Industrial carbon pricing is tied to major projects worth more than $57 billion

More than 70 major decarbonization projects stand to gain directly from industrial carbon pricing—and some could be at risk without these systems.

Industrial carbon pricing is Canada’s single-most important climate policy. Its importance rests not only on its emissions-reducing potential—greater than that of any other policy—but also because of the way that industrial carbon pricing helps attract investment for clean industrial projects.

Industrial carbon pricing is not just a stick, it’s a carrot

It’s well established that industrial carbon pricing functions as a stick by pricing industrial pollution, but it also works as a carrot. That’s because industrial carbon pricing—also known as large-emitter trading systems—creates credit markets where facilities can earn returns from their emissions reductions. Facilities that are highly emissions-intensive buy credits on these markets to cover their excess emissions, while facilities that reduce their emissions can generate credits for their high performance that they can sell for cash. In this way, large-emitter trading systems can use the prospect of credits to attract investment into Canada.

These credits are an important way for facilities to recoup the high costs of emissions reducing projects, especially if the projects wouldn’t earn much revenue on their own. For example, carbon capture projects are capital-intensive to construct and resource-intensive to operate, but their product is a gas that has little commercial value—except if there is a price on carbon. By making emissions reductions eligible for credits, large-emitter trading systems provide CCUS projects with revenue streams that make them viable.

This approach also diminishes the need for subsidies. Other climate policies can’t offer the same cost-effective returns for emissions reductions. The federal investment tax credit for carbon capture, for example, would cover up to half of the capital costs of a project, but wouldn’t provide support for the operating costs, which are high. Credits earned in large-emitter trading markets would help projects to help cover these costs, all without putting a burden on the taxpayer.

Companies are investing billions on the assumption of a carbon price

There are already billions of dollars of low-carbon investments across Canada that are banking on the existence of a carbon price. According to the Climate Institute’s research, this includes more than 70 projects in industrial and natural resource sectors with a combined value of more than $57 billion. These emissions-reducing projects would generate performance credits that could be sold in large-emitter trading markets.

These investments include carbon capture installations for oil and gas and heavy industry, decarbonization projects at steel plants and pulp mills, and renewable energy projects in Alberta (the one province where they can earn saleable performance credits and offsets).

Existing facilities stand to gain from large-emitter trading systems, too. Firms that have already completed emissions-reducing projects, such as the Quest carbon capture facility, are earning credits from large-emitter systems that help to cover the investments they’ve already made.

There are big risks to cancelling industrial carbon pricing

As 440 Megatonnes has shown previously, there are billions of dollars in assets that would be at risk if industrial carbon pricing systems were removed. The greatest direct risk is to the credits that companies already hold—amounting to $5 billion in Alberta alone—but investors have made many other decisions with the assumption of an industrial price on carbon, and they might change their minds in the absence of those policies.

One thing is clear: investors have put many billions of dollars on the table to reduce Canada’s emissions, and existing policies have helped make those investments happen. Industrial carbon pricing will help attract the capital to build a cleaner, more competitive Canadian economy—as long as it stays in place.

Ross Linden-Fraser is a Research Lead at the Canadian Climate Institute.

Cancelling industrial carbon pricing would destroy billions of dollars of assets

Dismantling large-emitter trading systems would erase billions in investment.

Industrial carbon pricing—also known as large-emitter trading systems (LETS)—have helped attract massive investments into Canada. And that means that eliminating these systems would devalue those investments, leading to significant costs for the companies that have already made those investment decisions. Those investors are banking on the existence of large-emitter trading systems and the saleable credits that low-carbon projects can generate.

The total value of these assets at risk—in terms of credit values, physical projects, and public liabilities—is substantial.

Eliminating LETS would devalue multi-billion dollars of credits

Large-emitter trading systems create incentives for investing in low-carbon projects by creating valuable emissions credits—and a market in which they can be sold for cash. Eliminating those markets devalues those credits, which are important assets for industrial emitters and their balance sheets.

Alberta has set the national approach followed by most provinces and territories, refining its system since 2007 to align with its competitiveness and emissions goals. Alberta’s TIER (Technology Innovation and Emissions Reduction) system is Canada’s largest industrial pricing system.

In Alberta where actual data is available, industry holds close to $5 billion in emissions credits—assets that were acquired with the expectation of generating a return as the carbon price rises.

Eliminating LETS would undermine the value of physical projects

Federal, provincial, and territorial industrial carbon pricing systems have quietly built a significant investment base over the years. Modeling for the Institute’s research on Canada’s climate policies indicates that new clean energy investments tied to LETS nationally total approximately $4.3 billion today. Scrapping these programs wouldn’t just be a policy shift; it would effectively erase billions in investment value for companies’ projects funded under assumptions of a carbon price, causing balance sheet losses and weakening companies’ financial positions. Those costs are in addition to the lost value of carbon credits mentioned earlier.

In Alberta, for example, Emissions Reduction Alberta reports that, in response to Alberta’s industrial carbon pricing program, industry has invested over $7 billion while the province contributed an additional $1 billion across 296 emissions-reducing projects. Just last month, the fund announced an additional $55 million in new investments.

The cancellation of large-emitter trading systems would imperil the returns for—and potentially the existence of—emissions-reducing projects that were counting on being able to generate saleable performance credits. Among the projects that would generate these credits are a $9 billion carbon-neutral petrochemicals facility outside Edmonton, $2.7 billion worth of upgrades to Ontario steel mills in Algoma and Hamilton, and a $1.4 billion low-carbon cement plant in Alberta.

These projects don’t only represent value for investors: each one is associated with thousands of jobs for people in communities across the country.

Cancelling industrial carbon pricing could leave taxpayers on the hook

In some cases, taxpayers could be on the hook for the loss of the industrial carbon price. For instance, the federal Canada Growth Fund is relying on carbon credits to repay a $1 billion public investment in an oil sands emissions carbon capture project. Without the credits, there would be no mechanism for taxpayers to recoup their investment. Similarly, the federal government has signed contracts worth hundreds of millions of dollars guaranteeing the value of carbon credits for some projects; without carbon credits, taxpayers will be on the hook for these liabilities.

