Are Carbon Contracts for Difference Well-Suited for Canada?

At least up to the release of the Federal 2024 Budget, many Canadian politicians, climate policy thinktanks, and industry groups promoted carbon contracts for difference (CCfD) to complement carbon pricing. This commentary urges caution against the broad adoption of CCfDs. I begin by noting that the current designs of provincial output-based pricing systems (OBPS) are not consistent with the expectation of the systems delivering robust price signals. I argue that CCfDs depend on such price signals, and they are not a plausible policy for encouraging the emergence of such signals. I then argue that it is hard to justify the government making a bet against itself on the "policy price" of carbon. An extensive scholarly literature has long argued against providing businesses with "certainty" against future policy changes in general, and there is little reason to think carbon pricing is relevantly different. Overall, the use of CCfDs should remain narrowly targeted.