Feb 22, 2024

Canada faces a “critical problem” in meeting its 2030 emissions target because businesses are delaying building low-carbon projects due to uncertainty over the future of the country’s climate policies, a new report warns.

To fix it, Prime Minister Justin Trudeau’s government should expand a program that backstops carbon trading markets with public money, according to the report from Clean Prosperity, a group that advocates for market-based climate policy.

“Firms and investors lack confidence that provincial carbon markets will deliver the revenue they need to justify big, long-term investments in low-carbon projects,” Brendan Frank, policy director for Clean Prosperity, said in the report.

One of Trudeau’s signature environmental policies is a carbon tax that rises over time — giving consumers and businesses a financial nudge to switch to cleaner energy or spend money on technology that reduces emissions. But there’s political uncertainty about whether the carbon price will stay. The Conservative Party holds a large lead in polls over Trudeau’s Liberals and has pledged to cancel the carbon tax on consumer fuels if it wins the next election, though Leader Pierre Poilievre has been vague about his plan for industrial emitters.

To reduce financial risk, Trudeau’s government has earmarked $7 billion for so-called “carbon contracts for difference.” The contracts provide a form of insurance for companies that invest in projects to reduce emissions — compensating them if the carbon price doesn’t rise as planned, or if the value of carbon credits falls too low on trading markets. 

The government is currently negotiating one-by-one with companies building specific projects, such as carbon-capture systems.

But the Clean Prosperity report called on the government to expand its contracts-for-differences program and make it broadly accessible to any company building a qualifying project. That could unlock another 33 megatons in industrial emissions reductions by 2030, it said — though at a potential cost of tens of billions of dollars in future government liabilities if carbon trading markets should falter.

Without those heavy industry reductions, Canada faces a much tougher path to its 2030 climate target, which is to reduce emissions by at least 40 per cent below 2005 levels.

“We wanted to see what the downside is if the private sector doesn’t really believe that the government is capable of following through on its promises,” said Frank in a phone interview. 


Government risk-taking

The Canadian government has only recently started to lock in carbon contracts with heavy industry. It signed the first one in December, a contract worth as much as $1 billion with an Alberta-based carbon capture firm called Entropy. 

That deal starts with an agreement to buy credits associated with a carbon-capture system at a natural gas plant, but can scale up with other projects later. If the system works as planned, the government will sell those credits on carbon trading markets, possibly even at a profit. But if not, the government takes the financial risk, not the company.

The government faces a trickier issue in the oil sector. A coalition of oilsands firms known as the Pathways Alliance is looking at a massive carbon capture system, a project that’s critical to Canada’s climate goals. But Pathways wants a carbon contract in place before proceeding. 

Such a contract has the potential to cost the government many billions of dollars, given the scope of the plans and the large carbon footprint of the oil sector. 

Regardless, negotiating each contract individually will not get Canada where it needs to be on emissions reductions, Frank said. “We need something more systematic,” he said. 

The report estimates that under Canada’s current approach, about 5 to 10 megatons in emissions reductions will be achieved by 2030. That implies the government would need to commit much larger amounts — somewhere between $20 billion and $50 billion — to see the full environmental impact from industrial carbon pricing.

But Frank argued the actual cost to the public treasury would be much lower, as long as the carbon trading markets function properly and the carbon price escalates as planned.

“What is really important here is that everyone believes that the government is going to enforce its own policies, that it has issued enough contracts for difference; that it will follow through on its commitments,” Frank said.