Originally published in the Calgary Herald.
Hidden in last Tuesday’s federal budget was a policy decision that could generate billions of dollars in new investment and thousands of jobs in Alberta’s energy sector, especially in hydrogen production.
The government announced a plan to offer carbon contracts for difference to low-carbon projects. These unique financial instruments could mean the difference between an investor choosing to set up a billion-dollar clean energy facility in Alberta or setting up instead in the U.S. or Europe.
Before I explain why, a little background on contracts for difference. These contracts are like an insurance policy that guarantees the future value of carbon credits traded on Alberta’s TIER market, where major emitters buy and sell credits that can be used to pay the bills for their carbon emissions. The government guarantees a specific carbon-credit price for a project proponent. If the average market price of credits falls below this guaranteed price, the proponent gets compensated for the difference.
If implemented correctly, there is essentially no cost to the taxpayer, because the contracts are only activated if Ottawa changes course on climate policy in a way that disrupts the carbon-credit market.
Companies I’ve spoken to in Calgary and Edmonton — in the oil and gas, electricity and industrial materials businesses — have all told me that contracts for difference would give them the certainty they need to make big investments in decarbonization and low-carbon energy projects.
When we look to global competitors, the economic opportunity that contracts for difference create is especially clear for hydrogen production.
A working paper we recently released with the Transition Accelerator compared low-carbon subsidies in the U.S. Inflation Reduction Act with incentives on offer in Canada. For blue hydrogen production, which uses natural gas as a raw material and captures the resulting carbon emissions, Canada’s carbon capture investment tax credit is worth only seven cents per kilogram of product. The U.S. production tax credit is worth $1.
That 93-cent gap means that an industrial-scale U.S. plant would earn more than $450 million per year more than a plant in Canada. The new hydrogen tax credit announced in the federal budget unfortunately doesn’t solve the problem — it’s worth even less than the carbon capture credit, and the two credits can’t be combined.
However, Alberta could match U.S. incentives without having to spend a single dollar by doing one thing — increasing certainty in the future value of TIER carbon credits. Contracts for difference could close the gap on blue hydrogen, and make Alberta an attractive destination for investment.
Contracts for difference build off the tremendous success of Alberta’s industrial carbon pricing system. We can be proud that we’ve developed a system that can compete with the U.S. to attract clean-energy investment, but we need to strengthen it, and get the federal government to help.
There are three key things that Alberta could do right away to drive low-carbon growth.
First, increase transparency of the TIER carbon-credit market. The provincial government should publish the aggregate price of TIER carbon-credit transactions on a monthly basis. That will make it possible to sign contracts for difference tied to the average price of credits.
Second, work with the federal government to ensure that contracts for difference are broad-based and standardized, so that smaller firms across our province can access them and unlock the value created by the TIER carbon price.
Finally, accelerate the made-in-Alberta emissions reduction and energy development plan and keep Alberta on our path of becoming a global diversified energy powerhouse.
Alberta is in the midst of a global clean-energy arms race. We can take the steps that will attract billions of dollars in new, clean-energy investment and thousands of jobs, or we can sit back and let the world pass us by. The choice is that simple — let’s not mess this up.
Adam Sweet is the director for Western Canada for Clean Prosperity. He is also the founding vice-president of policy and bylaw for the UCP board of directors and was spokesman for Canada’s Environment minister in the Harper government.
