Welcome to episode 274 of the Energy Talks podcast. I'm energy and climate journalist, Markham Hislop. Canada's greenhouse gas emissions for 2021, the latest year available, are 670 megatons per year. Canada's target, 2030 target is a 40 to 45% reduction, which is looking less and less likely to happen if you're a pessimist. I know there are some optimists who think that it's still possible, but with each passing year, it becomes more and more difficult.
So every ton of reduction counts. New modeling from from Clean Prosperity shows that Canada could miss out on up to 33 megatons of emissions per year reductions per year by 2030 unless governments expand the use of carbon contracts for difference to provide greater revenue certainty for new low carbon projects. I'll be talking to Brendan Frank, who leads policy development and analysis for clean prosperity, about that modeling. So welcome to Energy Talks, Brendan.
Great to be with you, Mark, and thanks for having me back.
Well, we've I've had you on here before to talk about carbon contracts for difference and, you know, for the last 2, 3 years, this has been a a talking point, and it's been mostly, you know, how it's needed, theoretical conversation, if you will. But now the government has allocated 1,000,000,000 of dollars to fund these contracts, through the Canada Growth Fund, and we're starting to see the odd contract signed, and there are other negotiations in the hopper, for this. But what maybe give us, an overview for those listeners who aren't familiar with carbon contracts for different just explain what it is.
Yeah. So there's a fundamental problem in Canada's carbon markets right now. Every province has a a functional carbon market that covers large emitters. And within these markets, there is a lack of confidence that the carbon price is going to continue to rise. These emitters, have an opportunity to produce credits that they can, sell for monetary value if they emit below a certain amount.
But the long term trajectory of that price, those credit values is very uncertain. And as a result, we have a lot of low carbon capital that is sitting on the sidelines and waiting for clarity. Carbon contracts for difference are a solution to that program. They are essentially an insurance policy that guarantee the value of those credits for a certain number of years at a specific value. And that becomes a a bankable, source of revenue for these these projects.
You can put it in your spreadsheet. You can take it to a loan officer at a bank, and it makes the economics of these new low carbon projects and low carbon investments much clearer.
What kind of projects are we talking about? Now I know carbon capture and storage for the oil sands in Alberta is a big talking point. And, are we also talking about wind farms, solar farms? What are the kind of projects that we're talking about?
As far as carbon contracts for difference goes, wind and solar don't really need the help. What we're talking about mostly is innovative, first of kind projects that have the potential to scale. And you can see that thinking reflected in the first deal that the Canada Growth Fund, which is issuing contracts for difference, signed. They are investing in a modular carbon capture technology. It's a company called Entropy.
The first deal will enable the construction of, what is called glacier phase 2. It's a gas fired electricity project, and we'll have this carbon capture technology attached to it. And the hope is that that technology will be able to scale, and similar thinking, will be applied, I I believe, to to future deals. It's about unlocking these investments that have, say, catalytic potential.
I've had some interesting discussions with, economists about the Alberta, industrial emitters tax, which is the one I'm most familiar with. It's called a tier, t I e r. And some economists agree with me that the, the price, the carbon price, is just too low. I mean, it just hasn't been high enough yet to have any kind of an impact on emissions reduction, any substantive impact on emissions reduction. But there are other economists then who kinda take me to task and point out that the I the point of TIER is to not, price every emission that comes out of, say, the oil sands, but the marginal barrel.
So you don't pay you maybe pay a low rate or no rate on you most of your production, but every additional barrel that you supply gets a 100% of the of the carbon price applied to it, which I think this year is $65 a a ton. And is are carbon contracts for difference meant to correct a deficiency in these pricing systems, or is this meant to speed up decarbonization? What's your take on that?
Yeah. I mean, I think you made the point that it depends on who you talk to. What we envision carbon contracts for difference doing is creating a strong enough expectation about the the way these markets will develop in the future that they can incentivize investments now rather than 5 years from now. So in the case of TIER, for example, there is the the headline price that you mentioned, $65 a ton. Credits are trading at a discount to that price.
And as such, you will exhaust demand for credits in that market before any investor starts to pay the carbon price. And if there are too many credits, no one is going to pay that headline price, and credit markets will will languish. Price won't rise as expected. So we view broad based carbon contracts for difference as a way to systematically secure that confidence in the market, not only now, but in the future to create that expectation.
Maybe you know, I I will confess here, and journalists should never do this, but, I'll do it. I don't not sure that I understand carbon credit trading, as well as I should. So maybe if you could take us through a little a brief explanation of how those credits are created and traded and priced.
