Canadian Carbon Pricing Requires Attention to Detail – and Sound Economics

To: Prime Minister Mark Carney
From: Grant Bishop, Keith LeBlanc and Brice MacGregor
Date: May 8, 2025
Re: Carbon Pricing Requires Attention to Detail – and Sound Economics

Rewind a year and many Canadians were expecting a carbon tax election. Of course, other threats to Canada’s economy soon overshadowed climate policy as the ballot question. Last week’s election and the government’s suspension of the federal fuel charge (the so-called “carbon tax”) undercut the Conservatives’ “axe the tax” slogan.

Now, this government’s navigation of decarbonizing our economy is pivotal to Canadian competitiveness.

The Liberal platform sketched general plans to strengthen provincial regimes for industrial carbon pricing and to develop a carbon border adjustment mechanism.  There’s merit in both ideas, but we need to get the details right.

Rather than make carbon pricing work effectively, Justin Trudeau’s Liberals proliferated a mishmash of inefficient, sector-specific rules – such as the Clean Electricity Regulations, mandate for zero-emission vehicles, and cap on greenhouse gases from oil and gas. This pancaking of new regulations confused industry about the value of different investments, paralyzing rather than spurring decarbonization.

Constitutional questions around these regulations also clouded business cases.  While the Supreme Court confirmed federal jurisdiction for carbon pricing, it also held that Ottawa’s move to cram climate considerations into impact assessments was unconstitutional.

Meanwhile, the less-noticed Clean Fuel Regulations (CFR) represent a carbon market likely to be worth more than $10 billion annually by 2030. This regime awards credits for activities like supplying biofuels or recharging electric vehicles. Fuel suppliers then purchase these credits to satisfy obligations for reducing their fuels’ “lifecycle” carbon intensity. Compared to the “carbon tax,” the CFR is arguably a more market-based pricing regime for emission reductions across Canadian fuel consumption.

However, the CFR lacks the transparency for its market to work effectively. In regimes similar to California’s Low Carbon Fuel Standard, market participants have access to monthly data on credit transfers and quarterly data on credit creation. In contrast, since the CFR came into effect in 2022, Ottawa has published only one report on the creation and trading of credits.

Foremost, the new government should press ahead with “bankable” investments, industry needs greater transparency around carbon markets and anchored expectations for future carbon prices. As any experienced central banker certainly understands, policy credibility is essential for markets to work effectively.

As well, Ottawa must carefully balance the costs of carbon pricing to Canada’s producers. In a world where many countries don’t price carbon, heaping higher costs on Canadian industry could price out our exports in overseas markets.

Alberta’s industrial emissions pricing regime under the Technology Innovation and Emission Reduction (TIER) Regulation is ground-zero for these challenges. TIER regulates around 160 million tonnes of emissions annually – representing more than half of emissions from large industrial facilities. Alberta has had industrial carbon pricing since 2007, and these incentives accelerated phase-out of coal-fired generation and a boom in new wind and solar.

But Alberta’s industries – particularly its petroleum, petrochemicals and fertilizer sectors – are also highly trade-exposed. Output-based emission allowances under TIER (i.e., facilities are allocated credits according to a benchmark relative to their production) aim to manage the cost impacts of carbon pricing on industry competitiveness. 

However, the bank of TIER credits has now grown to roughly three times emitters’ total annual obligations, and, despite a $80/tonne “headline” price for 2024 compliance, TIER credit prices have plunged to less than $30 per tonne. A protracted overhang of credits will depress credit prices and, in turn, stymie big investments like carbon capture and storage.

Additionally, quashing the federal fuel charge has knock-on consequences for TIER. Many small oil and gas facilities – representing roughly 20 million tonnes of emissions annually – optionally participated in TIER to avoid the federal fuel charge. But the axing that tax removes this incentive, and, if such facilities opt out of TIER, the bank of credits would be drawn down at a relatively slower pace.

Finally, although attractive on its face, the Liberal proposal for a carbon border adjustment mechanism requires a major overhaul of how industrial carbon pricing works across Canada. 

Arguments for a Canadian CBAM go back more than a decade; the 2021 Budget also floated this measure. The concept is to charge imports based on their assessed carbon intensity to level the playing field with domestic producers.

A CBAM would charge imports and rebate exports so that domestic producers aren’t disadvantaged against foreign competitors who don’t face a carbon price. 

However, anti-discrimination rules under international trade law disallow border adjustments that exceed the charge facing a country’s own producers. And, because of separate provincial regimes for pricing industrial emissions, carbon prices currently differ across the country. 

Therefore, implementing a CBAM requires a single national carbon price, which would mean phasing out provincial industrial carbon pricing regimes. Such a nationalization of carbon pricing would be fraught with technical complexities and tripwires to ignite regional resentment. And it would undoubtedly exacerbate tensions with the Trump administration.

History will almost certainly measure this government on these questions. With emission-intensive goods comprising much of our exports, Canada’s long-run economic destiny depends on decarbonizing efficiently. Policy details matter more than catchy slogans.

Grant Bishop, Keith LeBlanc and Brice MacGregor are partners in Foundation Economics.

To send a comment or leave feedback, email us at blog@cdhowe.org.

The views expressed here are those of the author. The C.D. Howe Institute does not take corporate positions on policy matters.

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