Perfect is the enemy of good: Understanding carbon pricing’s role in incenting decarbonization investments

Ryan Fan: Welcome to The Sustainability Agenda, a podcast series focusing on the evolving complexities of the sustainability landscape. I’m your host, Ryan Fan. Please join me as we explore today’s most pressing issues with special guests that will give you some new perspective and help you make sense of what really matters.

Michael Berends: To get zero emissions is a long journey and a difficult path. But those that are buying offsets now have a cost on their emissions above any carbon pricing that they already have. It’s going to be a greater incentive to make those reductions sooner than later. And that’s where we see offsets as a key part of driving the net zero pathway that we need to achieve.

Ryan Fan: Welcome to our multi-part series, profiling the Carbon Markets. The purpose of this series is to examine some of the most significant issues facing our clients in both the voluntary and compliance markets. On today’s episode, we’ll be discussing the role of carbon pricing instruments in the pursuit of net zero ambitions.We’ll take a closer look at policymakers’ approach to carbon pricing in Canada, the potential impact of political uncertainty on carbon pricing programs, and how carbon pricing is helping companies to accelerate decarbonization investments. I’m excited to welcome my guest, Michael Berends, CEO and Co-founder of ClearBlue Markets, an advisory firm specializing in compliance and voluntary markets. Michael’s extensive experience spans policy, strategy, transactions, market analysis, and offset development, working with emitters in the compliance and voluntary markets across more than 50 countries.Prior to co-founding ClearBlue Markets, Michael held senior positions in top tier energy and financial organizations in North America and Europe, including Barclays Capital, Vattenfall Energy Trading, and ICL. Welcome, Michael, and thank you for joining us on today’s episode of The Sustainability Agenda.

Michael Berends: Morning Ryan, thank you very much for having me here, looking forward to it.

Ryan Fan: I’ve been looking forward to this conversation for some time and I think our audience will have many takeaways. No pressure though.

Michael Berends: Haha. Definitely not. 

Ryan Fan: Okay, Michael, let’s dive in. Can you provide our audience with some background on the work that you do at ClearBlue?In particular, the new challenges that you’re helping clients deal with.

Michael Berends: It’s really about navigating the carbon markets. The team itself has been doing carbon markets for two decades, and we’ve seen a lot of changes, a lot of growth in these markets, and they’re still, for some, relatively new. So it’s navigating the complexities of the markets and really understanding what our customers face. And it’s both the costs and the challenges and also the opportunities in these markets. It’s really about identifying how best our clients can navigate through this, optimize their positions and save costs or even earn value in these markets. We do this through our market intelligence division. We do this through our advisory team. We do this through project development. And also a key part of all this is the market access for our clients to enter the markets and actually act in the markets.

Ryan Fan: Yeah, access, education, those are some key words and big challenges for our clients.

Michael Berends: Indeed, sorry, capacity building. I should have said that, right at the start really just understanding the markets. It’s really the first step sometimes. And you’d be surprised, although some of these jurisdictions have had markets for over a decade or so, just because of the way they were set up, the costs are starting to hit them now. They’re actually only learning them now in many ways because it’s hitting the balance sheet. Sometimes even though you’ve had these emitters or players in the market for so long, it’s really a new thing for many of them.

Ryan Fan: And like you said, there still seems to be this huge gap in understanding of carbon pricing for net zero. So maybe, if you could help us define how carbon pricing actually works and then the various forms and the current approach that’s actually taken in Canada?

Michael Berends: I’m glad you mentioned Canada because the current approach in Canada is many different approaches. I think I mentioned we started our careers in the European Union. I was there for about 15 years and the European Union is made up of many different countries. But amazingly, they have one carbon price, one carbon system. And when I moved back to Canada, I thought, okay, great, you know we can apply all our knowledge from Europe into the Canadian market. And I got here and it was amazing. There are how many provinces, 12 provinces or so and territories. And it’s essentially that many different carbon pricing programs in Canada, which is interesting, but it makes it a challenge and it’s navigating all those different carbon pricing programs. To really answer your question, we’ve got a carbon tax. We have a cap and trade system, for example, Quebec, and we have OBPS, output based price systems in a few other provinces like Alberta and then the federal system that’s applied to some of those as well, which is also essentially an output based pricing system. So long story short, I think the easiest way to look at it is they are markets for the most part and you can trade units, you can create units, you can owe units and there’s different systems within there. Something to keep in mind in most of these programs is that it’s important that there’s not a cap per se on how much you can produce and how much you can emit. It’s actually about how efficient you are actually producing what you produce. I think that’s a very key point in understanding these markets. When we first came to Canada, we sat down with many of these managers of the plants. The comment was, you know, why is the government trying to kill my business? It’s putting a cap on how much I can produce. And that’s not the case. They’re actually made to make you more efficient. And the more efficient you are, and more efficient you are compared to your competitors, you can actually come out a winner in these markets. I think that’s the key message I would say in all these markets, it’s really about being efficient and more efficient in the production of what you make.

