Carney Takes The Helm: What’s Next for Canada’s Carbon Policy?

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Last Updated on: 10th March 2025, 07:29 pm

With Mark Carney stepping in as the new leader of the federal Liberal Party, Canada’s carbon pricing system faces a critical juncture. Long a proponent of market-driven climate policy, Carney inherits a system designed to reduce emissions while maintaining economic competitiveness. The current framework consists of a consumer-facing fuel charge, an output-based pricing system for industry, and regulatory mechanisms like the Clean Fuel Regulations. Each component plays a role in achieving Canada’s climate targets, but with growing political opposition, particularly to the consumer carbon price, adjustments are inevitable.

Consumer Carbon Price

The consumer carbon price applies to gasoline, diesel, propane, and natural gas, levying a charge at the distributor level that is passed through to end users. At the current rate of $65 per tonne of CO₂, this translates to about 14 cents per liter of gasoline, 12 cents per liter of diesel, and approximately $1.30 per gigajoule of natural gas. These costs will rise in increments to reach $170 per tonne by 2030.

Revenues from the charge are redistributed back to households via quarterly rebates, with most receiving more back than they pay. Households in rural and remote areas, however, often face higher transportation and heating costs, meaning they can experience a net financial loss despite rebates. The distribution of rebates also results in different impacts across income brackets: lower-income households generally come out ahead, as they use less energy on average and receive equal or greater rebates relative to their costs, while higher-income households, with larger homes and more frequent vehicle use, see greater direct costs.

This price signal is designed to encourage lower-carbon choices, from driving less to upgrading home heating systems. Electric vehicle adoption, heat pump installations, and home energy efficiency retrofits have all increased in provinces with carbon pricing, with national heat pump sales rising by 50% since 2021. In British Columbia, where carbon pricing has been in place the longest, per capita gasoline consumption has remained below the national average since its introduction.

Despite these benefits, opposition to the consumer carbon tax has intensified, particularly in regions dependent on fossil fuels for transportation and heating. The cost disparity between urban and rural households, combined with political resistance from provinces with heavy oil and gas industries, has led to growing calls for its removal. Mark Carney himself has acknowledged that the consumer carbon price is unsalvageable in its current form, stating, “It has served its purpose but is now too politically divisive to remain intact.” His position suggests that Canada must transition away from direct consumer carbon pricing while ensuring emissions reductions continue through industrial pricing, regulatory mandates, and incentives for clean energy adoption. The challenge remains: without this price signal, emissions reductions from consumer energy use are expected to slow, requiring alternative mechanisms to maintain progress.

If the consumer carbon price were eliminated, Canada’s emissions trajectory would shift. Environment Canada modeling projects that carbon pricing will contribute nearly 80 million tonnes of CO₂e reductions by 2030. Without it, the gap to meet the 2030 climate target widens significantly. Removing the carbon charge on natural gas alone is estimated to increase emissions by 4.5 million tonnes in 2030. Transportation and home heating sectors would see the most immediate increases, as price signals disappear and fossil fuel consumption remains artificially cheap. British Columbia’s experience with carbon pricing, where per capita fuel use declined relative to the rest of Canada after its carbon tax was introduced, suggests that reversing the policy would likely increase emissions rather than simply leaving them unchanged.

Industrial Output-Based Pricing System

For large industrial emitters, the federal government applies an Output-Based Pricing System (OBPS), which operates at the same carbon price level as the consumer charge, currently set at $65 per tonne of CO₂ and rising to $170 per tonne by 2030. Instead of taxing every tonne of emissions, facilities are assigned performance benchmarks based on their sector’s emissions intensity. Companies exceeding their benchmark must purchase credits or pay the carbon price, while those under the threshold earn tradable credits. This system allows industries to avoid paying full carbon costs on every unit of emissions while still creating an incentive to improve efficiency.

For example, a cement plant emitting 800 kg of CO₂ per tonne of product in a sector where the benchmark is 700 kg per tonne would need to pay the carbon price on the excess 100 kg per tonne produced. At $65 per tonne, this equates to $6.50 per tonne of cement, with the cost rising as the price escalates. In contrast, a more efficient facility emitting 650 kg per tonne would generate surplus credits, which it could sell to less efficient competitors.

This structure has led to significant emission reductions in some industries while allowing others to continue high-carbon operations at a financial penalty. Government modeling suggests that OBPS will contribute approximately 30 million tonnes of CO₂e reductions by 2030, though tightening the benchmarks could increase this number. The system remains a politically palatable alternative to a blanket industrial carbon tax, but its effectiveness depends on strict benchmark adjustments and compliance enforcement.

