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

Pull Quote (Michael Bernstein): “I think I’d probably put it at a B or a B minus, all things considered. With, and if I could caveat this a bit, I’ll say with the potential for this to become an A, if the deal sticks for a decade or more. That’s really challenging in a political environment like the one we have. But if we can actually make this work, I will come back and upgrade the grade later.”

Tom Heintzman: Welcome listeners. I’m very excited about today’s episode because it’s both timely and important. On May 15th of this year, the Government of Canada and the Government of Alberta announced the execution of an implementation agreement. This agreement operationalizes the commitments outlined in the Canada Alberta Memorandum of Understanding dated November 27th of last year, 2025, and establishes a clear pathway for Alberta’s oil and gas sector to meet increasing domestic and international demand while supporting the shared objective of achieving net zero greenhouse gas emissions by 2050. The agreement contains a number of interconnected provisions to manage carbon pricing in Canada and Alberta specifically, including an agreed upon carbon price and escalator and various market mechanisms and guarantees to give investors confidence in the carbon market. Confidence that the carbon price will rise as agreed and not be undone by, for instance, an oversupply of carbon credits or a change in policy by future governments. My guest today is the ideal person with whom to discuss the carbon market and pricing provisions of the implementation agreement and their consequences. Michael Bernstein is the President and Chief Executive Officer of Clean Prosperity, a Canadian nonprofit that works toward practical climate solutions that reduce carbon emissions and grow the economy. He is an advisor to elected leaders across the political spectrum, and a frequent commentator on climate policy. He is also co-founder of Carbon Removal Canada, an initiative that advances policies to scale up Canada’s carbon removal sector. Good afternoon, Michael. Welcome and thank you for joining us again on the show.

Michael Bernstein: Hey, great to talk to you.

Tom Heintzman: So Michael, before we start with the changes that the implementation agreement introduced, let’s start by reviewing the current carbon pricing system in Alberta known as the TIER system. How does the current system work, the TIER system? And what are its current strengths and weaknesses?

Michael Bernstein: Yeah, so the idea today with the industrial market is to try to provide a carbon price signal without costing companies so much money that they might be made uncompetitive. And so the way the system works today in order to achieve that objective is that companies face a carbon charge, or what’s called a compliance obligation, on a relatively modest percentage of their emissions. So it depends on the sector, but let’s call it roughly 20% of emissions across sectors like oil, gas, electricity, chemicals, et cetera, that for 20% of their emissions, there’s a carbon fee that they have to pay. And that price was going up gradually from last year $95, this year $110, et cetera. But the key thing is that there’s also credits that are generated in these markets. So that if companies are performing better than the thresholds or benchmarks, as they’re called in the TIER system for their sector, they can earn credits that they can then sell to other companies who can use those credits to forego having to pay the government the carbon price. So what that all amounts to is that what matters most for companies in this carbon market is what the value of credits are. And credits were trading for a pretty low value historically and even in recent months. So depending on the month, we’d be talking about somewhere between $20 and $40 a ton for the credits, even though the headline price was much higher, as I say, about $95. And that kind of itself tells you a little bit of the strength and weakness of the market. I think the challenge with the market is really that credits were not priced high enough to incentivize large-scale decarbonization. The strength, advocates would argue, would be that the system was flexible, that it had buy-in from a series of major emitters, and that it was working to start to unlock kind of more incremental emissions reductions.

Tom Heintzman: Okay, so that helps with the problem, sort of a headline price on carbon of $95, reaching a hundred bucks, but credits are trading at 20 to 40. So in fact, the real cost of compliance is much, much lower. So now that we know what the status quo looks like, what changes to the current system is the implementation agreement introducing? Maybe you could start with a high level scan of the major changes, and then we can explore the main changes in a little more detail one by one.

Michael Bernstein: Yeah, and I would say overall what this agreement does is it helps make the system much more durable and stable. And that’s really important. But it does so by compromising on the what’s called stringency or let’s say strictness of the system. So to unpack that a little bit, what Premier Smith and Prime Minister Carney agreed to was to both lower and slow down the pace of increase in the headline carbon price. So whereas before it was supposed to go to $170 a ton by 2030, now the agreement is to get to $140 by 2040 a decade later. And perhaps more importantly than that, the agreement lays out a schedule for how the carbon credits in the market are going to rise over time and there too there will be quite a gradual rise, starting with what will be a legislated price floor for those credits of $60 in 2030 rising slowly and reaching $110 by 2040. So the bottom line of all that is that it is a really positive signal to the market that the two governments have now agreed on the schedule all the way out into 2040. The concern I have is that there is likely to be a much more modest set of emissions projects that will be made economic through this more modest price schedule. And what will be particularly key now is trying to make sure this deal lasts long enough so that the higher prices that could unlock the larger scale investment actually take place throughout the 2030s.

