Climate Institute Analysis Favours Industrial Carbon Pricing Over Emissions Cap

New analysis released last week by the Canadian Climate Institute is being interpreted as a call to phase out the federal oil and gas emissions cap in favour of a tougher industrial carbon pricing system—even though it would mean replacing an existing system with one that has yet to be designed, and would likely face a wall of provincial opposition.

The arguments are playing out at a moment when the fossil industry and its allies in some provincial governments are stepping back from their past support for industrial carbon pricing, while keeping up their relentless opposition to the cap.

Either or both approaches would have to make an appreciable dent in a 143% increase in oil sands emissions between 2005 and 2023, with the industry planning for major increases in production in the years ahead.

On its 440 Megatonnes blog last week, the Climate Institute cited industrial carbon pricing as “Canada’s broadest, most important climate policy tool,” reprising earlier research that found it delivered three times the more emissions reductions than the consumer carbon price. Based on new modelling released last month, the Institute concluded that the country’s large-emitter trading systems (LETS) could be strengthened to deliver an additional 25 million tonnes of emission cuts in 2030, while the federal emissions cap would produce a 24-megatonne reduction.

Both scenarios depend on the federal government implementing tougher methane regulations and factor in emission reductions under Alberta’s existing carbon credit system, which only prices carbon at about 40¢ per tonne.

The Institute’s concern is that implementing the two policies side by side would deliver “less than the sum of their parts” due to the way they “overlap and interact”, with the federal cap producing only 7.1 megatonnes of additional emission cuts on top of a tougher carbon pricing system. “That’s not nothing,” write authors Ross Linden-Fraser, Dale Beugin, and Dave Sawyer, “but it’s far from a neat and tidy exercise of adding the two emissions numbers together.”

“Not surprisingly, we found a lot of overlap when you’re squeezing the same emissions but can’t actively adjust both systems to account for double crediting and market imbalance,” Sawyer, the Institute’s principal economist, wrote on LinkedIn.

Given a choice between the two approaches, the Institute suggested prioritizing a “modernized” pricing system that would cover more sectors of the economy, cost less to implement, and rely less on carbon capture, utilization and storage (CCUS) technologies that can’t deliver at scale and are projected to cost more than $200 per tonne.

Beugin, the Climate Institute’s executive vice-president, laid out a menu of improvements to industrial carbon pricing in an interview with Globe and Mail policy columnist Adam Radwanski. They included a steadily rising price per tonne of excess emissions, increasing the stringency of the system by applying it to a larger share of industrial emissions, and ideally linking provincial carbon pricing systems to create a bigger market with greater impact.

But “provincial governments’ level of interest in finding middle ground is unclear,” Radwanski wrote. “Alberta Premier Danielle Smith’s opposition to most federal environmental policies has seen her call this year for Ottawa to leave industrial pricing entirely to the provinces, rather than setting standards as currently, and she has concurrently frozen a planned increase” in Alberta’s price per tonne of excess emissions.

“Saskatchewan, which has defied Ottawa by pausing its industrial pricing system altogether, stands to be an even tougher sell,” he added. “Then there are provinces, including Ontario, for which moving on from the emissions cap would be less enticement to embrace stronger industrial pricing, since they’re not major fossil fuel producers.”

With oil and gas now accounting for one-third of Canada’s climate pollution, and emissions still rising in 2024 due to record fossil production, Sawyer said the emissions cap should not be “killed or dismissed out of hand…. rather than reject the cap outright, we should rethink it as part of a broader modernization package focused on long-term investment certainty.”

Climate diplomacy veteran Catherine Abreu, director of the International Climate Politics Hub and an advisor to Canada’s Net-Zero Advisory Body, took issue with a “misleading headline” on Radwanski’s column—“Ottawa pressed to drop oil and gas emissions cap for stronger industrial carbon pricing”—that she said had fossil advocates celebrating and would leave everyone else confused.

The “‘compromise’ that’s being touted” in the post “is not between the existing oil and gas cap and the existing crappy industrial carbon pricing system,” she wrote on LinkedIn. “It’s between the oil and gas cap and an imaginary ideal carbon pricing system that this government hasn’t even started designing. Sure, a perfect beautiful industrial carbon price might work just as well to reduce oil and gas pollution as an emissions cap. That’s not what we have and it’s not what’s on offer.”

“Over a third of Canada’s total greenhouse gas emissions come from oil and gas, and yet somehow it remains the only sector of the Canadian economy that doesn’t face any regulations to drive those emissions down,” Abreu added. “Who would want to scrap something we already have, that will work to finally carve away at this huge part of Canadian climate pollution, for something that doesn’t exist and isn’t even on the table? I’ll leave you to answer that question.”