Activity in the TIER credit market has picked up as we have exited the summer holiday season. We are seeing an increase in transaction volumes for both spot and forward trades. Spot prices have remained in the mid/low $20s.
For some time now, the market has been anticipating policy changes to the TIER program (see our July Carbon Commentary). This week, the Alberta Government officially announced that these changes will take effect this fall. Full details have yet to be released, but the upcoming changes fall into two categories:
Small-Emitter Opt-Out: Emitters (and Aggregated Facilities) with total annual emissions under the 100,000-tonne threshold will be able to opt-out of the TIER program, potentially retroactive to January 2025.
Direct Spend: Emitters that make investments in on-site emissions reduction can apply this spending directly towards an annual compliance obligation. Initial reports suggests that investments made in either in the previous three years or current and following five years could be used to satisfy an annual compliance requirement. A full list of approved emissions reduction investments has yet to be released; however it is clear that spending on methane abatement or carbon capture technologies would qualify.
Both of these changes will reduce credit demand and are bearish for credit prices. However, given that they were widely anticipated it is not yet clear how much of an impact they will have on prices going forward.
In our August Carbon Commentary, we explored the impact of the Small-Emitter Opt-Out on medium-term credit demand. The expected impact is in the range of 1.5-2.0 million credits per year. This is potentially meaningful to the path of credit prices in the short-term, but does not in itself alter our view that the current supply overhang will be wound-down over the next several years.
The impact of the Direct Spend program is more difficult to quantify, but potentially more meaningful to the supply/demand balance. Under this framework, qualifying investments could count towards up to 90% of an emitter’s compliance obligation at the compliance price. Each $95 invested would thus reduce an emitter’s current annual compliance obligation by one tonne. Relative to the current option of buying a credit for around $25, the investment is clearly more expensive in the short term. The investment expenditure could only be justified, therefore, if it was expected to reduce future compliance obligations by an amount large enough to make up the difference (currently around $70, or $95-$25).
The magnitude of the investment that could result (along with the associated impact on compliance obligations) will depend on the nature of the projects that will qualify and their anticipated cost per tonne of reduced emissions
To the extent that investments that have already been made over the past three years are permitted to be included as Direct Spend contributions, the short-term impact could be very bearish: each $1 billion invested has the potential to cut the compliance obligation by over 10 million tonnes. For context, the total annual TIER obligation is in the range of 20 million tonnes.
A company with emissions below benchmark would not face a compliance obligation and would presumably have no interest in pursuing the Direct Spend option. Emissions per unit of output (and associated compliance costs) vary dramatically by firm. We explore some of these differences in our next section.
COST OF TIER COMPLIANCE BY SECTOR
Compliance costs per unit of output vary widely by company. Based on publicly-available data on credit retirements and production, we calculate the cost of TIER compliance (per unit of output), both for major market participants and by sector.
The oil sands industry had an average corporate-level compliance cost of C$0.20/bbl for the 2024 compliance year. For specific in-situ and mining facilities within the oil sands sector, 2023 compliance data show compliance costs of C$0.34/bbl. At the corporate level, companies can use carbon credits generated from their other, less carbon-intensive facilities to offset the higher costs associated with oil sands production, bringing their total costs down.
The Alberta power industry faces an average cost of approximately C$1.86/MWh. Given the average power prices in Alberta was C$60/MWh during last compliance year, compliance costs are not considered a major driver of power prices.
These costs vary widely by company (as shown in the charts below). Emissions relative to benchmark levels are a key driver of compliance costs, and of a company’s potential interest in the proposed Direct Spend program.
At ATB Financial, we actively engage with clients to navigate complex carbon markets, offering diverse solutions to meet their unique needs. Our team provides efficient, comprehensive market insights and strategic guidance, helping clients make informed decisions and capitalize on market movements to achieve their environmental and compliance objectives.
Our Strategy
Broad Client Coverage: ATB has a wide range of clients with exposures to the Alberta TIER Market.
Process Management and Documentation: ATB uses a Master Purchase and Sale Agreement for TIER deals, streamlining transactions and minimizing operational and legal effort for each deal.
Price Transparency: ATB's extensive reach enables the provision of competitive pricing and market transparency for our clients.
Trusted Name: Credit and legal risks are minimized when dealing with ATB.
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This report is provided to you for informational purposes only. Nothing contained in this report is, or should be, relied upon as a promise or representation as to future performance. The estimated financial information contained in this report, if any, is based on certain assumptions and the analysis of information available at the time that this information was prepared. There is no representation, warranty or other assurance that any projections contained in this report will be realized. If this publication has any information or data from third party sources, ATB cannot guarantee its accuracy or reliability.
This report is not intended to provide personal investment advice. Investors should seek advice regarding the suitability of any investments or strategies discussed in the report. Opinions, estimates and projections are those of ATB Financial Markets Group and are subject to change without notice.
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