Advancement of the Canada-Alberta MOU Agreement: Pipeline, CCS, and Carbon Markets
On May 15, Alberta and Ottawa announced updates to their MOU on carbon markets and energy policy, aimed at advancing a greenfield oil pipeline proposal to Asian markets by July 1, with possible construction readiness after September 2027. The agreement lowers industrial carbon compliance costs and introduces a TIER price floor (called a minimum transfer price), although industry groups still argue that costs remain too high. The new framework also introduces additional complexity and uncertainty around carbon markets. While the deal marks progress toward a West Coast oil export pipeline, key uncertainties remain regarding commitments to the Oil Sands Alliance Pathways CCS project, opposition in British Columbia, and the future of the Clean Electricity Regulations (CER).
On May 14, the federal government also announced a national electricity strategy. The strategy includes plans for regional electricity planning, along with proposed measures such as extending the Clean Electricity ITC to certain intra-provincial transmission projects and a plan to consult on added flexibility to the CER.
To help Peter and Jackie unpack this wave of policy announcements and their implications for carbon markets and investment, they are joined by Rachel Walsh, Director and Head of Carbon Strategy and Partnerships at BMO Capital Markets.
Content referenced in this podcast:
- Government of Canada, Powering Canada Strong: A National Strategy for an Electrified Canadian Economy (May 14, 2026)
- Prime Minister’s Office, Canada and Alberta strike agreement to diversify our exports, reduce emissions, and build a stronger economy (May 15, 2026)
- Prime Minister’s Office, Implementation Agreement for the Canada-Alberta MOU of November 27, 2026 (May 15, 2026)
- Alberta Government, Release on the updates to the Canada-Alberta MOU Agreement (May 15, 2026)
- Studio.Energy, Carbon Competitiveness and Canada’s Oil Industry (April 21, 2026)
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Episode 327 transcript
Disclosure:
The information and opinions presented in this ARC Energy Ideas podcast are provided for informational purposes only and are subject to the disclaimer link in the show notes.
Announcer:
This is the ARC Energy Ideas podcast, with Peter Tertzakian and Jackie Forrest, exploring trends that influence the energy business.
Jackie Forrest:
Welcome to the ARC Energy Ideas Podcast. I’m Jackie Forrest.
Peter Tertzakian:
And I’m Peter Tertzakian and welcome. It’s Monday, May 25th, 2026, $92 a barrel. Price has fallen well 5% overnight. Since yesterday, Sunday, no deal has been announced yet between the United States and Iran. I don’t know. Some of the tankers are making it through, which is why I think the price of oil has fallen a bit and there is an expectation, but honestly, it’s going to take months and months before things get back to normal, but that’s a subject of another day.
I think another big theme that’s out there is the acceleration of artificial intelligence and its implications to energy usage. And I want to talk about that more on subsequent podcast, Jackie, because I was at a big AI conference just last week. But the third big theme that is circulating certainly in Canada is our memorandum of understanding between Alberta and the federal government. And so we do have a special guest, a third time round special guest, but no spoiler alert. We’ll come to the guest here in a moment, but I think it’s worthwhile. Maybe Jackie, if you can give us a bit of a summary of where we’re at, where we’ve been, where we’re potentially going with all of this.
Jackie Forrest:
Yeah, for sure. So we have this MOU advancement of the agreement called implementation. We’ll get into some of the details of it. May 15th. Spoiler alert, Peter. You know how you’d been saying you just want something really simple? Well, you didn’t get that.
Peter Tertzakian:
No, I know.
Jackie Forrest:
We’re going to get into that and try to keep it as high level as possible if that’s even possible. But I did want to talk about some of the drama around it. Premier EB from BC was not supportive saying on May 19th, Canada cannot work if separatist premiers get all of the attention of the federal government and we need to have at least as much enthusiasm by the federal government for BC projects as they have shown for Alberta. And just as a reminder, I think this really rubs people in Alberta the wrong way because BC has, count them, four projects on the major projects list and Albert has zero right now.
Now, of course, if this oil pipeline gets submitted, then we would have one. But I don’t think Premier EB’s being treated that badly when it comes to his share of projects on the major projects list.
Peter Tertzakian:
Yeah. Even our prime minister, Prime Minister Carney made that comment that BC has four projects in the province and Alberta has none. So that’s big because each one of these projects are multi, multi-billion dollar projects that contribute much to employment and GDP and so on. The federal government also announced the National Strategy for Electrification. Can you tell us a little bit about that?
Jackie Forrest:
It’s a big document as well, just a few highlights. It’s really a plan to make a plan because of course the federal government, they don’t have jurisdiction over electricity, but a key message is they want to move towards more regional planning, creating these infrastructure links between the provinces, which I support. There was a few policy changes extending the investment tax credit so that it will count for intraprovincial high voltage lines and only counted for ones that go between provinces, but not within a province. And also launching a consultation on changing the clean electricity regulation. So no real signs of what they want to do there other than they said they want to increase the flexibility. But I think this is welcome. Natural gas dependent provinces aren’t big fans of this policy. However, it does create some uncertainty and we will get to it. There’s even more uncertainty with the news and the MOU around that clean electricity reg.