A high-stakes decision

Industrial carbon pricing works so well—and so cost-effectively—because it relies on market forces. Making abrupt, unexpected changes to those markets destroys value. It also creates uncertainty, creating expectations that policies are unstable and volatile. In a time in which Canada’s economy is already under pressure, these are high-stakes decisions that affect both current and future prosperity.

Dave Sawyer is Principal Economist at the Canadian Climate Institute. Ross Linden-Fraser is a Research Lead at the Canadian Climate Institute. Dale Beugin is Executive Vice President at the Canadian Climate Institute.

New research presents the case for modernizing industrial carbon pricing

Large-emitter trading systems are powerful tools for reducing emissions and attracting investment—but they need updates to reach their full potential.

Countries are facing mounting challenges to advance their climate goals with rising protectionism, shifting political priorities, and tighter fiscal pressures—further complicated by the prospect of Trump-era policies returning to the U.S. To address these challenges, Canada will need a policy toolkit that is both flexible and adaptive, while remaining firmly aligned with its long-term economic and emissions goals.

Leading that toolkit is industrial carbon pricing—also known as large-emitter trading systems (LETS)—the country’s top driver of emissions reductions and a shield against carbon protectionism.

However, these systems face a critical risk: the oversupply of credits and low prices threaten to undermine their effectiveness. If left unaddressed, Canada could miss out on up to 48 megatonnes of emissions reductions by 2030, slashing the impact of LETS by nearly half. That’s about the same as the annual emissions from nearly 15 million cars on the road. This gap is too significant to ignore.

This shortfall would not only jeopardize Canada’s ability to meet its climate targets but also create significant uncertainty for industries planning to make long-term low-carbon investments. Moreover, it heightens the risk of border tariffs from other countries, effectively outsourcing Canadian climate policy to foreign governments and eroding the competitiveness of Canadian industries in global markets.

Making sure LETS function as intended is essential to maintaining their stringency, effectiveness, and capacity to retool Canadian industry for success in carbon-constrained markets. This research examines a key challenge for Canada’s large-emitter trading markets, presenting new modeling and highlighting the need for federal, provincial, and territorial governments to proactively update their LETS.

Industrial carbon pricing is designed to contain costs—but has overcompensated

To understand the current challenges in Canadian LETS credit markets, let’s revisit the origins and design of Alberta’s system, which has shaped many provincial and federal industrial carbon pricing frameworks.

Introduced in the late 2000s, Alberta’s carbon pricing system aimed to address industry concerns over high and unpredictable costs. This approach prioritized cost containment, emphasizing reductions in emissions intensity instead of implementing the robust market mechanisms of cap-and-trade, which set a hard limit on total emissions. This intensity-based LETS allowed emissions to grow with production while maintaining low compliance costs by charging only for emissions that exceed a performance standard (sometimes called a benchmark). It then introduced a range of flexibility mechanisms to contain costs below a set price ceiling.

In general, low compliance costs in LETS are a feature, not a bug: they reduce the risk of losing market share to firms in jurisdictions with weaker climate policy. Critically, however, when designed right, they maintain incentives for firms to reduce emissions by improving performance while maintaining production: top-performing firms can generate credits they can sell for cash, while lower-performing firms have an incentive to improve emissions management to avoid paying for excess emissions. In theory, the price of credits in LETS should trade at or above the carbon price set by the regulator, because the credits can serve as a substitute for paying the fixed carbon price.

Yet that principle only holds if overall demand for credits—across the full LETS credit market—remains strong. As a result, setting sufficiently ambitious performance standards is crucial: if the limits are too stringent (again, overall limits, not for one specific sector), then compliance costs increase; if too lenient, credit markets become oversupplied, prices of credits (both current and expected) crash, and firms lack incentives to invest in emissions improvements while devaluing credit holdings. This balancing act influences the fundamental value of emission reductions, directly impacting industry costs and competitiveness.

Performance standards in LETS systems are set for sectors or facilities, guided by competitiveness and technical assessments and decisions by elected officials. Often, governments face pressure to reduce the stringency of these standards in response to real or perceived competitiveness risks.

While the Alberta blueprint initially struck a balance between enhancing carbon productivity and controlling costs, certain design choices have not kept pace with evolving circumstances. This risks creating an oversupply of credits and lowering prices, undermining the market signals critical for driving emissions reductions.

Currently, performance credits and offsets in Alberta are valued at approximately $40 per tonne—substantially below the national minimum carbon price of $80. This low price suggests a credit glut, undermines the system’s effectiveness, and creates ripple effects that influence price expectations in other jurisdictions, like Ontario. As a result, the system’s focus on cost containment over market functionality is now limiting its effectiveness.

The risks of oversupplied credit markets

An oversupplied credit market is fundamentally unbalanced, with insufficient scarcity to drive demand or sustain credit value. In LETS, those imbalances often arise from a mix of design choices and unforeseen interactions with complementary policies and emerging technologies:

Generous performance standards produce little net demand. Regulators design LETS markets so that there is more demand for credits than supply—but to contain costs, they tend to err toward more generous performance standards that increase the supply of credits, shrinking the net demand in the system. In practice, some facilities receive more credits than they need, enabling them to bank or sell surplus credits without significantly changing their behavior. While this approach reduces compliance costs and addresses competitiveness challenges, it leads to thin margins of demand. Thin margins leave little cushion to absorb unforeseen impacts on supply or demand that could undermine the overall function of the market.
Policy interactions can add to oversupply. The interaction between federal, provincial, and territorial policies can exacerbate credit market imbalances. Overlapping programs may unintentionally amplify credit supply and depress demand. For instance, investment tax credits make it easier for firms to reduce emissions, making more firms likely to generate credits and fewer firms likely to require additional credits. Likewise, federal policies designed to drive emissions reductions in one sector, such as the Clean Electricity Regulations or the proposed oil and gas emissions cap, may overlap with provincial LETS. This overlap creates a surplus of credits, further depressing prices and weakening the market’s ability to incentivize deeper emissions cuts. These problems can be overcome by adjusting the design of LETS to account for the interactions.
Some costs are unpredictable. The costs of reducing emissions aren’t static. For example, global low-carbon innovation has led to rapid declines in the costs of renewable electricity and batteries. As a result, electricity producers can reduce emissions more cheaply—and generate credits in some LETS markets more easily, again slanting credit markets toward more supply and less demand.
Large emissions reductions can have big implications. Technologies like carbon capture, utilization and storage (CCUS) play a critical role in emissions reductions but also contribute to market imbalances simply through scale. Large-scale CCUS projects generate significant volumes of credits, potentially overwhelming market demand. This dynamic further depresses prices, especially if the market has thin net demand.

