Canada’s carbon markets are operating at “only a fraction of their potential,” but could be a powerful tool for advancing clean energy if lawmakers remove interprovincial trade barriers, say experts.
“Canada has yet to create a national, integrated market for carbon emission reduction products with fungibility and transparency,” write lawyers at Osler, Hoskin & Harcourt. Instead, “a patchwork of provincial regulatory frameworks and voluntary and public sector initiatives” have emerged, which are fragmented, have limited liquidity, and require regulatory development and stability.
Carbon markets are an important tool to bring down emissions, say many climate advocates. Putting a cost on units of carbon pollution can create incentives for heavy emitters to cut back emissions, while saving money for clean energy users and generators that can profit by selling credits. But Canada’s federated system—which leaves emissions regulation to provinces as long as they meet certain standards—has created nine separate markets where industrial emitters can buy carbon credits to offset emissions.
Barriers that prevent credits from moving between markets and provinces are limiting clean energy development, Brendan Frank, director of policy and strategy at Clean Prosperity, writes for The Hub. The individual markets are also each constrained from reaching a size that can sustain a liquid market for credits, which leads to more price volatility and higher compliance costs.
Moreover, companies that span also have to navigate varying regulations and pricing, depending on where the emitting takes place.
It isn’t just climate advocates calling for reform. Last fall, a letter from 13 signatories in industrial sectors, addressed to the 10 provincial premiers, called for removal of interprovincial carbon credit trade barriers to give them flexibility and incentive to invest in emissions-reducing technologies, reported The Globe and Mail.
The Royal Bank of Canada has also criticized the fragmentation for “hampering Canada’s ability to build low-carbon industries.” The inconsistent rules bog companies down, slow down investment, and erode confidence in the markets, the bank said.
Notably, industrial carbon pricing is not expected to see the same fate as Canada’s consumer carbon pricing scheme, which has come under attack by politicians across the spectrum—especially Conservatives—and may not survive a change in government. The industrial carbon pricing scheme operating in carbon markets is expected to remain in place even if Conservative leader Pierre Poilievre is elected, writes the Narwhal.
Clean Prosperity’s Frank says the move to a more unified Canadian carbon market should start incrementally and be led by provinces, similar to the New West Partnership Trade Agreement that opens interprovincial trading for other sectors across four western provinces.
“Carbon markets are operating at only a fraction of their potential,” he writes. “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.”
