The stakes are high as Alberta and Ottawa sit down to hammer out the contours of their memorandum on energy and climate policy, and negotiations over the next few months will be fraught with complex policies and regulations. Yet the main question is simple: Will Alberta bring genuine good faith to the negotiating table?
Initial signs are not good. Just a week after Alberta signed the memorandum of understanding, which committed it to strengthening its industrial carbon pricing system, the province pushed through regulatory changes that do the opposite.
Alberta’s system only functions if companies are confident the carbon credits they will earn in future (if they reduce their emissions) will hold a reasonable value. If they suspect otherwise, a large component of the business case for their low-carbon investments is lost. This is why achieving, in short order, the much-talked-about $130 credit value that Alberta committed to in the MOU, is vital.
Like any market, supply-and-demand is king: when supply of credits is high, their value decreases. And, once the value of a credit tracks too far away from the price companies must pay for every tonne of carbon they emit – something we call the “headline price” – the credit market starts to bottom out.
Put simply, if companies can meet their emissions obligations by buying cheap credits, they won’t feel compelled to invest in technologies and projects. This has been the case in Alberta for the last couple of years, with credits trading in the low $20s, while the headline price is currently $95 a tonne.
Equally, if credit values stay weak, companies are particularly put off high-cost, multidecade investments – such as the massive Pathways carbon capture and storage project. A common refrain from industry and pundits is that, unlike oil and gas pulled from the ground, carbon capture generates no saleable “product.” Alberta’s industrial carbon pricing system is supposed to do away with that concern by putting a value on captured carbon in the form of credits, but the system works only if credit values are strong and predictable.
This is the crux of why Alberta’s recent changes to its system appear in such bad faith. The province has amended its regulation to allow companies to earn credits not when they prove emissions have been reduced (as was previously the case), but at the initial point of investment in a supposedly emissions-reducing project. Companies may therefore opt for the least expensive actions – for example, commissioning an engineering study – and still earn credits, while having no duty to prove emissions are ultimately reduced. As more companies utilize this new option, the credit market is likely to be flooded, pushing credit values even lower.
After all the talk of turning the page on years of federal‑Alberta discord over climate policies, it is difficult to imagine a more cynical manoeuvre. At best, it suggests Alberta has misunderstood the fundamentals of its own system – which should not simply incentivize investment for its own sake, but generate actual emissions reductions. At worst, it suggests Alberta is attempting to move the goalposts before negotiations begin. Starting with a weaker industrial carbon pricing system means the federal government has to negotiate harder to reach a reasonable outcome.
Perhaps these regulatory nuances seem like small potatoes compared with the political significance of a Liberal prime minister and Conservative Alberta premier standing together, smiling, signing their MOU. But if industrial carbon pricing is to do much of the heavy lifting in a post-Trudeau Liberal climate plan, then these details matter indeed.
Secondly, and not unrelatedly, Alberta is still pursuing a legal challenge of the federal Clean Electricity Regulations. This is despite the MOU outlining a pathway to those regulations being suspended if Alberta demonstrates a credible way to use its preferred method – you guessed it, industrial carbon pricing – to reduce electricity sector emissions instead.
A legal challenge is a curious thing to have hanging over these talks. If Ottawa doesn’t get what it needs on industrial pricing, and the Clean Electricity Regulations don’t end up suspended, will Alberta get up from the table and simply say “see you in court?” It seems to be keeping its options open. This isn’t something good-faith negotiators are supposed to do.
It’s true Canada would have a better chance of fighting climate change if its highest-emitting province, home to its highest-emitting industry – the oil sands – co-operated. But nothing is final until it is final. Industrial carbon pricing is incredibly important, but it’s also necessarily complex, and that complexity leaves lots of room for gamesmanship. Ottawa must remember that while this may be a season of goodwill with Alberta, strong climate policy must endure.