In summary, if the emissions intensity of regulated industries declines faster (for any reason) than the market-wide average performance standard, there may be no incentive to further reduce emissions.

LETS are intentionally designed to balance cost containment with emissions reductions, but this focus on minimizing costs absent well functioning and transparent markets has created structural challenges. Generous performance standards, overlapping policies, and thin margins between supply and demand all contribute to market imbalances.

Credit markets in Canada could tip into oversupply

So far, we’ve mostly been talking in theoretical terms. How are the actual LETS markets playing out in Canada? We collaborated with Navius Research to model the performance of Canada’s various LETS through 2030. Two scenarios from this modelling illustrate just how vulnerable LETS are to an oversupply of credits—and therefore to losing potential investments and emissions reductions.

In the legislated policies scenario, which represents existing federal, provincial, and territorial climate measures, LETS markets remain stable, but only just. Generous performance standards and rapid technology change lead to limited net demand. In this scenario, the demand for credits exceeds supply by about 2 per cent nationally in 2030. This narrow margin means that even a small shift in available credits could lead to an oversupplied market and depressed credit prices in some jurisdictions. For example, the modelling shows that some markets would risk oversupply even under the existing policy architecture, if technologies like CCUS become cheaper than expected.

Now, consider a case where new climate policies overlap with carbon pricing. The announced policies scenario adds proposed federal policies, such as a cap on emissions from the oil and gas sector and tighter methane regulations. These policies interact with carbon pricing in some jurisdictions, inducing emissions reductions that generate LETS credits. Because LETS markets have not been designed to account for these interactions, some systems develop an oversupply of credits, and prices fall. Lower prices threaten the business case for additional reductions (and could even undermine returns on existing projects).

Figure 1 illustrates the balance between credit supply and demand in these two scenarios. The figure shows net demand, meaning the extent to which demand exceeds supply, expressed as a share of covered emissions in each system.

When supply exceeds demand, prices fall

The modelling above also provides insights into expected prices in Canada’s LETS markets. Figure 2 illustrates the projected carbon price in LETS across Canada in 2030 in the announced policies scenario. In this scenario, the price of credits in Alberta’s TIER system remains very low at $46 per tonne, while the prices in Saskatchewan and B.C.’s systems fall to $139 and $164 per tonne—all below the federally scheduled price of $170.

In the announced policies scenario, the LETS in three provinces have an oversupply of credits that pushes their prices below the national carbon price. It is significant that these three provinces are Alberta, British Columbia, and Saskatchewan, since together their industrial facilities account for a full third of Canada’s total emissions.

The oversupply in these LETS is driven by the challenges described above: generous performance standards and unexpected technology change combined with the impact of interacting policies. But each of these dynamics plays out in regionally specific ways.

In Alberta, the oversupply is a result of interactions between LETS and oil and gas sector policies, combined with excessive credit generation in the electricity sector.

First, Alberta’s system already has more credit generation than most systems, thanks to a uniform performance standard for electricity that rewards renewable and low-carbon generators with credits. This approach is best practice and rightly rewards low-carbon generation—but the performance standard may be set at too generous a level. The unanticipated high uptake of renewables has led to widespread crediting that puts Alberta’s system on the margin of oversupply.

Second, in this scenario, additional oil and gas sector policies, chiefly the federal cap on oil and gas sector emissions, induce emissions reductions that reduce demand for credits. Alberta’s LETS becomes stricter over time, but it does not tighten fast enough to account for these additional credits, leading to excess supply.

In British Columbia and Saskatchewan, the oil and gas sector drives the bulk of oversupply. B.C.’s industrial carbon pricing system, in particular, is highly sensitive to performance standards for the liquefied natural gas (LNG) sector, as electrified LNG facilities could swamp the market if the performance standards are overly generous. The provincial government has not finalized these performance standards.

Other provisions may exacerbate the oversupply. For example, B.C. applies a declining annual cap on the use of tradeable credits for compliance, which could lead to a buildup of unusable excess credits and put downward pressure on credit prices. B.C.’s cap on use of tradeable credits was not modeled, and would further depress credit prices if explicitly included. In Saskatchewan, the system’s performance standards are sufficiently generous that small changes in CCUS uptake would be enough to push the system into oversupply, even in our legislated policies scenario.

Stronger systems would reduce more emissions at a manageable cost

Our modelling shows that if credit prices stay on their current trajectory, Canada could miss out on between 18 to 48 megatonnes (Mt) of emissions reductions by 2030.

In the scenario we’ve modelled above, with several markets on knife-edge and some facing oversupply, LETS deliver 18 Mt fewer emissions reductions by 2030, compared to markets that function as intended where credits trade at $170 per tonne in 2030 and other federal policies, such as the cap on emissions from the oil and gas sector, are implemented as proposed. . Still, that scenario doesn’t fully model downside risks, given how the factors we’ve discussed above can increase supply of credits, and how thinly balanced LETS markets are in multiple jurisdictions.

We also considered two further scenarios: one in which prices for industrial carbon pricing stagnate at $110 in 2030, and another in which performance standards in Alberta, B.C., and Saskatchewan are substantially tightened and prices hold at $170, with revenue re-invested in low-carbon technologies, and policy overlaps are minimized. In the scenario in which benchmarks are tightened, carbon prices continue to rise, and credit markets are stable, Canada avoids an additional 48 Mt of emissions in 2030.

Even with stronger systems delivering greater emissions reductions, industry costs would remain manageable. With a binding price of $170 per tonne in 2030, and tighter performance standards, average compliance charges paid for industry as a whole would stay modest—at about $30 per tonne—and some sectors would remain net creditors.

Building functional markets for industrial carbon pricing

Current market data and modelling projections highlight the fragility of credit markets, where overly generous performance standards risk oversupply, credit gluts, and undervalued emission reductions.