And of course that impacts, you talked about AI, but for provinces like Alberta, we need clarity on that and we’ll get ahead maybe to what was talked about in the MOU. But initially in November it was said it was suspended, but now it seems like it’s back in play with the news of the implementation agreement.
Peter Tertzakian:
I always get a little anxious or uneasy when somebody says they’re launching consultations. And that just speaks to me to be years of endless meetings with dubious outcomes potentially or no outcomes. Have they put any sort of timeline on this consultation?
Jackie Forrest:
No, they didn’t. And so I think this creates some uncertainty obviously on the policy. I mean, I think it’s welcome uncertainty because people didn’t like it the way it was, but at the same time, we need to get this uncertainty cleaned up quickly because it certainly does impact investment in electricity generation. And so I hope that they can add the flexibility, which I welcome, but do it in a way that we can kind of get back on track in terms of understanding what could be invested in.
Peter Tertzakian:
Quickly can be measured in weeks, not months and years, because I just don’t feel we have a lot of time to waste. I mean, the world is moving by us so quickly, whether it’s the geopolitics or certainly the artificial intelligence. And there’s a lot of talk at the AI conference about building sovereign data centers and well, to build a data center, you have to power it, but you can’t power it without these policies being cleaned up. And if you have endless consultations, I mean, we’re just not going to get anything done.
Jackie Forrest:
And as a reminder, this is going to put a hold on natural gas generation being built. Although wind and solar and hydro and everything else are helpful, we do need probably some natural gas generation to go along with all of that.
Peter Tertzakian:
Right. Now on the spoiler alert earlier, you talked about the carbon policy, which is another area which is unfortunately not simplified and not simplified quickly because it’s still uncertain exactly how the carbon policy is going to work in terms of the carbon markets and the overall pathways project and things like that. What’s the status of that?
Jackie Forrest:
Well, yeah, a quick summary of it. It’s tough to make this quick, but of course we had the release of this implementation plan and some of the news around it was that Alberta would submit a greenfield pipeline to Asian markets by July 1st. That’s Canada Day. With the possibility of being approved and ready to start construction by September of 2027, this agreement softens the industrial carbon pricing, but some industry groups like CAP and the Oil Sands Alliance argued that the costs still remain too high, even though they’re lower than the previous version. Beyond prices, it also puts in a number of different prices associated with the carbon markets in Alberta, including a price floor, which we’ll get into. So that’s positive. I think a price floor would be great and it would help with investing, but let’s see how they’re going to do it because there’s still some uncertainty on can you do that and how would you do it?
Also on the challenging side, the framework does add a lot of complexity and uncertainty and we’ll get into that. For sure, it’s a step forward towards this Asian pipeline being submitted on July 1st, but I will say there’s still some uncertainties if that can happen because it seems like a commitment to build the large oil sands carbon capture storage project is still needed for that pipeline to move forward. And from statements made after the agreement was released, it’s not clear to me that the industry’s in support of building that. And of course, BC is against the pipeline. We talked about that already. It’s important to note that past court decisions show that BC does not have the constitutional right to block a West Coast pipeline, although it would be great if they could support it because it certainly creates uncertainty.
And then the changes to the CER where it was supposed to be suspended as of the November agreement, but the wording on May 15th considered it stays around and says Alberta needs an equivalency policy if Alberta, they have a court challenge right now saying that that CER electricity regulation is unconstitutional. If they win that, then it’s dead, but if they don’t, then they need to actually do something about it. So that’s kind of the highlights.
Peter Tertzakian:
Here’s my take on it, Jackie. The fact that you can’t explain it in two or three sentences tells me that we need to phone a friend and we have phoned a friend, an expert. It’s her third time here, so I’m delighted to welcome Rachel Walsh. She’s the director, head of carbon strategy and partnerships at BMO Capital Markets. Welcome back, Rachel.
Rachel Walsh:
Yeah, thanks for having me. It’s always a pleasure.
Peter Tertzakian:
Yeah. So listen, before we talk about what’s being proposed or what is to come, let’s talk about where we’ve been and where we are, particularly with the Alberta carbon markets, which are called the TIER, T-I-E-R. Actually, I don’t even know what that stands for anymore. I forgot. What does it stand for?
Rachel Walsh:
It’s Technology Innovation and Emissions Reduction regulation.
Peter Tertzakian:
Okay, good. I’m glad we called the expert. So tell us where we’re at with TIER, the overall carbon markets and what is to change. We’ll talk about that after that.
Rachel Walsh:
Yeah, certainly. So let’s talk about the state of TIER at the moment and what facilities are regulated under TIER at present. So industrial facilities that emit over 100,000 tons per annum of carbon dioxide equivalent emissions are regulated under the TIER regulation as well as some facilities that choose to opt into the program. They are not taxed on their entire emissions footprint, which is really critical to think about. Their emissions are measured relative to a baseline emissions intensity and a benchmark and that benchmark changes over time and gets more and more stringent through these things called stringency rates.
