Alberta’s carbon pricing system is under review and some policy experts say the wrong changes risk not supporting decarbonization investment.
Currently, the province is reviewing the system that allows big emitters to generate carbon credits or purchase those credits if they emit more than they are allowed, in a program known as the Technology Innovation and Emissions Reduction Regulation (TIER).
Alberta has had a carbon market since 2007 which has changed three times since its inception. When the UCP came to power in 2019, the party implemented the TIER system — an output-based carbon pricing system that creates benchmark emissions rates based on each facility's emissions, rather than a threshold of emissions across sectors.
If a facility creates more emissions than its benchmark allows, the company can buy a carbon credit to pay for the extra emissions. If a facility creates fewer emissions than the benchmark allows, it is issued a credit by the provincial government and can sell that credit on the TIER carbon market in Alberta.
Alberta’s system must meet the federal carbon market standards. Alberta and Ottawa are in negotiations over how the system will look going forward into the 2023 to 2030 period to ensure the TIER system meets the federal carbon pricing requirements, said Scott MacDougall, senior advisor on the Pembina Institute’s oil and gas team. The Pembina Institute is a Canadian think-tank and registered charity focused on energy.
“It's essentially a federal decision whether or not the TIER system meets federal pricing benchmark requirements for that period,” MacDougall said.
The stakes for any changes are high, said MacDougall, because if the changes aren’t made appropriately, the sensitive carbon market could be pushed “out of whack” from 2023 to 2030.
“If those credit markets are oversupplied, then the price of credits could plummet, which would not help the business cases for lots of well-meaning decarbonization investments or low-carbon investments,” MacDougall said.
There is no fixed number of carbon credits in the carbon market, said Dale Beugin, executive vice-president of the Canadian Climate Institute, and the provincial government will issue them for any facility that goes below its benchmark emissions threshold.
This can create challenges in the market, Beugin said, because if benchmarks are set too low, many facilities can achieve emissions below the benchmark, causing a flood of credits into the system. The supply and demand of the market would then be upended, with more supply than demand, and the value of the credits would plummet.
Other factors can also throw off the balance of supply and demand in the market, Beugin said, such as the advancement of technology, which could result in giving all facilities the ability to reduce their emissions below the benchmark. They would then be issued credits, which would in turn flood the carbon market with the credits.
Change in government policies and incentives can also rapidly change the carbon market, such as the recent tax credit from Ottawa on carbon capture, utilization and storage (CCUS) facilities, Beugin said.
“Suddenly, it's cheaper to do CCUS with that tax credit, and that's going to drive a bunch more emissions reductions, making it easier to reduce emissions and therefore making it easier to do better than your thresholds, potentially adding to the glut of credits,” Beugin said.
Cap and trade versus TIER
The U.S. operates under what is known as a cap-and-trade system, Beugin said, which issues a finite number of credits. A facility can only produce emissions if it holds that credit in hand.
“The price of those credits is going to fluctuate depending on demand,” Beugin said.
The introduction of a CCUS tax credit, for example, might change the price of carbon in the system, but it won't to change the quantity of emissions reduced. In TIER, the same constraints aren’t at play, Beugin said, as there are infinite credits, but the system's integrity relies on not flooding the market or it will undermine the price credits.
The TIER system offers benefits to investors in that they have relative certainty in pricing and knowledge of what the future price trajectory, Beugin said. TIER still deals with their competitiveness concerns by alleviating the total costs they are paying for decarbonization by offering them a credit that has monetary value.
“I think that [TIER] can work. You’ve got to just make sure that the details are keeping up,” Beugin said.
The TIER program is currently under review and what the industry wants to see most is certainty, Beugin said.
“They want to know that the system is intact. They want to know where it's going. They want some policy certainty to do their investment planning,” Beugin said.
Some businesses might be happy with a glutted credit market because it would lower their costs, however others would be worried about government intervention to fix the problem, Beugin said.
“There's sort of a tension there. On one hand, firms want less volatility, but also all else being equal, they would prefer lower costs,” Beugin said.
But for environmental outcomes, the best results are whether the system has integrity, Beugin said, and businesses would want the price signal to be maintained, which means adjusting to the firm-level emissions over time, so there aren't too many sellers in the market.
One problem carbon markets face is the risk of carbon leakage, said MacDougall, which is when a jurisdiction has too high of a carbon price, and firms move to jurisdictions with a lower carbon price. Carbon markets then try to allow facilities to emit a certain amount of carbon for free, but then pay a fee for a going above those standards, to keep business in the market.
Generally, Alberta hasn’t been at risk of driving out business with its compliance market, Beugin said.
In August, the Pembina Institute released its input into the provincial government’s TIER review program, recommending the province have greater TIER stringency, so the market isn’t flooded with credits, which could cause a price crash.
The report also called for the electricity market to be fully priced within TIER and said Albertans should receive a government rebate to cover the costs passed on to them on their electricity bills. TIER should begin aligning the Alberta Emissions Offset System with a net-zero emissions context, and not undermine the integrity of that system with a new class of offsets that double credits for CCUS projects, the report said.
Transparency, sector-level emissions
Currently, in Alberta’s carbon market, each individual facility has its own emissions benchmark, Beugin said, which is unique. The expert would like to see the benchmarks created for each sector, rather than on an individual facility basis.
Each facility's benchmark for allowable emissions is based on its emissions history. The facility is given credits for staying under the benchmark or must buy credits for going over. But this system rewards the dirtier firms, Beugin said, because they have an easier threshold to meet.
Cleaner businesses have a higher threshold to meet, but still pay the same carbon price, Beugin said, which results in a larger subsidy for making dirtier energy.
“That is helpful in maintaining the status quo, but it's not so helpful in making more stuff from clean facilities and less stuff from dirty facilities,” Beugin said.
The market is also dealing with a lack of transparency, Beugin said, which makes it difficult to know whether the market is working well. The emissions intensity thresholds are pretty generous; carbon technologies are getting cheaper over time; and the CCUS tax credit is changing incentives, which means the thresholds for emissions should be tightening over time, the expert said.
Over time, carbon pricing should be brought down, as technology advances and the market changes, Beugin said.
But overall, these assessments of the market are estimates rather than observations, as the trades and official prices of carbon credits are not public knowledge. To improve the system, Beugin said there must be transparency to know if it is working.
“I think that TIER can work, but we don’t know for sure how well it’s working and that’s a problem,” Beugin said.