Underlying all of these risks is a significant lack of transparency about what is happening in LETS markets. With the exception of Quebec, where credits are auctioned and there are regular market updates, no system publishes the price of credits and only Alberta has a transaction registry.

Fortunately, there are many good options to improve LETS design, and the federal, provincial, and territorial governments are all in a position to take action.

First and foremost, tighter systems would be more likely to deliver emissions reductions and investment certainty. Existing performance standards do not sufficiently account for the risk of faster-than-expected technology change, or the potential impact of policy interactions. While today’s systems may offer cost containment in the short term, they promise neither certainty nor competitiveness in the long term. Stricter performance standards would reduce these risks.

Frequent updates are a feature of these systems. Applying minimum federal standards has helped bring LETS across the country into closer alignment in the past, and future federal reviews could do more to preserve market function. But provincial and territorial regulators can take the initiative as well. Solutions like price floors, market stability reserves, and proactive benchmark adjustments are promising design options.

Greater transparency would also help. To ensure carbon markets function effectively, robust mechanisms are required to track and reveal settlement and future prices. This transparency would help identify imbalances early and allow policymakers to adjust supply and demand dynamics accordingly. Market monitoring should also provide insights into how credits are traded and used, ensuring that prices reflect the true cost of emissions reductions and that the market isn’t being distorted by oversupply or unanticipated policy interactions.

Stay tuned as we explore these market fixes in upcoming research.

Dave Sawyer is Principal Economist at the Canadian Climate Institute. Ross Linden-Fraser is a Senior Research Associate at the Canadian Climate Institute. Dale Beugin is Executive Vice President at the Canadian Climate Institute.

New analysis shows how Canada’s industrial carbon pricing protects competitiveness and profitability

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.

Canada’s energy transition will demand $16 billion worth of critical minerals by 2040

Critical minerals could be one of the clean economy’s greatest resources—if it’s done right.

Of all the building blocks that make up a clean economy, six critical minerals—cobalt, copper, lithium, nickel, graphite, and the rare earths—will form the foundation. In a world that meets its climate pledges, annual demand for these minerals will reach a value of $770 billion by 2040. This demand opportunity primarily comes from the clean economy, and particularly from the rise of electric vehicles. Canada has the mineral reserves to compete here, and how it approaches this opportunity will shape the success of its clean energy transition.

Battery and car makers have already invested billions of dollars into Canada’s electric vehicle value chain, betting that the country will ramp up its production of critical minerals. But expectations will have to reconcile with investor wariness towards mineral extraction. Capital markets remember the sector going bust in the early 2010s, when supply outstripped demand. The sector’s human rights violations and environmental damage—and the fact that many Canadian-based companies have committed both—also raise non-negotiable sustainability concerns. Attracting capital to Canada’s mining sector will mean making progress on multiple, and often competing, policy imperatives—and fast.

We estimate that Canada requires a $30 billion investment in critical mineral extraction, and that the mining sector must improve its sustainability performance to attract this much capital. Ultimately, critical mineral mining should not only supply the clean economy, but also become part of it.

Canada’s critical mineral production gap

In 2022, Canada produced $8 billion worth of critical minerals. By 2040, it could produce anywhere from $4 billion to $43 billion worth annually, depending on investment decisions today. To ground Canada’s production potential, we developed three scenarios showing critical mineral demand in the clean energy transition: a scenario with growing Canadian domestic demand, a scenario with growing Canadian domestic demand plus growing exports to the United States, and a scenario with growing Canadian domestic demand but reduced by greater recycling.

Even in our domestic demand scenario, securing enough critical minerals to keep up with growing demand means doubling annual production by 2040, from $8 billion to $16 billion worth of critical minerals. Because it takes 18 years on average to open a mine in Canada, this investment to secure domestic production can’t happen soon enough.

To dig into the details, the interactive Figure 1 shows the production gap between production forecasts from existing mines (existing production) and projected demand for 2040 (clean demand, other demand). Across all six priority critical minerals—which have been aggregated together using their respective market values—we estimate that reaching an annual production capacity worth $16 billion will require a total of $30 billion in new capital investment as soon as possible.

Figure 1 also shows the production gap for each critical mineral separately, in kilotonnes, and notes their individual capital requirements. Copper has the most domestic demand in 2040 (640 kilotonnes) and requires the most capital ($11 billion). Neodymium, a rare earth element, has the lowest domestic demand in 2040 (3 kilotonnes) and the lowest capital requirement ($0.8 billion).

We project $16 billion worth of demand when looking exclusively at mining for domestic demand. Meanwhile, in our exports scenario, we have critical mineral exports to the United States rising steadily as the North American clean economy grows. This doubles the value of demand that Canada could see to $32 billion, and it could be greater if Canada were to be more ambitious on exports. Conversely, in our greater recycling scenario, we have North America matching the European Union’s critical mineral recycling goals. This cuts Canada’s projected demand for raw critical minerals down to $12 billion, but also reduces the amount of mining capital required and facilitates more sustainable outcomes.

Closing the production gap would be an economic win for Canada. Across all three demand scenarios, the value of output exceeds the cost of investment after just two or three years of full production. Getting to that stage, though, requires billions more in capital investments, which, in turn, means convincing investors of the value of this opportunity.

Insufficient capital flows

At current market trends, Canada won’t attract enough capital to meet 2040 demand in the clean energy transition. To add to the challenge, our analysis does not include exploration costs, the 28 other lower-priority critical minerals, or the 16 other rare earth elements, all of which raise capital requirements.

Mining capital expenditure in Canada is stagnating, even as global investment grows. Moreover, of the $12 billion invested into Canadian metals mining in 2023, only a quarter went to metals other than gold, silver, and iron. Government policy won’t be able to cover the difference—the main financing mechanisms for critical mineral extraction are the Critical Minerals Infrastructure Fund of just $1.5 billion and the refundable Clean Technology Investment Credit that covers, at most, 30 per cent of capital costs.

Canada will require a major boost to its capital investment attractiveness, and soon, if the country is to play a significant role in meeting demand for the clean economy’s most important building blocks.

Unearthing a competitive advantage

Canada’s mining sector would be more attractive to investors if it could mine more competitively than other countries. Competitiveness is often understood in terms of capital intensity, which is the amount of capital required per product. Canadian critical mineral mines have capital intensities that are roughly on par with global mines, as shown in Figure 2, and this has not attracted enough investment to meet projected domestic demand. If Canada’s mining sector wants to compete over capital intensity, it would have to innovate substantially to bring its ratios down.

