The most intriguing policy idea in the federal government’s new Emissions Reduction Plan is to fix something that is far shakier than it might appear: the carbon pricing system that is supposed to underpin Canada’s entire climate strategy.
At first glance, that system might appear to be on more solid ground than ever before. An increase in the federally imposed carbon price, bringing it to $50 per tonne, just took effect on Friday. Further annual increases of $15 per tonne seem assured for the next couple of years, courtesy of a Liberal-NDP agreement meant to keep the current government in power until 2025.
But that doesn’t mean it will keep rising, as currently scheduled, all the way to $170 per tonne by 2030 – not when the federal Conservatives, the likeliest alternative to the Liberals in the next election, appear to be shifting back to carbon-pricing opposition after flirting with support for it.
And that political instability is a big impediment to carbon pricing fulfilling its biggest purpose, which is to incentivize big, long-term investments in clean technology that don’t offer enough financial upside otherwise.
Speak to leaders of large Canadian industries – including, very notably, the oil and gas sector – and you will hear less opposition to carbon pricing than frustration with the uncertainty around its future. If they knew it would keep going up as planned, they say, it would drive adoption of carbon capture, electrification, and other means of reducing emissions. Without that confidence, they feel at risk of high costs if the price does keep going up, but reluctant to spend in ways that won’t pay off if the price is flattened or scrapped altogether.
So there was very good reason for Ottawa to announce in the Emissions Reduction Plan (ERP) that “to enhance long-term certainty” it will be “exploring measures that help guarantee” the carbon price. That was mostly a reference to developing a mechanism to reduce the private sector’s exposure to risks from policy changes – ensuring companies will get the benefits from investments contingent on carbon pricing reaching a certain level, even if that doesn’t actually happen.
And it was equally encouraging to get the impression from Environment Minister Steven Guilbeault, in an interview with The Globe and Mail following the ERP’s release, that the government is readier to move than the exploratory language in the plan made it sound.
“I think this is something we can do very quickly,” he said, anticipating only “a matter of months” to choose from possible methods.
There is some cause for skepticism about the government moving at quite that pace, given its usual slowness. But it should help in this case that a credible idea for how to achieve greater carbon pricing certainty is already in play.
Known as “contracts for differences,” and explicitly mentioned as an option in the ERP, it was first proposed in a C.D. Howe Institute paper last year by Dale Beugin of the Canadian Climate Institute and Blake Shaffer of the University of Calgary.
The arrangement would boil down to a transfer of risk from private investors to the government. A public entity, such as the Canada Infrastructure Bank, would commit in advance to paying a company investing in a clean-technology project a specific amount, based on the anticipated value attached by carbon pricing to that project’s reduction of emissions. If the carbon pricing did not go up as expected, the government, rather than the company, would be on the hook for the lost revenue; if the carbon price went up more stringently than expected, the government would be the beneficiary.
It’s important here, contextually, to understand that this would not be primarily about the version of carbon pricing paid by Canadian families and smaller businesses. It would mostly apply to the system that covers large industrial emitters, in which companies can not only generate savings for themselves by reducing their emissions, but also earn credits they can sell to other emitters.
That’s where much of the worth for big clean-tech investments is supposed to come in – but again, only if there’s enough policy certainty. And while the Conservatives have not outright opposed industrial pricing, the way they have with the levy paid by most consumers, they have been non-committal at best on increasing its stringency.
It’s also worth considering how much the lack of certainty may be costing the government at the moment. The less that industries can count on carbon pricing to make their emissions-reducing investments economical, the more they are able to make a compelling case for subsidies, such as the large carbon-capture tax credit expected in next week’s federal budget.
The contracts for differences would not be ironclad, exactly. A new government could conceivably tear them up. But it would be given pause before doing so because such an action would open it up to lawsuits and compensation costs, and perhaps more importantly, reputational damage to Canada’s broader investment climate.
The mechanism would also provide disincentive to scrap or weaken carbon pricing itself, since that would leave the government on the hook for large sums of money.
For that reason, the idea’s inclusion in the new climate plan – and Mr. Guilbeault’s talk of acting quickly – is liable to be painted by Conservatives as undemocratic, because of the way it could tie their hands in future.
That’s probably a better argument when it comes to another possibility, mentioned in the same section of the ERP, that the government will somehow try to more firmly enshrine the carbon price in law. (That prospect seems somewhat dubious anyway, since presumably future parliaments could simply roll the law back.)
But when it comes to the contracts for differences, as Mr. Shaffer noted in an interview, governments already commit to all sorts of long-term investments and financial partnerships – in infrastructure, for instance – that are costly to break for their successors.
There is no good reason, at this point, why carbon pricing should be any different.
Canadians have essentially given it a green light in the last two federal elections. Industries, including those in a fossil-fuel sector that carbon pricing’s opponents claim it threatens, insist they’re ready to embrace it. It’s time to give it a chance to do its job.
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