Skip to content

Industrial carbon pricing faces two threats that demand urgent attention

New analysis shows how updating industrial carbon pricing to make markets work better and keep participants in the systems will reduce more emissions and give industry greater certainty.

Canada’s industrial carbon pricing systems need an update. Although these policies are the country’s leading drivers of emissions reductions and important tools for attracting investment while costing consumers next to nothing, there is mounting evidence that they are not delivering to their full potential. The resulting uncertainty is a barrier to Canadian firms that could otherwise be investing in big low-carbon projects that preserve their long-term competitiveness.

Two data points show what needs fixing. First, according to fresh research conducted by the Canadian Climate Institute and Navius Research, it is increasingly clear that some markets behind these systems are on the brink of malfunction, undermining the certainty that investors need to support emissions-reducing projects. Second, some facilities that currently participate in these systems are poised to opt out, which would shrink the markets and diminish their impact.

The first threat to industrial carbon pricing: low credit prices

At the heart of Canadian industrial carbon pricing policies are markets where industrial facilities buy and sell permits (or credits) for their emissions. Those markets are the reason that these policies are also known as large-emitter trading systems, or LETS. Facilities that reduce their emissions earn credits and can sell them to facilities that are more emissions-intensive. The power of the market rests on the price of the credits, which act as a stick for those who pollute more and a carrot for those that invest in emissions reductions. 

The problem is that credit prices aren’t evolving as intended. The Canadian Climate Institute has previously published research illustrating how credit prices in some LETS are expected to fall in the coming years, undermining the incentive to reduce emissions. The Institute has worked with Navius Research to update its previous analysis, and finds that the risks haven’t gone away. If anything, they have gotten worse.

Figure 1 displays the projected price of credits in Canada’s large-emitter trading markets in 2030 according to the latest research. To provide the certainty and return that investors are counting on, credit prices should rise to $170 per tonne of emissions in 2030. Yet that is not what happens in British Columbia, Alberta, Saskatchewan, Ontario, and Nova Scotia. Instead, credit prices in these markets may settle at lower rates, weakening the incentive to invest in emissions-reducing projects.

Figure 1

Low credit prices are the result of having too many credits available for purchase on the market. As 440 Megatonnes has written before, all LETS markets have been designed to maintain a narrow balance of supply and demand. That makes systems vulnerable: small changes in economic outlook could easily lead to a higher supply of credits and depressed prices. Low credit prices don’t significantly lower costs—functioning LETS markets already have low costs by design, to protect competitiveness—but they do significantly undercut the reward for reducing emissions. That’s bad for investors, who need certainty to move forward on big projects.

The actual credit prices that emerge in these markets will depend on many factors, some of which are difficult to quantify or predict. The evolution of technology, market conditions, and certainty are all unpredictable and affect carbon markets. The lack of transparency around the internal workings of these markets also makes them harder to model. What is clear is that they face significant risks.

The problem may even be worse than this research suggests. Market data from Alberta and auction results from Quebec show that credit values in some LETS are already underperforming expectations. And Alberta is projecting lower-than-expected revenue from its TIER system in the coming years as participants use up excess credits that are banked in the system. If systems remain as they are, low credit prices are not going away.

The second threat to industrial carbon pricing: emitters leaving the system

Another looming challenge could compound the problems facing large-emitter trading markets: lower participation. 

Canada’s large-emitter trading markets all contain two kinds of participating facilities: those that have to be there, and those that choose to be there. The second kind are known as opt-in facilities. Opt-in facilities are smaller than the facilities that are obliged to participate, but even those at the smaller end of the scale still produce nearly the same amount of greenhouse gases as 2,200 cars each year. Until recently, these facilities could choose either to pay the federal fuel charge or to opt into industrial pricing systems. Many chose to opt-in, because although industrial carbon pricing brought some additional administrative burden, its credit markets offered lower costs and even the potential to earn returns. But now that the fuel charge is gone, these facilities that have participated in LETS for years could simply opt out.

The loss of opt-in facilities could represent a significant loss of coverage, particularly in Alberta, which has many small oil and gas facilities but only obliges relatively high-emitting facilities (those emitting the equivalent of at least 22,000 cars per year) to participate in the credit market. According to this new analysis, as much as 31 megatonnes (Mt) worth of facilities could drop out of Canada’s LETS markets in the coming year. That represents around 9 per cent of Canada’s industrial emissions in 2023. 

Figure 2 breaks down what the loss of opt-in facilities would mean for LETS coverage across the country.

Figure 2

Fortunately, policymakers can address these risks. If governments act to keep participants in the systems and modernize their markets, LETS can provide more certainty to investors and deliver greater emissions reductions. This new analysis finds that policy fixes to preserve the function and coverage of LETS would deliver up to 25 Mt of additional emissions reductions. That’s a conservative figure. As 440 Megatonnes has written previously, low credit prices could as much as halve the impact of LETS in 2030, so the benefits of tighter systems could be even greater.

The federal government should modernize industrial carbon pricing, and fast

The benefits of modernized large-emitter trading systems—and the risks attendant to their existing design—are too great to ignore. Rapid policy action can update industrial carbon markets so that they continue to support projects that are central to the long-term competitiveness of Canadian industry. In contrast, policy delay simply risks project delay.

The list of climate priorities never seems to grow shorter, but it sometimes grows clearer. In this case, the data are unambiguous: the top climate policy priority should be the modernization of industrial carbon pricing.

Ross Linden-Fraser is a Research Lead at the Canadian Climate Institute. Dale Beugin is Executive Vice President at the Canadian Climate Institute. Rick Smith is President of the Canadian Climate Institute.

Industrial carbon pricing is tied to major projects worth more than $57 billion

More than 70 major decarbonization projects stand to gain directly from industrial carbon pricing—and some could be at risk without these systems.

Industrial carbon pricing is Canada’s single-most important climate policy. Its importance rests not only on its emissions-reducing potential—greater than that of any other policy—but also because of the way that industrial carbon pricing helps attract investment for clean industrial projects.

Industrial carbon pricing is not just a stick, it’s a carrot

It’s well established that industrial carbon pricing functions as a stick by pricing industrial pollution, but it also works as a carrot. That’s because industrial carbon pricing—also known as large-emitter trading systems—creates credit markets where facilities can earn returns from their emissions reductions. Facilities that are highly emissions-intensive buy credits on these markets to cover their excess emissions, while facilities that reduce their emissions can generate credits for their high performance that they can sell for cash. In this way, large-emitter trading systems can use the prospect of credits to attract investment into Canada.

