Rethinking Carbon Compliance Markets

Why Canadian Emissions Markets Need a Market-First Makeover

In the fight against climate change, carbon compliance mechanisms like Alberta's Technology Innovation and Emissions Reduction (TIER) program represent a bold attempt to harness market forces for environmental good. Launched in 2020, TIER imposes carbon pricing on large industrial emitters in Alberta, setting emissions benchmarks and allowing facilities to trade credits or use offsets to meet obligations. The program's core idea is simple: price carbon pollution to incentivize reductions, all while meeting federal stringency requirements. But here's the rub—while TIER and similar systems across Canada excel at the technical and environmental details, like benchmarking emissions and verifying offsets, they often fall short on the very market mechanisms they're built upon. It's time for governments to shift focus: prioritize robust market design and infrastructure to make these programs truly effective drivers of societal change.

The Prioritization of Granular Technology and Protocols at the Expense of Market Development

Carbon pricing isn't just about science and ecology; it's fundamentally an economic tool. Systems like TIER rely on markets to allocate resources efficiently, encouraging innovation and cost-effective reductions. Yet, much of the policy discourse and implementation zeroes in on environmental metrics—how many tonnes reduced, what technologies qualify—while treating the market as an afterthought. This imbalance creates inefficiencies: volatile prices, limited liquidity, and barriers to participation that undermine the program's goals.

Governments that mandate compliance must also nurture the markets they create. Without active support—through standardized rules, infrastructure, and oversight—these mechanisms risk becoming bureaucratic hurdles rather than dynamic engines for change. Alberta's TIER, for instance, operates in a provincial silo, but in a federated country like Canada, true success demands cross-jurisdictional thinking.

A Canada-Wide Carbon Credit: Making a Tonne Truly a Tonne

One glaring gap in current designs is the lack of interoperability between provincial and federal systems. Alberta's TIER generates emission performance credits and offsets, but these are largely confined to the province. Why can't a credit produced in Alberta be used for compliance in Ontario's federal backstop system, or vice versa? Or integrated with the national Clean Fuel Regulations?

Canada's carbon pricing landscape is a patchwork: provinces like Alberta and Quebec have their own systems, while others fall under the federal Output-Based Pricing System (OBPS). This fragmentation stifles market depth. A producer in Alberta might generate high-quality offsets from carbon capture projects, but if those can't be "exported" to emitters in British Columbia or the federal clean fuels market, opportunities are lost. As the saying goes, "a tonne should be a tonne"—emissions reductions are fungible, so credits should be too.

Imagine a unified Canada-wide carbon credit standard. It would allow seamless trading across borders, boosting liquidity and price discovery. Governments could facilitate this through harmonized registries and mutual recognition agreements, much like how electricity grids interconnect provinces. Without it, markets remain shallow, prices swing wildly (as seen in Alberta's oversupply issues), and the incentive to invest in reductions weakens. Federal leadership here is crucial, building on the Pan-Canadian Framework to ensure provincial innovations like TIER contribute to a national market.

Smoothing Out Compliance: From Annual Crunches to Rateable Timelines

Another market design flaw is the reliance on annual compliance cycles. In TIER, facilities typically face yearly reporting and settlement, leading to end-of-year rushes that distort prices and liquidity. This "once-a-year" model creates boom-and-bust trading patterns: quiet periods followed by frantic activity as deadlines loom. The result? Inefficient markets where true value isn't reflected consistently.

To fix this, compliance regimes should adopt more regular, rateable timelines. Think quarterly or even monthly accruals, where emitters track and settle partial obligations throughout the year, with a final annual true-up for imbalances. This would encourage steady trading, stabilizing prices and attracting more participants. It's a page from energy commodity markets, where pipelines and grids manage supply-demand in real-time to prevent disruptions.

Alberta could lead by piloting this in TIER, perhaps starting with quarterly benchmarks for high-emitters. Such a shift would require infrastructure upgrades—like digital tracking platforms—but the payoff is a more resilient market that better signals investment in low-carbon tech.

Creating an Integrated System Controller

Finally, to tie it all together, carbon markets need a neutral overseer: an integrated system controller akin to a grid operator in electricity markets or a pipeline manager in natural gas. This entity would monitor supply-demand balances and accruals, enforce rules, and intervene to prevent manipulations or shortages. In Canada's decentralized setup, private operators could fill this role, ensuring fair play across systems.

Without it, issues like Alberta's sustained oversupply persist, eroding confidence. A controller could also facilitate interoperability, managing cross-border credit flows and standardizing verification.

Conclusion: Building Markets That Match the Mission

Alberta's TIER program is a solid foundation, but to truly leverage markets for emissions reductions, we must prioritize design and infrastructure over just the environmental nuts and bolts. By enabling Canada-wide credits, implementing rateable compliance, and appointing a system controller, governments can create vibrant, efficient markets that drive real change. It's not just about pricing carbon—it's about building the systems that make that price work. As Canada eyes net-zero by 2050, now's the time to invest in the market machinery that will get us there.

Governments increasingly turn to market mechanisms to drive societal change, from reducing emissions to promoting renewable energy adoption. However, simply permitting a market to exist isn't enough; it demands deliberate market design and robust infrastructure to function effectively. This ensures that the price signals generated lead to a positive feedback loop of investments in sustainable technologies and practices, aligning economic incentives with environmental goals and preventing market failures that could otherwise derail progress.