Despite industrial pricing mechanisms, Canada’s oil and gas sector has experienced a notable increase in greenhouse gas emissions over recent decades. In 1990, emissions from this sector were approximately 106 million tonnes of CO₂ equivalent, rising to 193 million tonnes by 2018 — a substantial 82% increase. This surge is primarily attributed to the expansion of oil sands operations and increased natural gas production.

The surge also meant Canada’s greenhouse gas emissions rose even as every other segment of society and industry’s emissions fell.

Clean Fuel Regulations

The Clean Fuel Regulations further impose an implicit carbon cost by requiring fuel producers to reduce the carbon intensity of gasoline and diesel over time, compelling refiners and importers to blend cleaner fuels or purchase compliance credits.

The regulation sets a target of reducing the carbon intensity of transportation fuels by 14 grams of CO₂ per megajoule by 2030, gradually tightening each year. Compliance options include increasing biofuel blending, improving refining efficiency, or purchasing credits from clean energy projects. Notably, exemptions apply to fuels used in certain sectors, such as aviation and marine transport, where alternative low-carbon fuels remain limited.

For example, refiners blending ethanol into gasoline can earn credits, while those failing to meet intensity targets must pay into a compliance pool. The regulation is expected to cut emissions by approximately 20 million tonnes annually by 2030, with the greatest impact coming from reduced fossil fuel demand in transportation. However, challenges persist, particularly in rural areas where alternative fuel infrastructure is lacking, and for industries heavily reliant on diesel, such as trucking and agriculture, where cost increases may be more pronounced.

Provincial Variance

Under the federal framework, provinces and territories are allowed to implement their own carbon pricing systems as long as they meet or exceed federal stringency requirements. This flexibility has led to a patchwork of approaches across Canada.

British Columbia has had a broad-based carbon tax since 2008, currently set at $65 per tonne of CO₂, with scheduled increases in line with federal targets.

Quebec operates a cap-and-trade system linked to California’s carbon market, where companies buy and trade emissions allowances.

Ontario initially had a cap-and-trade program but dismantled it in 2018, opting instead for the federally imposed pricing system.

Alberta follows a hybrid approach, maintaining its own carbon pricing system for large industrial emitters — the Technology Innovation and Emissions Reduction (TIER) program — while the federal fuel charge applies to consumers.

Saskatchewan and Manitoba have also designed their own large-emitter pricing programs, while the federal system applies to consumer fuel use.

The Atlantic provinces — Newfoundland and Labrador, Prince Edward Island, Nova Scotia, and New Brunswick –previously resisted carbon pricing but introduced their own plans to meet federal requirements.

These provincial variations mean that while carbon pricing remains a national policy, its implementation is politically and economically tailored to regional circumstances. Some provinces, particularly those with large fossil fuel industries, have fought against higher carbon pricing, leading to political tensions over federal climate mandates.

Mark Carney’s shift away from consumer carbon pricing raises questions about whether provincial autonomy in pricing will be expanded or if new federal mechanisms will be introduced to ensure emissions reductions remain on track across the country. If the consumer charge is repealed, other measures will have to be strengthened quickly to avoid reversing progress on emissions reductions. Whether through tightening industrial pricing, expanding regulatory controls, or shifting to an incentive-driven model, the fundamental reality remains unchanged: cutting carbon requires consistent and credible policies. Without them, Canada risks falling further behind on its climate commitments, forcing future governments to implement even more drastic measures to catch up.

Regulatory Wedges

Politically, abandoning the consumer carbon price would require compensatory measures to prevent an emissions rebound. One option is tightening the OBPS for industrial emitters by lowering free allowances and increasing carbon charges on big polluters. This would shift more of the emissions-reduction burden to large industries while maintaining Canada’s overall decarbonization pathway. Another lever is regulatory mandates: zero-emission vehicle requirements, stricter building codes, and an electricity-sector emissions cap would all force emissions downward without relying on a price signal. Scaling up consumer-facing subsidies for electric vehicles, heat pumps, and home retrofits would provide the “carrot” to replace the carbon tax’s “stick.” The risk is that regulatory approaches tend to be more economically inefficient, driving higher compliance costs than a simple carbon price.