Now it is also to note that some facilities actually outperform these benchmarks, can generate credits and therefore generate revenue in these markets overall. And in the event that a facility does have an obligation, they have an option. They can either pay into a fund at that headline price, which we’ll get into a little bit more, I’m sure later in the conversation, or they can purchase credits or offsets in the secondary market.
Peter Tertzakian:
So a facility, that term, a facility is basically an oil and gas producing facility. The ones that are over a hundred thousand that are subject to this are basically the big oil sands facilities. Is that right?
Rachel Walsh:
Well, oil sands, fossil fuel, power generation are the most present and dominant from an emissions footprint standpoint. There’s many other products, including chemicals, forestry, chemical pulp and paper mills, et cetera, but many, many different facility types.
Jackie Forrest:
Okay, Rachel. Well, TIER really wasn’t working that well because the headline price, what was that?
Rachel Walsh:
170 by 2030, but the province had frozen it at $95 per ton.
Jackie Forrest:
Okay. $95 a ton, but the actual price had traded depending on the time over the last six months at times between 20 or $30 a ton. So this gets to the complexity of the new system because we had two prices before. We had the headline price and the price it was actually trading at, but now we have three prices that have been introduced. There’s a headline price, there’s an effective price and there’s a minimum transfer price and they’re quite different. The headline price instead of being 170, it’s now 140 by 2040. The effective price is 130 by 2040. The minimum transfer price is 110 by 2040. So if I’m sitting here with my spreadsheet and I’m trying to figure out, should I invest in this new emissions reductions project, what number should I be putting in this spreadsheet?
Rachel Walsh:
And maybe let’s just define those prices first before we get into the proper one to choose for your economic modeling, Jackie. So first off, the headline price is that fund price that organizations can always choose to pay into up to 100% of their obligation. It effectively acts as a soft price cap in the market. So think of that as a top end price. Effective price has been defined as the market price overall. Interestingly, in this agreement, they only provided one bullet price in 2040, whereas the other prices that they provided had a trajectory from 2030 to 2040, and that price is going to be dependent on market supply demand fundamentals ultimately. And then finally, they provided that minimum transfer price, which will likely act as a floor price. That said, for that floor price to be effective, the market does need to be somewhat imbalanced or there’s kind of risk of those credits trading worthlessly and expiring before they can be monetized overall.
So I think when you’re deciding what price is the relevant price for you, it does depend on your position in the market overall. If you are an obligated party, so you’re one of those regulated facilities and you have a tax obligation, based on what we can see in this implementation agreement, you will be subject to at least that minimum transfer price or the market price assuming that it’s above that minimum transfer price.
Peter Tertzakian:
Right. Well, in my mind, I mean, a market has one price and that is what the credits trade for. And I want to pick up on a comment that Jackie made. She just said the TIER isn’t working that well. What is the measure by which we deem the market working well? Because what that can be saying is that the price collapsed to 30 bucks when the headline price is supposed to be 95 or something. So the fact that the price is low, does that mean it’s not working well or does it mean it is working because there is an oversupply of credits and people are decarbonizing faster than we expect? What is actually going on? Why is the price at 30 bucks?
Rachel Walsh:
I think it’s closer to your latter point, Peter. I think the market industry was so efficient at either overachieving their benchmarks or there were so man investments made in offsetting opportunities, which are projects that sit outside the regulated facility boundary. We saw those emissions reductions exceed expectations or the rules around the market, and that has led to significant oversupply. We’ve got many years of inventory kind of sitting on the registry at the moment, which should reflect those emissions reductions at least relative to what the stringencies and market plans were prior to.
Peter Tertzakian:
So why is that a bad thing?
Rachel Walsh:
It depends on your perspective in the market.
Peter Tertzakian:
I mean, isn’t the ultimate goal to reduce carbon emissions?
Rachel Walsh:
Yep, absolutely. And ultimately the market will balance itself. Price trades down, that disincentivizes investment, those credits should get consumed. And we do believe even with these changes that the market will balance itself just at a slightly later date.
Peter Tertzakian:
So what is the impetus then to get the price higher, which is sort of like the benchmark for success that seems to be strived for? Do you know what I mean? We’re trying to keep the price up, floor price, headline price, whatever price, right?
Jackie Forrest:
Well, Peter, if you want to build a carbon capture storage project though, you can’t do that at $30 a ton. So if you want to have a lot of investment in these low carbon projects, then higher prices are helpful, right?
Rachel Walsh:
Yeah. I think it is a focus on those higher points on the marginal abatement cost curve, but certainly lower price points have been executed to date and that has led to this level of oversupply in the market.
Peter Tertzakian:
Talk about that marginal abatement supply curve, because that’s a bit of a mouthful. So for our audience, can you explain that?
