We\u2019ve been hearing about the problem for a while: firms broadly agree that Canada\u2019s approach to reducing industrial greenhouse gas emissions makes sense\u2014but that hasn\u2019t been enough to get them to make multi-billion dollar investments in decarbonization. Management is reluctant to sign off, and banks won\u2019t commit financing. It\u2019s just too much risk to assume. <\/p>\n\n\n\n
Herein lies the case for contracts for difference. <\/p>\n\n\n\n
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\u2019s 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.<\/p>\n\n\n\n
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. <\/p>\n\n\n\n
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\u2019s hamstringing Canadian industrial decarbonization. <\/p>\n\n\n\n
The carbon <\/em>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\u2019s industrial carbon-pricing markets, like Alberta\u2019s TIER system. Firms pay fees on their carbon output over a certain threshold, but they\u2019re 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.<\/p>\n\n\n\n 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\u2014maybe because a glut of credits from new decarbonization projects overwhelms demand\u2014then businesses could be in serious trouble. <\/p>\n\n\n\n The carbon contract for difference is like an insurance policy on the value of carbon credits. Designed correctly, it shouldn\u2019t cost the taxpayer anything, because if federal and provincial governments administer carbon-pricing systems according to the rules they\u2019ve laid out, then the contracts will stay on the shelf. Put another way, it\u2019s a promise to business that the government won\u2019t change the rules of the game after companies invest, and this cuts both ways. <\/p>\n\n\n\n It\u2019s a market-based approach to decarbonization that should resonate with conservatives. Former Conservative Party interim leader Rona Ambrose recently stressed that<\/a> \u201ccarbon contracts for difference are really important to the energy sector.\u201d <\/p>\n\n\n\n Now, it\u2019s important to emphasize here that contracts for difference have no bearing on the consumer-facing component of Canada\u2019s carbon pricing regime. They only apply to Canada\u2019s 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\u2019s industrial emissions are subject to systems designed by conservative provincial governments in Alberta, Ontario, and Saskatchewan. <\/p>\n\n\n\n In this sense, the contracts for difference model sets aside the part of carbon pricing that\u2019s 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. <\/p>\n\n\n\n But don\u2019t take our word for it. The folks who have to do the actual decarbonizing\u2014Canada\u2019s industrial emitters\u2014have also thrown their support behind this solution. The Business Council of Alberta summed up the consensus in their reaction to Budget 2023<\/a>: \u201ccontracts for difference are a critical remaining component to catalyze major decarbonization projects.\u201d<\/p>\n\n\n\n And for good reason. We think contracts for difference are an idea whose time has come because as a country we\u2019ve run out of time. The United States has thrown down an estimated $1.2 trillion dollars<\/a> worth of low-carbon investment, and the EU is set to follow. We\u2019re already feeling the impact: just last month Parkland Fuels cancelled plans<\/a> for a $600 million biodiesel plant in B.C., citing competitive pressures from U.S. subsidies. That means the loss of thousands of jobs.<\/p>\n\n\n\n![\"\"](\"https:\/\/thehub.ca\/wp-content\/uploads\/2023\/03\/Hub_Subscription_MooseQuarter_v1-1170x359.jpg\")
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