Large-emitter trading systems effectively reduce emissions and have limited impact on profits.
While the incoming Trump administration in the United States will likely mean a setback for climate progress in some respects, new analysis suggests Canada would benefit from maintaining and even strengthening competitiveness-driven policies led by industrial carbon pricing—also called large-emitter trading systems (LETS). The U.S.’ landmark Inflation Reduction Act (IRA), for example, is likely to persist in some form and continue to support U.S. industry as it re-tools for clean energy. On top of that, we can expect to see continued leadership at the subnational level as states and local governments fill a leadership gap. Additionally, bipartisan momentum around carbon border adjustments, just like in the European Union, suggests rising carbon protectionism isn’t going away.
Canada’s large-emitter trading systems, designed with competitiveness as a core focus, offer a balanced response. These systems keep costs low for industry while incentivizing emissions reductions and attracting investment. They help align Canada’s emissions-intensive and trade-exposed sectors with global standards in an era of rising carbon protectionism. Maintaining and refining LETS should be a priority for Canada to ensure its industries remain competitive in an international landscape that increasingly values carbon efficiency, regardless of political shifts in the U.S.
Industrial carbon pricing can deliver big emissions cuts at a low cost to industry
LETS are a foundational policy tool in Canada’s fight against climate change. Previous research from the Climate Institute’s 440 Megatonnes has shown that large-emitter trading systems will deliver more emissions reductions between now and 2030 than any other policy. But they have even bigger benefits.
While LETS are proving effective at reducing emissions, the data also suggests they are protecting—and in some cases, enhancing—the competitiveness and profitability of Canadian industries. That’s not to say that these systems are without their challenges, including potential market instability and political risk, and we’ll return to these issues in future pieces.
Canada’s commitments to reduce its emissions depend on various policies, with industrial carbon pricing playing a foundational role. Every province and territory has either its own LETS (for example, Alberta’s TIER system), or has the federal system applied. These systems are highly effective at reducing emissions. LETS can deliver 20-48 per cent of incremental emissions reductions from all climate policies in 2030, more than any other policy.
LETS are designed to drive investments in emissions reduction while preserving the competitiveness of industries that are emissions-intensive and trade-exposed. These sectors are vital to Canada’s economy, and a significant rise in their operational costs could make them less competitive, potentially causing production and emissions to shift to countries with less stringent carbon regulations.
LETS gives facilities multiple ways to compensate for these emissions, including investing to reduce emissions, obtaining emissions credits by trading them with other facilities, banking credits for future use, obtaining offset credits, or paying the carbon price. This flexibility helps further reduce the cost of the policy. Facilities that outperform the performance standard earn excess credits that they can sell, which helps generate returns for emissions-reducing projects.
Industrial carbon pricing ensures low compliance costs for large emitters
Despite the potential benefits of LETS, some industries have expressed concerns about the associated costs. However, our research shows that the costs and profitability impacts imposed by LETS are generally low and, in some cases, even negative—allowing emitters to profit by earning credits that they can sell or bank for future use. (Banked credits could yield a 13 per cent annual rate of return between now and 2030 because as the national carbon price rises, so does the value of the tonne of emissions it represents.)
Figure 1 illustrates the average cost of emissions for industrial sectors covered by LETS in 2025 and 2030, based on modelling projections from Navius Research. While there are variations across sectors and jurisdictions, the overall trend is clear: LETS compliance costs remain generally low, even as the headline carbon price rises to $170 per tonne in 2030. In 2025, no sector is paying more than $10 per tonne on average, against a carbon price of $95 per tonne rising to a maximum of $29 in 2030. In fact, we find that some industries on average nationally are able to earn more credits than they need to buy. This ability to earn and sell excess credits is shown as a negative average cost in Figure 1.
Note that the costs shown below represent national averages, and costs differ slightly by jurisdiction. Significantly, Alberta is the only jurisdiction that has negative costs for electricity producers sector-wide. The unique design of electricity benchmarks in Alberta’s TIER system—which has been very effective at attracting and generating capital for low-carbon electricity—also leads to so much crediting that the province pulls the electricity sector national average far into negative territory.
Industrial carbon pricing has limited effect on profits
The average cost metric tells an incomplete story. It does not account for critical dynamics that reflect real-world carbon pricing costs, such as facilities adopting technologies at costs below the carbon price, or the mitigating effects of industrial subsidies and revenue recycling, which can further offset compliance costs. Additionally, it fails to directly include the carbon costs of all regulatory measures, such as methane regulations. Furthermore, it overlooks the context for firms’ costs: whether $5 per tonne is a large or small number—and whether it has a meaningful impact on competitiveness—depends on firms’ profit margins.
Profitability is a better indicator of the overall impact of carbon policy on industry. As Figure 2 illustrates, our research suggests that LETS has a minimal impact on a sector’s overall profit margins and total earnings, even as the price rises to $170 per tonne by 2030. Profit impacts are even smaller when accounting for tax and royalty interactions.
Figure 2 illustrates how in 2030, the anticipated drop in operating profit margins for large emitters is 0.6 percentage points under carbon pricing alone —with the average operating margin falling from 36.1 to 35.5 per cent at a national level. On average, total earnings are 2.2 per cent lower when market impacts are included. This position improves when the benefits from subsidies and credit sales exceed the costs of other legislated policies, creating a net effect that can cushion or even counterbalance the impact of all legislated climate policies.
Though there are still important variations between and within sectors and regions, the negligible profit impact at a national level shows how effective LETS and other climate policies are at driving reductions while protecting the competitiveness of Canada’s large emitters.
As the Commission on Carbon Competitiveness notes, there are unique competitiveness challenges faced by specific Canadian industries as they work to reduce their emissions. The status quo is not an option: all of them will need to lower their carbon footprints if they hope to compete globally and attract investment in a world that increasingly cares about the carbon embedded in traded goods.
Industrial carbon pricing is a strategic advantage, not a competitiveness drag
LETS are not a threat to Canada’s competitiveness; instead, they offer a strategic edge in the global shift toward low-carbon re-tooling amid rising protectionism. By incentivizing emissions reductions and keeping compliance costs low, LETS position Canada to compete effectively in a carbon-constrained world. Nonetheless, challenges remain, including market opacity, regulatory uncertainty, and policy instability, which create volatility within LETS. Addressing these issues will be crucial to strengthening federal, provincial, and territorial large-emitter trading systems as a foundation for sustained economic resilience and global competitiveness.
As we’ve said before, governments can fix these issues by strengthening these systems to stabilize prices and drive even more cuts to emissions. Stay tuned as we delve deeper into these topics and explore solutions to enhance the performance and impact of LETS in the coming months.
Dave Sawyer is Principal Economist with the Canadian Climate Institute. Ross Linden-Fraser is a Senior Research Associate with the Canadian Climate Institute.