Ryan Fan: That makes a ton of sense. And it puts it in a better light, given the fact that we’ve got so many disparate policies and structures within Canada. As you’ve highlighted, Canada’s carbon management policies are fragmented, right? We’ve talked a lot about this,that the Liberal government has been losing a bit of support and there’s an election next year. What’s going to happen if a conservative government comes in? In your view, how does the potential for future political risk impact existing carbon pricing programs in Canada? And then to what extent could policy implementations change? And what should our clients watch out for?

Michael Berends: This is definitely a big topic, a big question. I would say a couple of things. The first thing is, I think regulatory risk is very different than it was 10 years ago. We saw that happened in Ontario where the regulation was just removed at a stroke of pen. And that’s something that is a risk in current markets in general. But I would say that that risk is much less than it ever was in the past. I say that because I think climate change itself is accepted by many more of us today as understood. The question of: ‘is climate change real or not’ is not a debate for most of us now, which is a very good thing. So now the question really is how do we solve this climate change problem? We are big proponents at ClearBlue of using markets to solve the climate change crisis and carbon pricing does that exactly. The details of what that pricing should look like, I think that’s up for question. And more importantly, I think what I didn’t mention in the first part was the difference between emitters paying a carbon price and consumers paying a carbon price. And the real impact, I would say, is the emitters and carbon pricing. That’s where a lot of the focus is on carbon markets. And in Canada today, we do have a retail, let’s call it a carbon tax, where we, the consumers, paid at the gas pump or we paid at our natural gas bill. And I would say that is the regulatory risk or change that we will likely see with the new government, where the voters, those that actually have a vote, the tax will probably be removed from those individuals and not on the industrial side. And I’ll use Alberta as an example of why we’re confident in that. Alberta, many people may not know this, has the longest serving carbon pricing industrial program in Canada. So we do not expect the carbon pricing to be removed into Alberta nor in any of the other provinces.

Ryan Fan: To someone like me, that’s comforting because I truly believe that our path to decarbonization needs to continue to accelerate. Fragmentation has been particularly burdensome on industrial emitters in particular,affecting how they allocate capital towards decarbonization investments. For instance, the energy sector companies in Canada, they either pulled back or delayed announced carbon capture utilization and storage projects over the lack of and uncertainty with economic incentives. So if you have investment dollars, how do you allocate them in this fragmented and uncertain market?

Michael Berends: Really good question and a tough one. There’s a change now with the emitters that they see that carbon markets are an opportunity, not necessarily a burden or a cost. And I think it’s those leaders and those emitters that are acting and seeing carbon pricing in that light, are going to be the winners in this. And I think that’s important to understand as well. There are winners and losers in carbon markets. I think it’s about being the best that you can in reducing emissions and using carbon pricing to lead that for you. And with all these different policies in place, and there are a number of different policies, I think it’s important that our clients rely on those policies which have strong foundations. And in this case, there’s a lot of new things coming through and lot of proposals from the government. And some of those may be here in a year or two and some of them may not. But as I mentioned, carbon pricing for industrial emitters will be here to stay. What that price will be, I think it’s important to run scenarios and see if your projects are still viable depending on different pricing scenarios. But definitely using the foundational carbon pricing that you have in these markets is going to be key to really giving a fair assessment of your investments. It is the incentive and it’s not just about Canadian competitiveness, it’s about global competitiveness. And we do see the changes around the world that, you know, the world is going green. We work at a global level and we see this happening. And actually what’s most interesting is that we’re seeing our clients, especially the multinationals, coming to us and asking us at a global perspective, what is the carbon price that I pay? And it’s very different. And that’s the challenge. I think that’s what makes carbon markets and carbon commodity very unique. There’s not one global price of carbon. We’re far from that, but there is a carbon price in many jurisdictions. So what you’re seeing are multinationals asking themselves, if all else equal, where should I make my investment when it comes to carbon pricing? And that’s why using that carbon pricing, using that price of your jurisdiction will bring capital to your site. I think it will be very important going forward. So at a site level, really utilizing what’s available to you will be very important going forward on investments into your projects.

