Industrial Carbon Price Must Deliver ‘Outcomes, Not Optics’, Climate Institute Tells the Feds

An updated industrial carbon pricing system must deliver outcomes as well as optics, the Canadian Climate Institute (CCI) concludes this week, based on a review of 57 possible future scenarios for how Alberta’s emission pricing system can deliver on a target price of $130 per tonne of carbon dioxide emissions by 2030.

The $130 target under Alberta’s Technology Innovation and Emissions Reduction (TIER) regulation is built into last November’s controversial memorandum of understanding (MOU) between the Canadian and Alberta governments. But the climate institute warns there’s a difference between the advertised price per tonne in a carbon regulation and the effective marginal credit price (EMCP)—the real-world price a carbon polluter actually has to pay, and therefore the strength of the incentive they receive to reduce their emissions.

The institute released its analysis [pdf] this week as Environment and Climate Change Canada (ECCC) looks into whether the federal government’s current benchmarks for industrial carbon pricing “can distinguish systems that merely function from those that deliver outcomes of equivalent stringency,” the CCI paper states. Most of the 57 scenarios could meet the 2030 benchmark on paper, “yet fail[ed] to deliver stringency equivalent to $130-per-tonne EMCP.”

The analysis by CCI Chief Economist Dave Sawyer and Executive Vice President Dale Beugin found that:

• 84% of the scenarios met the federal government’s design criteria for a provincial pricing system;

• But of those apparently successful design options, 77%  failed to deliver the equivalent of a $130-per-tonne EMCP by 2030, meaning that only 11 of the original 57 succeeded.

A High-Stakes Review

The stakes for the ECCC review are high, the paper states, since this year’s decisions on system design and stringency will shape Canada’s industrial carbon pricing market into the 2030s.

The review is also taking place in a deeply politicized atmosphere, with Canada facing a serious sovereignty threat from south of the border and a separation referendum likely to take place in Alberta this year. “Against this backdrop, the federal government has launched a process to modernize large-emitter trading systems,” CCI writes. “The first track is regulatory and technical,” while “the second track is political and bilateral, centred on negotiations between Canada and Alberta.” The paper says the Canada-Alberta MOU sets the $130-per-tonne benchmark, but contains no plan or deadline to meet the stringency target.

The weaknesses in the current system have been accumulating for some time, the institute says. Existing large-emitter trading systems (LETS) “are opaque, rely on outdated design choices, and have been systematically weakened by provinces over time.” The federal government, meanwhile, has been inconsistent in its oversight and “reluctant to impose the backstop where provincial systems fall short, most notably as Saskatchewan zeroed out its industrial carbon price in 2025.”

But improving the system wouldn’t just make it easier to link provincial carbon trading systems and reduce disparities between polluters operating in different jurisdictions: “It would also help shield Canadian exports from rising border carbon tariffs, including the EU Carbon Border Adjustment Mechanism.”

Asked what it would take for the federal government to adopt a more consistent, evidence-based pricing strategy, Beugin replied that “grounding the benchmark in concrete, transparent metrics of stringency is the best way to shift the federal government’s approach to industrial carbon pricing. It’s currently too easy for provincial systems to comply with the federal benchmark without delivering robust carbon markets with strong incentives to invest in low-carbon projects.  That’s why we’ve proposed an approach that’s focused on market outcomes and ensuring a minimum effective carbon price in each system.”

In response to Trump’s annexation agenda and the separatist threat at home, the CCI’s plan would also “ensure provinces have plenty of flexibility in designing provincial carbon markets,” Beugin added in an email. “We’re suggesting that the federal benchmark makes provinces accountable for delivering an outcome (minimum effective carbon price) without being prescriptive as to how. Provinces can and should tailor their approach to their own context.”

An ‘Unresolved Tension’

However, in the consultation materials that ECCC released late last month, the climate institute said it detected an “unresolved tension” between the carbon pollution price signal the government wants to send and the tools it is proposing to assess polluters’ performance.

“By establishing minimum national stringency standards, the benchmark seeks to ensure that regulated facilities face comparable incentives to reduce emissions and invest in low-carbon technologies,” the CCI explains. But the gap is in the detailed factors ECCC is proposing to measure, including market balance, credit availability, and banking dynamics. “These considerations are necessary to ensure market operation and compliance feasibility,” the paper states, but they aren’t enough on their own to ensure that provincial pricing systems meet the federal target, and meet it on schedule.

“This distinction matters. The relevant question is not simply whether systems adopt the minimum national carbon price (MNCP) schedule, but whether the price signal delivered by the system achieves the intended outcome,” the CCI stresses. “Tests of net demand, market balance, and static banking metrics are useful for determining whether a market is operational. They are not sufficient for determining whether a system meets a given stringency requirement.”

The report identifies the size of the buffer—the extent to which a carbon pricing system adapts to keep the demand for carbon credits higher than the supply—as a key factor driving the stringency of the system. A 6% buffer, the level ECCC has proposed, is enough to keep a carbon market from failing. But carbon pricing systems only “begin to deliver stronger outcomes” with buffers of 10 to 305. They can only deliver reliable price signals, consistent with the federal targets, with buffers of more than 30%.

What Works, What Doesn’t

The CCI paper identifies tighter benchmarks over time as the single most important tool to create a scarcity of carbon credits and reduce emissions. By contrast, that stringency is severely diluted by direct investment credits that allow polluters to directly fund emission reduction projects instead and increase the number of carbon credits in the system while paying a lower carbon price.

“In the scenarios, introducing direct investment credits reduces costs by roughly two-thirds and cuts abatement by more than half,” the paper states. “The cost savings are therefore not a productivity improvement but rather a dilution of policy stringency.”

With a half-dozen policy options included in the analysis, the paper lays out a “clear hierarchy of levers,” Sawyer and Beugin write. “Benchmark tightening does the heavy lifting for equivalency attainment. Floor escalation and banking controls protect and stabilize the signal that benchmarks create. Credit and offset limits provide guardrails. Direct investment credits, by contrast, act as a dilution lever capable of neutralizing even aggressive benchmark tightening.”

The two authors recommend four steps to bolster the system:

• Strengthening the investment incentive for emission reductions—in an updated federal benchmark, and in the MOU—by basing it on what carbon polluters actually have to pay, rather than the average market price of the credits;

• Allowing Alberta and other provinces to find their own way to hit the $130 threshold “subject to a small set of non-negotiable conditions” to ensure their programs meet the test for stringency—including benchmarks that get progressively tighter, minimum and maximum prices that shift over time, and limits on compliance options that dilute the carbon price’s impact;

• Requiring data that is transparent and credible enough to verify compliance;

• Tracking performance over time.

“Taken together,” they write, “these recommendations support a benchmark framework that verifies equivalency based on outcomes rather than optics while maintaining flexibility in provincial system design and strengthening confidence that industrial carbon pricing delivers federal climate objectives.”

Cover photo:  Kris Krug/flickr