Contributed by Robert Lyman © 2024. Robert Lyman’s bio can be read here.

Executive Summary

Budget 2024, the government of Canada’s statement of its economic and financial plans for the next five years, included an announcement that the government would continue to expand its use of “contracts for difference” as instruments of its climate policy. Contacts for difference are ways to transfer financial risks from one group of people to another. Specifically, they would transfer the risks that future policy or market changes may reduce or eliminate the present and planned financial incentives for “clean energy” projects. The risks would be removed from project investors and placed on the Canadian general taxpayer.

There are different ways in which CFDs could be used to “de-risk” investments in “clean” projects. One way would be to bring more certainty regarding the credit prices that emerge as a result of the output-based pricing system (OBPS) The OBPS is the version of carbon dioxide pricing that seeks to reduce emissions by industrial plants. Credit price CFDs could provide “certainty” on future credit prices by having the government guarantee firms a minimum value for the credits.

The biggest risk for many “clean energy” investors may be that a Conservative government would eliminate the entire carbon dioxide pricing regime (i.e. both the OBPS and carbon taxes). That would sharply reduce the cost advantage that these investors now enjoy and the growth of these advantages in future. The goal of a CFD in such cases would be to leave the green energy investors whole by having the government commit by contract to provide future financial benefits at least equal to those that the investors would have enjoyed if the present carbon dioxide pricing regime has continued. The design of such contracts could be complex.

Yet another way in which CFDs could be applied would be to insure investors in “clean energy” projects that, regardless of how either markets or policies may change, they will continue to receive financial benefits from taxpayers that approximate or equal the benefits that they now expect to receive from existing and announced federal subsidy programs. The number of these programs is very large; they include both direct expenditures and tax expenditures (e.g. credits, deductions, deferrals, exemptions and preferential tax rates).

To date, the federal government has announced only one CFD. On December 20, 2023, Deputy Prime Minister Chrystia Freeland announced that the Canada Growth Fund had concluded an agreement with Calgary’s Entropy Inc. Freeland proclaimed, could reduce emissions by up to 9 million tonnes over 15 years. At a price of $86.50 per tonne plus an initial payment of $200 million, the federal expenditure totals $978.5 million, or almost $1,000 per tonne, an absurdly high cost.

How can this be considered as justified? The alleged benefit of CFDs as applied to investments in many “clean energy” projects like CCUS or EV batteries is that it may accelerate the commercialization of new emissions reduction technologies. One has to wonder what evidence there is that CFDs are needed, in addition to all
the other measures in place, to do this. Also, if the general public is to take on the economic risks, what benefits are there to compensate for this? The only benefits are the theoretical ones that may come from changes in global emissions and temperatures over which Canadians have little influence and no control.

The tradition in Canada has long been that one parliament cannot bind another. In practice, this means that a new government is bound to honour the legislation passed by a previous government only until it passes new legislation to amend or repeal the previous legislation. CFDs negotiated by the present Liberal government would be an obvious attempt to frustrate the efforts of a future Conservative government if it chose to reduce or eliminate the carbon dioxide pricing regime and the other large subsidies and tax benefits now conferred on “clean energy” investments. They would contravene an important parliamentary and democratic principle.