Creating Carbon Market Certainty

Investors find it too risky to build low-carbon projects in Canada.

That means we’re losing out in the race to secure billions of dollars of investments needed to decarbonize our economy and meet our 2030 emission target.

It’s time for government to provide greater certainty to investors in low-carbon projects, before it’s too late.

The problem

Investors broadly agree that Canada’s approach to pricing industrial greenhouse gas emissions makes sense — but they need greater certainty in the long-term durability of the system in order to make multi-billion dollar investments in decarbonization. 

The current approach carries two clear risks:

  • The government might change or even cancel the current carbon pricing schedule.
  • The provincial carbon credit markets could become over-supplied, undermining the value of credits these projects rely on for revenue.

The solution

Industries across Canada agree that a broad-based carbon contracts program will increase carbon-market certainty and help secure final investment decisions on big decarbonization projects.

How carbon contracts will de-risk low-carbon investment


A carbon contract is a long-term contract between the federal government and low-carbon project proponents, tied to the average price of the carbon credits that trade on Canada’s industrial carbon-pricing markets, like Alberta’s TIER system. Firms pay fees on their carbon output over a certain threshold, but they’re also allocated credits to cover a share of their emissions. As they decarbonize, companies end up with unused credits that they can sell to other emitters.

Think of carbon contracts a bit like crop insurance. 

Just as provincial governments protect farmers against crop failure, Canada also needs an insurance product for industrial players in Canada’s low-carbon economy that are undertaking projects like carbon capture and hydrogen production. This is a good deal for the country because it backstops the jobs and growth that low-carbon investment is going to generate in the years ahead.

Four principles that must guide the broad-based carbon contracts program


A program designed around these four principles will serve to maximize the potential of carbon contracts, make Canada a global leader in innovative carbon pricing policy, and better position our country to compete internationally in the race to attract investment and decarbonize our economy. 

  1. Go as broad as possible: Decarbonizing the Canadian economy must be an all-hands-on-deck effort.

    The government should design a carbon contracts program with broad eligibility. Carbon contracts should be available, at minimum, to all industrial emitters that are regulated by Canada’s industrial carbon pricing systems.

    This would maximize the power of carbon contracts to unlock decarbonization investments, and position Canada to meet the targets laid out in the federal government’s Emissions Reduction Plan — while maintaining economic competitiveness in an increasingly carbon-constrained world.

  2. The sooner the better: The United States’ Inflation Reduction Act (IRA) was signed into law in August 2022, offering massive subsidies for low-carbon investment in the US and challenging Canada to deliver competitive incentives.

    The federal government has taken some positive steps by offering investment tax credits for a range of low-carbon technologies. But more powerful incentives are urgently needed.

    Carbon contracts are an integral part of Canada’s response to the IRA. They can leverage the strengths of our existing policy framework to help match or beat the incentives available in the US and other jurisdictions.

    The government must quickly take the next steps in establishing a broad-based carbon contracts program. Industry and investors are deciding every day where to allocate capital, and analysts predict supply chain and labour shortages as low-carbon investment ramps up.

    Time is needed to design carbon contracts that are well-adapted to the Canadian economy. There is significant risk in waiting too long before implementing a carbon contracts program.

  3. Focus on contracts tied to carbon credit prices: Guaranteeing the benchmark carbon price is valuable, but to maximize the potential power of carbon contracts, the government should focus on guaranteeing the value of carbon credits.

    Investment decisions for large-scale decarbonization projects often hinge on the projected revenues from selling carbon credits. Firms need confidence that these credits will have value in the future.

    Uncertainty about the future value of carbon credits is cited regularly by industry as a barrier to investment in decarbonization projects. It’s often the determining factor as to whether a project can advance to a final investment decision.

  4. Create clear eligibility criteria: Even once the government starts offering broad-based carbon contracts tied to carbon-credit prices, industry and investors will need certainty that their projects will qualify for carbon contracts.

    There should be clear, up-front criteria that determine eligibility to participate in the program. There should be no guesswork or protracted qualification process. This maximizes the bankability of carbon contracts for industry and investors.

    This is how IRA tax credits work in the United States. Under the 45Q credit for carbon capture, for example, applicants need only submit a single tax form to receive their credits.

Examples of how carbon contracts work at different carbon credit values


In the following examples, the government and Company X sign a carbon contract in 2023, guaranteeing the value of a specified quantity of Company X’s carbon credits at $150/tonne in 2030.

Carbon contract price guarantees will be set below the headline carbon price, to account for the fact that carbon credits trade at a discount to the penalty carbon charges that a buyer would otherwise have to pay for their emissions.

