Navigating Canada's Carbon Markets Ahead of the 2026 Federal Benchmark Review

Canada’s carbon pricing landscape is currently navigating a storm of policy fragmentation, political volatility, and rising international trade pressures. The upcoming 2026 federal carbon pollution pricing benchmark review represents the most important regulatory milestone for industrial carbon pricing. This pivotal moment will determine how Canada modernizes its industrial systems, enhances predictability, and safeguards the competitiveness of its emitters ahead of 2030 and potentially, 2050.

This post summarizes the key insights and forward-looking considerations discussed during a recent ClearBlue Markets webinar, which analyzed market dynamics and potential policy futures, drawing on their Federal Benchmark Equivalency Analysis report (Parts 1 and 2).

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Canada's industrial carbon pricing faces a convergence of pressures from domestic political divergence, wavering trade relations, and the EU's Carbon Border Adjustment Mechanism (CBAM). Watch this webinar prepare for what's next.

The Fragmented Industrial Carbon Pricing Landscape

Despite the federal pricing scheduled to reach CAD $170 per tonne by 2030, the actual trading costs for compliance credits vary significantly across Canada, highlighting profound fragmentation.

As Adi Dunkelman, Director of Policy and Strategy at ClearBlue Markets, noted, the price divergence underscores the urgent need for the upcoming review:

“Although Canada has a clear carbon pricing schedule—increasing by $15 per tonne to reach $170 by 2030 for explicit price-based programs, separate from cap-and-trade programs like Quebec's, the true, market-driven cost of compliance credits trades very significantly across these different provincial systems. This difference highlights the fundamental fragmentation of Canada's carbon pricing programs."

Patchwork Pricing Across Jurisdictions

• Alberta’s TIER Program: Alberta's government announced an indefinite freeze to the TIER compliance price at CAD $95 per tonne, citing industry competitiveness concerns. This political instability, compounded by a substantial credit surplus (approximately 48 million credits in the bank), has pushed TIER credit prices down to roughly CAD $18 per tonne. Proposed amendments, such as a Direct Investment Compliance Pathway (allowing facilities to allocate up to 90% of their obligation to on-site projects), further add to market uncertainty.
• Saskatchewan OBPS: Saskatchewan has essentially paused its system, resulting in a zero-carbon price right now, reflecting continued political posturing between some provinces and the federal government.
• British Columbia’s OBPS (B.C. OBPS): The B.C. OBPS is in its first compliance year, with reports due November 30, 2025. Prices are currently trading around CAD $65, a discount to the CAD $80 regulatory price. The market sees a supply injection from the Great Bear Offset projects.
• Ontario’s EPS (ON EPS): This is described as a very tight market that is extremely opaque. Because offsets are not eligible for compliance, facilities rely on Emission Performance Units (EPUs) or government-purchased Excess Emission Units (EEUs). This tightness drives price momentum, with EPUs currently trading around CAD $72. For the 2023 compliance year, EPUs traded at an average of CAD $57, representing a 13% discount to the CAD $65 government price.
• Federal OBPS (Manitoba, Yukon, Nunavut, PEI): This market is heavily impacted by external price pressures. Recognized Units, which are select offsets from the Alberta TIER system, are eligible for use in the federal OBPS. The inflow of these cheaper Alberta units—an "unintended consequence of a one-way linkage"—is driving down federal OBPS pricing to around CAD $37.50.

Policy Shifts and the Competitiveness Strategy

A major policy change influencing market participation was the removal of the federal fuel charge (consumer-facing carbon tax) on April 1, 2025, which B.C. also followed. The repeal removed the primary financial incentive for facilities to voluntarily opt into industrial emitter programs to avoid the fuel tax.

Facilities that opted in but consistently face a compliance obligation are expected to re-evaluate their participation and potentially opt out. ClearBlue’s analysis suggests this behavioral change could amount to a total loss of 9.5% of overall market demand for the evaluated programs. Jurisdictions, including the federal OBPS and Ontario EPS have already published regulatory amendments to allow facilities to opt out as early as 2025, with Alberta contemplating the same.

The direction for future industrial carbon policy was clarified in the government’s Budget 2025 and the subsequent Climate Competitiveness Strategy, reaffirming commitment to industrial carbon pricing. Key signals include:

• Long-Term Price Trajectory: Developing a post-2030 carbon pricing trajectory to 2050, the first time such long-term language has been used.
• Benchmark Reform: Focus on fixing the benchmark and improving the backstop to strengthen consistency and stringency across jurisdictions.
• Market Harmonization: Explicit language about exploring linking/harmonizing carbon credit markets for the first time from the federal government.
• Clean Economy Investment: Expanding and enhancing Investment Tax Credits (ITCs), particularly for Carbon Capture, Utilization, and Storage (CCUS).
• GHG Regulations Clarity: The strategy provided clarity on regulations, stating that if the Clean Electricity Regulation, methane reduction regulations, and industrial carbon pricing are strengthened, the government will consider removing the oil and gas emissions cap.