If Canadian mining could compete over emissions per product or emissions intensity instead, it would come out ahead. Across the four critical minerals displayed in Figure 2, Canadian mines tend to be 15 per cent more capital intensive than the global average, but stand out as being 68 per cent less emissions intensive.

Capital markets have not historically prioritized low emissions intensity, but mines, which are responsible for between 4 and 7 per cent of global emissions, are increasingly looking to display their climate credentials. The International Council on Mining and Metals represents over a third of the global mining sector and has set a target of net zero emissions by 2050. Canada currently enjoys a competitive advantage in this space, but needs to decarbonize its mining sector faster to keep growing activity and energy use from derailing improvements in emissions intensity.

Other measures of sustainability also matter to the future of Canada’s mines. We find that 34 per cent of active priority critical mineral projects are within 25 kilometres of protected and conserved areas, while 25 per cent are within 25 kilometres of federally recognized Indigenous Territories. The global mining sector does not have a common approach towards other measures of sustainability, but it is working towards one, and the Mining Association of Canada will play a leading role in defining standards. Any standards that emerge should, at a minimum, recognize Indigenous Peoples as having a right to free, prior, and informed consent, in line with Canada’s adoption of the United Nations Declaration on the Rights of Indigenous Peoples into law.

Critical mineral mining is a multibillion-dollar opportunity for Canada to power its clean energy transition, and investment must start flowing today to meet the opportunity. Given the sustainability risks involved with mining, though, the Canadian mining sector must fulfill this market imperative alongside environmental and social imperatives. Mines have an obligation to align with net zero and work with host communities.

Simultaneously meeting these economic, environmental, and social imperatives will be challenging, but necessary for building Canada’s clean energy transition. It could also be the sector’s greatest competitive advantage in a net zero world.

The data used for this insight can be downloaded here.

Calvin Trottier-Chi is a research associate with the Canadian Climate Institute.

Canada’s low-carbon exports are growing nearly twice as fast as all other exports

Over the last decade, Canada’s low-carbon exports have more than doubled in value, as the global energy transition has accelerated.

What’s new?

From critical minerals to electric motors, Canada’s diverse basket of low-carbon exports is outpacing the growth of all other exports. Since 2013, Canada’s low-carbon exports have more than doubled in value, growing from $15.8 billion to $38.7 billion last year. That’s nearly twice the growth rate of all other exports combined and shows the potential for future opportunities in a global economy increasingly moving to net zero.

This week’s Insight looks at the performance of low-carbon exports in Canada by tracking national export revenue over the past decade in hopes of getting a better picture of where the country is at and the potential road ahead.

Tracking the progress of clean exports is important in gauging the readiness and competitiveness of Canada’s economy in the midst of this low-carbon transition. The export data shows that Canada has a lot to offer countries in the midst of this accelerating shift to clean energy.

Clean exports have grown nearly twice as fast as other exports

To track the progress of Canada’s clean-energy exports, 440 Megatonnes revisited the list of low-carbon export products from an earlier piece in Policy Options. This list contains a total of 141 individual low-carbon commodities, providing a wide net measure to track Canada’s ability to compete in the global low-carbon economy.

Figure 1 highlights the performance of low-carbon commodities over a ten-year timeframe between 2013 to 2023, in current Canadian dollars. The low-carbon products are further broken down into six categories, each representing a different subset of products that are important in a low-carbon economy, ranging from clean energy to the critical minerals used in the manufacture of clean technologies.

At an aggregate level, these low-carbon exports have grown by an annual average of 9.4 per cent over the past ten years, starting at $15.8 billion in 2013, and growing to $38.7 billion in 2023.

This is almost double the average growth rate of all exports in Canada, which grew an average of 5 per cent per year. The growth in clean energy exports also outpaced oil and gas exports — which saw an average annual growth rate of 4.3 per cent.

As a share of total exports, low carbon commodities grew from just 2.8 per cent in 2013 to 4.5 percent last year, while oil and gas exports fell from 24 to 23 per cent.

Clean export growth is strong across sub-sectors

Figure 2 represents the annual growth rate of each of the six aggregated low-carbon categories compared to all exports between 2013 to 2023. Almost all of the categories outperformed the growth rate of all exported products in Canada.

Clean transport exports are scorching hot. This category saw the largest increase in annual growth over the past ten years, at 27.5 per cent. This group includes electric and hybrid heavy-duty and light-duty vehicles, as well as electric trains and electric forklifts. The boom in clean technology-related exports is driven by significant increases in electric vehicle demand. Exports in clean transportation were around $771 million in 2013 and have grown by more than 11 times their original value to around $8.8 billion last year. This trend is accelerating, with the value of clean transportation exports doubling between 2022 and 2023.

Clean fuels grew the second fastest at an annual average of 10.1 per cent. This includes products such as alternative fuels and biofuels like ethanol and biodiesel, as well as biomass, which typically includes products like wood pellets. Exported goods within this category more than doubled over the span of the past ten years, from $1.4 billion in 2013 now growing to $3.6 billion in 2023.

The growth of clean liquid fuels has notably accelerated in recent years. In 2013, biomass accounted for 65 per cent of clean fuel exports. Fast-forward to 2023 and clean liquid fuels have grown to account for roughly the same share of export value as biomass.

Rounding out the top three, was energy efficiency exports, which includes thermostats, LED bulbs, heat pumps for buildings, and high-efficiency electrical equipment. This category grew to a total of $6 billion in 2023, up from $2.6 billion in 2013.

There were a number of other notable data trends. The clean electricity and power equipment category outpaced the growth rate of total exports. This category is the largest by value of all the low-carbon subsectors, reaching $12.8 billion in 2023. Despite its significant size, the subsector maintained an impressively high annual growth rate at 7 per cent. Also of note: while this category includes renewable technologies and their components, non-fossil fuel-based generators, batteries not used in transportation, and more, a quarter of export value comes specifically from electricity exports sold south of the border ($4.3 billion).

