Canada’s patchwork system for pricing greenhouse gas emissions from heavy industry recently got a major shot in the arm.
It came primarily in the form of an agreement between Ottawa and the Alberta government to strengthen that province’s industrial pricing regime – the Technology Innovation and Emissions Reduction Regulation (TIER) – to meet new requirements for avoiding the federal backstop system. Starting this year, the price that Alberta charges its industrial emitters will rise annually until it reaches $170 a tonne by 2030 and it will be applied increasingly stringently.
Although it flew largely under the radar when announced shortly before Christmas, the deal – with the most belligerent of governments, in the province with by far the most industrial emissions because of its oil-and-gas sectors – seems about as positive an outcome as Ottawa could reasonably have hoped for, when it started negotiating new carbon-pricing equivalency agreements. And it may be mirrored elsewhere, with Ontario having announced a seemingly similar deal shortly thereafter, and other provinces expected to follow suit soon.
But whether even that is enough, to prove that carbon pricing will truly be the backbone of Canada’s climate and clean-economy strategy going forward, remains a matter of debate. And it’s one in which the federal government itself still shows some signs of being conflicted, through its actions if not its words.
While there are various complex changes to the way that the TIER will now function, the most important one involves the share of industrial emissions that will actually be subject to the price.
As in other provinces, the overwhelming share of heavy-industry emissions – ranging from 80 per cent to 95 per cent – have effectively been exempted from carbon pricing so far, in order to protect trade interests when competing against countries that lack comparable regimes. (Those competitiveness concerns are why the industrial system exists at all, rather than just subjecting companies to the simpler fuel charge paid by most fossil-fuel consumers.)
Now, that shelter will be significantly scaled back. Whereas the share of priced emissions for each industrial facility under the previous version of the TIER went up one percentage point each year, the new version will see it rise by two percentage points annually through to 2030, and an extra two points in each of the final two years of the decade for the oil sands.
It’s hard to definitively state where that will leave total emissions coverage, because it gets very confusing when the starting points for all the regulated facilities are factored in, but in theory it should ultimately bring total emissions coverage for Alberta emitters somewhere in the range of 30 per cent.
Nobody denies that’s significant progress, including environmental groups tracking the issue. But some of them suggest it still falls short.
“The new TIER rules are not right-sized for a scenario where Canada achieves its 2030 emission reduction target” of at least 40 per cent by 2030, says Michael Bernstein, the executive director of Clean Prosperity, an organization focused on market-based climate policy.
Mr. Bernstein is specifically worried about the credits-trading system that is a key component of the industrial pricing regime. Companies are supposed to be incentivized to cut pollution on the basis that those exceeding their emissions-reduction requirements can sell credits to those falling short. The concern is that if the stringency doesn’t rise fast enough, credits could be generated too easily and flood the market. That would mean a crash in their value, the prospect of which could be a disincentive to make emissions-reducing investments in the first place.
Ottawa is fairly dismissive of this concern. It’s eager to declare victory on a big leap for federal-provincial carbon-pricing co-operation, and it can certainly argue that the future of the credits market looks much stronger than previously.
But if the government were completely confident in the carbon-pricing system to do the heavy lifting on emissions reduction, it wouldn’t need to layer on lots of other policies toward the same end.
It already does that, of course, with various additional regulations, and billions of dollars in subsidies, including a new 50-per-cent investment tax credit for the carbon-capture technology that fossil-fuel companies are counting on for their decarbonization strategies. But other major policies targeting industrial emissions are currently in the works.
Some of those could be complementary to the provincial pricing systems. That may be the case with carbon contracts for differences, a mechanism that Ottawa has promised to develop to use public financing to assure companies investing in clean technologies of a specific financial benefit for each averted tonne of carbon. One possible approach would establish a floor for the value of each carbon credit, although the government has also been considering other models.
Others, though, could create heavy overlap. That most notably includes promised caps on total emissions from domestic oil-and-gas production. If Ottawa creates a separate, federally administered cap-and-trade pricing system just for that sector – the model it’s widely believed to be leaning toward – it would not exactly be a vote of confidence in the federal-provincial deal it just struck.
And then there’s whatever new spending measures are announced for heavy industry (fossil fuel or otherwise) in this spring’s budget, which is expected to be themed partly around keeping pace with massive new clean-economy investment in the United States.
The more that the government here tries to keep up through new spending commitments, the more it will tacitly recognize that carbon pricing (which the U.S. lacks at the national level) negates the need to spend the same way, which Prime Minister Justin Trudeau has intermittently suggested is the case.
None of that would be an indictment of the industrial pricing system altogether – just an acknowledgment of its limitations.
One of the big stories of 2022, as it turned out, was Ottawa managing to work with the provinces to get systems like TIER as far as it could. This year will be about figuring out how much they still fall short, and what to do about that.
Adam Radwanski