Canada’s Carbon Markets In Transition: A Greenhouse Gas Regulatory Update

Canada’s carbon markets are being reshaped. At the federal level, the “consumer carbon tax” has been eliminated and the carbon pricing benchmark has been updated to establish a new national price trajectory. At the provincial level, Québec has enacted a comprehensive package of regulatory amendments to its cap-and-trade system and Alberta and the federal government have reached a landmark Implementation Agreement that introduces structural reforms to Alberta’s industrial carbon pricing regime. Together, these developments signal a new phase for Canadian carbon markets.

This bulletin provides an update on key developments across Canada’s federal and provincial carbon markets along with a brief overview of notable international developments.

Federal Carbon Pricing: A Significant Policy Shift

One of the most consequential developments in Canada’s carbon policy landscape since Prime Minister Carney took office has been the elimination of the federal fuel charge applied under the Greenhouse Gas Pollution Pricing Act (effective April 1, 2025), commonly referred to as the “consumer carbon tax”. The consumer carbon tax, which had been at the centre of Canadian climate and political debate for several years, was first implemented in 2019. The federal fuel charge was levied upstream, at the point of fuel production and importation, applying to a wide range of fossil fuels including gasoline, diesel, aviation fuel, natural gas, propane and coal. Initially set at CA$20/tonne of CO2e, it was designed to rise incrementally to create a sustained economic incentive to reduce emissions. Ultimately, the charge was embedded in the prices consumers paid at the pump or on their home heating and energy bills.

In contrast, the industrial component of the federal carbon pricing framework, the Output-Based Pricing System (“OBPS”), remains in effect. The OBPS applies to large industrial emitters, incentivizing emissions reductions across the industrial sector by setting output-based performance standards against which facilities must measure and manage their compliance obligations. Facilities that exceed their emission limits must purchase compliance instruments, which may include federal offset credits, performance credits, or contributions to the OBPS fund. That the OBPS remains in place signals a continued federal commitment to industrial-level carbon pricing, despite the removal of the consumer carbon tax. Provinces have the option to rely on the OBPS to regulate the provincial carbon market or enact their own carbon pricing framework that meets the minimum benchmarks set by the federal government.

Updated Federal Carbon Pricing Benchmark

As of May 15, 2026, the federal government updated its carbon pricing benchmark to establish the latest carbon pricing applicable to both the OBPS and any provincial carbon pricing systems in Canada. The updated pricing replaces the previous trajectory, which would have reached CA$170/tonne by 2030, with a more moderate path: CA$95/tonne in 2026, holding at CA$100/tonne from 2027 through 2029, rising to CA$115/tonne in 2030, and then, from 2036, increasing at a rate of 1.5% per year plus inflation to CA$140/tonne by 2040. A full updated federal benchmark is expected to be published later in 2026 and will set out how the updated stringency criteria will apply across provincial systems. The federal government has stated that this trajectory takes into account feedback from provinces and territories, industry and other stakeholders, and is intended to provide the long-term price certainty necessary to support major decarbonization investment decisions.

Provincial Carbon Market Developments

As noted above, the federal OBPS for large industrial emitters operates as a backstop, applying only in jurisdictions that do not have their own equivalent industrial carbon pricing regime meeting federal standards. As of the date of this bulletin, the federal OBPS applies in Manitoba, Prince Edward Island, Yukon and Nunavut, while all other provinces and territories (Ontario, Alberta, British Columbia, Québec, Saskatchewan, Nova Scotia, New Brunswick, Newfoundland and Labrador and the Northwest Territories) operate their own equivalent industrial carbon pricing systems.

Most recently, there have been updates to the Québec, Alberta and British Columbia greenhouse gas (“GHG”) programs which are discussed in turn below.

Québec

Québec’s cap-and-trade (“C&T”) system, which has been in operation since 2013, remains one of the most established and liquid carbon trading markets in North America and covers approximately 80% of the province’s GHG emissions. In 2014, Québec linked its system with California’s, under the Western Climate Initiative (“WCI”), to form one of the largest carbon markets in North America and one of the first cross-jurisdictional carbon markets designed and operated by subnational governments from different countries, broadening the range of trading opportunities available to participants.

The system requires covered entities, including industrial facilities emitting 25,000 tCO₂ or more per year, electricity producers and importers, and fuel distributors to hold one emission allowance (or permit) for every tonne of GHGs they emit. Allowances are distributed through quarterly auctions jointly administered with California and through free allocation to emission-intensive, trade-exposed industries. Covered entities may also use offset credits, representing one tCO₂ reduced or removed through projects outside the C&T system, to satisfy up to 8% of their compliance obligations (such amount being potentially reduced pending recent regulatory amendments, described below). Credits issued by Québec or California are currently treated as fully interchangeable and can be purchased directly from other market participants.

