Early February, Liberal-party leadership candidate Mark Carney unveiled his climate policy designed to reduce household costs, stimulate economic growth, and create sustainable jobs for the future. Recognizing the growing discontent surrounding the current consumer-facing federal fuel charge (the “carbon tax”) Carney proposed an alternative framework that emphasizes incentives and ensures fairness across industries and households. Other Liberal party members, such as former Deputy Prime Minister Chrystia Freeland and Minister of Environment and Climate Change of Canada Steven Guilbeault have acknowledged that an alternative to the carbon tax is needed, a major deviation from the current Liberal government’s approach to climate action.
By way of background, Carney, who served as the governor of the Bank of Canada from 2008 to 2013 and the governor of the Bank of England from 2013 to 2020, officially launched his campaign for leader of the Liberal Party at the end of January. This followed Prime Minister Trudeau announcing his intention to resign as party leader, and proroguing parliament until 24 March 2025. The Liberal party will elect a new leader on 9 March 2025, and Chrystia Freeland, a Member of the House of Commons and former Deputy Prime Minister, is the other primary contender.
Notably, Carney’s plan states the removal of the consumer-facing carbon tax, with the introduction of targeted incentives and complementary investments, to maintain Canada’s emission reduction trajectory, which aims for net-zero emissions by 2050. The plan will maintain and enhance industrial-emitter programs. While there was no explicit mention of the longevity of programs such as the Clean Fuel Regulations (CFR), Clean Electricity Regulations (CER), or the Oil and Gas Sector Greenhouse Gas Pollution Cap, it did indicate strengthening existing commitments such as the oil and gas methane regulations by working with provincial and territorial governments.
Removing the consumer-facing carbon tax will not eliminate a carbon price in Canada, given that the industrial emitter programs remain in place. The federal carbon pricing schedule is currently set to CAD 95/tCO2e (consumer-facing carbon tax to increase to CAD 95/tCO2e on 01 April 2025). A regulatory review of the federal benchmark used to assess the stringency of industrial emitter programs is scheduled for 2026, which will reevaluate existing program design. Any changes to the federal benchmark criteria will require provinces and territories to amend their program design to align with the revised benchmark. While the current price trajectory remains in place until 2030 when the carbon price will reach CAD 170/tCO2e, political and regulatory uncertainty remains. For example, Alberta’s Technology Innovation and Emissions Reduction (TIER) market is currently seeing prices at ~50% discount to the annual carbon price.
Carney’s plan highlights a shift from “stick” policies that use disincentives such as taxes to “carrot” policies that focus on incentives to encourage behaviour. This will be implemented via 3 main approaches as follows.
1. Made-In-Canada Industrial Competitiveness Strategy
Intended to avoid carbon leakage, the output-based pricing system (OBPS) regulates emissions from large industrial emitters in Canada. Provinces either follow the federal program or may employ a provincial system that is at least as stringent as the federal requirements. Regulated entities under the OBPS do not pay the federal fuel charge on a portion of their emissions, and transact credits or pay for excess emissions at a level parallel to the federal fuel charge, based on the emissions intensity relative to a declining benchmark. Industrial emitter programs are primarily responsible for driving emissions reductions from Canada’s heavy industries, which contribute significantly to Canada’s greenhouse gas emissions.
Carney’s Made-In-Canada Competitiveness Strategy will extend the OBPS to 2035 and tighten the program to avoid credit oversupply and maintain the price signal. While the federal OBPS applies in Yukon, Nunavut, and Manitoba, provincial programs will have to modify their programs to maintain a comparable price signal. The strategy will also include inter-provincial collaboration to increase transparency between programs, harmonizing the price signal and providing certainty on carbon abatement in these industries.
Carney will also work to develop a Carbon Border Adjustment Mechanism which is a carbon tariff applied on imported carbon-intensive products, aimed to maintain competition for Canadian products that have carbon pricing baked into their supply chains. Canada does not currently have such a system in place, although it has been mentioned in Canada’s 2024 Fall Economic Statement and was first introduced in 2021.
The strategy will strengthen the existing oil and gas methane regulations which currently aim for a 75% reduction in oil and gas methane emissions by 2030, implement an efficiency mandate for low-temperature industrial heat, and accelerate approvals by reducing red tape for clean energy projects.
