Canada has a major economic opportunity in the global low-carbon economy, if it gets its climate and energy policies right. Those policies should be informed by principles like leveraging the ingenuity of markets and free enterprise, limited government, and respect for provincial jurisdiction. The following article is the latest installment of The Hub’s series sponsored by Clean Prosperity exploring the why, what, and how of conservative climate policy.
Interprovincial trade barriers are a needless drag on economic growth in a nation struggling with productivity. Estimates suggest that barriers to internal trade are akin to a 7 percent tariff on all goods traded across provincial borders, and their removal could boost GDP by 3 to 7 percent. Trade barriers are also holding back one of Canada’s fastest-growing export sectors: low-carbon technologies.
When it comes to removing these barriers, provinces should drive the bus. The New West Partnership Trade Agreement stands as a landmark achievement in this regard—a “bottom-up,” opt-in model with clearly defined rules and benefits for participants. In exchange for some loss of provincial control over the flow of goods, services, and labour across their borders, Western businesses enjoy access to larger markets, with less overhead and red tape.
Provinces can and should apply the same thinking to low-carbon growth. In a rapidly expanding segment of the global economy—the market for low-carbon technology is expected to nearly triple in size to $2.8 trillion by 2035—they should seize every advantage they can. Barriers to low-carbon trade increase compliance costs for firms, hamper emerging industries, and make emissions reductions costlier than they need to be.
The first step in removing these barriers should be to open up the industrial carbon markets that operate in every province. These markets are powerful, foundational tools for driving low-carbon investment. They can boost productive capacity in strategic sectors, like low-carbon electricity; offer significant revenue streams for projects that are innovative, riskier, or first-of-kind; and incentivize incumbent sectors to steadily reduce emissions while protecting their competitiveness.
Industrial carbon markets accomplish all this through trade in carbon credits. Facilities that cut their emissions intensity are awarded credits, which they can sell to other firms that cannot or will not make cuts. Markets reduce emissions and drive low-carbon investment at a lower cost than the alternatives.
Carbon credits are a vital currency for the low-carbon economy. In a healthy carbon market where there are clear expectations about future credit prices, projects can base final investment decisions on future revenue they’ll earn from selling credits. But right now, confidence in provincial carbon markets is low. Credit prices are trending in the wrong direction. Moreover, the movement of credits is needlessly restricted, with tight rules around who can buy and sell them and very limited interprovincial trading.
With few exceptions, carbon credits cannot move across provincial borders. Over the years, provinces have set up their carbon markets and adapted them to their economic realities. But now that these markets are up and running, regulated industries see plenty of areas for improvement—and the ability to trade carbon credits over provincial borders tops the list.
The central problem with siloed carbon markets is that in many provinces, there aren’t enough firms to sustain a liquid market for credits. This results in greater price volatility, less certainty, and higher compliance costs for emitters. Dozens of Canadian firms have operations in multiple provincial carbon markets that are walled off from each other. These firms are dealing with different regulatory regimes, various shades of red tape, and an artificially limited number of buyers and sellers. They are unable to efficiently allocate their carbon credits across the entirety of their operations.
Despite these obstacles, Canada’s low-carbon economy, underwritten by provincial carbon markets, is already generating massive, job-creating capital investments. In Alberta, there is Dow’s $11-billion Path2Zero ethylene facility, Strathcona’s $2-billion oil sands carbon capture project, and Moraine’s billion-dollar net-zero natural gas project, to name just a few. In Ontario, two of the country’s largest steel mills in Hamilton and Sault Ste. Marie are planning billion-dollar investments in direct reduced iron technology and electric arc furnaces, positioning themselves as global leaders in the production of green steel. In Atlantic Canada, offshore wind power has become an economic driver, led by a $3-billion proposal from Everwind in Nova Scotia and a $1.5-billion proposal from Pattern Energy in Newfoundland. Imagine what larger, more integrated markets could do.
It’s easy to see the potential, and it’s a pan-Canadian opportunity. But provinces are trying to seize it with one hand tied behind their backs. Carbon markets are operating at only a fraction of their potential. Harmonizing them and allowing interprovincial credit trading can help these markets play an outsized role in advancing Canada’s economic and geopolitical objectives while reducing emissions as cost-effectively as possible and at a comparable pace to other advanced economies.
So where to start? An integrated Canadian carbon market needs to include the country’s largest provincial system: Alberta’s Technology, Innovation and Emissions Reduction (TIER) market. The TIER carbon market covers over half of Canada’s industrial emissions. It’s arguably the country’s most important and influential emissions-reduction program. Without including TIER, interprovincial credit trading would have a lot less impact.
Opening up interprovincial trade in carbon credits does not have to happen all at once. On the contrary, an incremental, provincially-driven approach offers advantages. A New West Carbon Market, under the umbrella of the New West Partnership Trade Agreement, is one logical starting point. If Alberta were to join forces with the other signatories to the NWPTA (British Columbia, Saskatchewan, and Manitoba), they would cover more than three-quarters of Canada’s emissions from oil and gas, electricity, and heavy industry. It would offer a proof of concept for other provinces and compel participating provinces to craft a long-term vision for these markets.
Developing larger, more liquid interprovincial carbon markets would send a strong signal to firms and investors that they can count on the value of carbon credits over the long haul. This will accelerate low-carbon investment.
Carbon markets need other fixes as well, but removing interprovincial trade barriers is an obvious reform that has support from industry and precedents in other countries that we can learn from. It will lead to reduced red tape and regulatory burdens, greater competitiveness in fast-emerging sectors, and support more investments in technology and first-of-kind projects. The upside is too valuable to pass up.
