Weaker by the moment: the Government of Alberta moves to undermine the price signal in it's own carbon market

A little over two years ago I wrote a blog entitled "Alberta's TIER expands, gets tougher - and finally provides cost certainty to the carbon market" (you can read that here). At the time, I welcomed the long timeframe of Ministerial Order 62/2022 - which laid out the carbon price for industrial emitters from 2022 all the way through to 2030 - as providing the necessary cost certainty for industry to invest in effective emission reduction projects across the province.

Previously, the market had operated with a drip-feed of pricing announcements, with each Ministerial order providing only a year or two of price certainty. Thus an 8-year (!) window of certainty was extremely welcome for both facilities and project developers seeking to develop new emission reduction projects.

Alas, that cost certainty has been suddenly withdrawn with yesterday's announcement by the Government of Alberta that "in response to feedback from industry leaders, Alberta is freezing the industrial carbon price at the current rate of $95 per tonne of emissions".

The rationale being presented for this move is that 1) this freeze is necessary to protect Alberta's heavy industry - oil & gas, chemicals, pulp and paper, etc - from the impact of US tariffs and 2) that the freeze is providing certainty for industry. However, I think a certain skepticism around this explanation is warranted!

Firstly, in terms of protecting Alberta industry from the US tariffs, let's bear in mind that 81.5% of the $ value of Alberta's exports to the US in 2023 were from the oil and gas industry (according to ATB) - and oil and gas exports are not covered by the US tariff regime.

So we must conclude that the Alberta Government is claiming it needs to freeze the price of carbon for all industries (including oil and gas) in order to protect the 18.5% that is not oil and gas? However, the next largest export sectors according to the same ATB analysis, are agriculture and chemicals, at 5.6% each (in 2023). But most of the agricultural exports won't be covered by TIER anyway - which only applies to the largest facilities with over 100,000 t CO2e/yr of emissions - so this leaves the chemical sector, plus some pulp/paper, mining and other facilities are likely to be impacted both by the US tariffs and by TIER.

Thus, it is clear that the % of overall Alberta industry covered by both US tariffs and TIER is actually quite small. Furthermore, and very importantly, the TIER regulation already includes a Cost Containment provision designed to prevent carbon compliance costs from becoming unduly burdensome on these kinds of trade-exposed facilities! This Cost Containment program allows facilities that have carbon compliance costs which "exceed 3% of sales or 10% of profit at a facility" to apply for relief from TIER. In other words, if a facility finds US tariffs to be hitting sales and/or profits, and this impact subsequently causes the costs of carbon compliance to impact their competitiveness, they are already able to apply for Cost Containment from TIER.

Secondly, in terms of providing cost certainty, it is pretty clear that this announcement is providing the exact opposite of industry certainty! While the Minister has announced the freeze will be 'indefinite', it simply represents another abrupt change of policy, and thus I'd be very surprised if anyone in the industry now feels confident that they know where the carbon price will be next year, never mind in 5 years time! And if this really is to do with US tariffs, what happens if the tariffs are raised or lowered? If the tariffs are removed, will the TIER price increase be re-instated?

Thus, my take on this is that the rationale presented is just that - a presentation. Instead, this is all about politics and ideology - the press release announcing this price freeze states "The current tariffs imposed by the United States come after a decade of anti-industry and anti-development policies by Canada’s federal government. These rules and regulations have decreased Alberta’s competitiveness, increased uncertainty and driven away much needed investment since 2015. Alberta remains committed to reducing emissions through the development and implementation of new technologies, not unrealistically high taxes, while responsibly powering the world for decades to come." That's a pretty clear statement that this abrupt pricing change is actually about continuing the province's argument with the Federal government about pricing emissions and, of course, being seen to support the oil and gas industry.

Unfortunately, this politicking isn't good for efforts to reduce provincial GHG emissions. Yesterday's announcement by the Alberta Government not only weakens the price signal for facilities paying direct compliance costs but must surely further undermine the already soft Offset Credit market in Alberta, which has been suffering over the last year or so from both oversupply and policy uncertainty. And what about those projects that were evaluated, invested in and started based on the price increases in Ministerial Order 62/2022? We may find many of them are no longer economic.

So, while two years ago I may have stated "Alberta's TIER expands, gets tougher - and finally provides cost certainty to the carbon market", today I feel it would be more appropriate to state "Alberta's TIER gets weaker again - and continues to provide no cost certainty at all".