Thank you, Madam Chair.
Thank you, Madam Chair and members of the committee, for the opportunity to appear today virtually.
My name is Mark Purdon. I'm associate professor at école des sciences de la gestion at UQAM here in Montreal where I've held the chair in decarbonization. I'm a political scientist who has studied carbon markets for over two decades and have closely observed the Quebec cap-and-trade system since its inception, as well as international climate financing carbon markets under the Paris Agreement and Kyoto protocol. I'll mention that I'm currently co-editing a book under contract with the University of Toronto Press on Canadian carbon federalism, which includes chapters from academics from coast to coast to coast, including on indigenous peoples and carbon federalism.
In January, I submitted comments to the minister on the discussion paper “Driving Effective Carbon Markets in Canada”, and I welcome the chance to speak to those views today.
My main message is this: Canada's federal industrial carbon pricing system should evolve towards a cap-and-trade system based on absolute emissions accounting. The Quebec model, linked with California's, should serve as a reference point for that evolution. Absolute accounting offers greater environmental integrity, superior transparency and better alignment with the global carbon coalition now forming around the European Union's emissions trading system. I will highlight three reasons.
The first is transparency. Canada's output-based pricing system has serious transparency problems. Confidential facility-specific performance standards, complex credit calculations and opaque effective prices make it very difficult to know what industry is actually paying. The federal headline carbon price is $95 per tonne of CO2 equivalent, but the Canadian Climate Institute has estimated in some of their research that large emitters pay approximately $10 per tonne on average, so one-eighth of the headline price. In Quebec's cap-and-trade system, the last auction cleared around $40 per tonne, and that price is publicly available and applies uniformly across covered emitters. While there are concerns about free allocation in the Quebec system, their share is slated to decline, and both California and Quebec are now working to address the issue of overallocation.
The transparency issues are not minor technical ones. They make it difficult for Canada to compare stringency across different provinces, which each have their variations on their own output-based pricing system. Therefore, it's difficult to evaluate the equivalency with Quebec or to demonstrate compliance with emerging international requirements, such as the EU's carbon border adjustment mechanism, which just came into force earlier this year.
The second issue is environmental integrity and market stability. An absolute emissions cap drives a better environmental guarantee than the output-based pricing system. When the EU ETS faced suppressed prices during its first decades, where prices were really too low, Europe introduced its market stability reserve in about 2018, which is a rules-based supply valve that adjusts auction values automatically. Canada's current OBPS proposal relies instead on a number of policy and regulatory tweaks and interventions. While I believe these will be implemented with good faith, they are slower to react and are more exposed to political interference.
A cap-and-trade system with a market stability mechanism would provide the stable, long-term investment signal that Canadian industry and Canadian clean tech need.
The third issue is international alignment. According to the International Carbon Action Partnership, almost every carbon pricing system that has emerged in recent years—including in China, Indonesia, Brazil and Turkey—is based on absolute cap-and-trade systems. Canada's output-based system is increasingly an outlier. Cap-and-trade systems are inherently more compatible with article 6 of the Paris Agreement and better prepared for the carbon border adjustment compliance being implemented by the EU. Why? It's because the prices are transparent and auditable.
Alignment also matters for cost. The International Monetary Fund has estimated that a uniform global carbon price of approximately $73 Canadian—$90 in 2025 dollars—would be the price that we need globally to achieve 2030 Paris objectives. If Canada pursues only domestic measures, we're going to need much higher carbon prices, so this type of cap-and-trade system would allow us to better engage with these international mechanisms to help us distribute the costs of climate action.
Thank you.