Rachel Walsh:
Yeah. At a very simple level, it looks at all of the emissions reduction opportunities and in this case within the market context and what breakeven price those opportunities need to pass a hurdle rate. So some opportunities like energy efficiency, as an example, are likely to be at a lower point on the cost curve, therefore require a lower price on carbon for them to make economic sense. In contrast, you look at things at the higher end of the cost curve. We’re talking about things like carbon capture and storage that need a substantial and long duration.
Peter Tertzakian:
So is the market then telling us that all the low hanging fruit has been captured and that we’re now moving into the more expensive ones and the only way, as Jackie implies, is that we’re going to be able to mitigate carbon from the more expensive options is to create a higher price so investors come in or corporations come in as investing into the capital costs of carbon capture and things like that.
Rachel Walsh:
I think there’s potential for that, but if things that are lower on the cost curve have not yet been achieved, those will be invested in first and that could lead to more significant supply coming into the market. So it’s all depending on what opportunities exist for industry to decarbonize overall within the rules of the market.
Jackie Forrest:
Well, let’s talk about another feature of what was talked about in the implementation plan. It talked about this price floor and you tell me the 110 by 2040 maybe is the price floor because there’s many things that have been introduced in this implementation plan, which make me feel like the market probably has potential to be even more oversupplied in the future. For example, methane can contribute to making offsets, which has been a big reason why, one of the reasons why we have so many offsets that haven’t been used because they’ve kind of oversupplied the market. We have this idea that people can get offsets for spending capital and OPEX around emission reduction projects. We have the potential for natural gas power generation. That actually is helpful, I guess, because it will maybe use up some offsets, but what does it all matter? Because now suddenly there’s going to be a price floor.
And I guess my question for that is if I’m going to punch that number into my spreadsheet, can I feel certainty that the government is going to maintain that level and that’s a minimum? And then how can they do that? Is it the taxpayer that’s going to be paying for that?
Rachel Walsh:
I think ultimately for that price floor to be relevant, we need to be in a situation where the market is balanced from a supply demand perspective. If we have a situation where we have significant oversupply and there’s risk of these credits expiring worthlessly, the obligated parties, based on how we interpret this implementation agreement, the obligated parties are going to have to pay that floor price. However, that’s going to be limited from a volume perspective to how much demand they actually have. If supply exceeds that, you could get in a situation, Jackie, where you could have stranded assets and some of those credits and offsets could expire without ever being used. So the price you’re looking at is ultimately going to be that market price. And if we’re in a situation of oversupply, it could certainly be somewhere between that floor and zero.
Jackie Forrest:
Okay. You may have a token for a carbon offset, but nobody’s willing to buy it because there’s not enough demand, so it doesn’t matter. So are you saying that they’re just going to set the price, like the minimum trading price? So it’s not going to cost the government anything. They’re just going to say, “There’s no ability to trade if you’re not trading at this level.”
Rachel Walsh:
That’s what it seems like. And again, details are extremely limited in this agreement. We don’t know what the plan for implementation is overall and there’s some interpretation required, but based on what we can see, it’s just a price that is set and that’s when we just talk about the minimum transfer price that’s outside of contracts for differences and the other financial mechanisms, which are separate from that.
Peter Tertzakian:
So basically the government is forcing when the auction houses would term a reserve bid, like, “You cannot go below this price.”
Rachel Walsh:
Yeah. For the obligated parties.
Jackie Forrest:
But a good point is, again, back to my spreadsheet, if I can only sell 20% at 110 and the rest go for zero because I can’t sell them, then I’m still going to need to put a lower number, like 20% of 110 into my spreadsheet. So it’s still not going to motivate me necessarily to want to go ahead with an expensive emissions reductions project because there’s uncertainty there.
Peter Tertzakian:
Okay. We’ll come back to that, but we’ve just at this point been talking about Alberta and this TIER program. Is this a pan-Canadian solution that’s being proposed and where are the other provinces at with this whole thing?
Rachel Walsh:
So quietly, when this was announced, Environment and Climate Change Canada did change that headline price for federal equivalency. So other provinces are free to follow this price schedule now as well in their own jurisdictions. As well, we do see some provinces allow the federal program to govern their large regulated emitters. I think the only exception to this could be BC and the reason for that is the former price escalation schedule to $170 by 2030 is actually written into their regulation. So legislature would actually have to sit and change it to this lower schedule.
Peter Tertzakian:
Right. And presumably there’s resistance to doing that. Is that what Premier EB is upset about?
Rachel Walsh:
I haven’t seen any direct comments from Premier EB overall. It is just another kind of government process that’s required to actually change to this new price schedule.
Jackie Forrest:
I will say that when he went on his, I’ll call it a bit of a rant after the news came out, he talked about it would’ve been nice to have consultation with the other provinces in terms of changes to carbon policy. So as opposed to just being told what you need to do, but how they’re going to change it, I don’t know. Well, let’s go back to Alberta. Industry cap, Oil Sands Alliance Group have said the compliance costs while lower than before are still too high, especially considering that other countries do not impose these costs. What’s your perspective? Can you give us a sense of like if you’re a higher carbon oil producer, what’s your cost in 2040 and do you agree that other countries don’t impose these types of costs?
