The Bet: Canada's Carbon Price in a World That May Not Follow

1. What the System Was Designed to Do

When Canada's first ministers adopted the Pan-Canadian Framework on Clean Growth and Climate Change in December 2016, the stated purpose was a coordinated plan to reduce emissions while growing the economy. Carbon pricing was described as a core element — an efficient mechanism to drive innovation, encourage lower-pollution behaviour, and align Canada with the international direction set by the Paris Agreement. [17]

The framework had a simple division of labour. The consumer carbon charge handled households: it raised the price of fossil fuels at the pump, and the revenue was returned through rebates. The industrial carbon pricing system — the Output-Based Pricing System for facilities above certain emission thresholds — handled the trade-exposed sector: it imposed costs on large emitters but used output-based allocation to protect them from competitive disadvantage against foreign producers who didn't face equivalent costs. [18]

The consumer side is gone. As documented in Part 1 of this series, the federal fuel charge was set to zero on April 1, 2025, and the household rebate disappeared with it. [19]

The industrial side remains — and the policy architecture anticipated two conditions for its success. First, that major trading partners would eventually price carbon, reducing the competitive gap. Second, that if they didn't, Canada would impose border carbon adjustments to equalize costs at the border. Both conditions were embedded in the consultation record. The 2021 Finance mandate letter instructed the Minister to develop border carbon adjustments. [20]

Neither assumption has materialized for Canada's largest trading partner.

2. Who Moved

The global picture is not one of universal inaction. Several major economies have built or are building carbon pricing and border adjustment infrastructure. But the picture is uneven — and the unevenness is where the risk lies.

The European Union

The EU launched the definitive phase of its Carbon Border Adjustment Mechanism on January 1, 2026. Importers of cement, iron and steel, aluminium, fertilizers, electricity, and hydrogen now face financial obligations tied to the embedded carbon content of their products. The EU has proposed extending coverage to 180 downstream steel- and aluminum-intensive products from 2028, though that expansion is still a proposal and not yet operative. [3] [4] [9]

The launch was not seamless. A simplification amendment adopted in October 2025 created a 50-tonne de minimis exemption for most covered imports — exempting around 90% of importers while keeping 99% of embedded emissions in scope. The USTR's 2026 trade estimate notes that full implementing regulations were not issued until December 17, 2025 — two weeks before the definitive regime began. [4] [9]

The EU's CBAM credit mechanism works at the importer level: importers can deduct the explicit carbon price paid in the country of origin from their CBAM obligations. But this is not a blanket country-level equivalency agreement. There is no evidence of a concluded Canada-EU equivalency deal. Canadian exporters are not automatically shielded simply because Canada has a domestic carbon price. [21]

The United Kingdom

The UK CBAM is scheduled for January 1, 2027. Primary legislation was introduced in the Finance Bill 2025–26, and HMRC consulted on draft secondary legislation from February to March 2026. The initial scope covers aluminium, cement, fertiliser, hydrogen, and iron and steel. Glass and ceramics, proposed earlier, were removed from the initial start. The system is tied to the UK ETS price, with relief for carbon price paid overseas. [5] [22] [23]

China

China's national ETS is no longer a single-sector system. In March 2025, the Ministry of Ecology and Environment formally brought steel, cement, and aluminum smelting into the national trading system, adding approximately 1,300 entities and expanding coverage to over 60% of China's CO₂ emissions. More sectors — petrochemicals, chemicals, glass, copper smelting, paper, and aviation — remain candidates for later inclusion. [12] [13] [36]

Expansion is phased. The current period through 2026 focuses on data quality and system familiarization for new sectors. Tighter performance requirements are expected from 2027. The current carbon price is approximately CNY 96 per tonne on the secondary market — roughly C$18–20 — well below Canada's $110 per tonne. [13] [24]

The direction matters more than the price level for the convergence thesis. China is building carbon pricing infrastructure. But the timeline for meaningful price convergence with Canada remains long and uncertain.