For sure. So we can zoom into a the facility level to by way of explanation here. So you can imagine, let's say, a cement facility in Alberta that is covered by the tier market. They have what is called a performance benchmark. And if they emit more than that benchmark allows, then they face what is called a compliance obligation.
And they have to satisfy that by either purchasing additional credits and that those prices are privately negotiated with other regulated entities in the market, or they can pay into the tier fund, which is essentially the equivalent of paying the headline carbon price, $65 a ton. If they perform below that benchmark, then they generate credits that they can then sell to other emitters that either can't or won't reduce their emissions and therefore face a compliance obligation.
Is the compliance obligation on absolute emissions or emissions intensity per unit of production?
It is on emissions intensity.
Oh, that's that's interesting. So the the, now, again, the oil sands is what I know best. I've I've done a fair number of interviews on the emissions intensity per barrel and and compared to other crudes. So right now, the the average, in the oil sands is 68 kilograms of c 02 equivalent. Now that's really high.
I mean, the the, American average, crude oil is 31 kilograms. The average conventional Canadian is, is 41 or 42 kilograms. Saudi Arabia, Norway is like 9. Saudi Arabia is low. My where I'm going with this is that there are some facilities in the oil sands who are 140 kilograms, 120 kilograms.
That's some of the dirtiest oil on the planet. And how does this carbon contract for difference how is this this tier you know, how can it be designed to help those facilities decarbonize, the ones that need it the most, the ones that that are at the new projects that are at already at 44, don't need it as much, but it's those ones that the older ones that use inefficient technology and so on. What how give me the example of how this system could help those operations decarbonize.
So the one of the points that we make in our new paper, missing megatons, which you kindly referenced in in the intro, is that it is crucial that governments follow through on their commitments to increase the ambition of these carbon markets over time. And that means that the car the headline price needs to continue to rise, and it also means that credits need to be scarce. And what that means in practice is that the benchmarks are are falling. And if you have a broad based program of contracts for difference, you are basically creating a stronger incentive for the government to follow through on those commitments so that the overall cost of the contracts for defense program remains low cost. There are 2 there are 2 sides of the coin here.
One is on federal government to to follow through. And once it creates those expectations, it is on emitters to actually make the investments that are needed to to decarbonize.
Yeah. I I've been very critical of the oil sands and the oil and gas industry in Alberta in general, and and this is true of other provinces as well. You know, they're just not doing enough. They're not allocating enough, capital, to putting in the the equipment or the processes that are needed to lower their emissions. And, I was going through the investor presentations of the big oil sands companies, and really only, Suncor last year had any plans to reduce their emissions.
The rest of them were going to see supply rise, which means that emissions rise. And Suncor was going to lower it by 10, megatons a year, but that was mostly replacing, a big, boiler, switching it from coal to gas or, sorry, from petroleum coke to gas. So, anyway, where I'm going with this, is that you mentioned earlier that there's a surplus of credits, which lowers the effective price, of the, effective carbon price. And I think back to the problems that Europe had for years in in its ETF emissions trading system, I think it stands for. And and low value of those credits, made you know, because of that, the ETF languished.
Is that the problem we're facing here in Canada, is that that our carbon markets are just not functioning properly? There's too many, credits running around or floating around at at too low of a price?
So the price right now is okay, but the the expectation that there will be too many credits in the future is is creating that problem. And it is, yes, it is analogous to the the situation in the EU ETS, although they Alberta and the rest of Canada uses a a slightly different system. We don't have to get into the details of how they are different. But the point is, yes, that oversupply of credits and expectations, more importantly, of oversupply of credits is is a key problem here. And there are other risks as well that we can talk about if you would like.
Well, I'm I'm curious about, you know, if uncertainty in provincial carbon markets is holding up big investments in industrial decarbonization, and I just quoted you, by the way, from the press release, just to be clear to, to listeners. What kind of uncertainty, and which provincial carbon markets, if you don't if you don't mind naming them?
So there I mean, we see this risk across all of them, essentially. The the way that Canada has set this up is that these are provincial markets. The provinces have more levers. They can update their markets, and regulate them essentially as they see fit. And the role of the federal government on a rolling 5 year basis is to check-in with the provinces and ensure that those markets are adhering to some minimum standard.
And the federal government last did that in 2022 slash 2023. And in our view, what they did in the tier market, just to pick one example, is not stringent enough. The benchmarks that these facilities, face will be falling by 2% a year over the next 5 years. Our modeling at Clean Prosperity suggests that they will need to fall closer to 5% to avoid that risk of of credit oversupply. So that's that's that's a market risk.