In August 2026, Québec enacted significant regulatory amendments to the C&T system which came into force on September 10, 2026. Key changes include the following:

• Offset Credit Limits: The offset credit limit has been reduced from 8% to 6% of covered GHG emissions for the 2027 compliance period and onwards, with the current 8% limit maintained for the compliance period which began on January 1, 2024. This tightening could materially affect credit demand and pricing dynamics in the broader WCI market.
• Minimum Québec-Issued Credit Requirement: From 2027 onwards, at least 1% of offset credits used must be Québec-issued (rising to 2% in 2029), ending the ability to entirely satisfy offset obligations with California-issued credits.
• Stricter Offset Project Eligibility: Carbon capture projects must provide for the actual storage, elimination, or re-use of captured GHGs in a manner that avoids their subsequent emission into the atmosphere, and where storage is involved, it must be carried out in Québec. In addition, for any offset project to be eligible, all of the emitter’s covered establishments must have undergone a study of the technical and economic potential for GHG emissions reductions to qualify.
• Updated Emissions Accounting: The definition of “verified emissions” has been updated to exclude: (i) CO2 emissions attributable to the combustion of biomethane; (ii) CO2 emissions captured, stored, eliminated, re-used or transferred out of the establishment; and (iii) GHG emissions relating to electricity acquired from U.S. states where producers are subject to a cap-and-trade system established by a non-partner entity, calculated using a prescribed formula.

Taken together, these amendments represent a structural tightening of the Québec C&T system. Entities relying on California-issued credits should revisit their procurement strategies ahead of the 2027 compliance period and offset project developers should assess whether existing and proposed projects meet the updated eligibility conditions.

Alberta

Alberta’s Technology Innovation and Emissions Reduction (“TIER”) regulation, the province’s primary mechanism for industrial carbon pricing, has recently been the subject of a landmark Implementation Agreement between Alberta and the federal government. The agreement responds directly to market credibility concerns: Alberta’s carbon credit market is currently oversupplied, resulting in a market price that has fallen significantly below the legislated fund price of CA$95/tonne. In 2025, credits traded at approximately CA$20/tonne, representing a discount of roughly 80% against the fund price, before rebounding to approximately CA$40/tonne in early 2026. This dynamic has allowed emitters to satisfy compliance obligations at a substantial discount by purchasing credits on the market rather than reducing emissions, undermining the integrity of the pricing incentive the system is designed to deliver.

The Implementation Agreement introduces four main reforms to address these concerns:

• New Price Trajectory: The TIER fund price, which had been frozen at CA$95/tonne since 2025, increased to align with the updated federal carbon pricing benchmark, rising to CA$115/tonne by 2030 and CA$140/tonne by 2040.
• Mandatory Minimum Transfer Price: A mandatory minimum transfer price for carbon credit transactions will be introduced, starting at CA$60/tonne in 2030, to address the current discounting of market-traded credits relative to the fund price. Notably, no minimum transfer price will apply prior to 2030, leaving the existing oversupply discount unaddressed in the interim period.
• Constrained Direct Investment Pathway: The Direct Investment Pathway, which allows project proponents to meet their carbon compliance obligations by generating credits through investing in eligible on-site emissions reduction technologies (e.g., Carbon Capture, Utilization and Storage), will be capped at 50% of eligible capital to open new commercial pathways while addressing oversupply.
• Carbon Contracts for Difference: The federal and Alberta governments will jointly offer Carbon Contracts for Difference guaranteeing a minimum credit price on up to 75 million tonnes to provide long-term price certainty for large-scale decarbonization projects.

The contrast between Québec’s and Alberta’s reform approaches is informative. Where Québec is tightening its system to drive greater domestic emissions reductions, Alberta is opening new commercial pathways through direct investment and price floor mechanisms that allow project proponents to realize near-term value. Both approaches, however, share an underlying objective: improving the integrity and commercial credibility of their respective carbon markets.

The federal government’s agreement to update the carbon pricing benchmark to align with Alberta’s new price trajectory will also affect how other provincial systems, including Québec’s C&T system, are assessed for equivalency purposes under the federal framework.

