When Varme Energy set out to build a business converting waste into electricity while capturing carbon emissions, it was banking on two things: a strong carbon price and methane regulation credits.

Then the federal government announced new headline prices for carbon and revised its methane regulations. 

The changes, announced in the span of a few months, wiped $265 million in anticipated revenues off the books, according to Varme CEO Sean Collins. 

Varme is part of a coalition of Alberta-based carbon capture companies that travelled to Ottawa this week to tell the federal government their projects are “economically underwater” and they are running out of time. 

Collins says that without a solution, some projects could be cancelled within months, including his own.

Varme Energy needs carbon credits in Alberta’s TIER market (the province’s industrial carbon pricing system) to trade at $118 per tonne just to break even. They are trading at around $30 today, and even Alberta’s planned $60 floor in 2030 still leaves the company in the red.

READ MORE: Ottawa-Alberta carbon price deal brings some market certainty but no climate guarantees

So Collins is lobbying for access to an entirely different carbon market, one designed for fuels, even though his project has nothing to do with fuel. 

“If Canadian domestic carbon removals could sell into the clean fuels market, we’d be financed, our project would make it across the finish line,” he tells iPolitics. 

The clean fuel regulations market was designed to reduce the carbon intensity of liquid fuels, with oil refiners and fuel producers earning and trading credits for cleaner production. 

Credits in that market command a high price, surging past $400 per tonne. Most experts say the market is stable and working relatively well, even if compliance spending is flowing south of the border because domestic ethanol production is limited.

Collins is pitching carbon removal credits in the clean fuel market as a win-win that would redirect compliance spending back into the Canadian economy while putting downward pressure on prices at the pump.

Bigger picture goals

Jamie Stephen, managing director of Torchlight Bioresources, argues the underlying logic is straightforward.

“That is the whole basis for carbon dioxide removals. It’s a permanent removal from the atmosphere that we all share,” he said, adding that the clean fuels market is the “one real functioning carbon market that we have in Canada.”

But opening the clean fuel market to non-related carbon capture projects is not without its skeptics.

“I would have to really think about it,” said Bob Larocque, head of the Canadian Fuels Association. “If there’s no link to fuels, it’s very hard for me to understand how they could participate in that clean fuel regulation.”

Potential impacts on existing market

Michael Berends, CEO and co-founder of carbon market intelligence firm ClearBlue Markets, says the market is functioning as designed and that incoming supply will soon bring prices into balance. 

“The [clean fuel regulations] was designed to reduce the carbon intensity of fuels used in transportation, and it is difficult to see the policy rationale for including emissions reduction projects that have no connection to that objective,” he writes in an email to iPolitics. 

He adds that additional credit supply would likely put downward pressure on prices. 

“The bigger question is whether those credits are aligned with the emissions reductions the [clean fuel regulations] was designed to encourage.” 

Fred Ghatala, president of Advanced Biofuels Canada, argues the door is already open for carbon capture projects that relate to fuels — and that opening it any wider would do more harm than good.

“Any additional credit creation… would weaken the regulation and its intended purpose,” he said.

The Pembina Institute previously warned weakening the industrial carbon price would put some $40 billion worth of low-carbon project investment at risk. 

“The MOU resulted in weaker industrial pricing and methane regulations, and that was largely in support of the oil and gas industry’s wish list, but it is at the expense of other emerging sectors and companies,” said oil and gas program director Janetta McKenzie. 

“It’s unfortunate that we’re in a situation where companies are scrambling to find a subpar solution.”

She says the government will likely want to avoid oversupplying the clean fuel market credits. 

In a statement to iPolitics, a spokesperson for Environment Minister Julie Dabrusin declined to say whether Ottawa is seriously weighing the proposal, offering instead a general response about ongoing industry engagement.

Speaking on background, an industry source tells iPolitics a team with the department intends to discuss carbon capture in the clean fuels market with various stakeholders in the coming weeks.