Hello ATB Carbon Commentary Readers!
Today the Federal and Provincial governments have made a much-anticipated announcement on the future of industrial carbon pricing. While many details have not yet been released, the pathway for the industrial carbon price has been clearly laid out (see the summary table below). Some highlights from today's announcement:
Distinction Between the Headline Price and the Effective Price
Today's announcement makes a clear distinction between the headline price (set to reach $130 by 2035) and the effective carbon price (which includes the price emitters pay to purchase credits) which will reach $130 by 2040. Comparing the current market price (low-to-mid $40s) to the projected effective price implies a significant increase in credit prices from current levels. However, as credits currently in the market, including the large volume of credits generated between 2021 and 2023, will have expired well before the proposed timeline of 2040, the impact of this change may not be felt until far in the future
Minimum Transfer Price for Credits ("Price Floor")
The province has also committed to maintain a Price Floor for TIER credits, beginning in 2030. Credits currently in the market will be grandfathered, but market transactions for credits generated in the future will not be permitted below the mandated levels (see chart below). How this will be enforced, and how any potential oversupply that results will be managed, remains unknown. While the Price Floor is long-term bullish for TIER credit prices, the grandfathering of existing credits limits the implications in the short-term.
Contracts for Difference ("CfD")
The headline number of 75 million tonnes for CfD is a large one. Such agreements generally consist of offtake agreements where government agencies agree to purchase carbon credits at a fixed price over extended periods of time.
Each level of government is limited to a maximum liability of $600 million. In the event that either the Federal or Provincial government unilaterally abandons its industrial carbon pricing mechanism, they would be responsible for the full cost of $1.2 billion.
The implementation schedule stretches from 2030 to 2040, so the incremental impact is in the order of 7.5 million tonnes per annum (for context, the annual TIER compliance obligation is currently approximately 20 million tonnes). This CfD commitment is bullish for carbon credit prices in the longer-term, but much will depend on incremental credit supply going forward - if such CfDs are used to underpin large-scale credit-generating projects, they could result in a net supply increase. The 2030 start date also limits the short-term price impact.
Annual Benchmark Tightening
The changes to tightening benchmarks, on the other hand, have the potential to impact credit prices, at least in the medium term. The emissions benchmarks for oil sands were previously scheduled to tighten at a rate of four percent annually. Reducing this tightening rate to two percent has the potential to create 1.5 million tonnes of incremental credit supply, beginning in 2027.
Direct Investment
Today’s announcement provided further details on the Direct Investment program, specifying that eligible investment amounts for all projects will be limited to 50% of capital costs and up to 50% of operating costs, net of any public financial support. This move, as we previously discussed in our September Carbon Commentary, will reduce credit demand and is bearish for credit prices. However, this policy shift was highly anticipated and the details enclosed today are actually less bearish than expected given that not all project costs will be eligible under the program.
Implications
