8 min. read
Summary
- Canadian law requires provinces to implement a carbon pricing system for major industrial polluters as a way to reduce greenhouse gas emissions.
- But Alberta’s carbon pricing system isn’t producing the intended results, in part because its effective carbon price is too low to incentivise companies to reduce their emissions.
- It’s a sticking point in Alberta’s and Canada’s negotiations over whether and how to build a new pipeline to the West Coast. The two jurisdictions missed an April 1, 2026, deadline they set for themselves for agreeing on a new carbon pricing framework in Alberta.
Alberta and the federal government have been negotiating for months in an attempt to finalize a memorandum of understanding meant to pave the way for two key projects: a new pipeline to the West Coast and a massive carbon capture and utilization project in the oilsands.
Some elements of that deal have been hammered out, but one issue has proven tricky — an agreement on the industrial carbon price (once again, it’s not a tax).
The deal signed by Alberta Premier Danielle Smith and Prime Minister Mark Carney last year called for a new framework on industrial carbon pricing by April 1, a deadline that came and went.
So what exactly are they talking about and what could we expect to see?
Here’s a primer on what it all means, from who pays for what to why oil companies really don’t want to spend their own piles of cash.
What is the industrial carbon price?
The consumer carbon price (RIP) is what most people think about when they hear about a carbon tax or a carbon price (it’s truly not a tax, but we’ll call it that, if you insist). That since-deceased mechanism was designed to impose a cost on people to incentivize change. Think about “sin taxes” on cigarettes as one example. Make a tank of gas more expensive and maybe people will drive less.
The industrial price, snappily named the “output-based pricing system” in federal lingo, targets large industrial emitters. Like the consumer version, the price is meant to incentivize emissions reductions. The more efficient a company, the bigger the savings.
Each province manages its own industrial carbon price scheme. They can design their own, as long as its reduction potential is considered equivalent to the federal version, or they can simply use the federal system.
In Alberta, it’s known as the Technology Innovation and Emissions Reduction Regulation, but everyone just calls it TIER.
Okay, but how does the industrial carbon price work, exactly?
This stuff can get tricky, but let’s start easy.
The premise is simple: large-scale industrial emitters (think steel, oil and gas and concrete) create the highest amounts of emissions. To reduce this, the government has put a price per tonne of carbon pollution on a small percentage of emissions these companies produce to incentivize them to adopt cleaner processes that emit less carbon. The money collected from these charges is pooled and distributed back to companies for investments that support this shift in emissions-reduction technologies, like carbon capture and storage.
The government sets a specific price for a tonne of emissions from a company. It also sets a threshold — if you pollute under that threshold, you don’t pay the carbon price, but if you pollute more than that threshold, each extra tonne is priced.
Companies, especially ones with a lot of emissions such as oilsands mines or concrete plants, want to reduce emissions as much as possible to avoid paying too much.
It’s also important to note the price applies to large emitters, with more than 100,000 tonnes of emissions in a year (equivalent to the annual emissions from approximately 22,000 cars).
The federal rules also call for incremental increases to the price to add an extra nudge. Over time, that makes the price of pollution more and more expensive, which is the entire point.
This is a policy designed to reduce pollution. Without it, pollution is free for the polluter, despite its costs to society and the environment.
Carbon pricing is considered by many experts to be the most efficient and least disruptive way to reduce emissions. It’s a conclusion Carney himself came to both in 2015 and 2021.
Recent estimates from the Canadian Climate Institute peg the cost of the carbon price on oil and gas producers at 50 cents per barrel, with low, or non-existent, impacts for consumers across a range of products.
Is carbon pricing all stick? Where’s the carrot?
Glad you asked.
While the carbon price encourages companies to strive to be more efficient to avoid the cost of pollution, they can also reap benefits from going that extra mile.
If a company reduces its emissions below the threshold set by the government, it earns credits. Those credits can then be sold to other companies to bring in real-world revenue.
