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Etienne Rainville: Want to maximize Canada’s future energy economy? Embracing contracts for difference will be key

Commentary

Last month’s federal budget announced the government’s plan to pursue something called “contracts for difference” as part of its effort to catalyse private investment in emissions-reducing technologies. It’s a big idea with the potential to be misunderstood. The upsides for Canada’s environment and economy are significant, however, so it’s important that policymakers and the Canadian public have the basic facts. 

Let’s start with a short primer on Canada’s model of carbon pricing. Between the federal and provincial governments, Canada has a carbon price on consumers and industry. The current price is $65 per tonne and it’s set to rise to $170 by 2030. The gradual increase is designed to protect Canadian competitiveness and minimize the burden on businesses and households. 

Yet one consequence is that the incentive for businesses to invest in emissions-reducing (and in turn cost-reducing) technologies is somewhat blunted. Certain investments may not make sense at $65 per tonne but could be worthwhile if the price ultimately reaches $170 per tonne. The big uncertainty facing firms and investors—and holding back investment—is the risk that a future government might change or even cancel that carbon pricing schedule. This could leave companies holding the bag on major investments that suddenly become uneconomical. 

We’ve been hearing about the problem for a while: firms broadly agree that Canada’s approach to reducing industrial greenhouse gas emissions makes sense—but that hasn’t been enough to get them to make multi-billion dollar investments in decarbonization. Management is reluctant to sign off, and banks won’t commit financing. It’s just too much risk to assume. 

Herein lies the case for contracts for difference. 

Think of contracts for difference a bit like crop insurance. Just as provincial governments protect farmers against crop failure, we also need an insurance product for industrial players in Canada’s low-carbon economy undertaking projects like carbon capture and hydrogen production. This is a good deal for the country because it backstops the jobs and growth that low-carbon investment is going to generate in the years ahead.

In the U.K., the government of Conservative Prime Minister David Cameron introduced contracts for difference in 2015 to help drive the growth of renewable energy. The U.K. program signs deals with renewable producers that guarantee a set price for their power. If the market price of electricity falls below the guarantee, the operators get a top-up. If the price goes higher, they pay the difference back into the program. 

Inspired by the success of the U.K. model, we talked to large industrial emitters, trade associations, investment bankers, and industry experts. Everybody we spoke to agreed that if contracts for difference were done right, they could go a long way to relieving the paralyzing policy uncertainty that’s hamstringing Canadian industrial decarbonization. 

The carbon contract for difference is a long-term contract between the federal government and low-carbon project proponents, tied to the average price of the carbon credits that trade on Canada’s industrial carbon-pricing markets, like Alberta’s TIER system. Firms pay fees on their carbon output over a certain threshold, but they’re also allocated credits to cover a share of their emissions. As they decarbonize, companies end up with unused credits that they can sell to other emitters.

Why tie to the price of carbon credits? Because companies are counting on the revenues from credit sales to make their projects economic. If the carbon-credit market fails—maybe because a glut of credits from new decarbonization projects overwhelms demand—then businesses could be in serious trouble. 

The carbon contract for difference is like an insurance policy on the value of carbon credits. Designed correctly, it shouldn’t cost the taxpayer anything, because if federal and provincial governments administer carbon-pricing systems according to the rules they’ve laid out, then the contracts will stay on the shelf. Put another way, it’s a promise to business that the government won’t change the rules of the game after companies invest, and this cuts both ways. 

It’s a market-based approach to decarbonization that should resonate with conservatives. Former Conservative Party interim leader Rona Ambrose recently stressed that “carbon contracts for difference are really important to the energy sector.” 

Now, it’s important to emphasize here that contracts for difference have no bearing on the consumer-facing component of Canada’s carbon pricing regime. They only apply to Canada’s industrial carbon pricing system. Although the former is the subject of ongoing political debate, the latter is not. Governments across the political spectrum have come to adopt carbon pricing for industry. In fact, some 80 percent of Canada’s industrial emissions are subject to systems designed by conservative provincial governments in Alberta, Ontario, and Saskatchewan. 

In this sense, the contracts for difference model sets aside the part of carbon pricing that’s the subject of political debate and aims to support the part of the system that finds consensus across the political spectrum, between the federal government and provinces, and among businesses. 

But don’t take our word for it. The folks who have to do the actual decarbonizing—Canada’s industrial emitters—have also thrown their support behind this solution. The Business Council of Alberta summed up the consensus in their reaction to Budget 2023: “contracts for difference are a critical remaining component to catalyze major decarbonization projects.”

And for good reason. We think contracts for difference are an idea whose time has come because as a country we’ve run out of time. The United States has thrown down an estimated $1.2 trillion dollars worth of low-carbon investment, and the EU is set to follow. We’re already feeling the impact: just last month Parkland Fuels cancelled plans for a $600 million biodiesel plant in B.C., citing competitive pressures from U.S. subsidies. That means the loss of thousands of jobs.

