John Woodside, Canada’s National Observer
The federal government is looking for feedback on how a new era of carbon pricing should work.
In a discussion paper published on Dec. 19, Environment and Climate Change Canada outlined the current carbon pricing landscape and said it is soliciting feedback to improve carbon market transparency, investment incentives and regulatory efficiency.
Prime Minister Mark Carney campaigned on strengthening industrial carbon pricing and is making it a centrepiece of his climate competitiveness strategy. But he has also said he is a proponent of cooperative federalism and will discuss potential changes with provincial and territorial governments before acting. That’s in keeping with his recent deal with Alberta to support a pipeline in exchange for the province’s support of industrial carbon pricing — a political strategy that inflamed tensions with British Columbia and coastal First Nations.
Reviewing the federal benchmark — the minimum carbon price provinces and territories must meet — by seeking input on its effectiveness is part of the government’s normal procedures to periodically tweak the carbon pricing system, but one expert says that process has been kicked into overdrive thanks to political demands.
Dave Sawyer, principal economist with the Canadian Climate Institute, told Canada’s National Observer the benchmark review was on track for an update in 2027, but with Carney’s government weakening other climate policies in favour of betting big on industrial carbon pricing, the review has been accelerated.
“The political process is circumventing the technical process a little bit, and the bigger concern is we get into this ad-hoc negotiated world where each jurisdiction gets its little carve-out, which undermines all policy,” he said.
The federal government sets a minimum price per tonne of pollution (set to rise to $110 per tonne in 2026), but the provinces and territories are free to design their own systems, provided they meet the backstop price set by Ottawa. The government has committed itself to imposing the backstop whenever a provincial or territorial system falls below it, but Environment and Climate Change Minister Julie Dabrusin recently told a House of Commons committee the government would rather negotiate with provinces and territories than enforce the backstop, something the Supreme Court of Canada has confirmed it has the power to do.
In theory, industrial carbon pricing is a workhorse climate policy for Canada. But a fractured regulatory landscape and some provinces’ hostility to the policy is undermining it and now the feds are preparing to step in.
It’s not a hypothetical situation. In April, Saskatchewan openly defied the federal backstop when Premier Scott Moe announced the province would pause the industrial carbon price — essentially setting the price to zero. In December, a week after signing an agreement to negotiate a new industrial price with Ottawa, Alberta Premier Danielle Smith signed an order-in-council that will flood its carbon markets with extra credits, driving prices down even further (they’re currently trading at roughly $30 per tonne, Sawyer said).
Sawyer said in Ontario, the system is so opaque there’s no way to even tell if it’s working. These major challenges demand a process to fix them, he said.
How hard will Carney push?
Carney inherited a fractured regulatory labyrinth when it comes to carbon pricing. British Columbia, Alberta, Saskatchewan, Ontario, New Brunswick, Nova Scotia and Newfoundland and Labrador each have their own provincial systems; Manitoba, Prince Edward Island, Yukon and Nunavut use the federal system; Northwest Territories uses a tax and rebate system; and Quebec uses a cap-and-trade system linked with California.
As a result, regulatory challenges pile up.
“The problem is if you’re a company working in a bunch of provinces, you’ve got very different rules,” Sawyer said. “So it makes a lot of sense for the federal government to standardize these systems and get better alignment so there’re efficiency gains, there’re regulatory red tape gains, and there’re competitiveness gains.”
One option worth considering — and that the Canadian Climate Institute, RBC and a group of companies and industry associations (including the Canadian Renewable Energy Association, the Canadian Steel Producers Association and cement giant Lafarge) have each separately called for — is to link provincial carbon markets so credits could be traded across borders to overcome the patchwork landscape.
“The challenge of course is the provinces have shared jurisdiction, so the federal government only has so many levers,” Sawyer said. “We would hope this federal government would start imposing its will a little bit to just clean these systems up.”
Solving this problem is crucial to address climate change, Sawyer said. More than 40 per cent of the entire country’s emissions are covered by these industrial carbon pricing systems and they target industries that are not well covered by other regulations.
It’s also a major trade diversification issue, he said. Japan and Europe both have “carbon border adjustment mechanisms” — essentially carbon tariffs that impose steeper costs for goods with higher emissions — which mean Canada will require strong emission reduction regulations to be globally competitive.
“Canadian industry should lead in providing products that the world economy demands, using the cleanest and most efficient production methods,” Dabrusin said in a statement. “Industrial carbon pricing is a key tool to ensure this.”
In theory, these pricing systems (with the exception of the Northwest Territories) create carbon markets where large emitting companies are required to pay an ever-growing cost per tonne of pollution to incentivize decarbonizing investments. In practice, markets are frequently oversupplied with carbon credits that fall far below the price set by Ottawa, undermining decarbonization goals. The discussion paper says Ottawa is considering introducing a “price collar,” or a minimum price for tradeable credits, to address the problem of carbon prices falling far short of the target. Quebec already has this in place.
Carbon pricing systems designed by provinces tend towards an oversupply of credits because provincial governments don’t want to hurt the competitiveness of their industries, Sawyer explained. But the trade off is that companies don’t make those critical decarbonizing investments when oversupply drives credit prices down. Instead, it’s cheaper to pay the price than to invest in cleaner technologies.
“There’s this balance that needs to happen between let’s not hit the companies too hard … but also we need upward momentum on prices to incentivize investment,” he said. “It’s all about market balance.”
How far will Carney be willing to push provinces and industry to decarbonize after putting the industrial price at the centre of his climate plan? That’s the fundamental question in the discussion paper that goes unanswered.