These credits are an important way for facilities to recoup the high costs of emissions reducing projects, especially if the projects wouldn’t earn much revenue on their own. For example, carbon capture projects are capital-intensive to construct and resource-intensive to operate, but their product is a gas that has little commercial value—except if there is a price on carbon. By making emissions reductions eligible for credits, large-emitter trading systems provide CCUS projects with revenue streams that make them viable.

This approach also diminishes the need for subsidies. Other climate policies can’t offer the same cost-effective returns for emissions reductions. The federal investment tax credit for carbon capture, for example, would cover up to half of the capital costs of a project, but wouldn’t provide support for the operating costs, which are high. Credits earned in large-emitter trading markets would help projects to help cover these costs, all without putting a burden on the taxpayer.

Companies are investing billions on the assumption of a carbon price

There are already billions of dollars of low-carbon investments across Canada that are banking on the existence of a carbon price. According to the Climate Institute’s research, this includes more than 70 projects in industrial and natural resource sectors with a combined value of more than $57 billion. These emissions-reducing projects would generate performance credits that could be sold in large-emitter trading markets.

These investments include carbon capture installations for oil and gas and heavy industry, decarbonization projects at steel plants and pulp mills, and renewable energy projects in Alberta (the one province where they can earn saleable performance credits and offsets).

Existing facilities stand to gain from large-emitter trading systems, too. Firms that have already completed emissions-reducing projects, such as the Quest carbon capture facility, are earning credits from large-emitter systems that help to cover the investments they’ve already made. 

There are big risks to cancelling industrial carbon pricing

As 440 Megatonnes has shown previously, there are billions of dollars in assets that would be at risk if industrial carbon pricing systems were removed. The greatest direct risk is to the credits that companies already hold—amounting to $5 billion in Alberta alone—but investors have made many other decisions with the assumption of an industrial price on carbon, and they might change their minds in the absence of those policies. 

One thing is clear: investors have put many billions of dollars on the table to reduce Canada’s emissions, and existing policies have helped make those investments happen. Industrial carbon pricing will help attract the capital to build a cleaner, more competitive Canadian economy—as long as it stays in place.

Ross Linden-Fraser is a Research Lead at the Canadian Climate Institute.

Cancelling industrial carbon pricing would destroy billions of dollars of assets

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.

Industrial carbon pricing has negligible impacts on household costs – and in some cases is a benefit

Large-emitter trading systems help industry succeed and cost next to nothing for households.

Previous research from the Canadian Climate Institute has shown that industrial carbon pricing systems impose very low costs on Canadian industries while positioning them to succeed in increasingly uncertain global markets.

But how does industrial carbon pricing affect Canadian households?

The short answer is: not much, if at all.

Large-emitter trading systems have almost zero impact on households

The Institute’s recent research shows that Canada’s industrial carbon pricing systems—also known as large-emitter trading systems—have essentially no impact on households. This light touch is a feature: it’s a result of the way that systems have been designed to limit costs to industry, and a function of the kinds of products that are covered by large-emitter systems.

The Institute recently published an independent assessment of Canada’s large-emitter trading systems. The assessment includes detailed modelling that examines the impact of these systems on emissions and the economy. The analysis distinguishes the impacts of consumer carbon pricing systems from the effects of their industrial equivalents. It shows that while consumer carbon pricing slightly depresses household expenditures on average, industrial carbon pricing has almost zero impact on household costs.

Large-emitter trading systems have an average impact of around 0 per cent on household consumption in 2025, (with even small net benefits for some consumers) and a tenth of a per cent in 2030. In some cases, industrial carbon pricing could even have a positive impact on household consumption in 2030, largely because of provisions in Alberta’s TIER system that can reduce the cost of electricity.

Large-emitter trading systems are not carbon taxes

The low cost of large-emitter trading systems is especially notable considering that they are  expected to be the single biggest driver of emissions reductions across the country. 

What explains this cost-effectiveness?

Large-emitter trading systems are very different from consumer carbon pricing or carbon taxes, and three important differences help explain why industrial carbon pricing has so little impact on households.

First, large-emitter trading systems impose much lower costs on total emissions than consumer carbon prices, around $10 or less per tonne of emissions against a carbon price of $95 per tonne. At worst, these costs represent a Timbit per barrel of oil, while some industries are even able to earn money, on average. These low costs are intentional: large-emitter trading systems are designed to incentivize industry to reduce its emissions, but without imposing costs so high that Canada loses market share to places with weaker controls on emissions. 

Second, industrial carbon pricing applies to goods that are largely exported. About 50 per cent of the output of Canada’s large emitters is exported and some industries export much more; the oil sands send closer to 80 per cent of its production abroad. This implies that only a fraction of the already low costs get passed on to Canadian consumers. Moreover, the prices of industrial products are largely set by global markets, not domestic policy. The major exception is electricity, but as the Institute’s analysis has shown, in some places—like Alberta—large-emitter trading systems can actually help reduce prices by enabling low-carbon producers to generate saleable credits.

Third, industrial carbon pricing barely affects households because these modest increases in the cost of industrial goods have only a small impact on the price of finished products. Consider a product made with steel. Research finds that the use of pricier low-carbon steel has a negligible impact on the purchase price of a vehicle or the construction costs of a building. There are of course differences depending on the product; for example, the cost of cement has a higher impact on the total cost of construction (though households use very little cement). Yet the principle remains that the price of the inputs is only a fraction of what a consumer pays.

The bottom line is that large-emitter trading systems deliver big benefits at a low cost. And for consumers in Canada, these costs are negligible. Large-emitter trading systems are not perfect, but they are still powerful tools for reducing Canada’s emissions and retooling its industries for long term competitiveness. Along the way, Canadian households can rest assured that they will shoulder very little in the way of costs.

Ross Linden-Fraser is a Research Lead at the Canadian Climate Institute. Dave Sawyer is Principal Economist at the Canadian Climate Institute.

Five recommendations to modernize Canada’s large-emitter trading systems

Industrial carbon pricing systems reduce emissions while protecting Canadian competitiveness, and they will be more effective if they are modernized.

Large-emitter trading systems are Canada’s most important climate policy. As 440 Megatonnes has shown in the past, they drive more emissions reductions than any other policy while protecting the competitiveness of Canadian industry.