Tom Heintzman: Okay, so let’s dig into those. First of all, the pricing. So I think what I’m hearing, correct me if I’m wrong, but headline prices of $130 to $140, depending on 2030 and 2040, but actual credits trading at $60 to $110. So I guess first question is, does that mean effectively the cost of compliance is $60 to $110, not the $130 to $140 that we read in the headlines? And is that substantial enough to have impact while not handicapping industry or at least not crippling industry?

Michael Bernstein: Yeah, so I think there’s kind of two ways to answer that question. First, I would say that the actual prices will only be high enough to incentivize broad scale decarbonization. Think tens of millions of tons of emissions reductions. And just for context, the entire system in Alberta, the TIER system, regulates something like 120 million tons of emissions from Alberta industry. And so the ultimate goal is to see, many dozens of megatons of projects move forward. We’re not going to get there until prices get into the triple digits at least. And that’s that that’s late into the 2030s. The one important exception to that, though, and I think it’s an underappreciated and under discussed part of the deal so far, is that there were some changes announced also to the Clean Fuel Regulation. This is a federal regulation as part of the deal that allow oil companies, both upstream and throughout the oil sector’s supply chain, to generate more revenue from carbon capture by selling credits into the Clean Fuel Regulation market. Based on today’s prices for those credits, that change would provide about $80 a ton in extra incentives for carbon capture. And I mention this because when you combine that incentive from the Clean Fuel Regulation with the $60 in 2030 from carbon pricing and rising throughout the decade, you start to get into a zone where it becomes economic to do carbon capture in the oil sector, including the much discussed Pathways project that is an effort to decarbonize the oil sands. So I think for the oil sector, we actually could get a business case in the near term for decarbonization. For the rest of industry, I think we’ll need to wait into the 2030s before the business case really pencils.

Tom Heintzman: And just for clarity, so the oil sector then would be allowed to combine the carbon price or the savings from paying the carbon price, the $60 to $110, with the revenue that it would get from the Clean Fuel Regulations by selling its credits into that construct as well?

Michael Bernstein: That’s right. Yeah, the two credits are stackable as it’s called, which means that you could add that $60 and $80 together and now you’ve got $140, a ton of revenue potential to do carbon capture. And that starts to get, I think, quite interesting.

Tom Heintzman: So Michael, there was a lot of talk leading up to these discussions about stringency and measures that would have to be taken in order to assure the market participants that there wouldn’t be a flood of credits. So how is stringency being handled and what guarantee do investors have that prices won’t crater and they’ll have invested perhaps unnecessarily, certainly from an economic perspective, if the price of credits drop in five or 10 years, what guarantee do they give to investors over the long run?

Michael Bernstein: Yeah, so the stringency, as some of your listeners will likely know, is really about what percentage of a facility’s emissions are they going to be asked to pay a carbon charge on. And this deal did lay out a schedule, as you indicated, for stringency that differs by sector, but mostly is in the 1 to 2 % range a year. Now that’s…that’s kind of okay. It’s modest but a respectable level of stringency. The thing though that I think matters even more than that as part of this deal is that the Alberta government has agreed, at least in concept on paper, to regulate a minimum price for credits. And that means that they actually wouldn’t allow credits to be traded for anything lower than that price floor, which again would be $60 in 2030 and rising from there. So what that effectively means is if you’re considering a decarbonization project as a heavy industrial facility, you now can be confident, assuming that regulation stays in place, and I’ll come back to that in a minute because that is an important caveat, but assuming that stays in place, you can be confident that had you not gone ahead with your decarbonization project, you would be facing a minimum of $60 in cost in order to buy credits because you simply wouldn’t be allowed to buy them for any less. So that does add some certainty to the case for decarbonization and it actually removes the kind of reliance on stringency to ensure that the credit prices steadily rise. Now, let’s come back to the question of, How can investors actually have the certainty they need and even be confident that that regulation would stay in place? Well, the answer to that, which I was quite encouraged to see in the deal, is that the two governments agreed to jointly offer a form of insurance on the carbon markets known as carbon contracts for difference. And briefly, what that does is it says that the governments will compensate emitters for any gap between a credit price that the governments are guaranteeing within the contract and the price that actually transpires in the market. So imagine, for example, just to illustrate that the contract said the governments are going to backstop $100 a ton in credit values in 2030. Well, if that If those credits turn out to be trading at $65 a ton, the governments will collectively make up that $35 gap and pay the companies out for that. And that is a way of keeping them, meaning the two governments, financially motivated to stick to the terms of the deal and strengthen the credit values over time so that they aren’t forced to pay out to companies.

Tom Heintzman: Michael, there’s a lot there. I want to just touch on these three points and then I think we’re going to have to wrap it up. So first, just double click on stringency, second, double click on the minimum price and third, double click on the contracts for differences or CCFDs as they’re sometimes referred to. So on stringency, you mentioned that today roughly call it 20 % of emissions would be regulated. And then you mentioned one to 2%. That’s an increase so that that 20 % would be rising by one to two percent per year over the life of the agreement. Is that correct?

Michael Bernstein: Yeah, that’s right.