There are also what we call strobe and pen risks, and that is the risk that, the present government or a future government would alter the price path for carbon, something other than a $170 per ton by 2030, or that they scrap the program entirely or decline to enforce that minimum federal standard on these provincial carbon markets. So there's a there's a mix of risks at play here, and the net outcome is that businesses are hesitant to make these investments.
I can see that, and I and I keep hearing it from the, from the industry. And again, you know, in Alberta where, we spend a lot of time reporting on oil and gas, this is a a constant theme. This is not uncertainty is not the this isn't the first time I've heard that word, applied to carbon markets. But I'm a little you know, you can see why then the federal government was talking about an emissions cap for the oil and gas industry, because that's an industry that, you know, makes up 26% of all of Canadian emissions, and those investments have not been taking place, as I mentioned earlier. And this is just an aside, Brendan.
I I don't expect you to to address it. We'll we'll do another interview about the the emissions cap because it's a whole different beast. But I was a bit surprised that instead of just tightening up the the benchmarks and so on, of the existing, industrial pricing scheme, which in Alberta is tier, they chose to put a cap and trade system on top of that. And I think the industry has some cause for a complaint to say, why did you make it so complex? You had a system that we liked.
We we okay. So, you know, do more of the thing we're familiar with and and which we're already set up to administer. And now you what you've done is you've just made it now how do we you know, how how do how does a cap and trade system work with the carbon tax in the same industry and designed to do the same thing? And, anyway, so does this play out in at all of this confusion and and complexity play into the fact that your modeling shows that we could miss 33 megatons a year of reductions, industrial emissions reductions by 2030?
Yeah. It's a good question. And maybe I should start by saying that our organization is opposed to the oil and gas cap that the federal government has proposed for many of the reasons that you just outlined, Markham. It is duplicative. It is unnecessary, and it will prevent Canada from leaning into the policies that we actually have on the books.
This is one of the the outcomes of our our model. It doesn't make any sense to to replicate these policies. We should lean into what what we have. And this the an additional uncertainty that regulations like this the clean electricity regulations and the oil and gas cap are are creating are part of a broader constellation of issues that are creating business uncertainty. We're focused mostly on the uncertainty in in tier markets and similar equivalent markets, across the pro the provinces.
2 or 3 years ago, I I interviewed, doctor, Danny Cullenward from Stanford. And he and a colleague had written a book about climate policy. And they made the argument in the book that while it would be lovely, and economists love carbon pricing. You know, they it's elegant. It's simple.
It just it's in theory, it works like a hot damn. The problem is it's also politicized, and the politics often gets in the way and the function of the, of the of the the program. And so, Colin Ward argued that there are, you know, you have to use other policy tools. He mentioned industrial policy, he mentioned regulations. I know that your organization is not fussy about those.
And the but I could see I could see the merit his argument if it's done well. But what we're talking about is policy done poorly, And so if we have uncertainty in the provincial carbon markets and then we have a federal government that makes some policy that, you know, we kinda shake our head at, that seems that the climate policy and the potential for reductions gets reduced were inefficient and ineffective.
Yeah. Our preference is is and always will be market based policy, like carbon pricing. You know, I I take common words point, but implementation is challenging for regulations and subsidies as well, and they are also prone to things like rent seeking and and lobbying efforts. So it's not a guarantee that going with those is actually going to lead to better outcomes. And in fact, we've seen longer implementation timelines for regulations in Canada than we have for many of these markets, which are, you know, do have their problems, transparency and and long term certainty being 2 of them.
And we're working to address those. But markets are and will remain the most organ efficient organizing principle. And our view is that we should lean into that and make those markets work as well as they possibly can. Doesn't mean that we don't need some regulations or some subsidies, and it doesn't mean we don't need a coherent industrial strategy on top of that, but as first principles.
Fair enough. One of the points that you make in the report and and this is interesting because, you know, we're sitting here talking about kind of, you know, carbon pricing in abstract terms. But you suggest something very concrete that the Canada Growth Fund can do, which is publish a memo detailing the contract for difference programs design, eligibility criteria, standardized contracts that will reduce administrative and regulatory complexity. Publishing a memo just seems such a basic thing to do. Why have you focused on that?
Well, we think it's a a small ask, a near term ask that the growth fund could do in the near term to help reduce some of this uncertainty. Right? It's not clear right now to businesses because it's not a broad based program contracts for difference. Who is going to get to access it? What jurisdictions will get to access it?