Their design features—which ensure low costs while enabling revenue generation for low-carbon projects and shielding producers from foreign carbon tariffs—are valuable amid the uncertainty generated by tariff threats from abroad. As export markets rapidly change and new border measures and tariffs emerge, these benefits will only grow in value.

Yet though large-emitter trading systems are powerful, they are not perfect.

Our research has also shown that without updates, the trading markets created by these systems could start to unwind in the years ahead, undermining the revenue streams and certainty needed for emissions-reducing projects. 

The Canadian Climate Institute has just published an independent assessment of carbon pricing and a summary report explaining how large-emitter trading systems can be modernized, founded on economic modelling, real-time data, and discussions with governments and experts. The summary report makes five recommendations to modernize LETS so that they can continue delivering benefits for the climate and Canadian competitiveness in the long term.

Recommendation 1: Address the risk of credit market oversupply.

As we’ve explained elsewhere, the whole purpose of large-emitter trading systems depends on the functioning of the trading markets that they create. These markets are designed to ensure that emissions reductions have value—but some markets are not on track to continue providing that value. 

LETS need well-functioning markets. The independent assessment shows that modernizing the systems across the country would deliver a minimum of 18 Mt of additional greenhouse gas emission reductions in 2030 compared to existing system design.

We propose five actions that governments can take to ensure that their markets continue to function as intended. Chief among these, provincial governments should tighten performance standards where there is a clear risk of oversupply. 

Our assessment identifies the greatest risk in British Columbia, Alberta, and Saskatchewan, but also notes all systems are at risk. 

Governments can refine the design of their systems in other ways, including implementing market stability mechanisms. The federal government could also require provincial and territorial systems to demonstrate that they have additional net demand for credits in their systems. Meanwhile, all governments can minimize these risks by reviewing and assessing other policies for the ways they interact with LETS.

Recommendation 2: Align sub-national systems to improve their effectiveness and ensure fair competition

Large-emitter trading systems should also set a fair playing field for emitters. Facilities that make the same product should compete against common standards. That’s better for competitiveness within provinces and between them too. 

Today, however, performance standards in some jurisdictions can send perverse incentives, allowing more emissions-intensive facilities to gain credits while competing against cleaner facilities that pay more. And there are persistent differences between provinces and territories too, which adds competitiveness barriers when policymakers are looking to remove them.

The Institute’s report outlines a further five actions that would align sub-national systems and minimize existing competitiveness distortions. Above all, governments should move toward having one performance standard for all facilities within each jurisdiction that make the same product. They can also harmonize the rates at which their performance standards tighten, or increase costs in time. Systems should set common, lower thresholds for the size of facilities that participate in LETS, and they should work to cover more of the same emissions. Finally, systems should not return revenues to emitters in ways that undermine the incentive to cut emissions.

Recommendation 3: Facilitate pan-Canadian alignment for credit trading

One of the key advantages of large-emitter trading systems is that they have very low costs and give facilities various options to comply. However, those advantages are smaller in smaller markets. Canada is a fragmented landscape with multiple LETS trading markets. Combined markets would offer lower compliance costs and further reduce competitive distortions. 

Building a unified market for LETS is a long-term proposition, but at a time when Canada is looking to reduce internal trade barriers, now is a good time to start. To begin that process, policymakers can establish an intergovernmental harmonization process, create credit standards that are ready for cross-border trading, and develop secondary markets that allow other participants into the system.

Recommendation 4: Enhance system transparency

Transparency is linked to system effectiveness. The problems in large-emitter trading markets are an open secret, but important system design features, and most credit trading, are entirely private. This makes it hard to track and resolve problems within the systems.

Policymakers can enhance the transparency of LETS in several ways. Most importantly, they should make it mandatory to disclose the prices at which credits are traded, so that participants and regulators have more insight into the incentives in the system. The Institute’s report identifies other types of information that regulators should publish, notably on competitiveness impacts, and proposes the development of a central registry where all information can be compiled accessibly.

Recommendation 5: Prepare for future challenges

Canada is sailing in turbulent waters, but there are even bigger storms ahead: the ongoing transition to new forms of energy and lower-carbon forms of production, combined with the growing threat of border carbon tariffs. These challenges point toward the need for continuing emissions reductions, but in the most efficient and flexible way possible.

Large-emitter trading systems can continue to provide emissions reductions while serving as a shield for low-carbon growth. But that will be easier if systems are adapted with the future in mind. Governments can update their LETS with emerging border carbon tariffs in mind, including initiating a process to determine how the prices in Canada’s systems compare to the levies being imposed abroad. Other updates, like providing advance notice of carbon price adjustments, and aligning LETS with other sectoral policies, would similarly help set up systems for long-term effectiveness.

Large-emitter trading systems are working: they effectively cut emissions and support Canadian industries’ competitiveness. Their modernization would address oversupply risks, improve transparency, and align sub-national variations. By implementing these five key recommendations, policy-makers can ensure that LETS fulfill their potential in driving low-carbon investment, safeguarding industry, and positioning Canada for future climate and trade realities.

Dave Sawyer is Principal Economist at the Canadian Climate Institute. Ross Linden-Fraser is a Research Lead at the Canadian Climate Institute.

Cutting carbon from Canada’s chemicals

This is the fifth and final instalment of our series on heavy industry.

Canada’s largest-emitting, most diverse heavy industry has many pathways to net zero, but they will all take time.

The chemical industry is the largest-emitting and most varied of Canada’s heavy industries. 

It produces a huge range of products, including agricultural chemicals like fertilizers; industrial chemicals; formulated products like paints and soaps; and pharmaceuticals and medicines. In 2023, it was responsible for an estimated 22.6 megatonnes of emissions, representing 29 per cent of all emissions from heavy industry.

Chemicals have a vital role to play in the net zero transition, too. Chemical products have a huge number of uses, from the composites used in vehicles, solar panels, and wind turbines, to the chemical agents used in batteries and carbon capture.

This Insight discusses how the chemical industry can produce those valuable products while pursuing net zero emissions. The chemical industry described here is the same as the chemicals and fertilizer sub-sector in the National Inventory Report (NIR); 440 Megatonnes uses the simpler label since emissions from non-chemical fertilizers, such as potash, are captured in a separate part of the NIR.

