OTTAWA — The federal government plans to spend $7 billion on market protections for industrial CO2 emitters, a policy that advocates say could go a long way to encouraging construction of energy projects and emissions-reducing technologies like carbon capture and storage.

In her fall economic update on Tuesday, Finance Minister Chrystia Freeland said the Ottawa-backed Canada Growth Fund will begin negotiating contracts with energy companies to effectively guarantee the price they will receive for offsetting or removing carbon emissions. The policy tool—called carbon contracts for difference (CCFD)—was a key recommendation of the Canadian energy sector, which has argued that CCFDs are critical to reducing operating costs and making major low-carbon projects economically viable.

Under a CCFD agreement, heavy emitters like mining companies, concrete makers and natural gas producers would reduce emissions by the tonne and then sell those reductions on carbon offset markets. Government-backed CCFDs would guarantee those companies receive a minimum price for those offsets—say, $80 or $100 per tonne. Other types of companies, like those that use direct air-capture technologies to draw CO2 directly from the atmosphere, will be eligible to negotiate CCFDs for the carbon they remove.

The $7 billion allocated for CCFDs make up nearly half of Ottawa’s $15-billion Canada Growth Fund, a key program in the government’s efforts to slash carbon emissions and develop innovative technologies.

Freeland’s economic update acknowledged that CCFDs come with “significant fiscal risks” given that, if carbon prices implode, the government could be on the hook to make up the difference. Still, the policy could also work in the opposite direction and generate revenue for Ottawa if carbon prices rise higher than agreed-upon prices.

The policy represents a significant expenditure for the Liberal government as it looks to meet its net-zero emission goals. It comes as Canada struggles to match U.S. President Joe Biden’s Inflation Reduction Act, which promises to shower American energy developers with as much as US$1 trillion in subsidies over the next decade.

CCFDs come in addition to a range of investment tax credits the federal government has promised as a way to cover the up-front costs required to build major projects like hydrogen plants or carbon-capture and -storage (CCS) installations.

The government has not yet tabled legislation introducing the investment tax credit for carbon capture and storage projects—which will cover up to 60 per cent of the cost for some projects—prompting industry concerns that Canada is at risk of falling behind its U.S. competitors. In the fiscal update, Finance officials said the government would table the CCS tax credit legislation by the end of the year. Separate tax credits for cleantech manufacturing and hydrogen are expected to be legislated before next year’s fall economic update, the government said.

The Pathways Alliance—a group of six major oilsands companies including Suncor Energy, Cenovus Energy, Canadian Natural Resources and others—has been pressing Ottawa to introduce CCFDs in order to help cover operating costs.

The group has proposed a $16.5-billion CCS hub in northern Alberta that would sequester a sizeable chunk of the oil and gas sector’s total emissions.

Other major proposed CCS developments including Air Products’ $1.6-billion project currently under construction near Edmonton, which will be Canada’s first commercial-scale hydrogen facility.

Tuesday’s document said the growth fund is “already in the process of negotiating carbon contracts for difference with a number of project proponents across a range of sectors,” but did not specify which companies or industries.

It also said CCFDs would “support the establishment of robust carbon credit markets” by bringing investor confidence to the nascent sector.

Carbon offset markets are viewed by some observers as a way to incentivize carbon reduction efforts and take some of the financial burden of decarbonization off of the public sector.

This story was updated to specify who will negotiate and be eligible for CCFDs