OTTAWA — A new study by the Canadian Climate Institute suggests that Ottawa’s recent energy agreement with Alberta will have only a minimal impact on reducing Canada’s greenhouse gas emissions, raising questions about the effectiveness of the province’s revised industrial carbon pricing framework.
The analysis argues that the limited environmental gains from the memorandum of understanding (MOU) are unlikely to offset the potential increase in oil production, mainly due to structural inefficiencies in Alberta’s updated carbon pricing system.
“I think they have to take a look at the floor a little closer,” said Dave Sawyer, principal economist at the Canadian Climate Institute and author of the report. “I think they have to think whether or not those tightening rates put the floor at risk, and so I think they have to look at the design of this thing much closer.”
Sawyer was referring to “tightening rates,” which define how much emissions industries are allowed under Alberta’s carbon pricing framework, also known as stringency rates.
Revised carbon pricing framework under scrutiny
Last month, Prime Minister Mark Carney and Alberta Premier Danielle Smith signed an implementation agreement aimed at aligning Alberta’s industrial carbon pricing system. The plan targets an effective carbon price of $130 per tonne by 2040, while the headline price is set to reach $100 per tonne by 2027 before increasing to $130 per tonne by 2035.
The distinction between effective and headline pricing lies in how companies generate and use credits to comply with emissions limits.
However, the agreement also eases stringency rates, giving industries more flexibility in how much they can emit under the system. While the revised framework is less strict than the previous federal backstop system, Ottawa has defended it as stronger due to its expected influence on the provincial carbon credit market.
Risk of credit oversupply after 2030
The Canadian Climate Institute warns that the system may fail to generate sufficient market pressure to push carbon prices high enough to meet the government’s intended floor, potentially weakening incentives for emissions reductions.
Sawyer’s analysis highlights a likely oversupply of low-cost carbon credits after 2030, as companies are expected to outperform emissions benchmarks in earlier years and accumulate surplus credits under the more lenient rules.
“The floor maintains prices but the underlying signal to abate is lost,” the report states. “Price maintenance does not translate into emissions reductions and instead the system mostly delivers paper compliance rather than cutting emissions.”
Policy uncertainty and market reaction
The report also notes uncertainty over how governments will manage an excess supply of credits. Prime Minister Carney has previously suggested purchasing credits to reduce supply and support prices, though that approach is now being questioned.
“That’s off the table. What this agreement does now is it actually puts more of those credits into the system,” Sawyer said. “Now with these tightening rates, I don’t know if it’d be worth it. I think you’d be throwing good money after bad.”
Market reactions have already reflected shifting expectations. When early details of the agreement were leaked, carbon credit prices briefly rose to $40 per tonne, up from a low of $17 per tonne last year. However, following the full announcement, prices have since fallen back to between $30 and $35 per tonne.
The report concludes that the policy change is unlikely to significantly alter Canada’s long-term emissions trajectory, stating that it results in “negligible changes to a system already weakened” and risks reinforcing compliance without delivering meaningful emissions cuts.