Specifically, say one company reduces its emissions below the threshold and gathers credits. Another company that is still exceeding the threshold can come along and buy those credits and use them to cover its carbon pricing costs.
Money generated from the carbon price is also reinvested back into research and new technology development.
Win win, right?
Well, this is where things get messy. Especially in Alberta. Because the price is not really the price.
Sorry, the price is not actually the price? What?
The memorandum of understanding between Alberta and Ottawa explicitly calls for an “effective price” of $130 per tonne of emissions. That’s because the price most people know, known as the headline price, isn’t necessarily what a credit will trade for between those two companies we imagined earlier.
The issue is that the Alberta government made changes to its industrial carbon pricing system one week after signing the memorandum that, when announced, flooded the market with credits and undermined their value. It also now allows companies to invest directly in technologies at their facilities instead of paying the carbon price. Those technologies may or may not actually reduce emissions.
Those changes could allow companies to essentially double dip — avoiding the carbon price by investing in technologies directly, and then collecting credits if their emissions drop.
Alberta also froze its headline price at $95 per tonne last year, rather than increasing the price as dictated by the federal equivalency rules. Not only is that a violation, it undermines the stability of the credit market and reduces confidence in the system for companies making decisions based on projected costs and benefits.
There was also a flood of credits from the rapid expansion of renewable power generation.
The end result is that carbon credits were trading as low as $17 per tonne last year. So while the headline price, which everyone understands as the price of carbon per tonne, might be $95, the effective price was, and is, well below. It’s currently trading between $20 and $40 per tonne.
As it stands, it’s very cheap for a facility to buy $20 or $40 credits compared to paying $95, but that’s less good for the efficient facilities selling the credits. And removes the whole point of the carbon price — making it expensive to pollute.
So what’s the plan for the carbon tax?
The agreement between Alberta and Ottawa signed last November called for a framework to increase the effective price to $130 per tonne by 2030 to be finalized on April 1. That didn’t happen.
Both governments say they continue to negotiate a plan, and rumours suggest something coming soon, but there are still no details. Last week, The Globe and Mail reported the speed at which the price will climb is the main sticking point.
One interesting aspect of the memorandum calls for “a financial mechanism to ensure both parties maintain their respective commitments over the long term to provide certainty to industry, and to achieve the intended emissions reductions.”
Translation: that means the agreement could include some sort of financial backstop for the credit market. That could mean the province would guarantee a credit price by offering to buy credits at, say, $130 per tonne.
That would help to stabilize the price and, hopefully, discourage the province from eroding the carbon pricing scheme (again).
So we’re cool then?
The memorandum was framed around building both a new pipeline to the West Coast and the giant carbon capture and utilization project tied to the oilsands, known as the Pathways project.
The Pathways project would get carbon credits, which in turn would make that project more viable and could reduce the amount of public dollars used to build it.
However, the five largest oilsands producers behind the plan have dramatically walked back some of their enthusiasm for investing in emissions reductions.
On May 4, the group, which recently changed its name from the Pathways Alliance to the Oilsands Alliance, said it was still interested in carbon capture and storage.
“However, a project of this size requires supportive regulatory and fiscal frameworks, not an uncompetitive industrial carbon tax that no other major heavy oil producing jurisdiction faces, which would limit our industry’s ability to attract investment and grow,” reads the statement.
Jon McKenzie, the CEO of Cenovus, told investors in May the debate around oilsands development has been “myopically focused on the climate agenda,” according to the Canadian Press.
“The result of this myopic dialogue … is that we have created a set of national policies and regulations that make resource development and investment in Canada uncompetitive with the rest of the world,” he said, at the same time he announced an 83 per cent increase in the company’s profits. He also said increasing the carbon price would negatively impact the sector.
Cenovus reported $1.6 billion in earnings in the first three months of this year (McKenzie himself made $10.4 million in salary, stock options and bonuses in 2024). Suncor, another alliance company, reported earnings of $2.1 billion in the same time frame — 50 per cent higher than the same period last year.