The economic update that was meant to shed light on how Canada will compete with new clean-spending measures in the United States and elsewhere has instead sowed confusion about one of the key elements of that strategy.
Last spring, the federal government announced that it was exploring carbon contracts for differences (CCFDs). As presented then, the mechanism would guarantee companies making clean-technology investments of financial benefits from planned carbon-price increases, even if the price did not actually go up to $170 per tonne by 2030 as planned.
Since August, when Washington committed US$370-billion to climate-related measures via the Inflation Reduction Act, Ottawa has faced increased pressure to follow through.
Prime Minister Justin Trudeau has suggested that Canada’s national carbon price means it doesn’t need to match subsidies in the U.S. But Canadian industries have complained that political uncertainty around the market-based mechanism – including whether it will be maintained if a different government takes office – impedes its ability to spur investment.
The fall economic statement, tabled last week by Finance Minister Chrystia Freeland, ostensibly moved the file along, by indicating that CCFDs would be one of the instruments used by the Canada Growth Fund – the new $15-billion financing agency that Ottawa will entrust to attract private capital to decarbonization.
But the reality is that, despite the urgency of the competitiveness challenge, few in Mr. Trudeau’s government have wrapped their heads around what exactly this rather complex mechanism is meant to achieve and how it will be structured.
And mixed messages contained within the economic statement have contributed to different interpretations among stakeholders of where the government is headed with it.
The befuddlement is not entirely of Ottawa’s making, since it’s in the middle of friendly fire between advocates and lobbyists who broadly want CCFDs but disagree about the fundamentals.
The idea that initially came onto the government’s radar, first put forward in a C.D. Howe Institute paper by economists Dale Beugin and Blake Shaffer, would essentially involve an insurance policy for companies making clean-tech investments that only make financial sense with a robust carbon price. If the price didn’t reach a certain level by a certain date, companies signing such contracts would receive compensation.
A variation has since emerged, in which the government would instead guarantee the value of carbon credits that companies can earn under Canada’s industrial carbon-pricing system when they reduce emissions. Preferred by industry groups such as the Pathways Alliance representing oil-sands giants, it would address not just the risk of a change in government affecting planned price increases, but also uncertainty about how credit markets will take shape.
But there’s another approach being advocated by industries such as cement. They argue that even the scheduled carbon price may not be enough for new low-carbon technologies to compete with established emissions-intensive ones. So that model would guarantee a value for each tonne of averted carbon emissions, which might be higher than the scheduled price.
This version – which is actually a more established take on CCFDs, and is also being pursued by other countries such as Germany – would aim to pinpoint the financial needs of a relatively small number of large projects.
A generous read of how the fall economic statement navigated all this would be that the government is hedging its bets.
In the statement’s main text, CCFDs were described as “a tool that ensures businesses can plan long-term investments in decarbonization and clean technologies based on a predictable price on carbon pollution and carbon credits,” which could be read as either of the first two options.
But a background document detailing plans for the Canada Growth Fund stated that the contracts would “address demand and policy risk and improve project economics” by managing “perceived uncertainty around, for example, the evolution of a carbon price or of the price of a product, such as hydrogen.” That sounds more like Door #3, especially because hydrogen is a product for which carbon-price uncertainty is not the main concern.
The result has been a sort of climate-policy Kremlinology, in which CCFD proponents have competing interpretations of which explanation matters more.
What actually seems to have happened is that the Prime Minister’s Office was drawn to the initial carbon-pricing-certainty pitch, hasn’t paid close attention while the discussion has evolved, and was mollified by the language in the main economic statement text. Meanwhile, Finance officials steering the Growth Fund may have warmed to other options, reflected in backgrounder text to which the PMO paid little attention.
There are still plausible paths forward in the near term. For instance, Ottawa could start with contracts for the credit value needed for carbon-capture projects to go forward, which is relatively easy to calculate, and later expand to variations for other technologies.
But given the complexity of implementing this type of policy, and the stakes, Ottawa may not have the luxury of gradually backing into it.
To the extent that CCFDs are meant to minimize political uncertainty, the government needs to have them in place in advance of the next federal election.
And it will need to happen faster than that – with a clear idea of what problem is being addressed, and little room for error – if Mr. Trudeau is serious about a bolstered carbon price keeping Canada competitive with its big-spending neighbour.