CALGARY — Alberta’s heavy-emitting companies are planning to spend tens of billions of dollars in the coming years on carbon capture and storage, hydrogen and other technology to cut their emissions. 

That would mean a flood of new companies selling carbon credits into Alberta’s industrial carbon market—the largest such system in Canada, responsible for regulating nearly a quarter of the country’s emissions. While that expected flurry of activity is a signal of potentially massive emissions reductions to come, analysts warn that the dramatic influx of sellers threatens to tilt the market into a state of structural oversupply—an imbalance that could undermine the financial feasibility of several major projects and thrust the province and country’s broader net-zero targets into doubt. 

The oversupply could also heap added liability atop the at least $7 billion in carbon contracts the federal government plans to sign with heavy emitters, potentially putting taxpayers at risk of having to pay the difference. 

In Alberta, heavy emitters like oilsands producers, power generators and chemicals companies are regulated under a carbon-pricing system called Technology Innovation and Emissions Reduction, or TIER. In 2007, Alberta became the first province to introduce an industrial carbon price, called an output-based pricing system. Today, TIER regulates 160 million tonnes annually, making up a huge portion of Canada’s 720 million tonnes of total emissions. 

Under TIER, companies must meet certain environmental standards at their facilities—chiefly, a designated per-tonne threshold on the intensity of the CO2 they emit. When heavy emitters fall short of those thresholds, they have to buy carbon credits under TIER to make up the difference, or else meet other compliance requirements. Producers that lower their emissions intensity, by comparison, sell credits into TIER and reap a financial reward. 

For years, Alberta’s TIER system more or less saw harmony between supply and demand. Now, growing pressure to reach net-zero emissions and a raft of proposed government subsidies aimed at curbing pollution have prompted heavy emitters to start investing in decarbonization technology themselves, turning long-time carbon credit buyers into sellers. 

That could fundamentally shift the state of Alberta’s carbon market—and the value of the carbon credits that underlie it, according to Grant Bishop, an environmental researcher at Calgary-based KnightFork who compiled data on TIER and shared portions of it with The Logic. 

TIER regulated a total of 160 million tonnes of CO2 emissions in 2022, a year in which companies generated an undersupply of roughly seven million credits. By 2030, total greenhouse gas emissions under TIER could fall to 117 million tonnes while creating an oversupply between 20 and 30 million credits, Bishop’s research suggests. 

Bishop stressed that his outlook could change as he continues to update his modelling, and plans to release a complete study on the matter alongside researchers from the climate policy think tank Clean Prosperity. 

The looming supply glut has in turn prompted concerns that an oversupply of credits in TIER will cause the value of those credits to plummet, as would be the case in any marketplace. 

However, companies building major projects like commercial-scale carbon capture and storage (CCS) facilities are basing the financial viability of those developments on expectations they’ll get a certain price for each carbon credit they sell. 

“Balance is what ensures that there is a marginal price that incentivizes investments,” Bishop said in an interview. “This is the chicken and egg problem of the market. If you don’t have commitment to balance … you won’t allow for investments in decarbonization infrastructure to have a business case.” 

In a report late last year, analysts at BMO tracked a sizable drop in TIER credit prices starting early in 2023 “driven largely by the increase in supply” of offsets. 

Under Alberta’s carbon system, polluters have the option to pay into what’s called a TIER fund, or a target price for each tonne of emissions sold. BMO analysts found that credits are selling at a growing discount to the TIER target price, from an average of 9 per cent previous to 2023 to around 18 per cent per tonne today. 

Given that TIER is Canada’s most prominent system for carbon offsets, environmental lobbyists are pushing the Alberta government to make changes. By tightening the threshold beyond which companies are forced to pay, they argue, government could reintroduce balance and counteract the flood of new credits expected to enter the market. 

The Alberta government did not immediately respond to a request for comment. 

Provincial industrial offset systems like TIER are also the mechanisms through which the federal government plans to sign massive contracts, including so-called carbon contracts for difference, with heavy emitters in an effort to incentivize investment in carbon-reduction technology. 

Last year, the government allocated $7 billion toward carbon contracts, or agreements that essentially guarantee the price that heavy polluters or other companies receive for the carbon they successfully store underground or remove from the atmosphere. Under the scheme, Ottawa would essentially pay the difference if carbon credit prices fall below an agreed-upon level, or in other cases, simply buy credits from polluters at a set per-tonne price. 

In December, Ottawa signed its first carbon contract with Calgary-based Entropy, a carbon capture and storage company. The offtake agreement carried a total liability of $1.3 billion and guaranteed Entropy would receive $86.50 for every TIER credit it generates from sequestering carbon. A fall in carbon credit prices due to oversupply in the TIER market could, depending how contracts are structured, force the federal government to pay a higher cost in order to meet the agreed price. 

In the budget unveiled earlier this month, the federal government said Ottawa had been working with Alberta to “ensure that their TIER market was sufficiently stringent so that the projected demand for carbon credits exceeded projected supply, ensuring robust credit demand even as more major decarbonization projects get built and more credits are generated.” 

A spokesperson for Finance Minister Chrystia Freeland did not immediately respond to The Logic’s request for comment.

The dip in carbon offset prices comes at a time when banks and other investors are increasingly putting money into the sector. 

BMO acquired Calgary-based Radicle Group, a carbon offsets platform, in 2022 so it could start offering advisory services to heavy emitters. That came about a year after CIBC, alongside Brazil’s Itau Unibanco and National Australia Bank, joined the blockchain-backed carbon credit trading system called Project Carbon. TD has also launched a carbon-offset advisory practice, after a recent decision to invest $10 million in a boreal forest protection scheme that is expected to generate carbon offsets.