CCfDs are contractual agreements designed to provide price stability for projects that reduce emissions. Under CCfDs, a government entity guarantees a fixed price for the emissions reductions achieved by an industrial project based on established climate policy (for example, the existing or future carbon price).
If the market price for those reductions falls below this fixed price, the government pays the difference to the project proponents. If the market price exceeds the fixed price, the excess is paid back to the government.
The elegance and deceptive simplicity of this instrument has made it a policy winner in the eyes of many.
The Canada Growth Fund has allocated up to $7 billion for the issuance of CCfDs to unlock decarbonization projects. In theory, using a CCfD agreement gives an industry partner price stability on investment while the government gets to advance its goals of large emissions reducing projects. Seemingly, a win-win.
However, growing interdisciplinary research suggests that CCfDs may not always be the obvious win many assume they are.
Translating these insights to the broad-based use of CCfDs reveals that this instrument risks undermining positive feedbacks or encouraging industrial decarbonization projects with limited ability to contribute to a long-term transition to net-zero.
Not a perfect solution
There are three main issues with a CCfD-based approach.
Second, providing CCfDs for certain emissions reduction projects (such as carbon capture and storage) may inadvertently support industries that have an interest in reversing the direction of climate policy. This focus on opportunities that extend current systems or deliver least-cost emissions reductions reflects a common tendency in policymaking to misunderstand the climate crisis as simply a market failure, and not an issue requiring whole systems change .
Third, the time required to issue CCfDs on a case-by-case basis may actually encourage industrial actors to hold off on making final investment decisions until they receive a guarantee, delaying action further.
What this shows is that while CCfDs may have a targeted role to play in advancing critical emission reduction projects (such as those that unlock systems change in key sectors), policymakers should be wary of relying too heavily on this instrument.
A more strategic approach is needed that involves charting pathways between where sectors are now and long-term desirable net-zero outcomes — an approach that is being actively advanced by Canada’s Transition Accelerator . A strategic approach would focus support on industries willing to hitch their carts to the future of the climate policy mix and defend climate action no matter who is in office.
As the Ivey Research Chair in Sustainability Transitions, Daniel Rosenbloom would like to acknowledge the generous support of the Ivey Foundation. Rosenbloom is also a Steering Group member of the Sustainability Transitions Research Network, which is a scholarly network working toward the advancement of transition scholarship.
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