The remaining two categories were clean industry—which includes non-residential heat exchangers, heat treatment systems, steam or vapor generating boilers and electric furnaces—and mined clean energy materials. While the latter category includes critical minerals such as lithium and cobalt, it is largely dominated by uranium exports, which made up 93 per cent of total value. This category grew slower than the rest of the economy’s annual export growth rate, increasing 4.2 per cent on average over the past decade.

More growth opportunities for clean exports as the energy transition quickens

Low-carbon products have become a bigger part of Canada’s total exports, and increases in the share of low-carbon exports will only rise as global demand continues to rise. Growing these industries can smooth out transition risks for Canada’s economy, as global demand for fossil fuels wanes. Larger low-carbon industries can help to keep Canada more competitive over time.

Notably, the Inflation Reduction Act (IRA) has opened up new trade opportunities for Canadian clean industries with the United States. The IRA makes products made with Canadian electric vehicle components and critical minerals eligible for the law’s tax credits, which should spur the demand for goods flowing across the border.

But an increase in the global demand for low-carbon goods will also mean increased global competition to supply these products as well. As a result, government support—such as expediently finalizing Canada’s clean technology manufacturing and critical minerals investment tax credits—is important for maintaining a competitive business environment in Canada that attracts more low-carbon domestic and foreign investments.

With the right policy support in place, it's clear from the trade data that Canadian companies selling low-carbon goods are poised for strong growth, as the world continues to transition to a net zero economy.

Arthur Zhang is a research associate for the Canadian Climate Institute, and Dave Sawyer is the Principal Economist at the Canadian Climate Institute.

Reducing emissions from Canada’s banking sector requires better data

Without better emissions data, Canada’s banks face challenges living up to their net zero commitments.

What’s new?

Banks play a significant role in financing Canada’s transition to net zero. Specifically, they can shift their lending activity and investment decisions towards lower carbon projects to reduce the emissions they finance.

To date, all Canadian banks are a part of the UN’s Net Zero Banking Alliance (NZBA), a voluntary pledge which requires them to establish commitments to reach net zero emissions by 2050. But currently, banks lack the necessary data to track financed emissions — emissions associated with their investment or lending activities — and set reduction targets for many parts of their portfolios.

What are financed emissions?

Financed emissions, which are also known as Scope 3 Category 15 emissions, refer to the greenhouse gas emissions linked to investment or lending activities. They represent the largest portion of a bank’s carbon footprint, comprising up to 700 times more than the emissions from a bank’s operational — Scope 1 and 2 — emissions. In other words, they matter significantly for assessing a bank’s climate action.

A bank’s financed emissions can shrink by either divesting away from carbon-intensive companies or investing in lower-carbon technologies. For example, if a bank financed 30 per cent of an oil production plant, the bank’s financed emissions would typically be calculated as 30 per cent of the total annual emissions from that facility. The bank can reduce emissions if it sells its portion of the ownership in the facility or invests in helping it decarbonize.

On aggregate, Canada’s largest banks reported a total of 213.9 megatonnes of financed emissions from their most recently available estimates, broken down into six categories: oil and gas, power generation, transport, agriculture, industry, and real estate (Figure 1).

The NZBA typically considers these sectors to represent the largest areas of a bank’s financed emissions activities, and members of the NZBA are required to establish interim emissions reductions targets for these sectors for 2030 or earlier.

Oil and gas emissions represent the largest source for emissions across investment portfolios. However, significant portions of financed emissions can also be attributed to agriculture, transport, aviation, and automotive manufacturing sectors. Yet, the emissions across these sectors are still the least disclosed, with only half of the banks reporting their financed emissions across these sectors.

Shining a light on data gaps in financed emissions

Overall, banks frequently cite data quality issues as a primary barrier to setting short-term financed emissions reduction targets.

As mentioned above, there are still several sectors where financed emissions are not yet reported by all banks. Even for reported emissions, the quality of estimates also remains low on average. Banks typically self-report the quality of their financed emissions using the PCAF’s data quality score. A score of 1 reflects the highest quality of data by using a company’s verified reported emissions. By contrast, a score of 5 represents the lowest data quality, often given for estimates that rely on sector-wide activity-based emissions that often contain margins of error that may significantly under- or over-estimate actual financed emissions.

Figure 2 provides an aggregate of the average PCAF scores across all banks in each sector category, and also compares data quality scores with the number of banks that have set interim financed emissions targets for each sector.

Unsurprisingly, there is an inverse relationship with the number of interim targets and data quality, where poor data quality leads to fewer interim targets. For example, the data quality for agriculture and industrial sectors are particularly low and there are currently no banks that have set any short-term targets for these sectors.

Poor data prevents banks from obtaining accurate baselines needed to set their financed emissions reduction targets. It also increases the risks of over/under-investment when margins of error for estimates are significant.

As data quality improves, banks can be more confident that their estimates are accurate reflections of their financed emissions. Subsequently, they can use the data to inform their financed emissions reduction targets.

However, obtaining high quality emissions data for all sectors is easier said than done. Certain sectors, such as the agricultural sector, have historically faced challenges in accurately reporting emissions, which is reflected both in the low data quality score and the lack of interim targets for the sector.

For other industrial sectors, emissions data for Scopes 1 and 2 may already be available for facilities that are required to report their emissions to the Federal Greenhouse Gas Reporting Program.

Filling data gaps for more comprehensive target setting

To address issues around data gaps, securities administrators and other regulatory bodies have introduced some regulations to improve the availability of data.

One way of improving the availability of company-level emissions data is to simply make it mandatory for companies to disclose their emissions. For example, the Canadian Securities Administrators is considering proposals to require companies to disclose at least their Scope 1 emissions.

Expanding mandatory disclosures to include Scope 1, 2, and 3 emissions would further equip banks by providing more comprehensive data to estimate the full footprint of their financed emissions. Adopting greater emissions reporting standards would also align Canada with international peers, such as California, which recently passed a first-of-kind bill for mandatory disclosures, as well as Europe, which adopted the European Sustainability Reporting Standards.

Another option is to require banks to develop emissions reduction targets and incorporate them under their climate transition plans, in line with the federal government's guidelines on climate risk management. This work is already being developed. Requiring banks to publish and update their transition plans to include financed emissions targets can increase investor demand for more company-level data, which can drive more companies to pursue better disclosures.

