Upstream Methane Abatement Toolbox: Carbon pricing

Overview

Since 2019, every jurisdiction in Canada has had a price on carbon pollution. Carbon pricing covers approximately 80% of Canada’s GHG emissions. The Government of Canada’s approach is flexible: provinces and territories can implement their own carbon pricing system or can choose the federal pricing system. The federal government sets minimum national stringency standards (the federal ‘benchmark’), that all systems must meet to ensure they are comparable and effective in reducing greenhouse gas emissions. This includes a minimum carbon price (for direct pricing systems) of CAD$65/t currently (2023) rising by $15/year to $170 in 2030. If a province or territory decides not to price pollution, or proposes a system that does not meet these standards, the federal ‘backstop’ carbon pricing system is put in place. The federal carbon pricing system consist of two parts: a fuel charge on fossil fuels and a regulated performance-based trading system for emissions intensive, trade exposed industries – the Output-based Pricing System.

Methane emissions can be priced in a number of ways under carbon pricing systems, including direct inclusion under industrial pricing systems and through the use of offsets. Different carbon pricing systems in Canada take different approaches to methane.

Key points of interest

Implicated parties

Carbon pricing is economy-wide, covering approximately 80% of GHG emissions in Canada, and implemented through a mixture of federal and provincial/territorial systems. Implicated parties regulated under either federal/provincial output-based pricing systems include emissions intensive and trade exposed (EITE) industries; the federal fuel charge is applied to fuel producers and distributors.

Impact

Inclusion of methane emissions under carbon pricing systems creates financial incentives to reduce those emissions. The use of an offset approach allows flexibility for industries to voluntarily take action to reduce methane emissions and be compensated through offset credit sales into compliance credit markets. As new methane regulations come into effect, offset protocols will be updated to ensure they continue to credit only those methane reductions that exceed action required by law.

Challenges

• Cost concerns – Canada’s approach to pricing carbon pollution is designed to make life affordable while growing a clean economy by providing money upfront to families, leaving most families better off, with low- and middle-income families benefiting the most. In provinces where the federal system is in place and fuel charge proceeds are returned through rebate payments to households– called Canada Carbon Rebate (CCR) – 8 out of 10 households get more money back than they spend on the fuel charge. Low- and middle-income households in these provinces will benefit the most as they tend to spend less on energy-intensive goods, while still collecting the full amount of the pollution price rebate.
• Carbon leakage and competitiveness risks – federal, provincial and territorial carbon pricing systems in Canada are designed to mitigate competitiveness and carbon leakage risks, including for example through output-based pricing systems for emission-intensive, trade-exposed industries. Canada is also working with international partners to promote the expansion of carbon pollution pricing globally, to help mitigate risks of carbon leakage, including through the Global Carbon Pricing Challenge. 
• Methodological challenges - The uncertainties surrounding quantifying fugitive and venting methane emissions makes it challenging to include under pricing approaches.

Lessons learned

Market-based approaches like carbon pricing can be combined with other regulatory tools in a complementary manner to provide additional incentives to reduce methane emissions.

Additional resources

• How carbon pricing works
• The Government of Canada strengthens pollution pricing across the country
• Output-Based Pricing System