Study Critiques Alberta's Energy Deal with Ottawa for Emission Reductions
📅 Today
OTTAWA — A recent analysis by the Canadian Climate Institute has raised concerns regarding the effectiveness of Ottawa's energy agreement with Alberta, suggesting that it will have minimal impact on reducing emissions across Canada. The study indicates that the benefits expected from the memorandum of understanding (MOU) signed between Prime Minister Mark Carney and Alberta Premier Danielle Smith are insufficient to counterbalance the anticipated rise in oil production. This skepticism stems primarily from the inefficiencies inherent in the modifications to Alberta's industrial carbon pricing framework.
Dave Sawyer, the principal economist at the Canadian Climate Institute and the author of the study, emphasized the need for a closer examination of the carbon pricing system's floor. He remarked, "I think they have to take a look at the floor a little closer. I think they have to think whether or not those tightening rates put the floor at risk, and so I think they have to look at the design of this thing much closer."
The tightening rates Sawyer refers to denote the emissions limits set for industries under Alberta's carbon pricing system, also known as stringency rates. Last month, the implementation agreement was signed, establishing a target for Alberta's effective carbon price to reach $130 per tonne by the year 2040. Additionally, the headline carbon price is slated to hit $100 per tonne by 2027 before escalating to $130 per tonne by 2035.
The distinction between the effective carbon price and the headline price lies in the mechanics of how companies acquire credits to meet their emissions targets. Under the new agreement, the stringency rates have been relaxed, granting industries greater flexibility concerning their allowable emissions. Although the updated carbon pricing structure is portrayed as more robust than the previous federal backstop, Ottawa has opted against enforcing the stricter federal standard, arguing that the new model will positively influence the province's credit market.
However, the Canadian Climate Institute's study contends that this new system does not adequately promote market prices that could meet the government's established floor. As a result, it may dissuade investments aimed at reducing emissions. The fundamental objective of a carbon market is to encourage investments that lower emissions by making such initiatives more financially attractive than purchasing credits or paying the carbon price.
According to Sawyer's analysis, there is a significant risk of an oversupply of lower-cost credits emerging after 2030, as producers are likely to exceed their emissions benchmarks until that point and accumulate credit reserves under the more lenient stringency rates. The report states, "The floor maintains prices but the underlying signal to abate is lost. Price maintenance does not translate into emissions reductions and instead the system mostly delivers paper compliance rather than cutting emissions."
How Ottawa and Alberta will address this potential credit oversupply remains uncertain. Carney has suggested the possibility of purchasing credits to create scarcity in the market; however, Sawyer argued that this approach might not be viable. "That’s off the table. What this agreement does now is it actually puts more of those credits into the system. Now with these tightening rates, I don’t know if it’d be worth it. I think you’d be throwing good money after bad," he stated.
Sawyer noted that when preliminary details of the MOU were leaked prior to the official announcement, the market price for carbon credits surged to $40 per tonne from a low of $17 per tonne recorded last year. However, following the official announcement of the agreement, the price has since declined to between $30 and $35 per tonne.
The report ultimately concludes that this significant policy intervention will leave Canada’s long-term emissions trajectory largely unchanged from where it stood prior to finalizing the MOU. It results in only marginal adjustments to a system that has already been weakened.
Dave Sawyer, the principal economist at the Canadian Climate Institute and the author of the study, emphasized the need for a closer examination of the carbon pricing system's floor. He remarked, "I think they have to take a look at the floor a little closer. I think they have to think whether or not those tightening rates put the floor at risk, and so I think they have to look at the design of this thing much closer."
The tightening rates Sawyer refers to denote the emissions limits set for industries under Alberta's carbon pricing system, also known as stringency rates. Last month, the implementation agreement was signed, establishing a target for Alberta's effective carbon price to reach $130 per tonne by the year 2040. Additionally, the headline carbon price is slated to hit $100 per tonne by 2027 before escalating to $130 per tonne by 2035.
The distinction between the effective carbon price and the headline price lies in the mechanics of how companies acquire credits to meet their emissions targets. Under the new agreement, the stringency rates have been relaxed, granting industries greater flexibility concerning their allowable emissions. Although the updated carbon pricing structure is portrayed as more robust than the previous federal backstop, Ottawa has opted against enforcing the stricter federal standard, arguing that the new model will positively influence the province's credit market.
However, the Canadian Climate Institute's study contends that this new system does not adequately promote market prices that could meet the government's established floor. As a result, it may dissuade investments aimed at reducing emissions. The fundamental objective of a carbon market is to encourage investments that lower emissions by making such initiatives more financially attractive than purchasing credits or paying the carbon price.
According to Sawyer's analysis, there is a significant risk of an oversupply of lower-cost credits emerging after 2030, as producers are likely to exceed their emissions benchmarks until that point and accumulate credit reserves under the more lenient stringency rates. The report states, "The floor maintains prices but the underlying signal to abate is lost. Price maintenance does not translate into emissions reductions and instead the system mostly delivers paper compliance rather than cutting emissions."
How Ottawa and Alberta will address this potential credit oversupply remains uncertain. Carney has suggested the possibility of purchasing credits to create scarcity in the market; however, Sawyer argued that this approach might not be viable. "That’s off the table. What this agreement does now is it actually puts more of those credits into the system. Now with these tightening rates, I don’t know if it’d be worth it. I think you’d be throwing good money after bad," he stated.
Sawyer noted that when preliminary details of the MOU were leaked prior to the official announcement, the market price for carbon credits surged to $40 per tonne from a low of $17 per tonne recorded last year. However, following the official announcement of the agreement, the price has since declined to between $30 and $35 per tonne.
The report ultimately concludes that this significant policy intervention will leave Canada’s long-term emissions trajectory largely unchanged from where it stood prior to finalizing the MOU. It results in only marginal adjustments to a system that has already been weakened.
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Ottawa
carbon credits
energy deal
carbon pricing
industrial carbon pricing
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Canadian Climate Institute
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