Post-Election Questions for Canadian Carbon Pricing

April 30, 2025

A year ago, many Canadians were expecting a “carbon tax election,” as the Conservatives put it. Since then, other threats to Canada’s economy overshadowed climate policy as the ballot question.

And Prime Minister Mark Carney’s Liberals, by pre-emptively nixing the federal fuel charge before the election campaign even began, undercut the Conservatives’ “axe the tax” slogan.

But as Mr. Carney’s party shifts from campaigning to governing after winning Monday’s election, how it navigates decarbonizing our economy is pivotal to Canadian competitiveness – now, and for the long run.

The Liberals’ 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 the government must get the details right.

Mr. Carney will inherit a decade of prime minister Justin Trudeau’s climate policy that emphasized flashy, virtue-signalling announcements and fell short on timely, effective implementation. Rather than make carbon pricing work effectively, the Trudeau Liberals proliferated a mishmash of inefficient, sector-specific rules.

Whether the Clean Electricity Regulations, mandate for zero-emission vehicles or the cap on greenhouse gases from oil and gas, the “pancaking” of new measures confused industry about the financial 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.

Mr. Carney’s government now has an opportunity – and need – to streamline how climate policy works across Canada. Foremost, to press ahead with “bankable” investments, industry needs greater transparency around carbon markets and anchored expectations for future carbon prices. From his time in the trenches of central banking, Mr. Carney certainly understands that policy credibility is essential for markets to work effectively.

As well, Ottawa must carefully balance the costs of carbon pricing to Canada’s producers. Our country’s trade competitiveness has never been so important, and 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 50 per cent of emissions from large industrial facilities nationwide. Alberta has had industrial carbon pricing since 2007, and these incentives accelerated a 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 (facilities are allocated credits according to a benchmark relative to their production) aim to manage the cost effects 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-per-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 such as 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 Ottawa’s carbon levy. But Mr. Carney’s elimination of the levy removes this incentive, and if such facilities opt-out of TIER, the bank of TIER credits would be drawn down at a relatively slower pace. Again, strengthening provincial carbon markets requires diligent attention to detail.

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

Therefore, implementing a Canadian CBAM requires a single national carbon price, which in turn 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 toward Ottawa. And, even if valid under international trade treaties, a Canadian CBAM would undoubtedly exacerbate tensions with U.S. President Donald Trump.

While these issues received scant scrutiny during the election campaign, history will almost certainly measure Mr. Carney on these questions. With emission-intensive goods comprising much of our exports, Canada’s long-run economic destiny depends on decarbonizing efficiently. Here, policy details matter more than catchy slogans.