A statement of intent

It's been a while since I last discussed the carbon market situation in Canada. My last piece (published on 24th March, shortly after Mark Carney was elected Prime Minister) focused on the industrial carbon pricing system, making the case that while far from perfect, it is the most effective climate policy Canada currently has, and as such, it should be protected.

To recap, Canada’s industrial carbon pricing systems - often referred to as the large-emitter trading system or LETS - is an emissions intensity based market. This is where emitters only pay for those emissions above a certain threshold, either by paying the headline carbon price, or through purchasing carbon credits.

Provinces are allowed to tailor LETS to their individual needs and priorities, but they must meet the minimum requirements set out in the federal backstop. Alberta was the first province to introduce its own scheme in 2007, while others have either followed suit, or employed the federal backstop. The exception is Quebec which is part of the Western Climate Initiative (WCI) and is linked with California (see What now for America's state carbon markets?).

Analysis by the Canadian Climate Institute (CCI) projected that the industrial carbon price mechanism could contribute almost half the incremental reduction in emissions required to meet Canada's 2030 target, enshrined in the Net-Zero Emissions Accountability Act. However, that conclusion presupposes that all of the provinces play ball and adhere to at least the standards set out in the federal backstop.

The challenge facing Carney is that many of the provinces, but particularly Alberta are itching to explore separating from Canada. Indeed, shortly after the election Alberta's Premier, Danielle Smith passed legislation that lowered the threshold by which a referendum could be held on whether Albertans wanted to secede from Canada.

This lack of national unity threatens the long-term success of the industrial carbon pricing scheme as it is currently designed, the foundation of which is the backstop. In May, Smith announced that she was freezing the headline industrial carbon price at C$95 per tonne CO2 (€58.80) amid concerns about the economy. It was due to rise to C$110 per tonne CO2 in 2026, and then continue increasing to C$170 per tonne CO2 by 2030.

In late November, Carney and Smith met in Ottawa to announce that they had agreed to a Memorandum of Understanding (MOU) in which the federal government offered several important climate policy concessions to Alberta, but in return the province would take steps to radically improve its industrial carbon pricing system.