  • Example 1: Carbon credits are worth less for the proponent
    • In 2030, the average market price of carbon credits is $149/tonne ($1 less per tonne than the price set in the carbon contract).
    • The government must pay $1/tonne to Company X (multiplied by the quantity of carbon credits specified in the carbon contract).
  • Example 2: Carbon credits are worth more for the proponent
    • In 2030, the average market price of carbon credits is $151/tonne ($1 more per tonne than the price set in the carbon contract).
    • Company X must pay $1/tonne to the government (multiplied by the quantity of carbon credits specified in the carbon contract).
  • Example 3: Carbon credits are worth exactly as agreed 
    • In 2030, the average market price of carbon credits is $150/tonne. No payments are made by either party.


In this way, a carbon contract helps mitigate the carbon-pricing risks faced by proponents of new low-carbon or decarbonization projects that are relying on carbon credit revenue to make their projects economic.

Next steps

In the 2023 Fall Economic Statement, the federal government allocated $7 billion to the Canada Growth Fund to offer carbon contracts for industrial decarbonization. This was an important step for stimulating Canadian low-carbon economic growth, and for climate action. The Canada Growth Fund signed its first carbon contract in December 2023.

Then in Budget 2024, the federal government made significant new announcements about their carbon contracts program, including that the Canada Growth Fund will expand its range of contract offerings. The budget suggests that the Fund could develop off-the-shelf contracts, and offer them on a “competitive basis”. We’d suggest the auctions used to award contracts for difference to UK renewable power producers as a starting point for considering what this competition could look like.

The budget also promised that the program will have the funding required to expand. The government said it will ensure that the Canada Growth Fund continues to have the resources it needs to fulfill its role as the federal issuer of carbon contracts. This squares with the optimism expressed earlier by Growth Fund CEO Patrick Charbonneau that the government will recapitalize the fund as needed. The intention seems to be to assuage the concerns of project proponents who fear that they’ve missed the boat.

In June 2024, the Canada Growth Fund released its carbon contracts strategy, to de-risk investment in low-carbon projects. The strategy outlines the types of contracts the Growth Fund will offer, including a new commitment to offer standardized contracts to smaller projects, which could boost low-carbon investment across Canada. While the Growth Fund has taken significant positive steps with their new carbon contracts strategy, Clean Prosperity encourages them to go further. The Growth Fund should offer easily-accessible standard contracts to all emitters, both large and small, without linking those contracts to equity or debt investments as they’ve proposed to do in their strategy document. The contracts should also offer a standard carbon-price guarantee — the so-called “strike price” — at a level close to the headline carbon price. 

To maximize the impact of carbon contracts, the Canada Growth Fund will need to move quickly while ensuring that the program is transparent, efficient, and accessible to the widest possible range of emissions reductions projects.

Clean Prosperity is continuing to advocate with federal and provincial governments and other stakeholders to maximize the impact of carbon contracts on Canada’s low-carbon economic growth.

Clean Prosperity’s work on carbon market certainty

Reports

  • Strengthening TIER for Alberta’s Low-Carbon Growth (July 2024)
    The Alberta carbon market is likely to face an oversupply of carbon credits before 2030, which could undermine the case for investment in the province’s emerging low-carbon economy. Alberta should make urgent changes to the TIER carbon credit market to prevent this from happening, Clean Prosperity’s report argues.
  • Missing Megatonnes (February 2024)
    Modelling by Clean Prosperity and Navius Research shows how Canada could miss out on up to 33 megatonnes of emissions reductions per year by 2030, unless governments expand the use of carbon contracts to provide greater revenue certainty for new low-carbon projects.
  • Alberta can win low-carbon investment race: new findings show how (October 2023)
    A follow-up to Clean Prosperity and the Transition Accelerator’s Creating a Canadian Advantage, this paper — The Low-Carbon Playbook — shows how carbon contracts can close investment incentive gaps between Alberta and the US.
  • Canadian low-carbon incentives remain well behind the US, despite significant measures in Budget 2023 (July 2023)
    Updated economic modelling in Clean Prosperity and the Transition Accelerator’s Creating a Canadian Advantage paper shows how to close investment incentive gaps between Canada and the U.S. using carbon contracts.
  • Here’s how to kick Canada’s low-carbon transition into high gear (October 2022)
    Closing the Carbon-Pricing Certainty Gap, from Clean Prosperity and the Canadian Climate Institute, was the first report to describe in detail how a program of carbon contracts could reduce investor uncertainty and accelerate the growth of Canada’s low-carbon economy.

Press releases

Op-eds and articles

Joint letters and statements

Events