This report examines the histories and designs of five major Canadian carbon pricing systems:
- Alberta’s Technology Innovation and Emissions Reduction (TIER) regulation,
- British Columbia’s Output-Based Pricing System (OBPS),
- Ontario’s Emission Pricing System (EPS),
- Quebec’s cap-and-trade system, and;
- The federal OBPS.
For each section, we provide an overview of the industrial and emissions context for each system and outline their approaches to benchmarking, compliance flexibility, stringency adjustments, and other key design parameters. We also review market outcomes, highlighting risks such as credit oversupply and uncertainty, and distill lessons learned from each system’s implementation.
Overall, we have seen that Canadian carbon pricing systems have prevented Canada’s emissions from growing and have attracted decarbonization investment, while protecting the competitiveness of regulated industries. However, design and maintenance choices have recently undermined the effectiveness of some systems.
When designed and maintained well, industrial carbon pricing systems are widely regarded as an economically efficient policy to drive large emissions reductions while protecting the competitiveness of industries. However, there is room for improvement in Canada’s systems, especially to increase market transparency and linkages. In most systems, information on credit markets, especially with transaction volumes and prices, is difficult to obtain or not public at all.
Several systems in Canada are currently in or at risk of credit oversupply
For example, in 2025 credits in Alberta’s TIER system traded with 40–80% discounts against the direct payment options for system compliance. Historically in Alberta and other Canadian systems, credits are discounted around 10–20%. Furthermore, the volatility in Alberta’s 2025 credit prices have caused concern to investors. These ongoing issues demonstrate that systems need be consistently strengthened over time to drive deeper emissions reductions. Continuous monitoring, transparent reporting and timely adjustments are needed for pricing systems to achieve stated emission reduction and economic competitiveness objectives.
Key lessons that are important to creating and operating successful carbon pricing systems
The most important policy outcomes in pricing systems are reducing emissions while protecting competitiveness. However, these are lagging indicators and adequate data may be difficult to collect. Thus, the key challenge for both intensity-based emissions trading systems and cap-and-trade systems is to maintain a sufficient effective carbon price that matches the stringency of emissions reduction requirements with industry’s capacity to sustain investments in decarbonization projects and thus reduce emissions. The main system aspects to achieve this balance are to adjust:
- tightening rates for intensity benchmarks and caps
- the headline carbon price
- market rules surrounding credit transactions such as limits in time or volume for usage.
Engagement with both system participants and external entities, including from other systems, is important to balancing stringency with capabilities.
- System issues such as credit oversupply must be addressed swiftly. Provinces must match credit market supply and demand to emissions reduction progress, which requires continuous monitoring and adjustments. The federal government must be diligent in effectively evaluating regional systems against its benchmark and decisive in enforcing its backstop when regional systems fall short. Investors in decarbonization projects and in emissions offsets and credits rely on long-term predictability and stability in carbon pricing systems, which is threatened by oversupply and even more so by how long oversupply lasts. Guardrails against volatility allow investors to build trust in systems and allocate capital into them.
- Economic, social and political contexts have shaped design choices and led to Canada now having four major intensity-based emissions trading systems and one cap-and-trade system, each with unique characteristics and outcomes. Linking the systems and their credit markets is widely recognized as important to increase market liquidity and stability, which in turn provide confidence to investors. However, market linkages also create risks, such as credit oversupply that could affect multiple systems. Jurisdictions need to be coordinated and aligned on policy approaches and outcomes to successfully link markets. To date in Canada, there has been limited interprovincial, federal-provincial and national coordination to achieve more system linking, except for the long-term integration of Quebec and California cap-and-trade systems. Further strategic policy linkages may be necessary to facilitate more carbon market linkages.
A scheduled review in 2026 for the federal and regional industrial carbon pricing systems is expected to address some issues that have arisen since the last review in 2022, such as credit oversupply. Despite many stakeholders — including many in industry — already favoring industrial carbon pricing as a flexible system for emissions reductions, supporters of carbon pricing must anticipate opposition to stronger industrial pricing and they must clearly communicate its environmental and economic benefits. Doing so is essential to maintain support for the policy over time and ultimately ensure its lasting and positive impact.
