Clean Prosperity, a Toronto-based non-governmental organization focused on climate policy, has published a report arguing that Alberta risks losing billions in low-carbon investment due to a significant issue within its carbon market, which could be dealing with an oversupply of carbon credits by the end of the decade.
To avoid this scenario, the report urges the provincial government to swiftly amend the Technology Innovation and Emissions Reduction (TIER) Regulation that currently oversees the carbon credit market.
The report, “Strengthening TIER for Alberta’s Low-Carbon Growth,” is an update to research previously published in 2022.
Adam Sweet, the director for Western Canada at Clean Prosperity, writes in the foreword:
Countries around the world are in a generational race to attract low-carbon investment. From decarbonized petrochemical manufacturing to capturing, utilizing, and storing carbon, the global opportunity for new projects represents hundreds of billions of dollars worth of investment. Alberta is in this race and can win it. New multi-billion dollar low-carbon energy and carbon removal projects have recently been announced, such as Dow Chemical’s carbon-neutral petrochemical plant in Alberta’s Industrial Heartland and Entropy’s carbon capture, utilization, and storage (CCUS) facility in Northern Alberta. However, low-carbon project proponents still need greater certainty about the economic viability of their projects in order to invest in Alberta.
Investors, both foreign and domestic, are assessing Alberta’s market potential not just today but for 2030 and beyond, given the long lead times on these major projects. They are considering classic investment questions such as siting requirements, social acceptability, tax rates, and labour availability. Investors are also evaluating the potential revenue they can generate in Alberta from selling the carbon credits they produce, as this revenue is critical to their business cases, particularly given the generous subsidies for low-carbon investment on offer in the United States.
In Alberta, carbon credits are generated through the province’s industrial carbon pricing system, the Technology Innovation and Emissions Reduction (TIER) Regulation. TIER and the TIER carbon credit market form the backbone of Alberta’s low-carbon economy. TIER is Canada’s largest emissions reduction system, covering a quarter of Canada’s total emissions, over half of Canada’s emissions from large industrial emitters, and about 60% of Alberta’s emissions overall. It is also foundational to Alberta’s climate plan – the Emission Reduction and Energy Development (ERED) Plan – and the TIER carbon credit market is Canada’s largest and one of the largest in North America, in terms of emissions covered.
TIER works by setting emissions intensity benchmarks for industrial facilities across Alberta. The benchmark defines how much a facility can emit for each unit of production — tonnes of carbon dioxide emitted per tonne of hydrogen produced, per megawatt hour of electricity generated, and so on. If an industrial facility’s emissions intensity is below the benchmark, the facility earns carbon credits, called emission performance credits (EPCs). Companies can also create another kind of carbon credit, called an offset, by undertaking activities that reduce or displace emissions, such as CCUS or renewable energy generation. These carbon credits (i.e., EPCs and offsets) can be bought and sold between companies in the TIER carbon market. Companies buy credits to avoid paying into the Government of Alberta’s TIER Fund (at a higher cost than buying a credit). Credit sales are an important source of revenue for low-carbon investments.
Investors pay close attention to the current and projected future values of these carbon credits. If investors believe that demand for credits will exceed supply, they can have confidence that the value of the carbon credits their project generates will be sufficient to support their business case. However, if they believe that supply will be greater than demand, leading to lower credit prices, they will lose a critical revenue stream and may not proceed with the project.
This paper examines the outlook for the TIER carbon market. The analysis uses publicly available plans and data from the provincial and federal governments, along with market data available from various private but accessible sources. In other words, the inputs to our analysis mirror those available to investors when making an investment decision.
To secure Alberta’s share of low-carbon investments, it is imperative that investors have confidence that they can generate predictable revenue through the TIER carbon market. By advancing policies to ensure that TIER will not become oversupplied with credits, we will not only attract critical low-carbon investments, but also drive economic growth in the province. Let’s seize the opportunity to position Alberta as a global leader in low-carbon economic growth.
Executive summary
The Technology Innovation and Emissions Reduction (TIER) carbon credit market faces significant challenges that threaten its ability to support low-carbon economic growth in Alberta. The primary issue is the lack of confidence in the future value of emission performance credits (EPCs) and offsets (collectively referred to as carbon credits), which is crucial for justifying investments in low-carbon projects. The current uncertainty about the long-term value of carbon credits prevents TIER from working as intended to incent decarbonization projects and achieve emission reductions across Alberta industry.
This paper builds on Clean Prosperity’s earlier analysis of the TIER carbon market, published in October 2022, which modelled projections for net obligations (total compliance obligations less EPCs and offsets in a given year) to 2030 – including under the then-proposed 2% annual benchmark tightening.
Since then, a number of key government policy shifts have taken place, impacting the outlook for the TIER carbon credit market:
- The Government of Alberta increased the annual benchmark tightening from 1% to 2%, with the oil sands subject to a 4% annual tightening rate in 2029-2030;
- The Government of Alberta published its climate plan titled Emissions Reduction and Energy Development Plan (April 2023);
- The federal government published the draft Clean Electricity Regulations (August 2023) and a subsequent update (February 2024);
- The federal government published a regulatory framework outlining the proposed design of the oil and gas sector emissions cap.