Ontario and Alberta’s phase-out of coal-fired power generation provides a clear example of the impact regulatory mandates can have. Ontario was the first jurisdiction in North America to eliminate coal from its electricity grid, completing the transition by 2014. This shift, driven by government mandates and investment in renewables, cut the province’s power sector emissions by approximately 30 megatonnes annually, equivalent to removing nearly seven million cars from the road each year.

Alberta, once the province most dependent on coal for electricity, accelerated its phase-out under a combination of federal regulations and provincial policy, reducing coal-fired generation from 80% of its grid in 2015 to less than 10% by 2023. The final coal plant in Alberta was shut down on June 16, 2024, marking the official end of coal-fired electricity generation in the province. This transition was achieved through a mix of converting coal plants to natural gas and outright decommissioning of facilities. The move has resulted in annual emissions reductions of over 40 megatonnes.

The combined phase-outs of Ontario and Alberta have led to an estimated reduction of 70 megatonnes of CO₂ per year, a major contributor to Canada’s overall emissions decline in the electricity sector. These closures illustrate how policy-driven energy transitions can achieve substantial emissions cuts, although questions remain about the long-term role of natural gas in Alberta’s grid.

These examples highlight how stringent mandates can deliver rapid emissions reductions even in fossil-fuel-heavy economies, though they often require significant financial and political capital to implement successfully. They also underscore the reality that without continued policy intervention, emissions reductions will not occur at the necessary scale, as market forces alone would not have driven coal’s decline this quickly in either province.

Implications For European Trade

If Canada abandons its consumer carbon price, Europe’s Carbon Border Adjustment Mechanism (CBAM) could create new trade risks for Canadian exporters. The CBAM is designed to prevent carbon leakage by imposing a levy on imported goods from countries with weaker carbon pricing policies. It initially covers high-emission industries like steel, aluminum, cement, fertilizers, electricity, and hydrogen, with the possibility of expanding to other sectors. Since Canada currently has both consumer and industrial carbon pricing, its industries are somewhat insulated from CBAM tariffs. However, if the consumer carbon price is removed and not replaced with an equally stringent mechanism, the EU may view Canada’s climate policy as insufficient, subjecting Canadian exports to border taxes.

The implications could be particularly significant for Canada’s steel and aluminum industries, which rely heavily on exports to Europe. Without a strong carbon price at home, these industries could face higher costs when selling to the EU, potentially making them less competitive against European producers who already pay for carbon under the EU Emissions Trading System. The Canadian government would need to either tighten industrial carbon pricing or negotiate an exemption based on regulatory measures like clean fuel standards and emissions caps. Otherwise, the CBAM could act as a de facto external carbon tax on Canadian firms, shifting the cost burden from domestic consumers to exporters while reducing Canada’s control over its own climate policy.

Carney’s Position

Mark Carney, former Governor of the Bank of Canada and the Bank of England, has long been a leading voice in climate finance and an advocate for carbon pricing as an essential tool for cutting emissions. As the UN Special Envoy for Climate Action and Finance, he has worked to align financial markets with the net-zero transition, helping to establish the Task Force on Climate-related Financial Disclosures (TCFD) and co-chairing the Glasgow Financial Alliance for Net Zero (GFANZ). His efforts have been instrumental in pushing global financial institutions to integrate climate risk into investment decisions and scale up financing for clean energy projects. Carney’s advocacy has focused on leveraging market mechanisms to drive emissions reductions, emphasizing that pricing carbon is one of the most effective ways to incentivize decarbonization while maintaining economic growth.

While he initially supported Canada’s rising carbon price, he has recently acknowledged its political difficulties. He argues for shifting the burden away from consumers and onto industry, proposing that big polluters should pay more while consumers receive greater incentives for greener choices. His framework suggests using revenue from industrial carbon pricing to fund direct consumer rebates for EVs, home efficiency upgrades, and other low-carbon technologies. Carney’s broader view is that decarbonization is not a trade-off between climate action and economic prosperity, but rather a necessary investment in long-term growth. He envisions a future where financial markets integrate carbon risk fully, ensuring that capital flows toward clean energy and low-emission industries.

Canada’s carbon pricing system is at a crossroads. If the consumer charge is repealed, other measures will have to be strengthened quickly to avoid reversing progress on emissions reductions. Whether through tightening industrial pricing, expanding regulatory controls, or shifting to an incentive-driven model, the fundamental reality remains unchanged: cutting carbon requires consistent and credible policies. Without them, Canada risks falling further behind on its climate commitments, forcing future governments to implement even more drastic measures to catch up.