Liberals working on policies to ensure carbon tax remains in place for years to come


Gabriel Friedman
Tue, November 8, 2022

Canada's Minister of Natural Resources Jonathan Wilkinson attends a climate change conference in Ottawa

The idea that releasing greenhouse gases into the atmosphere should cost money — known as carbon pricing — sits at the center of the federal Liberals’ plan to limit climate change, and now they’re working on policies to ensure that it remains in place in Canada for years to come.

Last month, Jonathan Wilkinson, minister of natural resources, told a crowd in downtown Toronto, that the federal Liberals plan to introduce a policy to ensure carbon pricing not only remains in place through at least 2030, but also ramps up during that time, from $50 per tonne to $170 per tonne.

Wilkinson made his comments during a question-and-answer session after a speech to the Canadian Club, saying that industry won’t invest billions of dollars to reduce their carbon emissions until they have “certainty” that carbon pricing won’t be abolished under a future leader.

He said that his government is actively studying “carbon contracts for differences” — a policy under which businesses that invest money to reduce carbon emissions will be eligible to receive compensation if carbon pricing is either eliminated or reduced. While Wilkinson declined to offer a timeline, he mentioned a policy paper that cited the United Nations’ Climate Change Conference (COP 27) in Egypt, which begins on Nov. 6, as an “ideal” moment to introduce such legislation.

“I would say that we do feel urgency to give certainty to industry,” Wilkinson said after the event in an interview. “In my view, we can’t leave it there long.”

Any urgency may arise in part because Pierre Poilevre, leader of the Conservative Party of Canada and official opposition, has held rallies to ‘Axe the Carbon Tax,’ and tweeted that he would stop raising the carbon tax in response to inflation.

A spokesperson for Poilievre did not offer comment for this article.

Wilkinson did not mention Poilievre by name, but described the political conversation around carbon pricing as “frustrating.”

“There was an enormous step forward when Erin O’Toole adopted a price on pollution as part of his platform,” Wilkinson said. “That has obviously changed under the new leader and I think that’s very, very unfortunate.”

As a result, his government is moving forward with carbon contracts for differences, often called by the acronym CCfD. Under this policy, a firm that invests in a project to reduce carbon emissions could sign a contract with the government that would make it eligible to receive compensation if future projected carbon prices change, including if the price regime is scrapped altogether.

The policy paper mentioned by Wilkinson as a good source of information on the topic was issued in October by the Ottawa-based think-tanks Clean Prosperity and the Canadian Climate Institute.

Titled Closing the Carbon-Pricing Certainty Gap, the paper states that Canada’s target to cut emissions by 40 to 45 per cent by 2030 are an “enormous” challenge, largely because the three sources that account for nearly half of all emissions — heavy industry, oil and gas and electricity generation — lack the “certainty” needed to invest billions of dollars to cut their emissions.

“Carbon pricing isn’t yet working as well as it should,” the paper states.

The idea behind CCfDs is that taxpayers would be on the hook to compensate private firms for any difference between the scheduled carbon price and the actual price in any year of the contract.

For example, in Canada, the carbon price currently is scheduled to hit $95 per tonne in 2025 and then rise to $110 per tonne in 2026. If a future government froze the carbon price at $95 per tonne, a firm that signed a contract would be eligible to receive payments of the difference — $15 — for each tonne of carbon emissions that their project sequestered.

“CCfDs are an exciting innovation: they would accelerate industrial decarbonization, and require no new spending, regulations, or taxation,” the paper states.

Conservative Party of Canada leader Pierre Poilievre speaks in response to the fall economic statement in the House of Commons on Parliament Hill in Ottawa.

While carbon contracts for differences could be applied in numerous ways, a similar policy was used in Alberta to encourage renewable power development: The government guaranteed developers a fixed price for energy, but also received money when energy prices surged above that rate, returning an estimated $160 million to the province.

Such a mechanism could also be used with carbon contracts for differences to create an upside for the government, experts say.

“There are a couple different approaches to how this could work,” said Ollie Sheldrick, a program manager in Toronto for the think-tank, Clean Energy Canada.

The situation shows how years after the carbon tax was first passed into law, and more than a year after the Canadian Supreme Court upheld the tax, in March 2021, even by a Liberal minister’s own account, its actual impact on reining in carbon emissions remains dampened by uncertainty.

This September, the Calgary-based Pembina Institute issued a report that criticized Canada’s oil and gas sector for failing to make significant investments in carbon capture, even amid a record $152 billion in profits in 2021.

Canada’s overall carbon emissions have risen more than any other G7 nation since 2015, according to the Ottawa-based Centre for Policy Alternatives.

Mark Cameron, vice president for external relations for the Pathways Alliance, an oil sector industry group representing 95 per cent of production in the oilsands, said uncertainty is deterring investment.

“It’s not just uncertainty about a future government getting rid of carbon pricing,” said Cameron. “It’s uncertainty around the rules around carbon credits and credit markets.”

For example, Cameron said his members could finance the investment needed to build carbon capture equipment by obtaining carbon credits, which they would then sell to liquid-fuel distributors.

But when the government released its clean-fuel standards earlier this year, which require liquid-fuel distributors to reduce the carbon footprint of their fuel, it only applied to fuel consumed in Canada.

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Oilsands producers export an estimated 80 per cent of their fuel, and so he said selling carbon credits to liquid-fuel distributors was no longer a viable way to finance carbon capture.

He said his organization already had discussions with the federal government about its plans to develop carbon contracts for differences and such a policy “could spur investment depending on the design.”

Meanwhile, environmentalists agreed that there are many potential ways to dampen the effect of the carbon pricing.

Scott MacDougall, a senior advisor at the Pembina Institute said carbon contracts for differences are important as an insurance policy, but at the moment, a bigger issue slowing investment in carbon capture is that the price of carbon is not high enough.

“The carbon price is not high enough to drive investment in a lot of the carbon reduction projects that we need,” said MacDougall. “I think the certainty piece is just another part of that.