2. Direct incentives for green buildings, electrifying transportation, and direct benefits to consumers
A consumer carbon credit market will be linked with the industrial pricing system, designed to improve efficiency, compared to the current system which separates industry and consumers for carbon pricing. These are all the details provided in the plan, therefore there is limited visibility on how this would be practically employed. This could also help provide education to the public on the benefits of industrial emitter programs to drive and finance emissions reductions, which underpinned some of the polarization and discontent around the carbon tax.
The incentives aim to make Canada’s transition to a clean future more affordable and accessible, particularly for low- and middle-income households. Key measures include enhancing the Greener Homes Grant with a streamlined application process for home retrofits, strengthening subsidies for heat pumps through the oil-to-heat pump affordability program, and offering alternative financing mechanisms, such as discounted mortgage insurance for energy-efficient homes.
Technology will be leveraged to accelerate home energy assessments, enabling smarter energy-saving decisions. The plan includes phasing out fossil fuel use in federal buildings by 2030 and boosting private climate investments through tax credits, Canada Growth Fund initiatives, and provisions for accelerated depreciation of private investment such as through Carbon Contracts for Difference.
Additionally, CAD 5,000 subsidies for zero-emission vehicles (ZEVs) will be provided to low and middle-income households, alongside expanded EV charging infrastructure funded by green bonds, the Canada Growth Fund, and the Canada Infrastructure Bank.
3. Mobilize investments that promote economic growth and foster domestic jobs
To catalyze external investments in Canada’s energy transition, the plan seeks to rapidly finalize and implement Canada’s transition taxonomy for financial institutions, which has been in the works for nearly two years and provides guidelines on how to mobilize capital for transition investments.
By fall 2026, science-based transition taxonomies will be implemented for key sectors, including electricity, transportation, buildings, agriculture, forestry, manufacturing, and extractives. Broad climate risk disclosure will be mandated for companies nationwide to improve investor transparency and align capital with sustainability goals, ensuring alignment with provincial, territorial, and international best practices.
The removal of the consumer-facing fuel charge may change the dynamics with regard to individual consumer choices. For example, the CFR credit market is based on consumer demand for transportation fuels, and the removal of the carbon tax makes conventional fossil fuels for transportation cheaper. However, this effect may be avoided by direct subsidies for cleaner forms of transportation such as EVs.
Next Steps
The French debate for the Liberal party is set for Monday, February 24 and the English debate is on February 25. The Liberal Party will select it's new leader on 9 March, 2025.
The next steps for Carney’s climate plan will be to expand the current framework to strengthen the economy following the removal of the rebate.
Chrystia Freeland’s campaign has also indicated the removal of the consumer-facing carbon tax, and Conservative Leader Pierre Poilievre’s platform has been very vocal about “axing the tax”. Recent CBC polling as of 27 January 2025 indicates that Poilievre’s Conservative Party is at 44%, with a 96% probability of winning a majority. With a federal election occurring as soon as Spring 2025, it is likely that between these three possible leaders, the consumer-facing carbon tax will be dismantled. However, industrial carbon pricing programs are expected to remain, albeit with changes to the federal benchmark, stringency requirements, and other design elements.
Poilievre, who has branded this election as the “carbon tax election” will likely have to pivot his messaging, given that Liberal leaders are now also deviating away from the carbon tax. In light of the recent urgency in responding to U.S. tariffs imposed on Canadian goods by President Trump, this will likely change Poillievre’s tone with regard to the upcoming election.
While there is more certainty now on the removal of the federal-facing carbon tax, unclarity remains on what an alternative system may look like, the scale and extent of direct investments, as well as changes to industrial emitter programs. This may slow down investments in Canada’s clean energy industry in the short term, as investors take a “wait and see” approach as they seek political stability for long-term projects.
As Canada navigates the dual challenges of climate change and economic uncertainty against the backdrop of a new federal administration in the U.S., which has ushered in a markedly reduced approach to climate, this policy aims to address immediate affordability concerns while maintaining Canada’s global competition in clean energy.
ClearBlue will continue to monitor these developments and provide insights to clients. Contact us to learn how our market intelligence on the issues moving the carbon markets can benefit your strategy.