Rachel Walsh:
We’ll talk about it from an oil sands perspective. I think when we’re talking about a higher cost asset, generally speaking, steam oil ratios kind of drive that relationship overall. It’s how much energy and how much natural gas do you need to burn to get the incremental barrel out of the ground. When we look at some of those less efficient assets after all these changes, we do see kind of the cost of carbon. And I should say this is a worst case scenario. So this is they’re paying at that headline price or that price cap and there’s no improvements from an emission intensity perspective from now to that point in time. But when we take that perspective, we could see costs as high as $5 per barrel based on our modeling.
Again, the realized price they’re likely to pay is going to be lower than that for all the reasons we talked about with potential oversupply in the market. There could also be opportunities for investment at that facility. And then I think it is really important to note there is a feature within the TIER regulation. It’s called cost containment and it’s triggered at either 3% of sales or 10% of profit. If that threshold is reached with the cost on carbon from the TIER program, there is cost relief that is made available to these facilities. So it’s not ignorant to those profitability issues.
Peter Tertzakian:
Yeah. Well, people say, well, a dollar a barrel, but certainly $5 a barrel. Price of oil is a hundred bucks, but it’s not on the price of the full barrel. It’s actually after you deduct all expenses including other regulatory compliance costs that you’re left with a margin. So your margin is, depending on what kind of producer you are, I’ll just say the lower oil price is 10 bucks. Well, five bucks is like a 50% tax on income, right?
Rachel Walsh:
Yeah. So that cost containment feature would trigger there and that facility would be provided with that cost relief overall.
Peter Tertzakian:
So it’d be 3% instead of…
Rachel Walsh:
A 10% for profit.
Peter Tertzakian:
10%.
Rachel Walsh:
Yeah.
Peter Tertzakian:
I mean, it’s still a lot. And it sort of begs the question, and this is sort of the industry’s position that, well, why are we doing this because the competing jurisdictions that produce oil and gas have no carbon tax? Is that what you see?
Rachel Walsh:
So when we look at major energy exporting nations, only Norway and Australia appear to be the ones that have price of carbon on their oil and gas installation. Certainly when you look at other exporters, they don’t have an apparent price on carbon. That said, I think there’s lots of examples where we have potentially a higher cost structure required by industry just due to holding them to a higher standard. You could see that across things like environmental practices, permitting, as well as human rights issues. I do think there’s likely some balance where you can have a price on carbon that’s flexible and not ignorant to those competitiveness issues. And I do think this agreement is a little more reflective of that, especially relative to what was in place prior to by the former federal government.
Peter Tertzakian:
We actually wrote a paper on short one on which of the top 15 producers in oil and gas in the world have a carbon tax. There are two others. Kazakhstan is, I think, 93 cents a ton and Mexico has a small carbon tax as well, but really it’s de minimis compared to what is being proposed here. The only closest one really is Norway, but we don’t compete with Norway. So it’s a little bit moot on a barrel for barrel basis. But I think the other point is that this is just one regulatory costs of many and other jurisdictions have different kind of costs. So this whole issue of understanding competitiveness is really quite difficult because comparing apples to apples is an insufficient… You got to compare the fruit basket to the fruit basket and say, what is the overall cost of all these things in different countries to be competitive?
Rachel Walsh:
Yeah. And just on the carbon pricing alone, it’s extremely complex how these things are even quantified and measured. We spend a lot of time, to your point, Peter, it’s apples and oranges, and you really have to dig into facility specifics to even understand how to compare these facilities across jurisdictions.
Jackie Forrest:
Okay. Well, you’re talking from the oil producer side. I guess one thing is now with this, we’ll call it the price floor. I forget the actual term. The producers know what they’re paying though for these offsets because there’s a minimum transfer price, that’s the name. But the investor in the carbon reduction project, as we just pointed out, has a lot of uncertainty. There’s a lot of new features that have been added with this implementation and not a lot of details. What is your sense? Do you think there’s a good chance the market’s going to be oversupplied when you consider all these things that all these ways people can create offsets now that they didn’t before and the potential for oversupply because of that?
Rachel Walsh:
I think it’s likely, especially in what I would describe as the near to medium term. So when we look at the changes to stringency rates, which we haven’t touched on and maybe it’s worth going there for a moment. So from 2027 to 2030, the stringency rates, so those rates of improvement for regulated facilities on their emissions intensity benchmark is slightly softer than it was previously, especially for oil sands facilities. For 2029 and 2030, they were previously held to a rate of improvement at 4% year over year and that’s been reduced to 2% now. And then beyond 2030, we never had a definition for what those stringency rates were officially, but the market was somewhat pricing in a continuation of those linear rates. It’s now at half of that continuation where it was before.
