Canada has implemented an economy-wide carbon pricing system to help meet its emission reduction targets under the Paris Agreement and transition to a low-carbon economy. The core element of this system is a carbon credit trading that puts a price on greenhouse gas emissions. This -based approach is designed to reduce emissions in a cost-effective way across different sectors of the economy.
What Are Canada Carbon Credit?
Carbon credits, also known as emission permits or carbon offsets, represent the right to emit one tonne of carbon dioxide or its equivalent of other greenhouse gases. The government sets an annual limit or budget on total greenhouse gas emissions from different sectors and industries that are covered under the carbon pricing system. It then allocates or auctions carbon credits up to this limit. Companies can buy and trade these credits in the carbon . Those who emit less than their allowance can sell surplus credits to others who exceed their limit. This flexibility allows abatement to occur where it is cheapest.
Coverage Of Carbon Pricing In Canada
Canada's carbon pricing system applies economy-wide across all sectors and provinces. It currently covers around 70-80% of national greenhouse gas emissions. Major emitting industries under the carbon include oil and gas extraction, electricity generation, transportation, cement production, steel manufacturing etc. Residential and commercial buildings also face carbon prices applied through fuel charges at the pump. All provinces and territories have either implemented an explicit price-based system like a carbon tax or are participating in the federal benchmark system which involves capping and trading of emissions.
Administration Of The Carbon
The federal government administers the carbon in partnership with provincial regulators. Environment and Climate Change Canada sets the overall emissions limit and rules for the system. It also registers participants, tracks emission reports and verifies compliance. However, each province can tailor implementation to suit regional conditions. For example, they determine initial allocation of free credits versus auction, use of revenues and rules for offset credits. Several provinces like Alberta, Quebec and Ontario have developed their own independent cap-and-trade systems linked with each other through mutual recognition of emission permits.
Recent Performance Of Carbon Prices In Canada
After introduction in 2019, carbon prices in Canada have steadily increased each year and are expected to reach $50- $170 per tonne by 2030 depending on the jurisdiction. In 2021, most provinces had a price of $30 per tonne of CO2e applied through either an explicit carbon tax or through the federal benchmark. The linked cap-and-trade systems in Western Canada and Quebec saw average permit prices range from $40-50/t during quarterly auctions in 2021. This increasing carbon price signal is aimed at incentivizing gradual long-term reductions in emissions especially from intensive industrial processes.
Trading Activity And Offset Credits
Active trading of carbon credits has been observed between large final emitters covered under provincial emissions trading systems. Annual transaction volumes across these linked systems exceeded 50 million tonnes of CO2e in 2021. Offset credits from emissions reduction projects in sectors not covered under carbon pricing like forestry and agriculture are another key element. Such credits offer compliance flexibility and help lower overall abatement costs. Provincial regulators have approved several offset protocols and about 20 million offset credits were surrendered for compliance in 2021 across different trading systems.
Challenges Ahead In Scaling Up Carbon
While Canada's carbon pricing frameworks are progressively getting more stringent to catalyze emission cuts, challenges remain in further scaling up of carbon s. Ensuring robust accounting, reporting and verification of all covered emissions is resource-intensive. Coordinating linkage between multiple sub-national trading systems also adds to overall administrative complexity. Significant policy certainty will be needed on the long-term trajectory of carbon prices to drive large low-carbon investments by . Addressing concerns over potential carbon leakage also requires coordinated border carbon measures with Canada's trading partners. Proposed reforms aim to address these challenges and strengthen the role of emissions trading in Canada's climate policies.
Canada has established a comprehensive carbon pricing system to drive its climate goals, with tradable emission permits as a core element. Experience so far shows provincial and federal cooperation can facilitate linkage of regional carbon s at scale. An increasing carbon price signals the policy direction for transitioning towards a low-carbon economy. While challenges remain in further optimizing carbon operations, ongoing reforms aim to strengthen signals and incentivize deeper emission cuts across the Canadian economy.
*Note:
1. Source: Coherent Market Insights, Public sources, Desk research
2. We have leveraged AI tools to mine information and compile it
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