Sometimes government has to "get out of the way" but more often it has to lead
Government regulations created the value on which carbon capture and critical mineral markets are built.
In my Sunday post, I discussed the proposed series of emissions-reducing commitments by the Pathways Alliance – a group that represents the six companies that dominate oil-sands production in Alberta – that has recently gained new life from Bill C-5.
Because most of the Pathways discussion was beyond the paywall, many readers may have missed it. The Pathways project aims to capture carbon dioxide from more than 20 oil sands facilities in Alberta and transport it 400 kilometers via a dedicated pipeline to a storage hub near Cold Lake, where the CO₂ will be permanently stored underground. If built, Pathways would be one of the largest carbon capture projects in the world.
Financing for the massive project depends on the carbon credit market which consists of tradable carbon permits. Each carbon credit typically represents one metric ton of carbon dioxide (CO₂) emissions that have been removed from the atmosphere. Efficient companies, including oil producers, generate credits by emitting less than their limit.
Without emissions limits set by the federal government, there would be no baseline from which to measure reductions, and therefore no way to generate the tradeable carbon credits that make such projects financially viable. These federal limits—set by systems like Canada’s Output-Based Pricing System—create the scarcity and structure that make carbon credits valuable in the first place. In other words, there is no natural market for carbon credits. Canada’s carbon credit market is a government creation pure and simple.
For the private sector oil companies that build large-scale carbon capture projects, this value is critical. In the case of Pathways, the credits they earn by capturing CO₂ below their emissions limit creates a revenue stream that helps justify the massive upfront investment of $16.5 billion needed by the project.
Canada and Europe have an advantage here because the U.S. does not currently have a single, unified national compliance carbon market like Canada’s and the EU’s Emissions Trading System. Instead, it operates through regional programs and sector-specific initiatives. The most prominent example is California’s cap-and-trade program.
To get the Pathways project off the ground, Alberta premier Danielle Smith wants Ottawa to provide strong revenue guarantees for carbon credits through Carbon Contracts for Differences (CCfDs). CCfDs are financial tools designed to give companies revenue certainty when investing in emissions-reduction technologies like carbon capture. These would stabilize the financial returns for Pathways from captured emissions, which are otherwise subject to the volatile carbon markets.
However, the Canada Growth Fund (a federally-owned vehicle which has been involved in talks with Pathways and Smith) has so far declined to meet Pathways’ high demands because at $10 billion, it would would eat up most of the agency’s budget. The agency’s largest investment to date is another carbon capture project with Strathcona Resources. In that project, the Growth Fund committed up to $1 billion (starting with $500 million) to co-develop carbon capture and sequestration infrastructure that will eventually store up to 2 million tonnes of CO₂ annually.
The point of this admittedly wonky detour into the economics of carbon capture projects? If the Pathways project is ultimately deemed to be “in the national interest” under Bill C-5, the approval process will be expedited with the aim of having all approvals completed within two years. Yes, this is an example of the government “getting out of the way” of the private sector oil producers.
But the really important thing here is that the reason the market for carbon capture exists at all is solely because of government actions. These include:
The federal government’s emissions cap;
The federal Output-Based Pricing System which provides a legal framework for the carbon credits; and
Entities like the federally funded Canada Growth Fund which are required to back-stop the credits.
Yes, approvals under federal environmental laws and other government laws will be expedited under Bill C-5, but much more importantly, before it was possible for the Pathways Project to even be conceptualized, government had to put in place a set of laws and financial instruments that created the value on which a socially-desirable market was created.
There is still a missing piece in the project’s financing in that the government backstop for carbon credits discussed to date is short by billions of dollars. The federal government may be willing to increase the absolute amount it is willing to contribute through the Canada Growth Fund but my guess is that as a quid pro quo, they will insist that the government of Danielle Smith to throw in a pile, too.
And it should!
Is the central role that government is playing in the Pathways project a weird anomaly and all the rest of Canada’s markets, “natural” markets.
Not at all and they never have been.
Take the massive increase in the demand for critical minerals that is anticipated over the next ten years. Ontario Premier Doug Ford is touting the “Ring of Fire” in far Northern Ontario as a critical minerals project that should be deemed of “national interest” under the Bill C-5 provisions and expedited as such.
Well, maybe it should and maybe it shouldn’t be, but even if there is an argument for expedition under the Act, what really matters is not that government should “get out of the way and let the private sector do its job”, but that governments (and not just the Canadian government) created the huge increase in the demand for critical minerals through regulations. It is government regulations that created the underlying value on which the current critical minerals market is built on.
The demand for critical minerals—like lithium, cobalt, and nickel—has surged in recent years due the fact that these minerals are essential for technologies like electric vehicle (EV) batteries. As countries race to meet climate goals, the need for these materials has skyrocketed.
How did the Canadian and other governments create this demand? Through electrical vehicle mandates, that’s how!
In Canada, the electric vehicle (EV) mandate is officially called the Electric Vehicle Availability Standard—which requires that 100% of new light-duty vehicles sold by 2035 must be zero-emission vehicles. This includes battery electric, plug-in hybrid, and hydrogen fuel cell vehicles.
The mandate ramps up gradually with 20% of new vehicles having to be zero emission in 2026, 60% in 2030, and 100% in 2035.
China, the world’s largest EV market has even more aggressive targets. By 2030, EVs are expected to make up 80% of new car sales in China. The EU has also implemented strict CO₂ emissions limits under the CAFE regulation, effectively phasing out new internal combustion engine (ICE) vehicles by 2035. Automakers face hefty fines if they exceed emissions thresholds.
Finally, the Biden administration introduced tough greenhouse gas emissions standards that would effectively require two-thirds of new cars and light-duty trucks sold in the US to be electric or low-emission vehicles by 2032.
As I have written elsewhere, both the Alberta and Saskatchewan governments have publicly opposed Canada’s federal EV mandate and called for its elimination. They don’t want federal “interference” in what they deem provincial resource decisions.
Premier’s Smith and Moe should have a talk with their provincial cousin, Progressive Conservative Premier Doug Ford. Ford isn’t known as someone who wades much into the details but he is smart enough to know that his “Ring of Fire” project is worthless without Canada’s and the world’s EV mandates. He can put the stupidity of their opposition to Canada’s EV mandate in words they can understand.