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The Decarbonized Electrification Pathway: Output-Based Pricing in Canada’s Electricity Sector

In this paper (here) sponsored by the Canadian Council on Renewable Energy, Noel and I look at output-based pricing scenarios for Canada’s electricity sector using an integrated model of Canada’s electricity sector. With significant GHG and energy policy already in place, emissions from Canada’s electricity sector are falling rapidly. Output-based pricing (OBP) applied nationally could reinforce this trend.

We simulate three output-based pricing benchmarks to scale the federal carbon to GHG emissions from fossil generating units:

  • Current grid intensity (0.133 tCO2e/MWh). The carbon price by generating unit is scaled to an intensity benchmark of 0.133 tonnes of CO2e per MWh (tCO2e/MWh), which is our 2015 benchmark intensity for the national grid.

  • Federal (CDN) intensity standard (0.420 tCO2e/MWh). While the Reference Case includes a federal intensity standard of 0.420 t/MWh, we also apply an OBP benchmark set at the federal standard.

  • Fully Price (0.00 tCO2e/MWh). In this case, the full carbon price is applied to all emissions from the electricity sector (except the WCI jurisdictions which have their own price schedule and full auction).

In the scenarios, 1 to 16 Mt CO2e of incremental GHG reductions are achieved annually with output-based pricing. The generation mix is impacted, with natural gas generation falling 2% to 5% by 2030, coal is reduced by 5% to 11% and renewable generation climbs about 0.5% to 2%. These trends would be expected to strengthen beyond 2030 with further increases in a carbon price.

Average electricity prices rise nationally in the order of 1% to 2.4% under the scenarios, assuming household carbon proceeds are rebated lump sum to households. Rebating carbon proceeds to households effectively halves the incidence of the electricity price impacts.

The impact on income for the average Canadian household with carbon proceeds rebated ranges from 0.3% for a scenario that fully prices emissions to 0.1% with an output-based pricing rate set at 0.420 tonnes of CO2e per megawatt hour. This impact will vary by region given differing grid intensities and household energy end-use.

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