Notable omissions from the strategy were the absence of confirmation on the current pricing schedule to 2030 (critical given Alberta’s price freeze) and the non-inclusion of a Canadian Carbon Border Adjustment Mechanism (CBAM).

Modeling Federal Benchmark Equivalency: Future Scenarios

Nico Curtis, Manager of Market Analysis, detailed how ClearBlue modeled potential scenarios for aligning provincial Output-Based Pricing Systems (OBPS) with the federal OBPS structure ahead of the 2026 review. The goal was to quantify the impacts of aligning design variables like emissions thresholds, offset vintage eligibility, stringency, and credit usage rates.

Curtis emphasized the objective of the modeling analysis:

"This quantitative analysis allowed us to explore emerging market trends and examine potential impacts if the B.C. and Alberta programs were harmonized to align with the regulatory structure of the federal OBPS."

Three scenarios were modeled—Low, Middle (aligned with current federal OBPS rules), and High—by varying inputs such as the mandatory Emissions Threshold (100,000 tCO₂e/year in Low vs. 10,000 tCO₂e/year in High) and the Maximum Credit Usage Rate (50% in Low vs. 90% in High).

Alberta TIER Modeling Outcomes

The modeling showed that aligning TIER with federal OBPS design, which generally imposes higher stringency in the near term than the current TIER program design, accelerates the depletion of the current oversupplied credit bank.

• The high stringency drives a significant and immediate increase in credit demand starting in 2026.
• Under the High scenario (90% credit usage rate), the credit bank is depleted as early as 2027.
• The Middle scenario (75% credit usage) delays depletion only slightly to 2028.
• This acceleration highlights the significant influence of stringency and maximum credit usage rates on the long-term balance of the market.

B.C. OBPS Modeling Outcomes

The B.C. OBPS currently has the tightest program stringency, set at 65% for the 2024 compliance year, tighter than the federal OBPS stringency.

• Aligning B.C. with the federal OBPS actually reduces overall program stringency. This reduced stringency cuts the overall program obligation by around 1.5 million tCO₂e, or approximately 26%, emphasizing stringency’s outsized influence on credit demand.
• However, the modeling showed that if the Maximum Credit Usage Rate is increased (e.g., from the existing 30% to 90% in the High scenario), the ensuing increase in credit demand completely offsets the reduced stringency. This shift moves the program from long-term oversupply (under the existing design) to a relatively balanced market position.

Linkage Scenario (TIER and B.C. OBPS)

A scenario modeling full credit fungibility between TIER and B.C. OBPS (excluding Ontario EPS, which does not currently permit offsets) demonstrated that the TIER program dominates the market dynamics due to its sheer size.

TIER's immense demand (40+ million tCO₂e under a federal OBPS aligned stringency) drives the linked market toward long-term undersupply across all cases. While the linkage leverages B.C.’s credit bank and provides short-term relief (delaying the onset of undersupply by approximately one year in the High/Middle scenarios), the long-term result remains structural undersupply.

Looking Ahead: International Risks and Policy Priorities

The 2026 benchmark review occurs just as global trade policies accelerate carbon costs for Canadian exporters.

International Risks and EU CBAM

The definitive period of the EU Carbon Border Adjustment Mechanism (CBAM) begins in 2026, attaching a rising carbon cost to Canadian exports in sectors like iron and steel, aluminum, cement, fertilizers, electricity, and hydrogen.

The central issue for Canadian exporters is the uncertainty surrounding the EU’s recognition of the "carbon price effectively paid" domestically. Since Canadian systems primarily use output-based pricing, and compliance is often satisfied using a mix of payments and credits, complexity arises. Specifically, there is high uncertainty about whether compliance costs met through the use of compliance offsets (common in Alberta TIER) will be recognized by the EU. If not recognized, this could result in residual CBAM charges or double taxation.

Adi Dunkelman underscored the importance of recognizing the complexities of Canada's subnational systems to mitigate this risk:

"To prevent double taxation under the CBAM, the EU must recognize the nuances of Canada’s subnational pricing and compliance offsets. Canadian industry aims to ensure those compliance costs and resulting investments remain domestically to support our economy, rather than being transferred to the European Union."

