Policy Forum: 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 think tanks, and industry groups promoted carbon contracts for difference (CCfD) to complement carbon pricing. This commentary urges caution against the broad adoption of CCfDs. The author begins 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. He argues that CCfDs depend on such price signals, and they are not a plausible policy for encouraging the emergence of such signals. The author then argues 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. The author concludes that, overall, the use of CCfDs should remain narrowly targeted.