The new Alberta-Canada Memorandum of Understanding (MOU) appeared to find some common ground on industrial carbon pricing. Done right, it could increase policy certainty—with only targeted adjustments to the made-in-Alberta system already in place. 

But delivering on that potential requires fixing the market conditions that have led to a price crash. 

The Technology Innovation and Emissions Reduction (TIER) carbon market is hovering below $20 a tonne. That’s well below the headline price of $95 a tonne and is the result of design choices that created a supply of carbon credits in excess of demand. Recent TIER reforms announced earlier this year pushed expectations even lower, with trading collapsing and the value of credits plummeting. On Thursday, the Alberta government introduced regulatory changes that risk locking in those rock-bottom credit prices. 

The Canada–Alberta MOU centers on delivering a credible path to minimum effective credit prices of $130 a tonne. Getting from here to there by 2030 won’t happen on its own.

The current headline carbon price of $95 has little to do with market fundamentals. The real driver of the carbon price signal—and the return to investors—is the value of carbon credits. If credits are trading at a significant discount, low-carbon projects, including the Pathways carbon capture and storage project (CCS), are much less investable. Alberta’s market has been flooded with banked credits and offsets and affected by political uncertainty, undermining the value of credits held on balance sheets.

By establishing a minimum carbon price of $130 per tonne, the MOU commits both Alberta and Canada to a system that will deliver long-term certainty for industry. That certainty and transparency will help make investment flow.

Refining TIER requires two changes to the system. First, Alberta must reduce some of today’s 48 million surplus credits—about two and a half years’ worth of compliance already in accounts. Second, Alberta must tighten the rules so new credits reflect real performance gains. These are the core mechanics behind delivering a stronger price floor, all achievable by repairing the machinery Alberta already has in place.

Let’s deal with the surplus credits first. 

Alberta can address the surplus without punishing industry or relying on open-ended public spending. A simple revenue-recycling procurement fund would take industry payments currently going to government operations and technology funding under ERA, and redirect those payments to buy up and retire surplus fund credits. Fund payments alone could eventually cover much of the procurement need, with a limited Alberta government funding top-up in early years to ensure price support.

As the price tightens and the surplus is cleaned up, the Alberta government can step back. By around 2031, the system should become largely self-financing.

Taking at least 10 million tonnes of the surplus credits out of the system between now and 2030 would do much to raise prices, but this alone would not be enough. 

Changes to TIER should also increase demand for credits and decrease supply over time. In practice, that means selectively tightening performance standards for industry but also limiting banked credits and offsets. These changes would essentially throttle the speed at which these credits can enter the credit market and dilute the price signal.

As excess credits fall and design fundamentals are restored, the need for credit buybacks drops. But consistent with best practice in carbon markets, procurement would still act as a balancing mechanism to address future uncertainties, including commodity cycles and large abatement projects—such as Pathways—that could generate significant new carbon credits and push the system towards imbalance. By 2031, procurement of credits would mainly serve to maintain market balance.

Closing the loopholes in Alberta’s carbon market and getting on track for a minimum effective price of $130 a tonne by 2030 is necessary to unlock innovation, deliver the stability industry has been asking for, and turn the MOU into a signal investors can trust.

 

Dave Sawyer is the Principal Economist at the Canadian Climate Institute, Canada’s leading climate policy research organization, and Dale Beugin is the Institute’s Executive Vice President.