India

India is further along than most coverage suggests. The government established a Carbon Credit Trading Scheme under the Energy Conservation Act, published compliance rules in October 2025 covering nine energy-intensive industrial sectors, and has set greenhouse-gas intensity targets for obligated entities. This is a rate-based ETS — it measures emissions intensity rather than absolute caps — and it is still in early implementation. [14] [15] [25]

India's official posture toward foreign CBAMs remains wary. In November 2024, the Commerce Minister formally raised Indian exporter concerns about the EU CBAM and related measures with his French counterpart. [16]

The global picture

The World Bank's 2025 State and Trends of Carbon Pricing report counted 113 carbon pricing instruments worldwide, covering approximately 28% of global greenhouse gas emissions. [26]

Carbon pricing is spreading — but convergence remains partial and uneven, and too slow to resolve Canada's trade-exposure problem. Twenty-eight percent coverage is not close to the international alignment Canada's framework anticipated. At the multilateral level, COP29 in Baku produced movement on international carbon market rules under Article 6, and COP30 in Belém continued the implementation track — but rule-setting for cross-border trading mechanisms is not the same thing as domestic carbon pricing convergence. [37] [38]

So what does this mean? The countries that have moved are building real infrastructure — the EU's CBAM is operational, China's ETS is expanding, India's compliance system has rules. But none of this resolves the central problem for Canada: the country that matters most to Canadian trade has not moved at all.

3. Who Didn't

The United States has no federal carbon tax. It has no federal cap-and-trade system. It has no federal border carbon adjustment. State-level programs continue — the Regional Greenhouse Gas Initiative operates in 10 states, California runs its cap-and-invest program, and Washington's system auctioned allowances at $65.26 in March 2026 — but these are regional instruments covering a fraction of the American economy. [27] [28] [29]

The most concrete federal border adjustment proposal is the Clean Competition Act of 2025, introduced by Senator Sheldon Whitehouse on December 17, 2025. It would create a carbon border adjustment based on carbon intensity. It was read twice, referred to the Senate Finance Committee, and has not advanced further. There is no committee hearing, no markup, and no CBO score. [2]

The US has instead moved in the opposite direction on trade. The USTR's 2026 National Trade Estimate Report discusses the EU's CBAM in its annual report on foreign trade barriers, documenting concern that US exports will not receive credit for non-price regulatory measures and that implementing rules arrived too late for adequate preparation. [9]

Alongside documented concern about foreign carbon border adjustments, the United States has materially increased conventional tariffs on Canadian goods. A temporary 10% import duty was announced in February 2026. Steel and aluminum tariff rates were raised to 50% in June 2025. Section 232 national-security tariff machinery remains active into 2026. [30]

This is not a subtle shift. Canada's industrial carbon pricing now operates alongside a US trade posture that combines the absence of any federal carbon cost with the imposition of new conventional trade costs on Canadian exports. The result is a widening asymmetry: Canadian producers face both a carbon cost that American competitors do not share and tariff costs that did not exist when the framework was built.

4. Canada's Border Adjustment Gap

The EU built a border carbon adjustment. The UK is building one. Canada consulted on one — and did not follow through.

Finance Canada launched its border carbon adjustment consultation on August 5, 2021. The Prime Minister's mandate letter to the Finance Minister included an explicit instruction to develop border carbon adjustments. [6] [20]

A 2024 parliamentary briefing note from Global Affairs Canada provides the clearest official status: "at this time, there is no direction on whether border carbon adjustments will be pursued in Canada." [7]

The consultation page was archived in January 2025. [6]

What followed was not a border adjustment. Budget 2025 and the Finance Canada departmental plan for 2026–27 reference a "Climate Competitiveness Strategy" — a framework for strengthening industrial carbon pricing, not for equalizing costs at the border. In December 2025, Environment and Climate Change Canada launched engagement on tightening the minimum national stringency standards for industrial carbon pricing. The direction is to make the domestic price more rigorous, not to shield it from international asymmetry. [31] [32]

The House of Commons Finance Committee, in its pre-budget report, recommended that the government "develop carbon tariff policy tools to prepare for global developments regarding carbon border adjustments." That is parliamentary interest. It is not government adoption. [33]

The strongest Canada-EU language on CBAM cooperation comes from the 2023 summit joint statement, where both sides committed to continue exchanges on carbon pricing and work on measures addressing carbon leakage, "including on next steps for cooperation on the EU CBAM." [21] That was nearly three years ago. No equivalent Canada-UK framework has been identified in the public record.