The chemical industry has so far leaned on energy efficiency and carbon capture

There are more than 3,500 facilities making chemical products across Canada. But most of the industry’s emissions come from a small number of facilities, with the largest in Alberta and Ontario. The fertilizer sector, in particular, is more concentrated than the rest of the industry, with just nine facilities. Other chemical sub-sectors have many more producers, with the largest making petrochemicals. According to Clean Energy Canada, in 2022 the five top-emitting facilities accounted for 52 per cent of the emissions from chemical production.

The chemical industry generates so many emissions because it relies on fossil fuels not only for fuel, but also to provide the raw inputs for its products. For example, ammonia—the key ingredient in nitrogen fertilizers—is made by transforming methane gas into hydrogen, then reacting the hydrogen with nitrogen. Methane and hydrogen provide the energy and the key ingredients for the reaction, which releases additional process emissions.

Around 55 per cent of the chemical industry’s emissions come from the production of heat and electricity, while 43 per cent were process and other non-energy emissions that came from the use of fossil fuels in other ways, largely as feedstocks, lubricants, and solvents. Some chemical products such as nitrogen fertilizers also release emissions when they are used, but these do not count toward the industry’s emissions in the NIR.

Since 2005, emissions from the chemical industry have declined slightly. Figure 1 illustrates how the industry’s emissions are shaped by three key drivers: economic activity, energy intensity (or efficiency), and emissions intensity. The historical tab of the figure below shows that since 2005, rising economic activity put upward pressure on emissions, but this pressure was offset by efficiency improvements and some decarbonization from fuel switching.

Figure 1 also illustrates how the industry’s emissions could evolve between now and 2030. The projected tab of the figure shows that the industry’s emissions would decline further by 2030—if strong versions of climate policies are in place.

The emissions reductions shown in Figure 1, both historical and projected, depend on largely the same solutions. These data reflect facilities taking efficiency measures, cogenerating heat and electricity where possible, and in a small number of cases, installing carbon capture and storage. The path to net zero chemicals will rely on a broader and deeper range of solutions.

There are many possible solutions to cut emissions from chemicals, but no easy ones

There is no single approach to creating a net zero chemicals facility. Instead, there are multiple solutions, which may need to be combined in different ways depending on where a facility is located and what it produces. 

Existing solutions will continue to play a role. As in the past, facilities could adopt efficiency measures and install carbon capture where feasible to reduce some of their emissions. But these interventions are unlikely to achieve net zero emissions on their own. Efficiency measures will only go so far, and it would be impractically expensive to apply carbon capture to all of a facility’s emissions.

The deepest emissions reductions in the chemical industry are those that replace fossil fuels, either by adopting lower-carbon feedstocks, switching to lower-carbon sources of energy like electricity, or both. 

The largest current decarbonization project in the chemical industry relies on a combination of these solutions. This project, a planned expansion and retrofit to a Dow petrochemicals facility outside of Edmonton, will involve a mix of energy efficiency measures and fuel switching to hydrogen produced using carbon capture and storage.

Yet it may be some time before the most impactful solutions are widely adopted. 

The main technical barrier is that chemical facilities face the dual challenge of replacing an energy source and a feedstock at the same time. Some potential solutions, like electrification, can only provide a source of energy and not feedstock—and are not yet commercialized anyway. Other solutions like hydrogen or biofuels could serve as both energy source and feedstock. Though even these solutions do not fully replace the role of fossil fuels in the manufacturing process, as facilities would need to find an alternative source of the carbon molecules that currently come from fossil fuels. 

But beyond the technical barriers, there are practical ones. Currently, low-carbon hydrogen is very expensive and hard to procure in some parts of Canada, while biofuels are in low supply. And once the capital is acquired for a decarbonization project, it can be years before a proposal translates into construction.

These challenges are visible in the chemical industry’s net zero pathway. Figure 2 illustrates how the net-zero pathway for chemicals leaves room for emissions increases in the near term, with accelerating reductions after 2030. 

Figure 2 shows the net-zero pathway for chemicals allows time for solutions to become commercialized.

Net-zero chemicals are a long-term proposition, which calls for flexible, long-term policy signals.

Industrial carbon pricing is the most obvious policy lever that can support decarbonization in the chemical industry. Large-emitter trading systems are designed with the challenges of heavy industry in mind. They combine cost containment, technology neutrality, a long-term price signal, and the potential to earn revenue for emissions reducing projects. 

Large-emitter trading systems play a key part in Dow’s decarbonization project. The emissions reductions from that project will allow the facility to earn credits that can be sold to other emitters. But the credits are only valuable so long as facilities have certainty that large-emitter trading markets will function as intended. Governments can provide additional certainty about the long-term prospects of these systems by adopting modernizing reforms, and through complementary measures like carbon contracts for difference.

But carbon pricing alone is not enough. Government investment in research and demonstration projects have played an important role in past reductions, and will continue to. Similarly, federal tax credits for hydrogen and carbon capture have already played a role in pushing existing projects forward. Given the variety of technology pathways that are available, the International Energy Agency notes that climate taxonomies can also help to steer investment to the most transition-aligned opportunities.

Policies focused on increasing the circular use of materials can also play an important role in reducing emissions from chemicals. The benefits are most obvious in the manufacture of plastics, where recycled material can reduce the need for virgin feedstock.

The economy of today and the economy of a net zero world will both rely heavily on products from the chemical industry. But the manufacture of those products won’t always have to generate emissions.

Ross Linden-Fraser is a Research Lead at the Canadian Climate Institute.

The steel industry is on track for major emissions reductions

This is the fourth Insight in our series on heavy industry.

Canada’s iron and steel industry is poised to make big emissions cuts thanks to government support, industry investment, and industrial carbon pricing.

If there is an avatar for industrial decarbonization, it is steel. This versatile and infinitely recyclable material will help build the net zero economy, literally, as a component of vehicles, wind turbines, transmission towers, and much else. And low-carbon steel is expected to see rising demand compared to its more carbon-intensive equivalents.

Though Canada’s steel industry is currently lower-carbon than most of its foreign counterparts, it is still a highly emissions-intensive business. As with other heavy industries, decarbonizing steel means cutting emissions at capital-intensive facilities that face low-cost global competitors.

Policymakers have a part in helping the Canadian iron and steel industry navigate this transition. As this Insight will discuss, the role for policymakers is less about identifying the winning pathway to decarbonization and more about implementing the most cost-effective measures.