Ryan Fan: I’m going to follow that up a little bit, Michael.If you’re looking at it from a global perspective, how can Canada then position itself to accelerate decarbonization in an environment where our policies are fragmented?

Michael Berends: We should try our best to not be so fragmented, that’s the simple one. And unfortunately, we have that situation here. So trying to streamline in an ideal world, we would see more linkage across the different programs in different provinces. We attended a conference recently together as well, Ryan, where you have an emitter that has carbon pricing in Quebec and in Ontario and it’s very different and they’re trying to understand, you know, where do I make my investment decision? We did have a linkage between Quebec and Ontario at one point. That made things a lot easier and more efficient. So in an ideal world, that would happen. Ironically, we actually have linkage between Quebec and California and you see that market, probably I would say the strongest market in Canada is the Quebec cap and trade market, which is linked to California. So you see the benefits of that. Now, I don’t think we need to wait for linkage to occur. But in an ideal world, we see more provinces along the same line having something that’s very similar so you can make clear decisions and act on those. But in the meantime, it’s really understanding each market that you are facing, if you’re facing multiple markets and understanding where’s the best opportunity for you to make reductions, which is exactly what carbon pricing is there for, is to give you that incentive to invest to reduce emissions. To summarize, really understand carbon policy where you are located in and make educated decisions based on that policy.

Ryan Fan: Is there anything else beyond your markets in which you’re operating and the policies that you adhere to those markets?Is there any encouragement to invest in other areas to help grow decarbonization?

Michael Berends: Yeah, so one part that I didn’t touch on is that most of these markets and policies have a lot of funding, for example, that’s available to these markets. It’s not just you’re on your own here. So it’s really, again, utilizing all the tools that are available in these markets to help you have that incentive to reduce your emissions. And investing in projects is one thing, but actually acting in the market, transacting in the market to reduce your cost is also a very important part of this. We do see our customers who are active in the markets, buying, utilizing offsets when they’re available to reduce costs, looking long term at all the different various ways of actually procuring units in these markets. So forward contracts, options, financing yourselves with allowances that are available to you in these markets. It’s not just the actual reductions, but it’s all the things you can do before you actually make an investment to reduce emissions. Because we know it takes a long time to develop a project, to get the approval for a project, to actually implement the project. Most emitters, if they even decide today, would not be reducing their emissions anytime soon. In the meantime, optimize the capital that you have available to reduce your costs so you have more capital available in the future. To summarize, what we try to do at ClearBlue is optimize the pool of capital available to achieve net zero sooner than later. And I think each emitter themselves should be looking at it in that lens as well, saying we only have so much capital available. How do we optimize the marketplace itself and the actual investment in projects to reduce our own emissions?

Ryan Fan: That’s a great way to put it. There’s a quote that I read once and I’m probably butchering it to be honest, but if you’re stressing about something, it’s because you’re not taking action on something that you know you need to take action on. Even if you can’t take action on FID, for example, on a decarbonization project, you can at least explore the opportunities to deploy capital to decarbonize.

Michael Berends: Indeed. And maybe if I can jump in on that, I think the topic of offsets, it’s a big topic these days where you know buying offsets from a voluntary carbon market perspective, a lot of questions around that, are they perfect, are they not perfect? The way we look at it is you know climate change is a global problem. We need to together solve this crisis and, supporting reductions anywhere in the world is a good thing. And more importantly, for some of the naysayers on this label of greenwashing for corporates that are doing that, we see it the other way. I don’t believe any CEO wants to buy an offset. And what I mean by that is they would rather have zero emissions. But to get zero emissions is a long journey and a difficult path. But those that are buying offsets now have a cost on their emissions above any carbon pricing that they already have. It’s going to be a greater incentive to make those reductions sooner than later. And that’s where we see offsets as a key part of driving the net zero pathway that we need to achieve.

Ryan Fan: Michael, it’s always good to talk to you. Thanks for taking the time to join the show today. And thank you to our listeners for tuning in. 

Michael Berends: Thank you very much.

Ryan Fan: If you would like to learn more about how your business can navigate the carbon markets, join us for CIBC’s Carbon Summit on October 10th, 2024 in Toronto. The summit will bring together project developers, capital providers, policymakers, and corporate buyers to discuss the evolution of the carbon markets and their nexus with the energy transition. To register, please contact your CIBC Relationship Manager. Please join us next time as we tackle some of sustainability’s biggest questions, providing different perspectives to help you move forward. I’m your host, Ryan Fan, and this is the sustainability agenda.

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