That's great. Thank you very much, Chair, and thanks to the committee for having me here today.
I want to use my time to explain why I think leveraging the existing carbon pricing system for heavy industry is the best approach to pursuing the goals of the emissions cap.
I know a number of previous witnesses have argued for a cap-and-trade system. I agree that a cap-and-trade system is a viable option here, but I think there are some shortcomings to a cap-and-trade system that would make direct pricing a better choice. Here are the three reasons for that.
First, it's going to take time to set up a new system, and we really do not have more time. We need businesses to move forward with emissions reductions as soon as possible, because 2030 is really tomorrow when it comes to large capital projects.
Second, a new system creates more instability when what we most need, and what investors and businesses most need, is stable long-term policy.
Third—and this is a key thing—a cap-and-trade system doesn't necessarily have a true, hard cap, because they're almost always designed with price controls. If you look at the California and Quebec system, the EU system, or really any system around the globe, what you're going to see is if the price gets too high too quickly, the government will inject more credits into the market to reduce price pressure. Once they do that, a cap-and-trade system becomes functionally very similar to a direct carbon pricing system.
Those are the three reasons that I think a direct pricing system, meaning the output-based pricing system we have today as well as the provincial and territorial systems that are equivalent to that system, should really be the primary tool we use to drive emissions reductions across oil and gas and around heavy industry as a whole.
If that approach is to be followed, I would really emphasize to the committee three key recommendations for how that direct pricing system could be strengthened to achieve the objectives that would otherwise be achieved by a cap.
The first and biggest thing that should be done is to provide the private sector more confidence that the price will actually reach $170 per tonne by 2030. We have many decarbonization projects today that would be profitable at $170 per tonne, but they're not happening, and why is that? The key reason is that business doesn't have the certainty that the price will actually reach that $170 level, so I think the federal government should address this. They have a few options to do that, but one of them would be to sign so-called “contracts for difference”, under which the government would basically agree to provide financial relief to companies if the carbon price doesn't hit a specified level, such as $170 per tonne.
The second key recommendation to strengthen carbon pricing would be to increase the share of emissions that a carbon price applies to, within both the federal system and the provincial and territorial systems. Today, as many of you will know, the average oil and gas firm pays the carbon price on a pretty small share of emissions. Depending on the system and the firm, it's around 20%. The federal policy could be strengthened to require that the share of emissions grows over time to 25%, 30%, 35% and so on.
The third recommendation is that the government could, and should, reserve the right to increase the carbon price beyond the schedule if emissions reductions are not occurring quickly enough in accordance with the target or cap that might be set.
In using these three approaches, it would be a faster system. It would be functionally similar to a cap-and-trade system, and it has another really important advantage, which is that it will enable more emissions reductions at a lower cost. That's because if you strengthen the industrial carbon pricing system as a whole, it's going to apply not just to the oil and gas sector, but to all heavy emitters. Therefore, you're accelerating decarbonization and you're doing it at a lower cost by allowing trade. Of course, you'd need to do this all in a way that treats industry as a partner in decarbonization and allows them to maintain competitiveness. That's going to require policies such as an investment tax credit, such as a border carbon adjustment, but taken together, these policies can help industry do what they themselves have committed to doing.
In conclusion, I really think the government should closely consider using the existing carbon pricing system to achieve the types of reductions that are intended under a cap.
Even though a cap-and-trade system is viable—it can work—strengthening the carbon price can more quickly do more, and it would likely achieve those emissions at an even lower cost.
Thank you very much.