So generally speaking, softer overall, when we just look at the changes to stringency rates alone, we don’t have this market balancing until 2032 or 2033 timeline. So we’re generally oversupplied. The market should trade at a discount to at least that headline price until then. And then Jackie, as you mentioned, there’s introduction of direct investment, which I think could have potential to cause much more significant amount of supply to come into the market. It’s a very complex feature, but at a high level, in addition to be able to generate offsets at the project level, as an example, a carbon capture facility, that project will also be able to generate another class of credit called an investment credit from the capital they’re investing, both CapEx and OpEx. So in a way, from a net supply perspective, they’re creating supply beyond just the emissions abatement that they’re achieving overall.
Peter Tertzakian:
Okay. I don’t want to go too far into the weeds with all this because it is complicated. We’ve talked about the buyers of the credits, in other words, those that emit above the stringency and the limits allowed as a consequence of stringency. What are the sellers of the credits? I mean, it takes two sides to make a market. The buyers are not all that happy is my assessment. What are the sellers saying about what’s being proposed?
Rachel Walsh:
And in some circumstances, the buyers and sellers are the same parties. So some of the largest generators of credits in this market are actually the large obligated facilities and that’s due to how they perform against their benchmark and also other projects they invest in, like the existing carbon capture installation. Beyond that, oil and gas, the upstream industry from investments in methane reduction opportunities, as Jackie mentioned, they’re a significant supplier of credits into this market through offsets. And then you also have renewable energy owners.
Peter Tertzakian:
Yeah. So what are they saying? Are they happy with this new proposal?
Rachel Walsh:
I think from what we’ve heard overall, especially with where the market is trading today, it’s not supportive of first off what their expectations were originally when they had made those investment decisions. The market previously traded up around 50 to $55 per ton when a lot of these and with an expectation that it might go to $170 per ton due to the former federal regime. Now market is trading down to Jackie’s point. I think there was some expectation that market pricing would be higher. We have heard from those parties overall that they need higher price on carbon to have expansion projects, certainly.
Jackie Forrest:
Okay. But there’s another solution though, Rachel. They’ve introduced contracts for differences. So this I think is a way that someone who wants to invest in emissions reduction project could make it a deal with, I think it’s Alberta and the federal government, that no matter what the price is, they will pay the difference. So they get a floor price. Now, if there is a floor price, you could ask, why do you need a contract for difference? But I guess you’ve just explained to me why that is because it could be a whole bunch of people that can’t even sell their offsets. Just explain this and does this help those folks? Do you think this helps with their concerns around investing in clean energy projects?
Rachel Walsh:
I think there’s potential for it too. I think beyond maximums for both volume and notional value, we don’t have a lot of details on what these contracts for differences will look like or how they will be allocated overall. So some uncertainty there. I think the one really interesting thing in the language that was provided around this financial mechanism was in regard to taking on of the sole financial liability. I think what this ultimately does is it does create that financial liability for either party in the event they choose to unwind the policy that kind of underpins all of this, whether that be on the federal side or on the provincial side.
So as an example, if the federal government or future federal governments decides to remove the act that underpins this, they will take on the entire financial liability in contrast if Alberta gets rid of tier or the things in this agreement they would take on that entire financial liability. I think if these contracts for differences are rolled out in a meaningful and thoughtful way, what that does is create more programs or Certainty over time. And one of the things, even in the event we had a more substantial carbon price in this market, regime change risk and change of law risk are one of the largest reasons we hear about investment hesitancy and uncertainty in this market.
Peter Tertzakian:
So a new government comes in and shreds the policy.
Rachel Walsh:
Exactly.
Peter Tertzakian:
Right.
Rachel Walsh:
And so creating this financial liability for either party would discourage that complete unwinding and abolition of the program overall.
Peter Tertzakian:
Yeah. I mean, this is so complicated. I mean, I appreciate that it is not easy to satisfy all the various stakeholders. And I want to go back again to the specifics to sort of amplify this notion with greater clarity. And that is that if I was a renewable energy developer and I ran my spreadsheets a couple years ago and I estimated that I would be pretty certain that I would have at least $50 a ton for the credits that I generate and that’s a revenue stream for me and then that trickles down through to my cashflow, et cetera. But all of a sudden it’s $30 a ton and it looks like it’s going to stay at 30 or less for a long time. And so that doesn’t give me greater certainty to invest more in the future, right?
Rachel Walsh:
Yeah, that’s accurate.
Peter Tertzakian:
And so that this is part of the problem is that we have a legacy of expectations and a legacy of even credits that are on balance sheets of various companies. And so trying to create a system that is clear and simple is actually not easy, which is why it’s so complex. Is that where we’re at?
Rachel Walsh:
Yeah, it is. And I think to that, because this program is so complex, it is really hard for different parties in the market to have an accurate view on where supply and demand is going over the long term and therefore where price is going over the long term, which does prevent having confidence in what that price escalation pathway looks like go forward.
