Canada should try to profit from the U.S. transition to a low-carbon economy

Whether or not you believe that humanity has an existential imperative to cut greenhouse-gas emissions hardly matters anymore.

Photo by Ali Tawfiq on Unsplash

Originally published by The Globe and Mail

Michael Bernstein is the executive director of Clean Prosperity, Dale Beugin is the executive vice-president of the Canadian Climate Institute and Blake Shaffer is an assistant professor of economics at the University of Calgary.

Whether or not you believe that humanity has an existential imperative to cut greenhouse-gas emissions hardly matters anymore.

In August, the U.S. Inflation Reduction Act, or IRA, committed Canada’s largest trading partner to a low-carbon economic transformation about as resolutely as any piece of legislation could. The IRA will spawn US$1.7-trillion worth of investments in clean technology, and is unlikely to be repealed, especially because of the benefits it delivers to Republican-leaning states.

The IRA is writing on the wall: if Canada wants to escape the inflationary doldrums and reach for a new, shared national prosperity that we can count on into the future, then decarbonization is now an economic imperative. 

It’s hard to overstate the transformative impact of the IRA. U.S. economic might all but guarantees that we are finally on track to a decarbonized global economy – the question is how Canada can get on top of the tidal wave of change emanating from the south, rather than getting swept under. Maybe this is something that more Canadians can come to agreement on than the need to achieve emissions-reduction targets.

Unfortunately, instead of juicing our economy and delivering loads of good-paying clean tech jobs, Canadian industrial decarbonization is stuck. Despite all the talk of building a vast carbon-capture-and-storage infrastructure to suck up carbon dioxide from Canada’s high-emitting oil sands, for example, not a single new CCS project has been greenlit. Similarly, emissions reduction in other industrial sectors still consists mostly of pilot projects.

If you listen closely, you can hear a sucking sound – but it’s the sound of Canadian talent and capital getting sucked up by the U.S.’s new climate juggernaut.

Take atmospheric carbon dioxide removal, or CDR – extracting carbon dioxide from the air and storing it safely underground – which could grow into a trillion-dollar global industry. Canada is home to global CDR leaders such as Carbon Engineering, but they’re building their massive direct-air-capture projects down in the U.S., drawn by increasingly aggressive policy incentives. Canada should be capitalizing on rising demand to seed a thriving domestic CDR industry, instead of letting the benefits of our expertise accrue elsewhere.

A big part of the problem is down to public policy. Carbon pricing, the engine that’s supposed to be driving Canada’s industrial decarbonization, isn’t firing on all cylinders – or charging all battery cells, if you prefer. That’s a shame, because carbon pricing is more than capable of driving big emissions reductions and incentivizing big investments. It’s not the only climate policy we need, but it’s a policy we need to get right.

High-emitting industrial concerns in this country can tell which way the global winds are blowing, and they want to decarbonize. But we talked to dozens of big firms and investors, and they all told us a similar story: uncertainty about carbon pricing is holding up investment in emissions reduction. Companies don’t know if a future federal government is going to freeze or even cancel the carbon price, and the risk is discouraging them from going all-in on cutting their emissions.

Firms are also struggling to justify investments in big decarbonization projects that depend for their profitability on selling carbon credits within the industrial carbon-pricing systems that regulate most of Canada’s large emitters. The value of these credits, which serve as an alternate currency for paying high emitters’ carbon pricing bills, should track just below the carbon price. But a Clean Prosperity analysis shows a looming credit oversupply problem, which could crash credit prices and put decarbonization initiatives out of business.

We’ve just put out a new report at Clean Prosperity and the Canadian Climate Institute that suggests a couple of tweaks the federal government could make to address these problems and unlock the power of Canada’s industrial carbon-pricing system.

For starters, Ottawa should offer companies an insurance policy on the future trajectory of the carbon price to help de-risk investments and give industry the confidence to start building. We call this insurance policy a “carbon contract for difference.” It’s a deal signed between government and the proponents of big decarbonization projects that pays out in the event that the carbon price doesn’t rise to $170 per tonne in 2030 as planned. Assuming the price does increase as scheduled, this scheme would cost taxpayers nothing.

Second, Ottawa needs to check carefully for the risk of carbon-credit oversupply when it approves provincial industrial carbon-pricing systems for the coming five-year period – which it’s in the middle of doing right now. The federal benchmark for these systems stipulates that they be designed to ensure that credit demand always runs ahead of supply, so it’s really just a question of enforcing the rules.

These adjustments to industrial carbon pricing, and a few others we propose, could start accelerating investment in Canada’s industrial decarbonization, pumping money into the economy, generating jobs across the country and launching an era of renewed prosperity. By plugging into the massive low-carbon transformation that’s about to explode down south, we can turbocharge our own transition and the economic growth that will accompany it.

U.S. policy means that the low-carbon revolution is going to happen anyway, with or without us. Shouldn’t we at least try to profit from it? We can achieve our climate targets at the same time. Sounds like a pretty good deal.

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