Workable climate policy takes more than optimistic words

Slapping the word "clean" on a policy signifies high hopes for its environmental effects. That sparkle wears off quickly if the result turns out to be costly, clunky or counterproductive because it is driven by the stick of regulation rather than the carrot of positive business incentivization. Stewart Muir looks at how market-driven solutions can show promising results in creating climate improvement.

Because what could be better than clean? Other alternatives are...unclean, of course. And who would want to waste time on that? As a substitute for thinking or honest discussion, it must be said that the "clean" mantra has proven to be a durable construct. This is all the more reason to question what it is really meant by the term. And on closer examination the picture is messy, to say the least.  

The Canadian Energy Research Institute, in a 2019 report Economic And Emissions Impacts Of Fuel Decarbonization, put costs of the carbon tax and coming Clean Fuel Standard (CFS) at a yearly average $1,395 per household by 2030, reported Parliamentary investigative news site Blacklock's Reporter on Sept. 30, 2020.

Environment minister Jonathan Wilkinson is quoted calling the CFS "an important part of the climate plan" on which "we intend to move forward.”

Ottawa has already heard from numerous organizations including the Chemical Industry Association and the Canadian Chamber of Commerce. In a recent statement, the Chamber flagged concerns that increased costs and intensity coming several years after initial CFS implementation "will create significant challenges for companies to comply and will erode Canada’s economic competitiveness." (Its concerns are laid out in detail here.)

The CFS would mandate a doubling of renewable energy in all fuels used in Canada including natural gas for home heating. There is mounting evidence to show that the CFS is the wrong approach to take because it tilts the playing field against Canada's large industrial employers. As well as higher consumer costs, this risks large-scale employment loss with elusive benefits for the thing everyone agrees requires action: the global climate crisis.

Perhaps the mindset at work is that Canada has to adopt draconian measures as an example for others to follow, even though there is no evidence to show that other countries actually do so. That's certainly what we've seen in the United States. Rather than adopt the example of British Columbia's pioneering carbon tax from 2008, the United States has pursued a market mechanism, the 45Q set of tax incentives. These bear examination, since they represent a market-driven approach that is distinctly different than reaching for the regulatory hammer.

45Q provides large carbon credit incentives for carbon dioxide stored permanently underground but not used commercially and for use in enhanced oil-recovery operations (EOR) and in other commercial uses (US$35 per tonne).

California has the Low-Carbon Fuel Standard (notice they avoid that unnecessarily emotional and increasingly meaningless word "clean"), an offset credit for direct air capture (DAC).

Choosing to accelerate innovation in these highly necessary technologies would serve as a smart, forward-thinking choice for Canada’s economic recovery and help ensure that high-potential Canadian industries are kept competitive and productive as we move towards a low-emissions economy.

A market-oriented mechanism to reward successful deployment of negative emissions and carbon capture, usage and storage (CCUS) technologies would spur private-sector investment and lead to climate-relevant outcomes with potential wide-scale applications to oil and gas, power production, cement, steelmaking, pulp and paper and more. The sector has potential to create high-paying jobs, drive economic activity and advance export of high-value, low-emissions hydrocarbon products and technologies.

The recent Task Force for Real Jobs, Real Recovery report took a practical approach to the situation. Advisors determined that for Canada to become a competitive jurisdiction for CCUS and negative emissions technologies (NETs), government must explore ways to lower the costs of capital investment.

The task force observed that this can broadly be accomplished in two ways: first, by lowering costs through tax credits by using accelerated depreciation; and second, by providing revenue enhancements, such as production tax credits, contracts for differences or sufficiently long and stable electricity guaranteed energy purchase agreements, to cover the cost gap.

There is already a successful example to follow.

With a strong stated focus on bolstering industrial competitiveness, the United States re-formulated IRS credits in 2018, triggering construction of 17 additional CCUS facilities in the country, adding to the existing 10 facilities and making the United States the world leader in CCUS.

At this point in time it ought to be clear that carbon pricing alone will not necessarily spur the required innovation. Nor will CFS offset credits for CCUS without a guaranteed price floor. The task force found that a CFS offset credit may be too volatile and is likely not durable across election cycles. Result: "Without credit price stability and predictability, the private sector will be unable to make large capital investments in CCUS."

The Real Jobs analysts point out that Canada is distinct as an energy and resource commodity producer for operating under a carbon price. Most other global producers do not.

"Even if accomplished through a higher carbon price or CFS mechanisms, potential Canadian industrial users of CCUS or NETs would be at a significant competitive disadvantage," authors wrote. "Given the considerable need for this innovation and the inability of disincentives alone to spur investment, the federal government should provide a Canadian alternative to the United States’ 45Q incentives."

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