Why industrial carbon pricing may survive in Canada despite 'axe-the-tax' sentiment
Carbon pricing on large emitters helps generate money to invest in low-carbon tech, experts say
When the Liberals formed government in Ottawa back in 2015, climate action was one of Justin Trudeau's top priorities. And those policies, however controversial, seem to be making some progress; Canada's emissions are finally falling, even if a lot more cuts are needed by 2030.
But with a federal election looming next year — and a change in government south of the border — experts and industries are considering whether Canadian climate policies will survive.
A centrepiece of the Liberal climate plan, carbon pricing, has become a rallying cry for Opposition leader Pierre Poilievre and the Conservatives, whose Axe the Tax campaign has tapped into growing anxieties about the daily costs of housing, food and other necessities.
But the consumer carbon tax — which applies to the burning of most fossil fuels, adding about 18 cents to a litre of gasoline, for example — is only part of the carbon pricing system.
The biggest impact on emissions, according to an independent analysis, has come from putting a price on pollution from big industry.
In October, industry groups and leading companies in cement, steel and energy released an open letter in support of industrial carbon pricing, and proposed changes to the system to strengthen it. They say the policy is a cost-effective way to get companies to cut emissions, although needs to become more transparent and less bureaucratic to work better.
"It feels almost like there is a growing consensus that industrial carbon pricing is a Canadian competitive advantage," said Dale Beugin, who oversees research at the Canadian Climate Institute, a policy think-tank.
"It does appear to be reducing emissions. It does appear to be attracting investment, and that's a pretty powerful outcome."
The Canadian Climate Institute's modelling shows that industrial carbon pricing will be the biggest driver of emissions reductions for the country — accounting for up to half of the emissions reductions under the government's climate plan by 2030.
Poilievre, while forcefully criticizing many parts of the Liberal climate agenda, has not said that he will remove carbon pricing on large emitters. Earlier this year, oilsands lobby group Pathways Alliance told CBC that they would like more clarity from the Conservatives on whether they would keep industrial carbon pricing.
How industrial carbon pricing works in Canada
The industrial carbon pricing system is designed to get major industries — like steel, cement, oil and gas — to lower their emissions over time.
The system sets a threshold for how emission-intensive a company's operations can be — that is, the amount of carbon emitted for a specific amount of steel, cement or fuel that is produced.
If a company exceeds that threshold, it has to pay by buying credits or paying the government to account for their extra pollution. If a company produces less carbon pollution than is allowed, it will profit by having surplus credits to sell.
Over time, the threshold will get more stringent — meaning companies have to gradually reduce the amount of carbon emissions for the products they make. They can do this in various ways: using renewable energy to power their facilities, burning cleaner fuels, stopping leaks of methane and other pollutants and using carbon capture and storage to keep carbon out of the atmosphere.
The result is a financial incentive to find ways to lower costs by lowering emissions.
"That market means there's an ongoing push and ongoing incentive to reduce emissions even below the threshold as long as that market holds up," Beugin said.
"That market also helps attract investment, because firms that hold those credits in hand can think of them as cash flow, as long as there's a clear expectation that they're still going to be worth something in the future."
Where the money's going
While the federal government has mandated the industrial carbon pricing framework, it has allowed the provinces to operate their own systems.
Ottawa makes sure the provincial systems line up with federal standards, and the provinces get to collect and spend the money. The revenues from industrial carbon pricing have flowed across the country, much like U.S. President Joe Biden's centrepiece climate legislation, the Inflation Reduction Act — which led to over 300,000 new green jobs in just two years and billions of dollars of investment into the energy transition.
The U.S. investments are so big that a group of Republican lawmakers have called on their party to keep the signature Biden law in place.
In Canada, some observers think the flow of money may also help the industrial carbon pricing system survive.
"I think there is an advantage to going province by province. It allows provinces to tailor things towards their specific circumstances," said Tom Green, senior climate policy adviser at the David Suzuki Foundation.
"And I think it helps build political support for industrial carbon pricing because the province can decide how the funds that this pricing generates are to be used — whether recycled in some places back into industry to help them decarbonize … or supporting households and other sectors of the economy."
Alberta Premier Danielle Smith, who is a vocal critic of federal climate action, told The Globe and Mail that she supports carbon pricing on large emitters as a way to drive down emissions.
Alberta's TIER fund, raised from carbon pricing on industry, currently has $1 billion sitting in it. The province has invested millions from the fund to support carbon capture projects and help heavy industry switch to renewable energy.
Ontario came on board in 2022 with its Emissions Performance Standards program. The province estimates that it will collect over $2 billion from companies by 2030 in compliance payments, which it can then reinvest back into those industries for projects that reduce emissions and produce clean energy.
Beugin says the credits and payments generated by industrial pricing in Canada are a way to compete with the billions of dollars of investments the U.S. government has been making.
"Rather than being funded by governments, they're being funded by high emitters," Beugin said of Canadian companies that are lowering their emissions.
Why companies like the system — but need certainty
Climate policy experts say that industries need certainty, more than anything, to be able to invest the billions of dollars that are needed for the energy transition.
"The key to industrial pricing being effective is both that the price does gradually increase over time, and critically that industry players gain confidence that the system is going to be durable and be there for the long term," said Michael Bernstein, executive director of Clean Prosperity, a climate policy organization, and a member of the Canadian government's net-zero advisory body.
What this means is that companies need to know their performance standards will continue to strengthen, so they can justify spending the money to adopt cleaner technologies well into the future. More importantly, they need to know that if they are successful at lowering emissions, the carbon credits they receive will continue to be valuable.
Adam Auer, president of the Cement Association of Canada, said that his group supports the carbon price because it raises money for companies to invest in clean technologies and helps level the playing field with the billions of dollars of investments happening under the U.S. Inflation Reduction Act.
But for it all to work, companies need to know Canada will stay the course.
"I think the biggest challenge that we have in any kind of decarbonisation agenda is that carbon has no value outside of the value that we place on it through regulated systems — like the carbon pricing systems that we have in the country," said Auer.
"If you don't know what that value is going to be out five years, 10 years, then the investment becomes a lot riskier, right?"
Overall, this engagement with carbon pricing shows the staying power of the system, Beugin suggests.
"I think it's interesting that we're seeing industry starting to be vocal about the fact that they'd like to see the system maintained," he said.
"[The carbon pricing systems] are there to reduce emissions, they are there to help attract low carbon capital, and they're there to protect the competitiveness of big emitters. So there's all kinds of logic as to why they should stay around."
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