British Columbia

British Columbia, which operated one of the longest-standing carbon taxes in North America, announced the elimination of its provincial consumer carbon tax (the fuel charge) in 2025, following the federal government’s lead on the consumer carbon levy. This elimination applies only to the consumer-facing fuel charge and does not affect its industrial carbon pricing framework, the B.C. Output-Based Pricing System (the “BC OBPS”), which had long been regarded as a model for carbon pricing policy and operates as an equivalent to the federal OBPS and remains in force. The BC OBPS applies to facilities emitting more than 10,000 tCO₂e per year and employs 1% annual tightening rate on the reduction factor for non-process emissions. A notable design feature is a cap on the proportion of compliance obligations that may be satisfied using compliance units (earned credits and offset units), set at 30% from 2026 through 2030. The province continues to assess the future of its industrial carbon pricing framework and businesses operating in British Columbia should monitor forthcoming policy developments closely.

International Developments

European Union

The European Union (“EU”) continues to operate the most developed carbon market in the world through its Emissions Trading System (“EU ETS”). Following a substantial reform process, the EU ETS has continued its trajectory of tightening emissions caps and broadening the scope of regulated industries.

Of particular relevance to Canadian businesses is the continued advancement of the EU’s Carbon Border Adjustment Mechanism (“CBAM”), which is designed to address carbon leakage by ensuring that imports of certain carbon-intensive goods (i.e., steel, aluminum, cement, fertilizers, electricity and hydrogen) are subject to a carbon cost equal to that which applies to domestic EU producers. CBAM has now moved beyond its transitional phase and Canadian exporters in covered sectors should actively assess their exposure to CBAM and develop a clear understanding of the carbon content reporting and financial obligations that will apply to their EU-bond exports as full implementation approaches.

United States

The United States federal government has taken a markedly different approach to carbon pricing under the current Trump administration. The administration’s decision to withdraw the United States from the Paris Agreement for a second time, combined with a broader federal deregulatory agenda, has significantly curtailed the prospects for a federal carbon market in the near term and has introduced uncertainty for carbon-related initiatives that rely on federal policy support.

State-level activity, however, remains significant. As discussed above, California’s C&T program, linked with Québec’s under the WCI, continues to operate as one of the largest compliance carbon markets in North America. The Regional Greenhouse Gas Initiative (“RGGI”), a co-operative cap-and-trade program applicable to participating north-eastern states, similarly remains active, notwithstanding ongoing political debate in certain member states regarding continued participation.

Article 6.4 of the Paris Agreement

The approval of Article 6.4 standards at the 2024 United Nations (“UN”) Climate Change Conference (COP29) was a landmark development for the global carbon market. Article 6.4 establishes a centralized, UN-supervised carbon crediting mechanism under the Paris Agreement, sometimes referred to as the Paris Agreement Crediting Mechanism (“PACM”), which allows approved projects to generate internationally transferable carbon credits known as Article 6.4 Emission Reductions. Implementation work has continued since that approval, with the UN-backed Supervisory Body advancing its work on the technical rules governing the PACM, including ongoing efforts to clarify the rules around non-permanence risk. A number of important elements, most notably the operation of Article 6.2, which would permit bilateral exchange of emission reductions and removals between parties, remain subject to ongoing negotiations. Canadian businesses with an interest in accessing internationally recognized carbon credits should continue to monitor Article 6 developments as the framework moves towards full operationalization.

Implications for Canadian Businesses

There have been significant, and in some respects, divergent changes to the Canadian carbon market landscape in recent years. The elimination of the consumer carbon tax at the federal level and in British Columbia reduces the compliance burden for many businesses. However, the continued operation of industrial pricing mechanisms at both the federal and provincial levels means that carbon pricing remains a material consideration for large emitters across the country. The updated federal benchmark establishes a long-term increasing price trajectory that businesses should incorporate into their investment and commercial planning.

At the provincial level, the regulations in Québec and the Alberta Implementation Agreement present distinct but equally significant challenges and opportunities. Québec-based entities and those trading in the WCI market will need to reassess their compliance and offset procurement strategies ahead of the 2027 compliance period. In Alberta, the new price floor mechanisms and the Direct Investment Pathway open new commercial pathways for project developers, potentially restoring greater integrity to the credit market.

For businesses with an international footprint, the EU’s CBAM represents a compliance obligation that should be addressed proactively. Canadian exporters in sectors covered by CBAM are encouraged to begin assessing their carbon content reporting requirements.

McMillan will continue to monitor carbon market developments in Canada and internationally and will report on material developments impacting Canadian businesses and operations as they arise. Please reach out to member of our team if you have questions about how these developments may affect your business.