute. In a report being released on Thursday, the federally funded think tank and accountability body recommends that Ottawa drop its planned cap on oil and gas sector emissions – but only if both levels of government commit to strengthening the country’s existing carbon pricing system for heavy industrial emitters.
Variations of that trade-off have been floated in policy circles for months, because of how it could fit with the reset in federal-provincial relations that Prime Minister Mark Carney is seeking, particularly with Alberta.
That province’s government and fossil fuel industry have strongly opposed the emissions cap since it was first put forward under former prime minister Justin Trudeau, claiming that it would effectively be a production cap. However, they were previously much more accepting of industrial carbon pricing, before recently turning against it – and undermining its efficacy – amid mounting hostilities with Ottawa.
The Climate Institute’s report does not delve deep into those political dynamics. But it adds a new dimension by suggesting that prioritizing a bolstered industrial pricing system over the cap would in fact be a more efficient pathway toward Canada’s international emissions-reduction commitments than trying to maintain both policies.
The report’s central warning is that, while either measure would on its own be among the most impactful national measures to reduce emissions, they add up to much less than the sum of their parts.
Per the CCI’s analysis, which involves modelling by Navius Research Inc., either implementing the sectoral cap or strengthening the pricing system would result in approximately 25 megatonnes in annual emissions cuts by 2030. That’s roughly 10 per cent of the total reduction from current levels needed to achieve Canada’s climate commitments.
Together, however, they’d achieve only about 32 megatonnes – marginally more than just doing one of them.
That inefficiency would stem from both systems incentivizing the same oil and gas producers to decarbonize, which the CCI warns could also disincentivize other heavy-emitting sectors covered by the industrial pricing regime – such as cement and chemicals – from doing so.
The reason is that the carbon market at the centre of the pricing system, in which companies that exceed emissions-reduction targets can sell credits to those that fall short of them, would be flooded by credits generated by fossil fuel companies meeting their (more onerous) cap obligations, lowering the credit value and suppressing demand.
All this would add up to a higher cost per reduced tonne of carbon, the report suggests, since decarbonization investments would be disproportionately in one industry, for which the primary pathway is expensive carbon-capture technology not yet deployed at scale.
That’s not to mention administrative and compliance headaches from having two overlapping systems, lost competitiveness advantages of getting other sectors to invest in clean technology and all the political fallout, none of which the report dwells on.
Not that what the CCI is suggesting instead would make for a frictionless decarbonization path.
In an interview, Climate Institute executive vice-president Dale Beugin stressed that prioritizing industrial pricing would not simply mean keeping the existing system in place.
Even without the cap complicating matters, the pricing system is already underperforming somewhat in achieving emissions reductions, largely owing to weak, oversupplied credit markets. So, the CCI is calling for a series of measures aimed at strengthening those markets.
The simplest would involve recommitments to a steadily rising headline price (the amount that companies pay per excess tonne of emissions if they don’t purchase credits for a cheaper price), which is currently $95.
More complex, but probably more important, would be to increase the system’s stringency, particularly by raising the share of industrial sites’ emissions (above an allowable level) that are priced.
Other changes would include harmonizing and, ideally, linking the carbon markets of multiple provinces – which mostly have their own industrial pricing systems, under equivalency agreements with Ottawa – to create bigger, more robust markets.
The report also emphasizes that Mr. Carney should follow through on implementing draft regulations, introduced under Mr. Trudeau, aimed at cutting methane emissions from the oil and gas sector by 75 per cent.
The CCI has company in calling for a focus on strengthening industrial carbon markets while dropping the cap. Among others making cases along those lines has been the think tank Clean Prosperity, which has been calling for provincial governments to join Ottawa in offering carbon contracts for differences – essentially guarantees of future carbon-credit values. (Clean Prosperity goes further than the CCI regarding what Ottawa should give up in return, suggesting it also scrap its Clean Electricity Regulations.)
Provincial governments’ level of interest in finding middle ground is unclear. Alberta Premier Danielle Smith’s opposition to most federal environmental policies has seen her call this year for Ottawa to leave industrial pricing entirely to the provinces, rather than setting standards as currently, and she has concurrently frozen a planned increase to Alberta’s headline price.
Saskatchewan, which has defied Ottawa by pausing its industrial pricing system altogether, stands to be an even tougher sell. Then there are provinces, including Ontario, for which moving on from the emissions cap would be less enticement to embrace stronger industrial pricing, since they’re not major fossil fuel producers.
Mr. Carney has also been somewhat opaque so far about what he considers the right mix of policies to advance decarbonization while trying to make Canada an energy superpower.
But his government has mostly been muted on the cap, while more unreservedly talking up strong industrial pricing, and the trade-off seemingly fits with his talk of reaching grand bargains. The backing from the CCI, as a matter of climate-policy merit rather than just political expedience, may add to the momentum.