In 2022, we co-authored a paper that showed precisely how carbon contracts for difference could make Canada competitive against the rich subsidies on offer in the U.S. Inflation Reduction Act. There’s a huge amount of value waiting to be created in Canadian carbon-credit markets. It just needs to be unlocked—and carbon contracts for difference look like a key. 

Canada only gets one shot to grab our slice of the pie, because companies are now in the process of committing to investments that they will develop over decades. 

Staying in the race now requires close cooperation between provinces and the federal government. In signing contracts for difference the federal government will be agreeing to backstop carbon credits in systems designed and run by the provinces. For the plan to work, provinces will need to take enabling measures like publicly disclosing credit transactions. It’s this collaboration imperative that has further motivated us to bring people together around an idea that we think can benefit all of us. 

Canada needs to pick a lane—decide how we’re going to incentivize investment and commit to it. We need to stop being a country that waffles on big decisions and become a country that builds things again. Contracts for difference are a tool to help us build big things today, and create good jobs for Canadians across the country in the process. 

Otherwise, continuing to change lanes could put Canada in the ditch.

Brent H. Cameron: Handouts without hope won’t help Canada’s poor escape poverty

Commentary

The Trudeau government frequently touts its record on reducing Canada’s poverty rates due mainly to the Canada Child Benefit. Its claims mostly stand up to scrutiny. Targeted public spending has measurably reduced poverty according to an arithmetic conception of poverty as a solely materialistic state of being.

Yet many of the academics, pundits and politicians who talk about poverty lack a textured understanding of the individuals and families who experience poverty in materialistic and non-materialistic terms. Canadians in poverty have reason to be a bit skeptical of the second and third-generation Laurentians who have cast themselves as tribunes of the less fortunate, gesticulating their anger over the plight of the poor whilst brandishing $5,000 wristwatches.

There’s a verse in the Christian Bible that quotes Jesus as saying “It is easier for a camel to go through the eye of a needle than for a rich man to enter into the kingdom of God.” This is a rather harsh rebuke that I cannot comment on, but I’ll say that an equally onerous challenge is for a rich person to understand the experience of being poor—with the noted exception of those rare individuals who manages to pull off a Horatio Alger-worthy rise from rags to riches.

A richer, more textured understanding of poverty that saw struggling Canadians as individuals with complex sets of needs, interests and aspirations rather than mere statistics would cause the government to place as much attention on creating the conditions for hope as it does on the clever design of income-support programs.

I grew up what in hindsight would be considered a lower-middle-class environment. Our lives were marked by precious little money and moments when the creditors might be a step away, but a stable home with two consistently working parents who employed every effort to improve our prospects. Staying on one side of the ledger book was as much a stroke of luck as it was a feat of indefatigable effort.

I paid for university by selling a car that I restored and took side jobs like driving cab. Even with that, I couldn’t afford textbooks for the first two years, so the reserve reading room—where assigned readings for every course could be had for a period of three hours—became my friend. But my parents gave every spare penny they could, gladly and cheerfully. I graduated and became the first member of my family to get a degree, beating a cousin by one year. But I also readily admit my luck. 

My father, on the other hand, knew what real poverty was. He left a troubled home, quit school, and hitchhiked to Toronto where he got a job with a moving company. Until he had earned enough to pay for a room in a boarding house, he banked most of his meal allowances and slept in either one of the trucks or on a couch in the company’s storage warehouse. He was 12 years old at the time.

It is because of these things that I feel emboldened to comment on the nature of poverty. Yes, it is the lack of money, of food, of lodging, and of opportunity. But those are the things you see: the outward symptoms of the syndrome. What you don’t see—and what our white knight wannabes do not appreciate—is the lack of something we call “hope.”

Hope is subtle and nuanced. The transmission mechanism for public policy is complex. At some level, it requires that policymakers distinguish between “transitory poverty” and persistent poverty” and recognize that the messages and policies to make progress on both will necessary differ. It also demands that they recognize that while policy must confront systemic factors, it needs to inculcate a sense of agency and the possibility of a different and better future. A “hand up” rather than merely a “handout” may sound a bit cliched but it actually expresses a deep insight about empowering people rather than merely solving for their basic needs.

Want to address systemic poverty? Then policymakers have to think beyond materialism. They need to create the conditions for hope. They must seek to enable people like my dad to envision a future better than a couch in a warehouse. My dad would have eagerly taken the quarterly cheque for $250 set out in this year’s federal budget. But it was the hope of a better tomorrow that he really desired. 

Ottawa’s latest budget actually had plenty of money for Canadians in poverty. The government’s poverty reduction strategy isn’t suffering from a lack of dollars. But it is ultimately lacking a vision of how to help people take control of their lives and climb the ladder from poverty to the middle class.

Our prime minister once commented on Canada becoming the world’s first “post-national” country. I do not know whether this is true, but it is becoming clear that we are heading toward becoming a post-hope one.