Improving data quality is especially important to equip banks with the information to set sector-wide targets and, in turn, invest in lower-carbon projects across the Canadian economy to meet them.

Arthur Zhang is a Research Associate with the Canadian Climate Institute.

Calculating emissions intensity across the economy

New data show the most emissions-intensive sectors in Canada across Scope 1, 2, and 3 emissions.

At 440 Megatonnes, we’ve been tracking Canada’s climate progress through our Canadian Emissions Intensity Database, which helps businesses, governments and households estimate their emissions footprint.

Since we launched in November 2022, new data have become available.

The database provides emissions intensities for all the scope emissions in more than 60 economic sectors and 51 final demand expenditure categories and exports. This includes emissions from direct combustion (Scope 1), purchases of electricity and heat (Scope 2), and across supply chains (Scope 3 upstream).

Newly available data includes the federal government’s official National Inventory Report for 2021 greenhouse gas emissions. In addition, we’ve updated economic data points based on GDP from Statistics Canada for that year.

With new data in hand, we can compare progress across sectors and categories. And we can provide a more up-to-date tool for those using the database.

Canada’s top emissions-intensive sectors

Here we’ve broken down the top five most emissions intensive sectors in 2021 and how they compare to the previous year’s data.

In 2021, animal production and aquaculture was the most emissions intensive sector, followed by water, sewage and other systems, iron and steel mills and ferro-alloy manufacturing, and so forth.

In most cases, emissions for each sector were dominated by Scope 1 emissions—with the obvious exception being the petroleum and coal manufacturing sector. Some sectors saw greater year-on-year declines in emissions intensity, including petroleum and coal manufacturing, animal production and aquaculture, and iron and steel mills and ferro-alloy manufacturing.

Caveats to consider about emissions intensity

A couple points are worth mentioning before diving further into the data.

First, we’re considering the emissions intensities of each sector, which is different from total emissions. The data shows which sectors, pound for pound, emit the most greenhouse gases per unit of economic value, as expressed by GDP output.

This can be useful, not only to estimate an organization’s Scope 3 emissions footprint, if it isn't otherwise calculated from supply chain data. But it’s also useful to get a sense of the potential trade-offs when reducing emissions in different sectors through policy. Those sectors with high emissions intensity generate the smallest amount of economic wealth (GDP) per tonne of carbon emissions, and vice versa.

The second point is that our denominator—GDP, in this case—can change year to year based on whether commodity prices or profit margins change. That means a change in emissions intensity expressed in this way may not reflect an actual improvement in greenhouse gases emitted per unit of physical production—of tonnes of steel or barrels of oil, for example.

Physical units for emissions intensity are always a better measure to understand a sector’s progress to decarbonization, but this data can be difficult to come by. That said, tracking emissions by GDP is still a useful way to estimate emissions intensity and can provide a single metric against which all economic sectors can be compared against.

A deeper dive into the data

With that in mind, consider the steep declines in emissions intensity for petroleum and coal manufacturing in 2021, at nearly 25 per cent.

At first glance that seems like a good news story for climate progress. However, the bulk of that drop was driven by a decline in GDP that year (-32 per cent), and only modest declines in total emissions (-2 per cent).

Similarly, animal production and aquaculture saw a 15 per cent decline in emissions intensity, driven largely by a drop in GDP (-18 per cent), not a change in emissions.

It's also useful to consider the scale of these sectors relative to one another. Figure 2 shows the size of each sector in terms of GDP on the x-axis and the size of total Scope 1, 2 and 3 emissions on the y-axis. The total emission intensities are indicated by the bubble sizes.

You can see the rank order of each sector changes when considering total emissions and GDP contributions. Petroleum and coal manufacturing are far ahead of the pack on both metrics, but place fourth on emissions intensity. Likewise, water, sewage and other systems have the second highest emission intensity, but are the smallest of all sectors when it comes to total emissions and GDP. Animal production and aquaculture, the most emissions-intensive sector of the five, is still near the top when it comes to total greenhouse gas emissions and GDP contributions.

Decreasing emission intensity with clean tech

Each of these sectors have potential solutions to reduce emissions intensity in line with a net zero world.

Wastewater treatment plants can capture biogas and repurpose it to replace fossil fuels. The cement sector is piloting a number of ways to cut emissions, including through new applications of carbon capture and storage (see here, here, here and here). Clinker substitution with renewable resources is another potential route. And government and the steel industry have made big investments in emissions-cutting technologies that will move away from coal-based blast furnaces.

Most of the emissions from animal production and aquaculture come from methane released through the digestive process of livestock and manure management. Substituting and adjusting livestock feed can reduce these emissions–for example, by moving from corn to barley, adding seaweed or other food additives, or switching to high-quality forages like alfalfa.

While the primary goal of the emissions intensity database is to help estimate emission footprints, it can also provide new perspectives on progress across all sectors of Canada’s economy on the road to net zero.

Seton Stiebert is an advisor to 440 Megatonnes and the Principal of Stiebert Consulting.

How to align public finance with Canada’s climate goals

Canada’s Crown corporations have been gradually shifting to clean investments, but there are ways to make better bets with public funds.

There is a straightforward financial tradeoff at the core of the energy transition. Since every dollar invested in fossil fuels brings the risk of higher emissions, it follows that every dollar redirected toward low-carbon projects reduces the risk.

In other words, decarbonization demands the reallocation of huge sums of capital. In Canada alone, the federal government estimates that achieving net zero by 2050 will mean mobilizing at least another $100 billion in public and private spending—every year.

At 440 Megatonnes, we’ve looked at one dimension of this financial transition already by examining how federal departments use tax measures and program spending to reduce emissions. These are the types of spending that the federal government had in mind with its new guidelines to eliminate inefficient fossil fuel subsidies. The guidelines take a major step toward aligning Canada’s spending with its climate goals.

But there is another important category of spending that is worth examining. These are the billions of public dollars invested every year through public finance mechanisms, which include the loans, guarantees, insurance and other capital provided by Crown corporations for projects within and outside Canada. In its announcement on fossil fuel subsidies, the federal government promised to issue a plan for phasing out public financing for fossil fuels by 2024. This Insight illustrates just how significant that phase out would be—and what kinds of guidance Crown corporations will need to get it right.