Meanwhile, the national carbon pricing patchwork is fraying from within. Saskatchewan announced on March 27, 2025 that it would pause its provincial industrial carbon pricing — the Output-Based Performance Standards program — effective April 1, 2025. [10] The federal government's carbon pricing overview page notes the pause but does not clearly confirm whether the federal OBPS has been applied to Saskatchewan facilities as a backstop. [11]

The gap between the consultation record and the current policy is now structural. The government explored border adjustments, identified them as a tool for managing competitive disparities, and did not implement them. The consultation was archived. The international asymmetry the tool was meant to address has widened.

5. What the Bank of Canada Found

In May 2023, Bank of Canada staff published a working paper titled "An Investigation into the Effects of Border Carbon Adjustments on the Canadian Economy." The paper modelled what happens to Canada under different coalition scenarios. [8]

The findings were specific. When the United States is inside the border carbon adjustment coalition, Canada benefits: carbon leakage decreases and domestic competitiveness improves. When the United States is outside the coalition, the results reverse: Canada's carbon leakage increases, domestic competitiveness weakens, and foreign competitiveness improves. [8]

The paper also found that Canadian welfare improves when BCA revenues are transferred to households — regardless of US participation. [8]

Two caveats are important. First, this is a staff working paper, not a Governing Council position. The Bank has not adopted these findings as official policy. Second, the paper models border carbon adjustments that Canada does not have. The revenue-to-household pathway it identifies as welfare-improving is the opposite of what Canada has built: no border adjustment, and the household revenue transfer mechanism eliminated.

No stronger Canadian institutional model has superseded this paper's findings in the public record. The Bank of Canada paper remains the clearest institutional analysis of the specific scenario Canada is now in: industrial carbon pricing without US participation, without a border adjustment, and without household revenue transfer.

The paper describes the conditions under which the system works. It also describes the conditions under which the system doesn't. Canada is operating under the second set of conditions.

6. The Clean Fuel Regulations Under Pressure

The Clean Fuel Regulations — documented in Part 1 as the embedded carbon cost that adds an estimated 4–6 cents per litre to fuel today, rising to 6–17 cents per litre by 2030 — are themselves showing signs of strain from the same asymmetry. [34]

Between December 2025 and January 2026, Environment and Climate Change Canada consulted on targeted amendments to the Clean Fuel Regulations. The stated reason was explicit: competitiveness and trade pressure on Canadian biofuel producers. The consultation paper acknowledged that these pressures could deepen reliance on imports, including from the United States. [34]

The federal government planned to publish draft amendments in the Canada Gazette following consultations. The published amendments have not yet appeared in the sources reviewed for this article.

The significance is not the specific amendments. It is that the government's own consultation acknowledged the problem this article documents: a domestic carbon pricing instrument is being undermined by international competitive asymmetry. The Clean Fuel Regulations are bending under the weight of a trade environment that the original policy did not anticipate.

7. What Happens If the Bet Doesn't Pay

The sections above establish the asymmetry. This section examines the consequences if it persists.

Risk 1: Layered costs for Canadian exporters. The EU's CBAM provides relief for explicit carbon prices paid abroad — but this is an importer-level deduction, not a blanket country recognition. If Canadian producers' carbon costs are not fully credited under EU or UK rules, they could face both domestic carbon costs and CBAM charges at the border. No official Canada-EU equivalency agreement is in force. Canadian exporters selling into the EU are not automatically shielded by the fact that Canada has a domestic carbon price. [4] [21]

Risk 2: Political durability erodes without a border shield. Saskatchewan has already paused its provincial industrial system. [10] If competitiveness pressure mounts without border equalization, more provinces may follow. Australia provides the closest historical parallel: it repealed its carbon tax in 2014 under competitiveness and cost-of-living pressure, replacing it with a less stringent Emissions Reduction Fund. [35] The political dynamics that ended Canada's consumer carbon charge are the same dynamics that would eventually pressure the industrial system — unless the asymmetry is resolved.

Risk 3: The Clean Fuel Regulations amplify the asymmetry. As documented in Part 1 of this series and confirmed by the government's own 2025 consultation, CFR costs are embedded in consumer fuel prices with no rebate and no border equalization. Industrial carbon costs pass through to goods prices. If neither cost layer is offset by border adjustments, Canadian households absorb costs that foreign competitors do not face — with no climate benefit if emissions simply relocate. [34]

None of these risks require the system to collapse to be consequential. The system can remain in force while the conditions for its long-term durability erode.