Moving the Coal-Posts: Ottawa’s Wrong Turn on Carbon Pricing for Electricity Generation

Abstract

New federal government carbon pricing regulations for electricity generators will reduce the average carbon cost for coal plants, while decreasing incentives for cleaner wind, solar and hydro projects, says a new report from the C.D. Howe Institute.

As phase two of the carbon-pricing “backstop”, originally enacted in 2018 under the Greenhouse Gas Pollution Pricing Act, the federal government has proposed an emissions benchmark for electricity generators that will vary by the type of fuel used.

In “Moving the Coal-Posts: Ottawa’s Wrong Turn on Carbon Pricing for Electricity Generation,” author Grant Bishop examines Ottawa’s proposed plan and finds that a fuel-specific approach creates an unlevel playing field between different sources of electricity. The federal government’s fuel-specific method contrasts with Alberta’s current Carbon Competitiveness Incentive Regulation, which uses a uniform benchmark for all fuels used to generated electricity.

The report finds that relative to a uniform standard for output-based allocations, Ottawa’s fuel-specific benchmark risks distorting the order in which plants are dispatched (i.e. turned on and off as demand requires) – potentially pushing high-emission coal plants ahead of lower-emission natural gas plants. In addition, unlike Alberta’s approach, Ottawa’s system does not allocate credits to zero-emission electricity producers such as hydro, wind and solar, and will diminish incentive for new investment in renewable generation.

“Ottawa’s approach undercuts the concept of a single economy-wide carbon price and the economic rationale behind carbon pricing,” says Bishop. “While the federal government is likely concerned to avoid spikes in power prices in those provinces where power generation currently relies on coal, Ottawa risks distorting provincial power markets and investment incentives by differentiating carbon costs for producers of the same product.”

Keywords: Energy and Natural Resources; Electricity;Environmental Policies and Norms;Role and Efficiency of Government; Fiscal and Tax Policy; Federalism and Constitution

JEL Classification: Q58