Canada’s industrial carbon pricing systems are designed to drive emissions reductions in the most cost-effective way by setting sector-specific emissions intensity benchmarks. Facilities emitting less than their benchmark earn tradable credits, while those exceeding it must pay for their excess emissions. This system encourages investment in clean technologies and improved efficiency, while providing flexibility for emissions-intensive and trade-exposed sectors. The federal government has established a minimum national standard for industrial carbon pricing through its Federal Benchmark, aiming to ensure consistent policy stringency across provinces and territories.
The Liberal government plans to strengthen and extend the Output-Based Pricing System (OBPS) for large emitters through 2035, reinforcing carbon pricing as a central pillar of Canada’s climate strategy. Mark Carney’s “Canada Strong” plan calls for a combination of strengthened industrial carbon pricing, the development of a Carbon Border Adjustment Mechanism (CBAM), and expanded financial tools such as Carbon Contracts for Difference (CCfDs) and Investment Tax Credits (ITCs) to support low-carbon investments.
Attention is turning to how the oil and gas sector greenhouse gas pollution cap (“the cap”) could overlap with existing carbon pricing policies. Originally introduced by the Trudeau government, the cap seeks to reduce upstream oil and gas sector emissions through a cap-and-trade system layered on top of existing industrial carbon pricing, with select compliance offsets eligible for use under both systems. This was met with strong opposition from provinces such as Alberta, which launched a ‘Scrap the Cap’ campaign last year.
If implemented, aligning the cap with existing carbon pricing systems would require a careful balancing act. Recent analysis conducted by Navius Research and the Canadian Climate Institute indicate that the emissions reductions from the cap do not simply stack on top of reductions driven by OBPS. Instead, the two policies may overlap in ways that reduce their combined effectiveness.
Another key challenge is how the cap affects the carbon market. As oil and gas facilities reduce their emissions to comply with the cap, they could generate surplus credits within existing industrial emitter carbon programs. This additional supply of credits could put downward pressure on carbon credit prices, especially if performance standards are not tightened further to absorb the surplus.
Carney has indicated that the government is amenable to reconsidering the cap, provided that the industry delivers on carbon capture projects. Removing the cap could position the Liberal government well for the 2026 federal carbon pricing benchmark review, which they will likely use to strengthen the stringency and consistency of industrial carbon pricing across provinces. This will put pressure on provinces operating parallel programs to align with the federal benchmark. This could trigger tensions with provinces such as Alberta, which are seeking to have more control over their future program design.
In the near term, refining industrial carbon pricing stringency remains a necessary step to ensure the integrity of Canada’s carbon markets and to provide the policy certainty needed for investment. However, the interaction effects of layering additional policies like the cap underscore the importance of thoughtful policy design and intergovernmental coordination to avoid unintended consequences.
For more information on the interaction between carbon pricing levers or to understand the potential implications of the 2026 federal benchmark review, please reach out to a member of our team. ClearBlue will continue to monitor these developments and provide updates.