To become "CBAM-ready," Canada needs to strengthen its output-based pricing architecture by seeking recognition of the OBPS framework, advancing alignment on product benchmarks, and harmonizing core rules across provinces to simplify documentation and compliance.

Strategic Early Wins for Harmonization

To accelerate preparations for the benchmark review, the federal government could pursue several low-hanging fruit opportunities that require political buy-in but would significantly improve consistency:

• Aligning Opt-in/Opt-out Conditions: The rules, thresholds, and timelines for voluntarily entering or exiting programs are currently scattered and inconsistent. Standardizing these rules would reduce administrative burdens and ensure similar industrial activities face comparable carbon cost exposure regardless of jurisdiction.
• Enhancing Transparency and Reporting: Many provincial systems (like Ontario and Saskatchewan) lack comprehensive public data on credit issuance, trading volumes, and pricing. Standardized reporting on macro-level price ranges and market inventories is needed to strengthen confidence and liquidity, and aid in efficient price discovery.
• Considering a Floor Price Mechanism: The federal carbon price is labeled as a minimum national price, but it acts more as a ceiling. As demonstrated by Alberta TIER credits trading as low as CAD $18, the market value of credits can be substantially discounted. An enforceable floor price would stabilize market expectations and protect the integrity of the carbon price signal, providing investor confidence in the long-term value of credits.
• Aligning GHG Quantification Methodologies: Standardizing the measurement, reporting, and verification (MRV) requirements across provinces would streamline reporting, reduce administrative costs for multi-jurisdictional facilities, and ensure credits are based on uniform, credible accounting rules.

What to Watch for in 2026

The period from late 2025 into 2026 is expected to be defined by regulatory activity and stakeholder engagement. Key milestones include:

• Federal Benchmark Review Consultations: Formal guidance and consultations are expected on tightening criteria, future equivalency decisions, and, critically, the consultation for post-2030 pricing.
• Price Trajectory Confirmation: Confirmation is critically needed on the current CAD $170/tonne price trajectory to 2030, which was notably absent from the Climate Competitiveness Strategy.
• Provincial Updates: Key announcements are expected concerning:
  
  
  • Alberta: Details on the proposed Direct Investment Compliance options, guidance on small-emitter opt-outs, and clarity on the TIER price freeze and its federal alignment.
  • Saskatchewan: Clarification on the removal/pause of the OBPS program and the implications for facilities and federal equivalency.
  • Quebec: Regulatory amendments to the Cap-and-Trade program are expected shortly to address allowance surpluses and restore scarcity.
    
    
• Energy Deal Impact: The recent Memorandum of Understanding (MOU) between Prime Minister Carney and Alberta Premier Danielle Smith concerning energy deals suggests that greater provincial collaboration may be forthcoming. This increased cooperation could lead to greater certainty on the price trajectory within Alberta and across Canada.
• Budget Implementation: The implementation of the Climate Competitiveness Strategy and Budget 2025, including the regulatory development and funding for Investment Tax Credits (ITCs), will be closely watched.

The overall federal strategy is to modernize the industrial carbon pricing framework to improve predictability and competitiveness. Strong federal-provincial collaboration and sustained, coordinated advocacy from industry stakeholders are essential to ensure the 2026 benchmark review results in clear, consistent, and competitive carbon pricing systems that support Canada's decarbonization goals.

Conclusion

Canada's industrial carbon pricing system is currently sailing into a storm of complexity. The domestic patchwork system suffers from fragmentation and widening provincial policy divergence, which undermines the predictability and investment confidence essential for long-term decarbonization.

Ahead, the EU Carbon Border Adjustment Mechanism (CBAM) definitive period, beginning in 2026, presents a significant global trade shift risk. Due to the lack of clarity on how the EU will recognize the nuances of subnational systems, especially regarding the use of compliance offsets, Canadian exporters face the prospect of residual charges or double taxation. The primary aim is to ensure compliance costs remain within Canada rather than being transferred to the EU.

The 2026 federal carbon pollution pricing benchmark review represents the critical regulatory milestone needed to stabilize the course. This review must focus on fixing the benchmark by harmonizing core rules, such as standardizing GHG quantification methodologies and improving market transparency. Establishing a clear post-2030 carbon price trajectory and strengthening stringency will modernize the system, ultimately securing Canada’s industrial competitiveness against the trade winds of global policy.

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This article features expertise from our award-winning Advisory and Market Intelligence teams, and findings published in our recent Canadian Federal Benchmark Equivalency Analysis report. Please contact us for sales information.