Grant Bishop writes that we should not bow to businesses that are pushing for Canada to adopt U.S.-style carbon subsidies, which are at taxpayer expense and carry a significant fiscal cost.Reuters
Grant Bishop is the Calgary-based founder of KnightFork, which builds data-driven tools for carbon pricing and the energy transition.
Since the United States passed its Inflation Reduction Act in August, the storyline has been that Canada is being dumped as an attractive locale for decarbonization investments.
Canada’s markets for emission credits and offsets are considered too complex, opaque and vulnerable to shifting political winds. In contrast, the U.S. IRA provides tax credits of clearly specified value for new renewable power, battery storage, and carbon capture and storage (CCS). In the lingo of finance, this makes stateside investment “bankable,” giving lending a solid expectation of payback.
Understandably preferring guaranteed returns, our energy sector and infrastructure players are pushing for Canada to adopt IRA-style subsidies. And they have a point. In its upcoming fall economic statement, Ottawa should seek to anchor certainty for future carbon prices and help carbon markets mature.
But abandoning carbon markets as Canada’s key tool for long-run decarbonization to copy U.S. policies would be a mistake. In its IRA, Congress chose to subsidize decarbonization investments at taxpayers’ expense.
There is a better solution: Through so-called “reverse auctions,” the federal government should contract to purchase a given number of carbon credits each year. This would build on the proposal by Blake Shaffer and Dale Beugin for “carbon contracts for difference,” which these authors detail in a new report from Clean Prosperity, a climate-policy organization.
Such a reverse auction would collect offers from developers of decarbonization or renewable-energy projects to sell the future carbon credits those projects would create. Up to a specified amount of credits, Ottawa would acquire the credits offered at the cheapest price. This would provide developers with necessary price certainty for “bankability” of their projects.
The federal government can also serve as a “market maker,” selling to emitters who seek credits for compliance and providing liquidity as these markets mature. Analogous to a central bank’s open market operations, government interventions to stabilize carbon markets can attract financial institutions to provide further liquidity.
The IRA had solved a political problem of pushback by industry but at significant fiscal cost – some estimate at US$800-billion. Lawmakers lack perfect information about each developers’ costs and therefore risk subsidizing projects that would have been built without or with lesser subsidy. While the IRA will accelerate U.S. progress toward its 2030 emissions targets, decarbonizing further will likely require even more generous subsidies – or ultimate adoption of carbon pricing stateside.
On the surface, the IRA tax credits offer projects less value than would offsets under Alberta’s industrial carbon pricing regime. For example, under the IRA, a new CCS project can get a full production tax credit of US$85 per sequestered tonne (assuming it meets various procurement and geographic requirements) over a 12-year crediting period.
In contrast, in Alberta, such projects can create offsets for a 20-year period, and the current federal government requires provinces to increase the carbon price to $170 a tonne by 2030. Alongside the generous investment tax credit for CCS in the last federal budget, these economics should favour investing in decarbonization projects here.
However, one problem is the lack of transparency in carbon markets such as the one under Alberta’s Technology Innovation and Emissions Reduction Regulation – for which no prices for traded credits are reported. As well, as Michael Bernstein of Clean Prosperity and I have emphasized, Alberta must significantly tighten TIER’s stringency to avoid a credit oversupply and depression of credit prices.
But the big deficiency of Canadian carbon pricing is its political vulnerability. Developers have greater confidence in U.S. laws that are passed through Congress and signed by the president. In the words of the first secretary of the treasury, Alexander Hamilton, the U.S. system makes good measures “far more difficult to undo than to do.” However, lacking legislation for future carbon prices in Canada, a developer must bet a future government won’t unwind the current one’s planned 2030 carbon price or relax emitters’ obligations.
Therefore, by contracting to acquire credits at a certain price over a project’s life, the federal government can help the developer “hedge” its price risk. Economically, since the value of carbon credits is entirely dependent on federal policy, Ottawa is the most efficient partner to insure developers against policy uncertainty. By inserting itself as a market maker for carbon credits, it can help Canada’s carbon markets mature and get the most efficient decarbonization projects built.
Canada will need carbon pricing for decades to come. Now is the time for Ottawa to strengthen carbon markets rather than heap the country’s decarbonization bill on taxpayers.
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