Steel emissions are poised for big cuts this decade

Canada’s iron and steel industry is on the cusp of significant changes. Between 2005 and 2022, its emissions fell by 3 megatonnes, but not because of decarbonization. Though facilities installed some efficiency upgrades, the industry’s emissions fell largely because one large plant stopped producing iron and steel. You can see this trend in Figure 1 by clicking the historical button.

The future drivers of emissions—shown by clicking on the projected button in Figure 1—will look very different. Under the measures in Canada’s 2030 Emissions Reduction Plan, 440 Megatonnes projects that the iron and steel industry will grow while slashing its energy and emissions intensity. Overall, the industry is on track to cut emissions by 5 megatonnes, or 40 per cent, between 2022 and 2030.

This drop in emissions is thanks to decarbonization projects that target the emissions associated with ironmaking, the most carbon-intensive stage of steel production. Ironmaking generates so many emissions because it requires separating iron from oxygen, traditionally by combining iron and high-carbon coal in a blast furnace. The combustion of the fuel and the chemical reaction between carbon and oxygen both produce large quantities of carbon dioxide.

Today, Canada has three steel mills that make their iron using coal-based blast furnaces. These facilities—the largest in the industry, known as integrated plants—are responsible for about 90 per cent of the sector’s emissions. 

There are a few ways to reduce those emissions. One of Canada’s integrated steel facilities is opting to avoid ironmaking altogether. Instead of producing steel from scratch, it will make steel exclusively using scrap, in a process that can be largely decarbonized by using an electric arc furnace. 

However, scrap-based or secondary steelmaking cannot entirely replace ironmaking-based or primary steelmaking. Primary steelmaking will still be needed to make some high-performance grades of steel, and scrap-based steelmaking will always depend on reliable supplies of good quality scrap. That means finding ways to decarbonize ironmaking itself, a much more challenging task. 

One of the main alternatives to blast furnace ironmaking is a process known as direct reduced iron, in which steelmakers find lower-emitting ingredients that can remove oxygen atoms from iron ore. Currently, the most common input for direct reduced iron is natural gas, which still releases carbon dioxide during the reaction. It is also possible to use hydrogen, which does not release carbon dioxide when combusted—though the production of the hydrogen itself can generate emissions, depending on the process.

Another of Canada’s integrated steel plants has chosen the route of direct reduced iron. In the coming years, it will install an electric arc furnace and replace its blast furnace with direct reduced iron fueled by natural gas. 

The decarbonization projects at these two plants will significantly cut Canada’s iron and steel emissions, but they won’t take the facilities all the way to net-zero emissions.

Carbon pricing and federal funds have helped put steel on track to net zero

The emissions reductions that we project in the near future would put the iron and steel industry on a pathway aligned with net zero (Figure 2). As steel producers have noted, those reductions are thanks to a combination of commercial interest and government policy. Customers increasingly demand low-carbon products (though there is not yet a widespread willingness to pay a premium for them), while industrial carbon pricing and significant public support for the industry’s recent decarbonization projects have provided powerful incentives to cut emissions.

To stay on its net zero pathway after 2030, the industry will have to make deeper emissions reductions. The most important action will be to eliminate the remaining emissions associated with ironmaking, whether those come from fuel combustion or chemical processes.

There are many possible solutions, though none are yet commercialized. In theory, Canada’s last remaining blast furnace could be replaced with other technologies, or its emissions could be captured. Facilities that use natural gas could reduce those emissions through carbon capture or by replacing gas with low-carbon hydrogen. Alternatively, ironmaking could be completely electrified through electrolysis. 

Every solution has its challenges. Carbon capture projects are hard to install at steel plants, with their many point sources of emissions, and the world’s only commercial-scale solution has low capture rates. In turn, low-carbon hydrogen is expensive to produce, and it would be difficult to procure in Ontario, the home of Canada’s integrated plants. Meanwhile, the technology to electrify ironmaking is still under development, and it would require enormous volumes of electricity, at a time when demand for electricity is already expected to rise.

Steelmakers around the world are experimenting with all these technologies. For policymakers, the challenge is identifying the most cost-effective measures that create the enabling conditions for net zero solutions.

Policies to decarbonize steel should be cost-effective

Public policy has been a crucial factor in the decarbonization of iron and steel. But what has worked in the past should not necessarily be the template for the future.

The iron and steel industry’s latest projects are supported in large part through public funds. There can be good reasons to use public funds for decarbonization: subsidies can motivate first-movers in hard-to-abate sectors, and they are easier to justify where industries are major employers and when there is growing demand for low-carbon products, but limited willingness to pay a premium for them.

Yet governments should be cautious about continuing this approach. As Canada travels further along its pathway to net zero—and as global competitors face continuing pressure to decarbonize too—it will be more cost-effective to rely on other policies that offer powerful incentives to cut emissions without relying on expensive subsidies.

One such policy is industrial carbon pricing, or what we call large-emitter trading systems. These systems are designed to reduce the risk of offshoring Canada’s industrial emissions, while sending a consistent price signal that encourages firms to reduce their emissions. Usually, systems also recycle some proceeds back to emitters for decarbonization projects.

Governments can also help create a market for low-carbon steel through their procurement rules. By requiring projects that use public money to buy low-carbon goods, including steel, governments can reduce emissions and support the competitiveness of low-carbon producers. The federal government doesn’t yet include steel in its green procurement rules, but it plans to do so. 

The prospects for low-carbon Canadian steel are encouraging. The industry is taking constructive steps to reduce its emissions and Canada has a range of effective policies already in place. Together, they can generate the momentum to decarbonize steel even further while setting the stage for its long-term competitiveness.

Ross Linden-Fraser is a Research Lead at the Canadian Climate Institute.

New analysis shows how Canada’s industrial carbon pricing protects competitiveness and profitability

Large-emitter trading systems effectively reduce emissions and have limited impact on profits.

While the incoming Trump administration in the United States will likely mean a setback for climate progress in some respects, new analysis suggests Canada would benefit from maintaining and even strengthening competitiveness-driven policies led by industrial carbon pricing—also called large-emitter trading systems (LETS). The U.S.’ landmark Inflation Reduction Act (IRA), for example, is likely to persist in some form and continue to support U.S. industry as it re-tools for clean energy. On top of that, we can expect to see continued leadership at the subnational level as states and local governments fill a leadership gap. Additionally, bipartisan momentum around carbon border adjustments, just like in the European Union, suggests rising carbon protectionism isn’t going away.

