Dismantling large-emitter trading systems would erase billions in investment.
Industrial carbon pricing—also known as large-emitter trading systems (LETS)—have helped attract massive investments into Canada. And that means that eliminating these systems would devalue those investments, leading to significant costs for the companies that have already made those investment decisions. Those investors are banking on the existence of large-emitter trading systems and the saleable credits that low-carbon projects can generate.
The total value of these assets at risk—in terms of credit values, physical projects, and public liabilities—is substantial.
Eliminating LETS would devalue multi-billion dollars of credits
Large-emitter trading systems create incentives for investing in low-carbon projects by creating valuable emissions credits—and a market in which they can be sold for cash. Eliminating those markets devalues those credits, which are important assets for industrial emitters and their balance sheets.
Alberta has set the national approach followed by most provinces and territories, refining its system since 2007 to align with its competitiveness and emissions goals. Alberta’s TIER (Technology Innovation and Emissions Reduction) system is Canada’s largest industrial pricing system.
In Alberta where actual data is available, industry holds close to $5 billion in emissions credits—assets that were acquired with the expectation of generating a return as the carbon price rises.
Eliminating LETS would undermine the value of physical projects
Federal, provincial, and territorial industrial carbon pricing systems have quietly built a significant investment base over the years. Modeling for the Institute’s research on Canada’s climate policies indicates that new clean energy investments tied to LETS nationally total approximately $4.3 billion today. Scrapping these programs wouldn’t just be a policy shift; it would effectively erase billions in investment value for companies’ projects funded under assumptions of a carbon price, causing balance sheet losses and weakening companies’ financial positions. Those costs are in addition to the lost value of carbon credits mentioned earlier.
In Alberta, for example, Emissions Reduction Alberta reports that, in response to Alberta’s industrial carbon pricing program, industry has invested over $7 billion while the province contributed an additional $1 billion across 296 emissions-reducing projects. Just last month, the fund announced an additional $55 million in new investments.
The cancellation of large-emitter trading systems would imperil the returns for—and potentially the existence of—emissions-reducing projects that were counting on being able to generate saleable performance credits. Among the projects that would generate these credits are a $9 billion carbon-neutral petrochemicals facility outside Edmonton, $2.7 billion worth of upgrades to Ontario steel mills in Algoma and Hamilton, and a $1.4 billion low-carbon cement plant in Alberta.
These projects don’t only represent value for investors: each one is associated with thousands of jobs for people in communities across the country.
Cancelling industrial carbon pricing could leave taxpayers on the hook
In some cases, taxpayers could be on the hook for the loss of the industrial carbon price. For instance, the federal Canada Growth Fund is relying on carbon credits to repay a $1 billion public investment in an oil sands emissions carbon capture project. Without the credits, there would be no mechanism for taxpayers to recoup their investment. Similarly, the federal government has signed contracts worth hundreds of millions of dollars guaranteeing the value of carbon credits for some projects; without carbon credits, taxpayers will be on the hook for these liabilities.
A high-stakes decision
Industrial carbon pricing works so well—and so cost-effectively—because it relies on market forces. Making abrupt, unexpected changes to those markets destroys value. It also creates uncertainty, creating expectations that policies are unstable and volatile. In a time in which Canada’s economy is already under pressure, these are high-stakes decisions that affect both current and future prosperity.
Dave Sawyer is Principal Economist at the Canadian Climate Institute. Ross Linden-Fraser is a Research Lead at the Canadian Climate Institute. Dale Beugin is Executive Vice President at the Canadian Climate Institute.