Key Takeaways
- The recent agreement between Alberta and Canada includes several steps back on climate change policies, but also presents an opportunity for progress on industrial carbon pricing.
- The effectiveness of industrial carbon pricing in Alberta and Canada depends on the implementation of the agreement.
- A minimum carbon price of $130 per tonne is necessary to encourage investment in emissions-reducing projects.
- The federal government can establish a minimum carbon price for all provinces to reduce uncertainty and encourage investment.
- Correcting industrial carbon pricing is a sensible choice for heavy industry, carbon-reducing projects, investments, competitiveness, and emissions reductions.
Introduction to Industrial Carbon Pricing
The recent agreement between Alberta and Canada has been met with mixed reactions, with some viewing it as a step back on climate change policies, while others see it as an opportunity for progress on industrial carbon pricing. Industrial carbon pricing, also known as a cap-and-trade system for large emitters, is a market-based approach aimed at reducing emissions from heavy industry in a cost-effective manner. This approach was first introduced in Alberta in 2007 and has been designed to protect the competitiveness of these sectors in international markets.
How Industrial Carbon Pricing Works
The cap-and-trade system sets performance standards for heavy industry based on the amount of emissions per unit of production. If a company emits less than the allowed amount, it generates credits that can be sold. If it emits more, it can buy credits on the market or pay for the excess emissions. The key aspect of this system is that companies only pay for excess emissions, which encourages significant emissions reductions at a low cost, rather than shifting production and emissions to other regions. It’s worth noting that industrial carbon pricing has little impact on consumer prices, as the pricing is intentionally low, and companies cannot pass on the costs to consumers due to international competition.
The Importance of a Functional Carbon Market
The effectiveness of industrial carbon pricing in reducing emissions and attracting investment depends on the functionality of the carbon market. A well-functioning market can encourage significant emissions reductions at a low cost and attract private funding for emissions-reducing projects. However, the current market in Alberta, known as the TIER system, is saturated, with credit prices below $20 per tonne, which undermines investment incentives. The uncertainty surrounding the future of industrial carbon pricing also increases risks and discourages investment.
The Potential of the Agreement
The recent agreement between Alberta and Canada has the potential to address these issues. Notably, it provides for a minimum carbon price of $130 per tonne, which is lower than the federal government’s current reference price of $170 per tonne but significantly higher than the current price. A predictable price of $130 per tonne could make carbon capture and storage projects more viable and attractive. With a guaranteed minimum price, the carbon market can provide a stable source of revenue for emissions-reducing projects.
Establishing a Price Floor
To establish a price floor, Alberta can set a minimum price for credits at $130 per tonne. This can be achieved by reducing the supply of credits over time, limiting reserves and offset credits, and buying back credits. The revenue generated by the current system can be used to finance these purchases. A price floor of $130 per tonne is necessary to guide investments towards low-carbon facilities and to achieve the goal of net-zero emissions by 2050.
A National Approach
The agreement between Alberta and Canada is not limited to Alberta; it has implications for the rest of the country. Industrial carbon pricing reduces the cost of emissions reductions by encouraging uniform reductions across all types of emissions. A minimum price floor should apply to all provinces, not just Alberta. Other provinces, such as British Columbia, Saskatchewan, and Ontario, also have carbon markets that appear to be out of balance, posing the same risk to investments.
Conclusion
The agreement between Alberta and Canada is not perfect, but it presents an opportunity to correct industrial carbon pricing in Canada, providing much-needed policy certainty. Correcting industrial carbon pricing is a sensible choice for heavy industry, carbon-reducing projects, investments, competitiveness, and emissions reductions. By establishing a minimum carbon price of $130 per tonne and applying it to all provinces, the federal government can reduce uncertainty and encourage investment in emissions-reducing projects, ultimately contributing to a more effective climate change policy.