Canada’s large-emitter trading systems, designed with competitiveness as a core focus, offer a balanced response. These systems keep costs low for industry while incentivizing emissions reductions and attracting investment. They help align Canada’s emissions-intensive and trade-exposed sectors with global standards in an era of rising carbon protectionism. Maintaining and refining LETS should be a priority for Canada to ensure its industries remain competitive in an international landscape that increasingly values carbon efficiency, regardless of political shifts in the U.S.

Industrial carbon pricing can deliver big emissions cuts at a low cost to industry

LETS are a foundational policy tool in Canada’s fight against climate change. Previous research from the Climate Institute’s 440 Megatonnes has shown that large-emitter trading systems will deliver more emissions reductions between now and 2030 than any other policy. But they have even bigger benefits.

While LETS are proving effective at reducing emissions, the data also suggests they are protecting—and in some cases, enhancing—the competitiveness and profitability of Canadian industries. That’s not to say that these systems are without their challenges, including potential market instability and political risk, and we’ll return to these issues in future pieces.

Canada’s commitments to reduce its emissions depend on various policies, with industrial carbon pricing playing a foundational role. Every province and territory has either its own LETS (for example, Alberta’s TIER system), or has the federal system applied. These systems are highly effective at reducing emissions. LETS can deliver 20-48 per cent of incremental emissions reductions from all climate policies in 2030, more than any other policy.

LETS are designed to drive investments in emissions reduction while preserving the competitiveness of industries that are emissions-intensive and trade-exposed. These sectors are vital to Canada’s economy, and a significant rise in their operational costs could make them less competitive, potentially causing production and emissions to shift to countries with less stringent carbon regulations.

LETS gives facilities multiple ways to compensate for these emissions, including investing to reduce emissions, obtaining emissions credits by trading them with other facilities, banking credits for future use, obtaining offset credits, or paying the carbon price. This flexibility helps further reduce the cost of the policy. Facilities that outperform the performance standard earn excess credits that they can sell, which helps generate returns for emissions-reducing projects.

Industrial carbon pricing ensures low compliance costs for large emitters

Despite the potential benefits of LETS, some industries have expressed concerns about the associated costs. However, our research shows that the costs and profitability impacts imposed by LETS are generally low and, in some cases, even negative—allowing emitters to profit by earning credits that they can sell or bank for future use. (Banked credits could yield a 13 per cent annual rate of return between now and 2030 because as the national carbon price rises, so does the value of the tonne of emissions it represents.)

Figure 1 illustrates the average cost of emissions for industrial sectors covered by LETS in 2025 and 2030, based on modelling projections from Navius Research. While there are variations across sectors and jurisdictions, the overall trend is clear: LETS compliance costs remain generally low, even as the headline carbon price rises to $170 per tonne in 2030. In 2025, no sector is paying more than $10 per tonne on average, against a carbon price of $95 per tonne rising to a maximum of $29 in 2030. In fact, we find that some industries on average nationally are able to earn more credits than they need to buy. This ability to earn and sell excess credits is shown as a negative average cost in Figure 1. 

Note that the costs shown below represent national averages, and costs differ slightly by jurisdiction. Significantly, Alberta is the only jurisdiction that has negative costs for electricity producers sector-wide. The unique design of electricity benchmarks in Alberta’s TIER system—which has been very effective at attracting and generating capital for low-carbon electricity—also leads to so much crediting that the province pulls the electricity sector national average far into negative territory.

Industrial carbon pricing has limited effect on profits

The average cost metric tells an incomplete story. It does not account for critical dynamics that reflect real-world carbon pricing costs, such as facilities adopting technologies at costs below the carbon price, or the mitigating effects of industrial subsidies and revenue recycling, which can further offset compliance costs. Additionally, it fails to directly include the carbon costs of all regulatory measures, such as methane regulations. Furthermore, it overlooks the context for firms’ costs: whether $5 per tonne is a large or small number—and whether it has a meaningful impact on competitiveness—depends on firms’ profit margins.

Profitability is a better indicator of the overall impact of carbon policy on industry. As Figure 2 illustrates, our research suggests that LETS has a minimal impact on a sector’s overall profit margins and total earnings, even as the price rises to $170 per tonne by 2030. Profit impacts are even smaller when accounting for tax and royalty interactions.

Figure 2 illustrates how in 2030, the anticipated drop in operating profit margins for large emitters is 0.6 percentage points under carbon pricing alone —with the average operating margin falling from 36.1 to 35.5 per cent at a national level. On average, total earnings are 2.2 per cent lower when market impacts are included. This position improves when the benefits from subsidies and credit sales exceed the costs of other legislated policies, creating a net effect that can cushion or even counterbalance the impact of all legislated climate policies.

Though there are still important variations between and within sectors and regions, the negligible profit impact at a national level shows how effective LETS and other climate policies are at driving reductions while protecting the competitiveness of Canada’s large emitters. 

As the Commission on Carbon Competitiveness notes, there are unique competitiveness challenges faced by specific Canadian industries as they work to reduce their emissions. The status quo is not an option: all of them will need to lower their carbon footprints if they hope to compete globally and attract investment in a world that increasingly cares about the carbon embedded in traded goods.

Industrial carbon pricing is a strategic advantage, not a competitiveness drag

LETS are not a threat to Canada’s competitiveness; instead, they offer a strategic edge in the global shift toward low-carbon re-tooling amid rising protectionism. By incentivizing emissions reductions and keeping compliance costs low, LETS position Canada to compete effectively in a carbon-constrained world. Nonetheless, challenges remain, including market opacity, regulatory uncertainty, and policy instability, which create volatility within LETS. Addressing these issues will be crucial to strengthening federal, provincial, and territorial large-emitter trading systems as a foundation for sustained economic resilience and global competitiveness.

As we’ve said before, governments can fix these issues by strengthening these systems to stabilize prices and drive even more cuts to emissions. Stay tuned as we delve deeper into these topics and explore solutions to enhance the performance and impact of LETS in the coming months.

Dave Sawyer is Principal Economist with the Canadian Climate Institute. Ross Linden-Fraser is a Senior Research Associate with the Canadian Climate Institute.

Finding a path to net zero in the pulp and paper industry

This is the third Insight in our series on heavy industry.

The pulp and paper industry has good options to cut emissions—if it can capitalize on them.