What types of technologies they're looking at? What sort of strike prices, they can expect in in the contracts. So it's it's a a modest ask that we think would help to provide some needed clarity to businesses on how this program is actually going to work.
I I you know, as an outsider looking in at this, I can't help but think that my goodness, are are we really in a position, you know, I don't know what, 4, 5, 6 years since we've begun in, industrial pricing of industrial emissions? And and one of the things we're suggesting is, like, write a memo. Make things clear so what the business understands. That seems like such a fundamental something fundamental that government should do and, you know, I have to ask myself why they haven't. Maybe I could ask you that.
Why why haven't we done this before?
So I'll clarify off the top that the growth fund is not the governments. They're arms length. They're assessing these projects independently and coming to conclusions about which merit deals and and which do not. But I will also say the program is is very new. Right?
The the growth fund has recently been stood up. The announcement that they would even be issuing contracts for difference came in the fall economic statement in November. So it is still very early days, and we are trying to provide early guidance as a result.
I I guess so. And and I do take a little bit of issue with your point that the growth fund is not the government. Oh, yeah. Sure. It's not a department of the government.
I get that. But the government sets the guidelines, and the government appoints people who who run the thing. And it's see it's certainly seen as an arm of the government and and the arm you know, part of its climate policy, suite of climate policies designed to reduce emissions. Anyway, that's we're quibbling over that that point, but I I thought I'd throw that in. So alright.
We fumbled along here for a number of years trying to get this to work, and we haven't been very because I I said earlier that I've been deep into the Canada's emissions data. And, you know, some provinces are bringing down their emissions, and that's that's great, but they're tend to be the ones that are where it's not as important to bring them down, you know, like, we can it's not coming down in Alberta, and it's not coming down much in Saskatchewan. Those are 2 of the the bad boys in of the Canadian provinces. So what you're telling me is that we now have we have $7,000,000,000 committed to the Canada Growth Fund. The contracts for difference program is new, so we're working out the kinks, but it's gonna get going.
Are you optimistic that this, new approach, is going to help Canada meet its 2030 climate targets?
I am. It's a good start, what the growth fund is doing, but we are still arguing for a a broader based program. The current approach that the growth fund is taking is to use contracts for difference to unlock specific deals, specific low carbon deals. And that is valuable. Absolutely.
But the 33 megatons that we identify as as missing in our report, those are 33 megatons that may not materialize if there is not sufficient confidence in industrial carbon markets. That can only be accessed with a broad based program.
Right.
And we like to see growth fund take steps to, in service of of that larger objective, and that will also require the federal government to to take additional steps, provide additional funding.
Yeah. You know, 33 megatons a year doesn't sound like much, but it's about 5% of the total. And, when it's in a case like this where it's hard to squeeze out emissions out of the this is, you know, it's not an easy task. Leaving 5% on the table is a big deal.
It absolutely is, and it makes it much less likely the Canada will meet its 20 30 targets with these missing 33 megatons out of out of the picture. Heavy industry, the the industries that are covered by these industrial carbon markets are the sticky wicket of decarbonization. We have lines of sight on how to decarbonize the transportation sector, electricity, buildings. This is the most challenging piece of the puzzle. And without carbon contracts for difference, we don't see many viable pathways to even coming close to our 2030 targets, let alone eating them.
Yes. And I would say, watching the oil sands producers struggle with this issue, and and some of it's self inflicted, by the way. I I mean, I'm highly critical of the producers, because, you know, I was doing interviews for our unethical oil series, and I had, like, at least 2 insiders tell me that the only way these companies will allocate capital for emissions reduction is if they can make a profit out of it. And if they can't make if they can't if it isn't net positive for revenue generation, they simply won't do it. And so they they need to be hit with a a bigger stick, basically, so that we change that behavior, around and their their perception.
That's that's my view on this. And but I think it's it's consistent with, the function the prop the correct and proper function of of carbon markets.
We need bigger sticks, and we need bigger carrots. And we think that robust carbon markets that provide a strong price signal to emitters of of all kinds, plus carbon contracts for difference that guarantee that these firms can monetize their credits strikes that balance.
Maybe we could hit them with hit them with bigger carrots. Maybe that would work. Alright. That was a that was a terrible joke. I took the obvious one there. Look. Brandon, thank you very much for coming on and clearing some of this up. These are highly technical issues. They're, sometimes difficult to understand. I mentioned it earlier on, but I'm still struggling to get understand exactly how these various markets work.
You've done a good job of explaining it to me. We'll see how much sticks, but thank you very much. Really appreciate this.
My pleasure. Thank you, Malcolm.