Jackie Forrest:
Yeah. There’s just so many moving parts that you can’t predict, right? Whether it be how many direct investment credits are going to come from people that build these projects. If the carbon capture storage project in Alberta goes forward or not, that’s a huge change in terms of your outlook. How much natural gas power comes on. Now we don’t even know if the CER is being suspended or not. So if it sticks around, maybe there’d be less natural gas power. So you really can’t even model how this is all going to evolve. But let’s talk about that carbon capture storage project because that was another aspect of the deal. Now the agreement seemed to include a scaled down version of the carbon capture storage project now targeted it from my math, about half of what was originally talked about and the original date was 2030.
Now we’re talking about a 2035 date. And Premier Smith said on May 15th, she’s very confident that a pipeline is going to be built and a pathways project is linked to this. And Mark Carney also said that the pipeline project is conditional on the carbon capture storage project. So how challenging is it to get this CCS project going forward? It seems like it’s needed for this submission on July 1st of the pipeline.
Rachel Walsh:
It does seem like both the oil pipeline and pathways are mutually dependent. Premier Smith said at an event speaking to industry last week, she said, “No pathway, no pipeline, no pipeline, no pathways.” And so it does seem like they are very much tied to one another. She also framed the benefit of this additional egress capacity on oil to be significantly higher about 200% relative to the increased carbon cost from what was agreed on in this carbon pricing framework overall. And so to that end, I think it’s going to be entirely dependent on having confidence in that oil pipeline going ahead, especially when we consider the carbon market at the moment and talking about a market that’s trading $40 per ton, especially with things like direct investment, have less confidence in that price going up over time, even with direct investments. It’s not supportive of project economics for pathways alone at the moment.
And again, we don’t have the market balancing until 2032. So not on the timeline required to have confidence to make investment decisions overall on pathways.
Jackie Forrest:
Rachel, I’d be interested in your view. What is the price that you need to support a carbon capture storage project and including the fact that there’s an investment tax credit federally plus the provincial government I think has the equivalent of something 12.5% of like an investment tax credit through a different mechanism. Are we talking like $200 a ton? What price would they need to feel confident in for the next 20 years to go ahead with a project like this?
Rachel Walsh:
Yeah. Based on our understanding of the technology, including that 50% CapEx coverage from the federal ITCs and 12% from the provincial ACIP, we have the required breakeven price for carbon capture around 120 to $135 per ton for post combustion applications. When we include things like direct investment, which we don’t have all the details for, that price could drop substantially to as low as call it $85 per ton overall, but still well above the current market price.
Jackie Forrest:
So Peter, with those numbers that Rachel just told you and the fact that it does look like the project is smaller and further in time back five years, do you think this can go forward and get the pipeline going and is it worth doing so that we can get this West Coast pipeline?
Peter Tertzakian:
Yeah, I think there’s a higher probability things are going to get done despite the complexity as a consequence of all this because net net, certainly what is being proposed is I would call it more favorable if you go through all the calculations, if you can go through all the calculations, that it is better than what was in place before. And don’t forget even before there was like the emissions cap and everything else, which was yet another market on top of a market. So I would characterize it as favorable in a sense that there’s a greater probability that things are going to get done. And with all the work that we’ve done in terms of the benefits of another million and a half barrel a day pipeline, it’s the amount of GDP, which is like $30 billion per year, jobs, royalties, taxes, et cetera, certainly makes it worthwhile.
But let’s not forget that this is a trilateral negotiation that Alberta and the federal government have come to an agreement and now industry and their investors have to basically buy into it and finish off the MOU and that’s yet forthcoming. So really it’s not up to me to decide whether this is favorable or not. It’s going to be up to the corporations and their investors. And it’s not just oil and gas, as Rachel pointed out, there’s all sorts of other emitters in the carbon sphere, I’ll call it.
Jackie Forrest:
And there’s also a huge cost, right? The original price, probably 20 billion, maybe this is, I don’t know what it costs, there’s no estimate, but still potentially $10 billion or more of capital costs that these companies have to come up with. Now some of that’s offset with investment tax credits, but still that’s a big number.
Peter Tertzakian:
Yeah, it is a big number. And if you had $10 billion, the question is, well, what would you do with it today given all the issues that the country faces? So that’s a whole other subject because I want to come back to the regulation stack because there’s all sorts of regulations when it comes to carbon, including the clean fuel regulations federally. There’s actually fuel regulations in BC and so on and so forth. But the big one for data centers, which I pointed out or talked about earlier was are the clean electricity regulations. And so they’re no longer being suspended immediately as originally proposed in the MOU from November of last year. So what’s the status of that, Rachel?
Rachel Walsh:
Yeah, that was the one major departure from that MOU that came out, which we found to be quite interesting. It looks like both the federal government and the provincial government are going to let this move through the courts and see if it’s found constitutional or not and then reevaluate whether there’s a requirement for equivalency if it is deemed constitutional after all of that settles. So certainly creates some uncertainty over the long term. That equivalency could be achieved through something like the Alberta TIER Regulation or perhaps through another regulation, but it would influence the TIER market certainly regardless and so potential for some things to be changed.