Meeting Canada’s climate goals is not only a matter of emissions; it’s also a matter of long-term competitiveness, community resilience, and regional fairness. Such is the case with Canada’s pulp and paper industry. 

Canada’s pulp and paper industry is responsible for a comparatively small 7.6 megatonnes of emissions, which at first glance might make it a lower priority than larger emitters like oil and gas. But the case for reducing emissions from pulp and paper is also about the importance of these facilities to many small, remote communities.

Emissions from pulp and paper are lower than they once were, since the industry has faced substantial headwinds as demand for some of its products, like newsprint, has fallen

These trends have made it hard for the sector to invest in significant decarbonization, but as analysis from 440 Megatonnes shows, there are good options to reduce emissions in the sector.

Pulp and paper emissions are down but for the wrong reasons

The pulp and paper industry consists of pulp mills, paper mills, and paper product manufacturers that make newsprint, cardboard, toilet rolls, kraft paper, wood pulp, and other products. The bulk of its emissions comes from the pulp and paper mills, a collection of around 80 facilities that employ around 20,000 people.

These mills transform forest products into wood pulp, and pulp into paper. They are largely located in remote areas, and most of them are in five provinces: Quebec, Ontario, British Columbia, Alberta, and New Brunswick. 

The industry is much smaller than it was two decades ago. Over that time, many facilities have closed, and employment has dropped significantly.

As a result, emissions have also declined dramatically. As Figure 1 shows, declining economic activity has driven the largest change in pulp and paper emissions since 2005. Meanwhile, the other two drivers of emissions are headed in the wrong direction. Energy intensity and emissions intensity have trended upwards over time, counteracting some of the downward pressure on emissions. This is partly because the industry has started producing some of its own electricity through cogeneration, thereby increasing direct emissions. 

The picture looks different when comparing emission trends from the 1990s—since that time, the pulp and paper industry has significantly improved its energy and emissions-intensity. Regardless, the recent trends will need to reverse to put the industry on a path to net zero. 

Pulp and paper has practical options to decarbonize

There are two main sources of emissions in the industry: combustion emissions from boilers used to generate steam and electricity; and process emissions, including from lime kilns that produce inputs for the pulp- and paper-making process. The industry uses a combination of fossil fuels and biomass for these processes—mostly natural gas, pulping liquors and wood waste. 

However, only some of the emissions from these fuels count toward the industry’s total in Canada’s National Inventory Report. Carbon dioxide emissions from biomass combustion—which amounted to 30 megatonnes for pulp and paper in 2021—are not attributed to the industry. Under international rules for emissions accounting, those emissions are treated as part of the forest carbon cycle, whose emissions are recorded in a separate part of the inventory and are not added to Canada’s total emissions.

To reduce fossil fuel emissions, the pulp and paper industry is likely to rely on a mix of electrification, fuel switching, and efficiency. Industrial heat pumps could be used for some of the moderately high temperature processes at pulp and paper facilities, and electrified dryers could replace some fossil fuel use, if economically viable. Where electrification is more challenging, switching to lower-emission fuels like biomass or renewable natural gas can reduce emissions (though the pulp and paper industry is already a major user of biomass, and not all facilities can scale up their use of these energy sources). Finally, enhanced efficiency measures, like greater recovery of waste heat, could reduce the energy inputs that mills need, and therefore their emissions.

Given the feasibility of these solutions, and their relatively low cost compared to some solutions in other heavy industries, our analysis finds that current climate policies, alongside market drivers, will reduce emissions from pulp and paper by nearly 3 megatonnes by 2030. Click on the projected tab of Figure 1 to see how these solutions can drive down emissions. Figure 2 shows how these reductions compare to the sector’s net zero pathway.

In addition, because biomass is sometimes considered to be carbon-neutral, pulp and paper could theoretically go beyond net zero and achieve net negative emissions. However, some proposed solutions, like bioenergy with carbon capture and storage, would be expensive to deploy, and there is disagreement about whether biomass fuels should be considered truly carbon neutral.

Climate policy can keep pulp and paper on a net zero path

The reductions projected in Figure 2 would put the pulp and paper industry on an emissions pathway aligned with net zero. But to deliver those reductions, an industry facing economic headwinds would still need to invest in decarbonization. And to stay on that pathway after 2030, emissions reductions would need to deepen.

Though the pulp and paper industry is projected to reduce emissions in the coming years, it has not been a significant focus of climate policy. Though some facilities have won grants from larger funding envelopes, the industry has received less funding than some others. That is partly a matter of scale. Compared to other industries, pulp and paper is a small emitter, and the dispersion of emissions among many small facilities means that no single project will deliver major emissions reductions.

Yet there are other reasons to pay attention to pulp and paper. Perhaps the most important is that pulp and paper facilities have outsized economic importance in their regions, since they are often located in remote or small communities. Interventions that improve the long-term competitiveness of these facilities—and minimize their impacts on the local environment—would have disproportionately positive impacts on their host communities.

The fact that the pulp and paper industry has received less funding from public decarbonization programs may be partly due to funding guidelines that privilege projects with a low per tonne cost of emissions reductions. There may be a case for broadening those metrics, considering the pulp and paper industry’s combination of structural economic challenges and regional importance. At the same time, industrial carbon pricing can provide a continuing incentive for facilities to shift to lower-emitting energy sources and use their inputs as efficiently as possible. Given the achievability of emissions reductions, some facilities could be well placed to earn saleable carbon pricing credits.

Though the path behind the pulp and paper industry has been marked by obstacles, the data suggest that there is a pathway ahead to a more prosperous future.

Ross Linden-Fraser is a Senior Research Associate at the Canadian Climate Institute.

Industrial carbon pricing is crucial for deploying carbon capture

CCUS projects can help Canada reach net zero, and well-designed carbon pricing will help build more of them

Last month, Canada enacted a long-awaited investment tax credit that will cover up to half the capital costs of carbon capture, utilization and storage (CCUS). Canada’s climate plans—and global research about reaching net zero—are banking on this technology to play an important role in decarbonizing industrial operations.

In theory, CCUS refers to a versatile suite of technologies that can capture streams of carbon dioxide from industrial processes. In practice, CCUS projects have been expensive to install and operate, and many have fallen short of their promised performance.

As Canada’s new tax credit suggests, public policy plays a crucial role in reconciling the promise and the challenges of CCUS. This Insight examines how Canada might use CCUS, and how climate policy—especially industrial carbon pricing—can help ensure that this technology can live up to its potential.

