The Canadian government’s allocation of C$7 billion to carbon contracts for difference in this fall’s fiscal update will promote a stable environment for companies looking to invest in a low-carbon future, policy experts say.

But climate advocates say the country’s latest economic statement overlooks a critical aspect of the climate crisis—its ongoing financial support for fossil fuel extraction.

Carbon contracts for difference (CFDs) will help future-proof decarbonization efforts by providing industries with financial support in the event that the market price of carbon falls, making them an “important step to unlocking low-carbon investment,” writes Clean Prosperity. “As long as the federal government maintains the carbon pricing trajectory for industry and ensures the proper functioning of carbon markets,” the policy think tank adds, the $7 billion for CFD “can stay in the bank, and eventually be invested elsewhere.”

In that sense, “carbon contracts for difference are like an insurance policy against the future value of carbon credits, which low-carbon projects are counting on for revenue,” Clean Prosperity explains. “If carbon markets function properly, there won’t be any claims, and there won’t be any payouts.”

Uncertainty about the future of carbon pricing has held back investments in long-lasting, low-carbon projects for years. At the root of the instability is lingering uncertainty about future government policies, which could result in lower-than expected carbon prices in years to come. That makes decarbonization investments risky because they only make sense if they are cheaper than what the company will pay later if mitigation efforts fail.

During last week’s fall fiscal update, Finance Minister Chrystia Freeland announced that Ottawa will allocate $7 billion from the $15-billion Canada Growth Fund as the primary funding source for CFDs. Some of those contracts are already being negotiated, CBC reports.

Freeland said the contracts will accelerate a clean energy transition that advances Canada’s climate objectives while making the country more competitive in the race for clean technologies. At the moment, cleantech companies in the United States have the edge, thanks to major subsidies under the Inflation Reduction Act passed last year.

“We are in a race, and we are committed to owning the podium,” Freeland told media. “That is what we saw in the budget in the spring, and that is what we see in this economic update.”

“This is a plan to attract investment,” she added. “It is a plan for the economic transformation, for the industrial transformation. Most of all, it is a plan for good jobs for Canadians today and tomorrow.”

CFDs can make an important difference in Canada, where political disagreements plague the carbon pricing mechanism. Recently, an announcement by Prime Minister Justin Trudeau to exclude home heating oil from carbon pricing—which was widely interpreted as a political move to accommodate the Atlantic provinces—raised doubts about the mechanism’s long-term effectiveness and its possible susceptibility to future changes.

Officials said there would be no further carveouts, but farm groups are pushing for Parliament to pass Bill C-234 to achieve a similar exemption for natural gas and propane used in farming activities. The legislation passed the House and is awaiting a vote by the Senate.

Opposition leader Pierre Poilievre’s perpetual promise to scrap the carbon tax if he is elected prime minister adds further uncertainty about the benefits of investing now in low-carbon technologies. In such a scenario, CFDs would legally obligate the Canadian government to reimburse companies for any shortfalls if carbon pricing drops below current projections, writes iPolitics.

“If the Conservatives come in… and wipe out all our carbon pricing, these contracts are in place so the companies can then sue the government for that difference,” explained Chris Bataille, an adjunct professor at Simon Fraser University and research fellow at Columbia University’s Center on Global Energy Policy.

The contracts are also an easier sell for government leaders, since they’ve been proposed by the Liberals while also fitting well into the Conservative mindset, said Rachel Doran, a former policy advisor to Trudeau who now serves as policy vice-president at Clean Energy Canada. The contracts are oriented to only affect industrial emitters, which is a far less sensitive issue than carbon pricing for individuals.

Even in Alberta, where Premier Danielle Smith staunchly opposes carbon taxation, carbon contracts for difference shouldn’t require federal Conservatives to impose any carbon pricing program.

“I would hesitate to lump it into the current charged environment,” Doran said. “Long story short, industrial pricing is really kind of on a separate track and is an instrument that has been used widely across governments of many political stripes.”

Contracts for difference may also be the “final piece of the puzzle that major oil sands companies need in place to start building massive carbon capture and storage (CCS) projects,” CBC adds.

This potential is at odds with the expectations of advocacy groups that were looking for a fall statement that addressed the central threat of climate change. “The federal fall economic statement failed to address a key root of the climate crisis, the continued flow of Canadian financial capital invested in fossil fuel development and extraction,” Alan Andrews, climate program director at Ecojustice, said in a release.

“Climate change is overwhelmingly caused by burning fossil fuels,” he added, “yet Canadian banks, insurance firms, and pension funds continue to fund oil, gas, and coal, to the tune of billions of dollars each year.”

Ecojustice acknowledged some wins—like Ottawa’s “positive intent to align Canada’s economy with its climate goals” and its commitment to crack down on greenwashing from the oil and gas sector. But it stressed that any progress Canada has made on a green taxonomy for financing “real climate solutions” must have independent climate experts at the table “to ensure that the fossil fuel industry doesn’t write the rulebook.”

Program managers with Environmental Defence Canada pointed to other shortcomings, including failures to expressly tie affordable housing funding to limiting sprawl, stop subsidizing oil and gas, and accelerate funding for public transit.

Another big problem: “Unfortunately, the Government of Canada continues to funnel huge public handouts to oil and gas companies for their false solutions like CCS and hydrogen, despite the massive profits these same companies are raking in,” Environmental Defence said.

Climate Action Network similarly criticized the fall update for supporting “unproven and expensive solutions” like CCS instead of more effective actions, like capping emissions.

Ottawa is promising to finalize an oil and gas sector emissions cap by mid-2024.