Peter Tertzakian:
I mean, this affects the power generators substantially and their incentive to invest in more power generation for the purposes of just electricity load growth. And then on top of that, the data center momentum. So Jackie, why do you think this has been a bit of a reversal has been thrown back to the courts?
Jackie Forrest:
I don’t know, but I really don’t like this one because first of all, you said in November that it was immediately suspended. People were moving forward with their plans on AI data centers based on that. Now suddenly we get a curveball and I’m sorry, waiting for finding out if this is constitutional or not, what is that, Peter? Is that like a two, three year process? I have no idea how long it takes to go through the multiple levels of court cases to decide what the resolution is here. And so for me, for Alberta’s hopes of becoming an AI data center place, this is not good. If I was the hyperscaler, I’d be like, “I can’t wait three years. This is happening today. Sorry, going where I can build my natural gas power generation.” So I think this is just a really bad idea, but this is probably the thing I like the least out of the new plan if you did figure that out.
Peter Tertzakian:
Yeah. Well, it is consequential to AI. And as I said, we’re going to talk about that in another podcast, but I strongly believe that because AI is 100% an energy play, we talked about it on previous podcasts because semiconductors are basically heaters, AI policy cannot be extracted from energy policy. The two are connected together. And so this energy carbon policy, the clean electricity regulations seems to be out of sync at the moment with AI policy because there’s a strong desire by the federal government to build sovereign data centers so that we have control over our own data and information and doesn’t go outside our borders with the huge momentum behind AI that we’re seeing now.
Jackie Forrest:
Well, and it’s not just an Alberta issue. All across this country, almost every jurisdiction, every jurisdiction actually, except for Alberta right now that has a little bit of access, is needing powered very fast and even without AI data centers is worried about their ability to meet the demand. And so to me, this kind of creates uncertainty across the country and I’ll add to the fact that now we have some sort of consultation process around it. I welcome changing it because right now it’s really prohibitive and I think that’s not going to be in our best interest as a country to not build some natural gas generation to meet just the growing demand and then the potential for AI to add more to it. So I hope they get this uncertainty cleaned up and I really don’t like for people in Alberta having to wait three years to figure out what’s going to happen.
Peter Tertzakian:
Well, and as we’ve said on this podcast many times, it’s not the uncertainty. In other words, there’s no such thing as certainty. You are never going to get certainty on anything. But what we really need to do is reduce uncertainty to the point where, as Jackie, you’ve pointed out, you can put it in a spreadsheet and understand it so you can make a financial decision. And so Rachel, in terms of the finance side of the world at BMO, are you getting any sense of what investors are saying about all this?
Rachel Walsh:
I’ll go back to something I said earlier in the podcast. I think in theory, what has happened here could be viewed as a general softening of stringency rates, prices coming down. And so from an opportunity to invest in decarbonization projects, perhaps you might think that this detracts from that overall. But again, if you look at how sustainable those policies were, there was a lot of contention around them just from a competitiveness issue standpoint. And because of that, there was a lot of risk that these policies would go away. I think this does balance those competitiveness issues despite being very complex. I think this could lead to a situation where people have a higher degree of confidence that what has been agreed upon here will be in place for a longer period of time and could provide a little bit more investor confidence because of that overall. Even in situations with the previous program where we were thinking that carbon price would go to $170 per ton by 2030, folks were still hesitant to allocate capital to things like carbon capture. And again, it was because that policy could go away overnight.
Peter Tertzakian:
Right.
Jackie Forrest:
Yeah. And my vote is, well, it’s not perfect. It’s better than what we had before. The price is lower. As you say, the stringency is lower. So it’s maybe more affordable, maybe not as affordable as the industry would like, but better than it was before. I like the idea of this price floor. Now Rachel’s kind of wrecked my view that that is very stable. So if they could actually make it stable, then that would even be more helpful. So we’ll see how they actually implement that price floor. If they can actually do that, then that would be positive. And let’s come back to this carbon capture storage project. If it is smaller, if it proceeds and it paves the way for an oil pipeline project, which I see as an imperative for the country, I don’t like the fact that we have to build a CCS project to get a pipeline, but getting a pipeline is something that’s really needed. So I’d say it is overall constructive that way.
Peter Tertzakian:
Well, we’ll see how it plays out. This story is not lacking in complexity. It’s not lacking in consultations, so I’m sure we’re going to be talking about it a lot more. And when we talk about investor confidence, it’s confidence in building decarbonization projects, whether it’s CCS or otherwise, whether it’s investing in pipelines or whether it’s investing in the resource development to fill the pipeline and they’re all interconnected. So again, we’ll watch to see how it all plays out as these negotiations go forward and we see what happens probably this summer in terms of a proponent coming forward to build an oil pipeline going forward. So Rachel Walsh, thanks very much. We hope to talk to you again because the story is obviously not going away.
Rachel Walsh:
Yeah. Thanks for having me as always.
Jackie Forrest:
Thank you and thanks to our listeners. If you enjoyed this podcast, please write us on the app that you listen to and tell someone else about us.
Announcer:
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