Ottawa under pressure to bet big on its own carbon pricing system as industry warns of lost investments

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A protracted struggle to implement a new financing tool for major clean-technology projects is coming to a head this fall – with billions of dollars in capital, millions of tonnes of greenhouse gas emissions and the very future of Canada’s industrial carbon pricing strategy hanging in the balance.

Ottawa first promised 18 months ago to develop carbon contracts for difference (CCfDs). The basic premise is that the government would strike deals with companies – in industries such as oil and gas, cement, steel and electricity – guaranteeing a minimum value for emissions-reduction credits earned under the industrial pricing system. They would ensure that the credits serve as a reliable revenue stream, insulated from uncertainty about how credit markets will take shape, for investments in carbon capture and other decarbonization technologies otherwise not financially viable.

Since the initial commitment, CCfDs have taken on added urgency. Massive subsidies for similar projects in the United States, through the Inflation Reduction Act, have raised the danger of capital flight. Meanwhile, there is pressure to get the deals in place before the next federal election, because one of the risks that CCfDs are meant to protect against is the devaluation of carbon credits if another government takes office and scraps the existing carbon-pricing policy.

But based on recent interviews with more than a dozen people engaged in the discussions, including sectoral representatives and federal officials, there remains a large gap between what Ottawa is ready to roll out and what companies say is needed.

To date, Ottawa has committed only to providing CCfDs through the Canada Growth Fund, a $15-billion agency to support low-carbon investments which began operations this summer. The fund’s managers, however, have signalled to industry that they intend to offer the contracts in a modest way, alongside several other financing tools they are mandated to provide.

Now, industry is pushing for a bigger and broader CCfD program, which this year’s budget vaguely promised to develop, to be put in place by the end of this year. And it’s warning that otherwise, some pending decarbonization projects could be delayed too long to hit national climate targets, and others abandoned altogether.

“I think heavy industry is fairly united in looking for details of this by the Fall Economic Statement,” Canadian Steel Producers Association president and chief executive officer Catherine Cobden said.

Adam Auer, the president and CEO of the Cement Association of Canada, added that “we will be losing out on investment, across multiple sectors” if contracts aren’t struck “over the next few quarters.” (His sector includes one of the more prominent projects at risk: the world’s first cement plant with full-scale carbon capture, which Germany’s Heidelberg Materials plans to build in Edmonton.)

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Senior members of Prime Minister Justin Trudeau’s government appear receptive to such warnings. “I’m hopeful that we are going to be able to move forward in the relatively near term,” Energy and Natural Resources Minister Jonathan Wilkinson said, calling it “critical” to investments such as carbon-capture projects in Alberta’s oil sands, when asked about a broader CCfD program during a meeting last week with The Globe and Mail’s editorial board.

Some industry leaders echoed that optimism. “We’re in constructive discussions on CCfDs as we speak,” Kendall Dilling, who heads the Pathways Alliance representing the six companies that dominate the oil sands, told The Globe. “I think there is light at the end of the tunnel.”

But the Finance Ministry, which is leading the file for the government and recently ramped up efforts to explore a broader program, is still non-committal.

“The government and the Growth Fund are in ongoing conversations with a number of commercial project proponents to understand the demand in the market for carbon contracts for difference and how we can best facilitate these in a way that both is fiscally responsible and supports the creation of clean growth projects,” said Katherine Cuplinskas, a spokesperson for Finance Minister Chrystia Freeland.

Conversations with five other federal officials, whom The Globe agreed not to identify because they were not authorized to speak on the government’s behalf, shed light on major stumbling blocks for Finance that stand in the way of quick resolution.

The biggest of those is the sheer scale of the contracts that industry is seeking.

CCfD proponents point out that the deals need not ultimately prove costly for the government. The idea is that the guaranteed price of an abated tonne of carbon will be set at a level high enough for companies’ projects to be worthwhile, and lower than the benchmark national carbon price, which is scheduled to reach $170 in 2030. If carbon credits’ value surpasses the price that the CCfD has guaranteed, the government breaks even or comes out slightly ahead; if they’re worth less than the guaranteed price, the government effectively pays the difference.

Officials, however, are complaining that industry is seeking contracts with guaranteed prices that are too high to be fiscally responsible. In some cases, they say, companies are claiming that more than $170 a tonne is needed to make their projects viable, which would effectively be a subsidy since there is no chance of credit values being that high.

Companies also want the contracts to cover a greater number of years, once clean-technology investments are operational and emissions reductions are being accrued, than Ottawa may wish. “When this policy is announced, we will be looking for long-term coverage, not just for a few years,” Ms. Cobden said.

Further contributing to the Finance Department’s risk concerns is the fact that most provinces have their own industrial carbon pricing systems and markets, under broad federal requirements. That means changes to provincial policy could cause crashes to carbon-credit values and necessitate federal payouts.

Michael Bernstein, who heads the think tank Clean Prosperity and has been a leading advocate for CCfDs, suggests that Ottawa should be trying to persuade provinces to partner on the contracts or provide assurances of policy consistency. That sort of pitch would largely have to be directed at Alberta, which is home to the bulk of carbon-capture projects for which CCfDs are being sought – including in the oil sands, at Capital Power’s gas-fired Genesee Generating Station and at the Heidelberg cement plant.

Even if Ottawa’s risk is minimized to the greatest extent possible, a broad-based CCfD program would mean billions of dollars in liabilities. So another consideration it has to resolve is where and how those would appear on the government’s books.

And since CCfDs would be a novel instrument, many other questions are still to be answered about their precise structure.

One of the more optimistic scenarios for much (if not all) of this being resolved comes back to the Canada Growth Fund, which the government has enlisted the Public Sector Pension Investment Board to run.

It will not offer many large CCfDs, as some initially envisioned, because they would eat up too much of its budget. And other instruments which it has also been tasked with deploying, including equity stakes, give it a better chance of fulfilling its mandate to earn a return on investments.

But the Growth Fund is working toward an initial CCfD or two. In the process, federal officials say, its managers are becoming experts on how to negotiate the contracts, and may set a template.

A possibility floating around Ottawa is that the Growth Fund could wind up as negotiators even for the broader suite of CCfDs that would live elsewhere on the government’s books.

For now, that’s just one of many options under consideration.

But it’s the sort of operational detail that industry wants this fall. And despite its many causes for hesitation, Finance could be under pressure from others in Ottawa to deliver on that timeline, because of the way demand for CCfDs cuts to the heart of federal strategy for low-carbon economic competitiveness.

Although his government is introducing a handful of tax credits in response to more generous ones in the United States, Mr. Trudeau has said that Canada does not need to fully match the subsidies in the Inflation Reduction Act, because unlike the U.S. it has a national carbon-pricing regime.

The message from industry is that could indeed be the case, but only if there is more certainty around the credits generated under that system.

That makes, to some eyes, for a test of faith in the policy approach to which Mr. Trudeau has staked his credibility since his first term.

“Is the federal government committed to making carbon pricing the cornerstone of Canadian climate action?” asked Mr. Bernstein, whose organization has advocated for the market-based system since before it was introduced.

“If so, it needs to quickly deploy carbon contracts for difference and give business the confidence to start making big investments. Otherwise, industrial carbon pricing won’t live up to its potential.”

With reports from Kelly Cryderman and Emma Graney.