Originally published in the Calgary Herald.

There’s been a flurry of big new carbon capture projects announced in Alberta in recent weeks, which is good news for the province’s growing low-carbon economy, and the investment and jobs that will come with it. Fueled by TIER — Alberta’s carbon credit market — this growth is good for Alberta today and into a low-carbon future.  

But risks are bubbling beneath the surface that must be addressed now to sustain the momentum. Investment in Alberta’s low-carbon economy could stall if companies believe that carbon credits won’t be worth enough in the future to make their projects economic.  

What’s more, low-carbon capital is mobile. Alberta is competing for global investment against countries offering more generous and straightforward government incentives for carbon capture, hydrogen production, and renewable energy. Alberta has strong competitive advantages in this race for low-carbon investment, but it needs to do more to instill confidence in the durability of the TIER system that is driving decarbonization. 

The provincial government needs to make urgent reforms to Alberta’s carbon market to prevent the province from becoming a victim of its success, according to new research our team at Clean Prosperity recently released.

The problem comes down to supply and demand for carbon credits. 

Alberta’s Technology Innovation and Emissions Reduction (TIER) system incentivizes companies to reduce their emissions by awarding them carbon credits. These credits can be sold to other Alberta companies that need to pay the bill for their excess carbon emissions.

Every year the TIER system becomes more stringent, meaning that companies have to pay more to cover the same volume of emissions, all else equal. However, our analysis found that the rate at which TIER’s stringency is tightening may not be fast enough to absorb all the carbon credits that new low-carbon projects are generating.   

As a result, Alberta faces a risk of a growing imbalance between supply and demand for TIER credits. Perceived risks of such an oversupply are already driving down credit prices. The spread between the market price of carbon credits and the “headline” carbon price (currently $80 per tonne) is widening — from five per cwent in 2020 to 40 per cent in 2024. If the provincial government doesn’t act, modelling shows the problem will only get worse as more low-carbon projects come online.  

The solution is to enable the TIER system to respond to the rapidly evolving nature of carbon markets. Right now, TIER stringency is tightened at a fixed rate every year. We think the government should instead dynamically adjust TIER stringency based on market conditions — similar to how the Bank of Canada adjusts interest rates based on inflation. This will ensure the carbon credit market remains balanced and supports prices for carbon credits close to the headline price. 

Adopting this approach would offer much-needed certainty to firms that are considering the business case for low-carbon investment. Projects like carbon capture and storage are complicated, risky, long-term, capital-intensive ventures. They’re hard to justify to boards of directors if future carbon credit revenue remains a question mark. 

To provide additional certainty, the government should offer carbon contracts that guarantee the minimum price a company will receive for its carbon credits. This would remove an important business risk and unlock even more investment. Provincial carbon contracts would complement contracts offered by the Canada Growth Fund, which is already supporting low-carbon companies in Alberta. 

Another helpful move would be for the government to increase transparency of the TIER carbon market, by regularly publishing price statistics based on trades. 

The Alberta government has already implemented important policies to support the province’s low-carbon growth ambitions, most recently the Alberta Carbon Capture Incentive Program. By implementing our suggested reforms, Alberta can continue building on its ambitions and creating the right conditions for continued investment growth. 

Getting Alberta’s TIER regime working optimally matters a lot. It’s the largest system of its kind in Canada, covering over half of Canada’s emissions from large industrial emitters. TIER has the potential to attract hundreds of billions of dollars worth of investment that will create economic growth and jobs for Albertans now and in years to come. We should do everything we can to capture these rewards.