The Canadian government is in talks with heavy industrial emitters about ways to ensure Ottawa's planned carbon price increases will remain in place even if Prime Minister Justin Trudeau's Liberal government is voted out of power.
Federal Natural Resources minister Jonathan Wilkinson told Reuters most of the discussions have focused on "carbon contracts for differences." These contracts set a price on tradable carbon credits, which heavy emitters can get if they reduce pollution. If the market price for the credit falls below the minimum in the contract, the government would make up the difference.
Wilkinson said the government expects to finish the talks by year end. His comments shed more light on the government's intention to provide carbon price certainty, which was flagged in its Emissions Reduction Plan released in March.
Some heavy emitters such as oil sands producers say lack of pricing certainty has held them back from making significant investments in emission reduction projects like carbon capture and storage. They are also concerned that costly projects could be a waste of money if carbon pricing is scrapped in future.
"The government will take on to provide some kind of certainty guarantee around the price. If a future government makes a decision to abandon carbon pricing it would be on the hook," Wilkinson said.
Guaranteeing the value of reducing emissions would be a "game-changer" for investors in capital-intensive projects, RBC Capital Markets said in a note.
Canada's carbon price is set to rise to C$170 a tonne by 2030 from C$50 a tonne currently, and is key to Ottawa's commitment to cut emissions 40-45% below 2005 levels by 2030 and reach net-zero by 2050.
The opposition Conservative Party, which is in the process of choosing a new leader, has mostly opposed carbon pricing, saying it fuels inflation.
Under Canada's carbon pricing rules, large industrial polluters pay per tonne of carbon emitted above a certain sector-specific threshold. Polluters can also generate credits by cutting emissions and then sell the credits, which has raised concerns that cheap credits will flood carbon markets in coming years as more large emissions-reduction projects start operating.
A contract with the government guaranteeing a minimum price would mitigate that risk, said Mark Cameron, an adviser to the Oil Sands Pathways Alliance to Net Zero, which represents Canada's biggest oil sands producers.
"It would be like an insurance mechanism so if there's not sufficient credit value or a carbon price in 2030 or later, companies that had reduced emissions would be guaranteed to see a return," Cameron said.
Last month the government unveiled a tax credit to help cover the upfront cost of carbon capture and storage (CCS), but Cameron said carbon price certainty was needed too.
Dale Beugin, analyst at the Canadian Climate Institute, said if companies were certain of higher future carbon prices they would be more likely to cut pollution.
"It's a much much better way to use public dollars than tax credits or subsidies. It's a way of sharing risk between the private and public sector more efficiently," he said.
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