Tom Heintzman: Okay. And then on the minimum price, now when the government sets a minimum price, the assumption is the price could be lower if supply were allowed to meet demand. So what that implies is there are situations in which there could be a lot more supply of credits and they would trade for lower than the $60 to $110, but the government’s artificially imposing a minimum price floor. Who gets to sell then in that construct? Because in theory, you’ve got a surplus of supply and supplies not being allowed to meet demand because the price floor cannot fall that far. So there’s going to be excess supply. How did the sellers decide who gets the $60 to $110 and who doesn’t?

Michael Bernstein: Yeah, it’s a really good point. The short answer is it hasn’t been defined yet. There are a lot of details still within this deal that need to be worked out. My own preference would certainly be to see stringency continue to rise over and above what we’ve seen in the deal. Because again, all of these things are kind of minimum levels. But in the absence of that, what I would expect is that you may see some offset developers credits possibly lose priority because the dynamic you have in the market today is that many of the companies who have been able to generate credits within the system are actually holding them to use them against compliance obligations they will either have in future years or that they have in other facilities within their network. Think for example, the oil sands companies who each have multiple facilities, some of which might be generating credits and others that might be paying the carbon price if they didn’t have those credits. So that’s my expectation, but this is a question that still needs to be worked out. And certainly I think for everyone, the optimal outcome would be to have prices trading well above those regulated floor prices so that the market can clear and decarbonization projects can move forward.

Tom Heintzman: Okay. And then last, well, maybe second last, because I won’t be able to resist the final question. The second last question, CCFDs, carbon contracts for differences. So maybe just walk us through, you gave a mathematical example, but what happens if the two governments have both pledged, I believe it’s $600 million each, but you can tell me whether I’m mistaken. What happens if that amount is used up and there’s more than 1.2 billion of shortfall in pricing. Does the market just then collapse after that? How do investors get comfortable that there’s going to be enough of a backstop to, and remember, they’re investing for the 20, 30 year timeframe and billions and billions of dollars. How do they get comfortable that this 1.2 billion won’t get eaten up rapidly and then their investment ultimately doesn’t make economic sense.

Michael Bernstein: Yeah, this is such an important question. I mean, to my mind, this is probably the most important question that still needs to be resolved because the way that this deal ends up still being a good deal from a decarbonization perspective. And to be clear, I think it’s good for other reasons that we probably won’t get into today, like economic growth and national unity. But from a decarbonization perspective, this deal really only works if it sticks and if it sticks well into the 2030s and the carbon contracts for difference are the way at least from a financial perspective that the parties will remain motivated to stick with the deal. And so my hope is that and you are right the agreement did contemplate $600 million in potential liability for both parties respectively, so $1.2 billion in total liability. And what I believe is critical as the two parties sit down to hash out the next level of details on how they’re going to roll out these contracts is that they are going to have to forgo capping their liability at $1.2 billion in the event that either party reneges on their commitments in the agreement. there is some ambiguity in the agreement today in that provision where my hope and what I will be pushing both governments to try to do is to say it is fine to cap your liability at $600 million a year under a circumstance where you remain committed to the provisions of the agreement, including the price floor and other similar provisions. But if Alberta were to cancel the price floor, for example, or if it were to let’s say in an extreme case, cancel TIER altogether, it would be necessary for anyone who signed a contract, any emitter, to be fully compensated for that result. And those costs would far exceed either the $600 million or the $1.2 billion. So that’s something I will be focused on and I would encourage your listeners to watch out for as well.

Tom Heintzman: We’ll have you back on the show when all these details emerge. So last question, Michael, you’re a school teacher and you’re evaluating this deal from all perspectives, from economic perspective, from a national solidarity perspective. You’re the prime minister -do you give this deal an A? Do you give it a B, C, D, E, F?

Michael Bernstein: Yeah, I was very curious to know what your final question was. It sounded like it was going to be a challenging one and I think you’ve come up with one. But to try to sum it up, I think I’d probably put it at a B or a B minus, all things considered. With, and if I could caveat this a bit, I’ll say with the potential for this to become an A, if the deal sticks for a decade or more. That’s really challenging in a political environment like the one we have. But if we can actually make this work, I will come back and upgrade the grade later.

Tom Heintzman: Fantastic. Well, I can’t promise we’ll have you back on in a decade. I don’t know that either of us will be doing the same job, but here’s hoping. Great. Well, fantastic to have you on the show as always. And we’re honoured that you would make time. I know you’re doing a lot of big press gigs these days. And so thanks for joining and thanks to the listeners for tuning in.

Michael Bernstein: Yeah, my pleasure. Really good to talk to you.

Tom Heintzman: Please join us next time as we tackle some of sustainability’s biggest questions, providing you different perspectives to help you move forward. I’m your host, Tom Heintzman, and this is The Sustainability Agenda.

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Carbon pricing in focus: Does the Canada-Alberta deal make the grade?

Tom Heintzman

MD & Vice-Chair, Energy Transition & Sustainability

CIBC Capital Markets

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