CCUS is both a safe bet and a wild card

CCUS is one branch of the broader category of carbon capture technologies, and it refers specifically to projects that capture and store emissions from point sources—sites that discharge greenhouse gasses—rather than capturing carbon from the atmosphere.

Even then, CCUS encompasses many types of projects. They can be distinguished between what the Canadian Climate Institute calls safe bets—projects that can be more easily scaled and counted upon—and wild cards—projects that could deliver significant emissions reductions, but whose viability is uncertain. To reach net zero, Canada will need some combination of both.

In general, safe-bet CCUS projects are the ones that rely on highly concentrated streams of carbon dioxide. Cement plants, oil refineries, and some chemical facilities all produce concentrated streams of CO2 that can be more easily captured.

Wild-card CCUS projects are those that can capture CO2 at low concentrations, like from the natural gas boilers used in various industries, including electricity generation and oil sands production. There are many more of these sources, but capturing their emissions will be more costly.

Canada has many CCUS projects in the pipeline

Canada is well placed to deploy CCUS. The country has industries that are looking to use the technology, ideal geology for carbon storage, and—in the case of oil and gas—facilities that are already linked by pipelines that can transport CO2. Canada also has a head start. It already has operational CCUS facilities with a combined capture capacity of about four megatonnes annually, coming mainly from electricity generation, bitumen upgrading and refining, and fertilizer production.

But government and industry climate plans depend on the country deploying many more CCUS projects in the years to come. Federal projections estimate that the country will roughly quadruple its capture capacity to 16 Mt by 2030. And in its net zero scenarios, the Canada Energy Regulator projects that Canada could have between 60 and 80 Mt of carbon capture by 2050.

According to a database compiled by the International Energy Agency (Figure 1), existing projects could put Canada on track to meet government projections—if those projects are followed through. IEA data shows that, with its current pipeline of proposed projects, Canada could install up to 26 Mt of CCUS capacity by 2030, of which 12 Mt would be captured by the Pathways Alliance oil sands project. The database also includes projects in sectors that do not currently use CCUS but where it could play an important role, such as the Heidelberg and Exshaw cement projects, both planning on capturing 1 Mt of CO2 per year.

But the database also illustrates how much uncertainty surrounds those projections. Very few are already under construction. And at least some of the projects in the database have already been cancelled due to uncertainty about their economic viability, while others are at a very early planning stage. 

|

Industrial carbon pricing can help close the certainty gap for CCUS projects

CCUS projects—even those that count as safe bets—face a range of uncertainties. 

The projects are technically challenging to build and operate, requiring dedicated capture, transport, and storage infrastructure. There are still relatively few large-scale examples of CCUS, and many of them have fallen short of their intended capture rates.

But perhaps the biggest problem for the long-term is the high cost of the projects. CCUS projects are capital-intensive to construct and resource-intensive to operate, and they capture a gas that has little commercial value (unless it is injected into the ground to extract oil, but that limits the utility of CCUS in reducing emissions).

Climate policy therefore plays an important role in creating the appropriate incentives for CCUS. 

There are some reasons for governments to turn to subsidies like the recent federal tax credit, the Net Zero Accelerator Initiative, and Alberta’s Carbon Capture Incentive Program, which provides grants for CCUS, funded by carbon pricing revenues. Not only is CCUS expected to deliver some big emissions reductions; the country’s storage potential and technological expertise are potentially bankable. And because there are generous tax credits available for carbon capture in the United States, direct supports could help Canada compete for investment in CCUS.

But the most important measure is industrial carbon pricing. Industrial carbon pricing systems put a cost on emissions while enabling emissions-reducing projects to earn credits that they can sell to emitters for cash. In this way, carbon pricing can provide CCUS projects with revenue streams that make them viable—diminishing the need for subsidies.

For industrial carbon pricing to be an effective incentive for CCUS, the carbon pricing systems themselves must function as intended. And some industrial carbon pricing systems in Canada are at risk of interacting with other climate policies in ways that make them less effective.

Previous research from 440 Megatonnes has shown that some climate policies could create an imbalance in the credit markets created by industrial carbon pricing systems. When the supply of credits in these markets exceeds the demand, the price of credits falls—putting the revenue for emissions-reducing projects (like CCUS) in jeopardy.

To incentivize CCUS cost-effectively, carbon prices must be certain

Policymakers have different options to make sure that carbon pricing works as intended. Regulators can set more stringent standards for large emitters. Supporting policy instruments, like contracts for difference that guarantee the value of carbon credits, can also help give project proponents the certainty they need to proceed. Research shows that these fixes can backstop the value of carbon credits and help the country deploy more CCUS. There are practical examples, too. Up to three megatonnes of carbon capture projects in the oil sands and other hard to abate industries are already backstopped by contracts between the proponents and the federal Canada Growth Fund that guarantee a fixed price of carbon.

If carbon pricing systems are stringent enough for credits to trade at $170 per tonne, they will significantly increase CCUS deployment—and deliver more emissions reductions overall.

Figure 2 illustrates that, if carbon pricing systems are stringent enough for credits to trade at $170 per tonne (what we call a binding carbon price), they will significantly increase CCUS deployment. In the analysis shown below, a binding price leads to as much as 56 per cent more capture capacity in 2030, compared to a non-binding price that doesn’t reach $170 per tonne. (Unlike the IEA data, which is based on a list of all the projects proposed in Canada to date, this figure shows projections based on the impact of current and proposed climate policies). The fixes to carbon pricing don’t only result in more CCUS: they also deliver more emissions reductions overall.

Research consistently shows that if CCUS is going to play a meaningful role in meeting Canada’s climate targets, then the country will need more projects to move from concept to completion. Climate policy will play a crucial role in getting those projects across the hurdles that they face.

The challenge for governments is to ensure that policies are providing coherent, cost-effective incentives. Carbon pricing is the best tool Canada has for this job. Other policies can be effective complements in supporting CCUS, but carbon pricing is the foundation. That foundation just needs to be well designed to deliver its full potential.

By tightening its carbon pricing systems, Canada will not only ensure the better functioning of a crucial climate policy—it can also help to close the certainty gap that faces a potential key technology on the path to net zero.

Ross Linden-Fraser is a Senior Research Associate with the Canadian Climate Institute. Arthur Zhang is a Research Associate with the Canadian Climate Institute.