As the carbon price rises to 2030, it will drive greater emissions reductions, but the risk of future price changes and credit market oversupply undermines the effectiveness of this price signal. This is significant, because the financial viability of many decarbonization projects depends on a certain and stable carbon price, and any uncertainty has a secondary effect of driving up the cost of capital for project developers, as investors and lenders charge a premium for this revenue risk. This risk is one factor that will lead to actual emission reductions being less than otherwise predicted in Canada’s Emissions Reduction Plan (also see Canadian Climate Institute independent modelling of that plan). There are examples of this playing out.
A federal agency could award contracts for differences through a competitive process, such as auction calls or competitive tenders, cost-effectively de-risking private sector low-carbon investments, by guaranteeing the lowest acceptable carbon price that the projects need to go ahead. Once projects are covered by contracts for differences, the agency would pay projects the differential if the actual carbon price is lower than the contracted minimum guaranteed carbon price, and would receive payment if the actual carbon price is higher than the contracted guaranteed carbon price. This means more decarbonization can be achieved with a given level of carbon pricing and decreases the likelihood a future government will weaken carbon pricing, because they would have to pay out these contracts. To enable carbon contracts to lower the risk of major policy changes to the carbon pricing regime, a number of market and policy uncertainties should be addressed. They include making carbon credit prices transparent, plans for periodic and transparent credit market reviews and recommendations, and output based pricing stringency that is aligned with national net-zero commitments. Without those measures, contracts are based only on the legislated carbon price as opposed to the actual carbon credit prices, without consideration of the expected oversupply of credits.
Allocate up to $10 billion to the Canadian Infrastructure Bank or Clean Growth Fund to create a competitive bidding process for contracts-for- difference, developed in consultation with ECCC, FIN, NRCan, INFC, and other relevant agencies. The contracts would be primarily focused on difficult to decarbonize sectors excluding oil and gas (e.g., cement, steel). There should be explicit rules capping upfront and long-term subsidies paid to industry, use competition and targeted calls for contracts to drive cost-efficient emissions reductions, engage stakeholders, and be clear on which aspects of Canada’s carbon pricing landscape are in scope. The program should report on its role in subsidizing sectors, program costs, revenues, and emissions reductions it achieves. To enable these contracts, federal and provincial carbon pricing systems must make credit prices public information, their stringency must increase at least 4% per year to align with Canada’s net-zero commitment, and transparent processes are needed to monitor and make recommendations on credit market management.
See also Cleaning up and decarbonizing domestic shipping, on pricing shipping emissions, later in this document; and Aligning federal investments and policies, including subsidies, with Canada’s Nature commitments, earlier in this document, on pricing forestry-related emissions.