This paper examines the risk of a credit oversupply in TIER’s carbon market under these policies and targets. The paper models three scenarios for TIER’s market balance in 2030 under current benchmark tightening rates:
- an Emissions Reduction Plan (“ERP”) scenario, reflecting federally proposed policies (specifically, the oil and gas emissions gap and the Clean Electricity Regulations) and target reductions under the federal 2030 ERP;
- an Emissions Reduction and Energy Development (“ERED”) scenario, reflecting target reductions presented by the Alberta government’s ERED Plan; and
- a “Status Quo” scenario, where emission intensity is “frozen” at current levels for all sectors while allowing production output to grow.
These scenarios are not intended as predictions but instead illustrate the potential for a future carbon credit oversupply, which in turn would depress prices for EPCs and offsets. We find that the TIER market is likely to face an oversupply by 2030 under any meaningful decarbonization scenario with the current rules for benchmark tightening. This risk is evident to investors, as the market prices for credits have diverged significantly below the headline carbon price – the discount has risen from roughly 5% in 2020 to nearly 40% in 2024.
Consistent with the findings of our 2022 paper, this updated analysis again shows that a 2% tightening rate would be insufficient to avoid an oversupply of EPCs and offsets in 2030 under our modelling scenarios. If TIER benchmarks are only tightened by 2% each year and facilities achieve the emission reductions targeted in the federal ERP and implied by the oil and gas emissions cap and Clean Electricity Regulations, the market will face an oversupply of 25 Mt of credits in 2030. If TIER benchmarks are only tightened 2% each year and facilities meet the emission reductions targeted in Alberta’s ERED Plan, the market will face an oversupply of 27 Mt of credits in 2030. Additionally, in our Status Quo scenario, where facilities’ emission intensities remain at current levels, the TIER market can absorb 30 Mt of credits in 2030 before tipping into oversupply. However, we also show that this available capacity for additional reductions could be exhausted if just some of the proposed low-carbon projects announced in Alberta move forward. Currently, there are about 60 Mt worth of proposed carbon capture, utilization, and storage projects in Alberta by 2030. If half of this sequestration capacity moves forward, TIER will be oversupplied with credits.
For the long-term viability of TIER, the Alberta government must provide certainty for investors that the TIER market will not be oversupplied. In other words, the Alberta government must ensure that the demand for carbon credits will consistently exceed the newly created credits. This requires a commitment that reductions in emission intensity will not consistently outpace the rate of tightening benchmarks. For project proponents to undertake investments in long-term decarbonization based on future credit prices, market participants must be confident that the TIER market will be balanced – regardless of what emissions reductions are actually achieved.
Conclusion
This paper has exhibited the risk of an oversupplied market for EPCs and offsets under TIER based on the status quo tightening of benchmark stringency. We show that TIER faces an oversupply of EPCs and offsets for the reductions in emission intensity implied by both the federal 2030 ERP (including the proposed oil and gas emissions cap and Clean Electricity Regulations) and Alberta’s ERED Plan. And in a business-as-usual scenario, the TIER system could easily tip into oversupply if proposed emission reduction projects come online.
This underscores the “chicken and egg” problem facing proponents of decarbonization projects under TIER. If the market for credits and offsets faces the risk of oversupply, uncertainty around prices for these instruments will diminish the expected value for investing in these projects. This uncertainty facing the TIER market means that critical decarbonization projects may not be built, potentially causing Alberta to fall short of its emission reductions target.
To mitigate this uncertainty, governments can guarantee the value that proponents will receive from future EPCs and offsets through carbon contracts for difference (CCfDs). Notably, structuring CCfDs requires reliable and regularly published statistics for market prices, and TIER presently lacks such transparency.
In offering broad-based CCfDs available to any participant in the TIER market, the contracting government has a vested interest in ensuring that a credit/offset oversupply does not materialize, which would result in significant fiscal costs to government. Providing these guarantees therefore requires governments to commit to tightening stringency to safeguard against any oversupply.
For the long-term viability of TIER, the Alberta government must anchor the expectations of market participants that the TIER market will not be oversupplied. In other words, the Alberta government must ensure that emitters’ obligations will consistently exceed the newly created EPCs and offsets. This requires a commitment that reductions in emission intensity will not consistently outpace the rate of tightening benchmarks. For project proponents to undertake investments in long-term decarbonization based on future credit or offset prices, market participants must be confident that the TIER market will be balanced – regardless of what emissions reductions are actually achieved.
That is why we recommend that the Alberta government:
1. Review TIER stringency and the rate of benchmark tightening at least every two years to preemptively address any emergent oversupply of EPCs and offsets.
2. Adopt a policy rule like adaptive tightening for TIER stringency that would automatically trigger changes to stringency based on market conditions (i.e., to accelerate tightening of benchmarks to keep up with a rapid reduction of emission intensities).
3. Increase transparency of the TIER market through regular publication of price statistics for traded EPCs and offsets.
4. Participate in guaranteeing the long-term value of EPCs and offsets under TIER through carbon contracts for difference (CCfDs).
Download the full report, “Strengthening TIER for Alberta’s Low-Carbon Growth: Measuring credit oversupply risks in Alberta’s carbon market,” by Emma Dizon and Grant Bishop, originally published by Clean Prosperity on July 23, 2024.
