Expert Commentary

1.  Trade is the anchor

Carbon policy is increasingly shaped by global market access and competitiveness, not domestic policy alone.

Large trading partners are embedding carbon constraints into trade architecture. The EU’s Carbon Border Adjustment Mechanism (CBAM) is the most visible example: it effectively exports EU carbon prices into global supply chains. Starting with exporters selling steel, cement, aluminum, fertilizers, or electricity into the block, carbon pricing is no longer optional – it’s a cost of doing business. However, shifting political winds in the EU could cast uncertainty onto the implementation of CBAM, creating a rocky landscape for Canada’s carbon policy makers to navigate as they consider benchmark stringency in the context of market access under unpredictable geopolitical conditions.

But emerging economies aren’t waiting.

Brazil is advancing a national carbon market framework tied to sustainable finance taxonomies. Several African jurisdictions are building carbon market infrastructure alongside trade and development partnerships–often accelerated by deeper commercial ties with Europe.

These systems may start narrower, but they are being designed with international alignment in mind from day one.

2. Scale sets the rules

Large consumer blocs are pulling climate policy into their economies at scale.

China now operates the world’s largest Emission Trading System (ETS) by covered emissions. The EU ETS covers thousands of facilities, has a declining cap, deep liquidity, and a clear long-term trajectory. The UK ETS mirrors this logic. Systems in Japan, Korea, and India are expanding rapidly.

Canada stands out–not for ambition, but for structure. Instead of a single scaled trading system, we operate a patchwork: the federal backstop, provincial fuel charges, and multiple industrial output-based systems (OBPS, TIER, etc.), each with different rules, prices, and compliance options. Scale and harmonization have helped other countries build function carbon pricing system. Canada’s fragmented approach makes it harder for investors and trading partners to engage. The benchmark review must grapple with whether flexibility has crossed too far into fragmentation.

3. Functioning markets are a prerequisite for investment

Financing decarbonization at scale without a carbon market will be extremely challenging. Large-scale decarbonization projects can be risky to backstop through government guarantees alone. A deeper, more liquid national market would let the market itself absorb more of that price risk, reducing reliance on public balance sheets.

Establishing fungibility of carbon credits across federal-provincial systems emerged as a critical first step to building the market depth that serious decarbonization investment requires. Investors were clear: price volatility kills capital formation.

• They need price certainty over investment time horizons

• They need credible incentives that reward real decarbonization

• They need policy or fiscal backstops that hold when markets wobble

Alberta’s TIER market is a frequently cited example for price volatility. Prices swung from under $15 per tonne to over $40 in a matter of weeks in tandem with the announcement of the Alberta MOU. And this ignores the reality that too often TIER prices can become dislocated from the headline federal carbon backstop–implying future volatility as well. The result is investors are forced to price in the risk that spreads could widen further.

ECCC benchmark criteria focused only on minimum price levels may miss the point. Predictability, guardrails, and credible price corridors matter just as much as nominal stringency. By contrast, the EU ETS combines a long-term cap trajectory with market stability mechanisms that dampen extreme swings. The result isn’t cheap carbon—it’s bankable carbon.

4. 2026 is the year to act

Canada is in the middle of an infrastructure push. The first tranche of major projects under Bill C-5 was announced six months ago; the second tranche is underway. Hydrogen, LNG, pipelines, grid interconnections—there’s real momentum behind getting things built faster.

Market design choices made now will shape where capital flows next. The ECCC benchmark review is an opportunity to signal that Canada is serious about building a market that works and how complementary instruments can crowd in capital.

Carbon contracts for difference (CCfDs), for example, were discussed as a powerful complement to carbon pricing, if used in a targeted manner. They de-risk investments by guaranteeing a carbon price floor for projects that deliver deep emissions reductions.

—

Market design is investment policy. It determines whether Canada attracts the next generation of clean industrial projects – or watches them land elsewhere.

As ECCC reviews the national carbon pricing benchmark, the question isn’t whether carbon pricing should exist. That debate is over. The real question is whether Canada’s system is credible, scalable, and stable enough to compete in a world where carbon markets now shape trade, capital flows, and industrial strategy.