Public financing for energy has largely favoured fossil fuels

Canada has two major providers of federal public finance. The first is Export Development Canada (EDC), the country’s export credit agency and by far the largest purveyor of public finance; and the second is the Business Development Bank of Canada (BDC), which provides credit to small- and medium-sized enterprises.

This Insight focuses on these two organizations, though in the coming years, other federal Crown corporations may provide public finance to accelerate the energy transition. EDC and BDC support a variety of projects across the economy, and their investments in energy include everything from smart thermostats to wind farms to wood pellets. But as Figure 1 shows, the bulk of their financing for energy has historically gone to fossil fuels industries.

It’s worth acknowledging that Crown corporations don’t always call the shots. Much of the funding for the Trans Mountain pipeline, which contributes to the visible fossil fuel spikes in 2018 and 2020, is issued from an account reserved for transactions that are too risky for EDC but that government ministers have deemed to be in the “national interest.”

But as late as 2021, Canadian public finance was out of step with global trends that have long since shifted in favour of clean energy. In that year, as the world invested about $1.5 dollars in low-carbon energy for every dollar invested in fossil fuels, Canada’s public finance institutions did the opposite, directing about $3.2 dollars to fossil fuel industries for every dollar that went to low-carbon energy.

To align Canada’s public finance with the country’s climate goals, financiers must consistently do two things: redirect public financing from fossil fuels to low-carbon energy, and simultaneously ensure that any remaining public support for fossil fuel- or transition-exposed projects is consistent with climate goals.

The beginning of the end of public financing of fossil fuels

There are signs that Canada’s approach to public finance is shifting.

First, Crown corporations are dedicating increasing sums to clean technologies and emissions reduction. BDC has a dedicated fund of $1 billion set aside for clean tech companies, while EDC financed clean technology deals that were worth a total of $8.8 billion in 2022—well on the way to its goal of financing $10 billion in deals by 2025.

Second, federal entities are setting explicit goals to shift capital away from fossil fuels. The most important is the federal commitment, mentioned above, to make rules for phasing out public financing of fossil fuels in 2024. Those rules will complement guidelines that the federal government issued in 2022 to prohibit public financing for unabated fossil fuel projects overseas. For its part, EDC has already implemented those guidelines and has set a modest target to shrink its portfolio related to upstream oil and gas production by 15 per cent by 2030 relative to 2020.

These commitments point in the right direction. But green investments still represent a small share of public finance for energy. And public finance institutions lack tools to assess whether their remaining investments in transition-exposed industries are genuinely aligned with climate goals.

To some extent, both of these challenges are symptoms of uneven standards and information scarcity. Even when a public institution like EDC or BDC discloses its own exposure to climate risks and documents its financed emissions, the companies that seek certain lines of financing may not be scrutinized for the credibility of their climate plans or the consistency of their projects with net zero emissions. Nor are public institutions equipped with direction about how to reconcile short-term benefits like job retention with the long-term risks of economic transition.

More information enables better investments

One way to equip financiers with better information is to standardize the way that we evaluate investments against climate goals. The recently proposed climate investment taxonomy is exactly this kind of tool, outlining best practices for companies that want to be eligible for sustainable finance and establishing benchmarks against which financial institutions can measure their investments. EDC is well positioned to adopt this taxonomy in full because it already has a framework for classifying investments as “green” or “transitional”.

Assets financed by these green bonds must measure and disclose some of their exposures to transition risks, so the natural next step is for regulators to broaden these requirements. Standardized climate disclosure rules would help level the playing field and equip markets with information to make more sustainable bets. A further step would be to develop a more detailed framework to evaluate whether investments will be resilient to the economic changes that accompany the energy transition.

Finally, institutions can commit to investing an even greater share of their portfolio in demonstrably clean projects. The more capital that is allocated to reducing emissions, the more quickly we will reach our goals. More detailed guidance and more ambitious targets will help Canada’s public financiers move money faster and shift it toward projects that promise greater long-term benefits for investors and the climate.

Following the money for climate action

The federal government has committed significant public funds to cut emissions, but can be more transparent about where the money is spent.

One way to track Canada’s progress to net zero is to study the trajectory of carbon emissions. Another way is to follow the money that is being spent on climate action.

Public spending plays several critical roles in reducing emissions: among other things, it supports the research, development and commercialization of emissions-reducing technology; helps build low-carbon infrastructure; and can encourage private-sector investment across sectors.

Of course, money is only one tool in any government’s kit. Carbon pricing and smart, flexible regulations create powerful incentives that reduce emissions and allow governments to spend more judiciously. And not every dollar spent necessarily translates into climate progress.

But by examining where and how a government is investing in emissions reduction, we can start to understand whether public funds are being used cost-effectively and achieving their intended results.

We analyzed all federal budgets, fall statements and climate plans announced since 2016 to track the money that the Government of Canada is spending to cut carbon emissions. Our analysis identified more than $190 billion in planned federal spending over 15 years that is dedicated to reducing the country’s emissions. While there are some important caveats to these numbers, they represent a substantial commitment to meeting Canada’s climate targets.

Figure 1: Federal spending commitments total more than $190 billion to cut emissions across sectors since 2016

CLIMATE SPENDING HAS INCREASED BUT IS DIFFICULT TO TRACK

The data tell us a few things.

First, the federal government has ramped up its commitment to cutting emissions. Budget 2023, its latest, was an historic investment in emissions reduction on an even more ambitious scale than previous budgets, particularly in its spending on clean electricity.

The federal government is also clearly counting on the potential of clean technology as a tool for both economic development and for decarbonizing industry. It has set aside specific funding envelopes for some technologies, like carbon capture, utilization and storage, while delivering other funds through broader measures, often in the form of tax credits, that apply to everything from fittings for nuclear power plants to heat pumps to zero-emission mining vehicles.

At the same time, the breadth of some government measures, like the ones that apply to multiple clean technologies, can make spending difficult to follow. It can be equally hard to know when—or even if—the money has been spent, since governments often reallocate funds between programs or “reprofile” money to spend it at a different time. These challenges currently make it hard to track who benefits from climate spending and what exactly the money has accomplished.

More information will make it easier to track climate progress

The federal government can make it easier to analyze the results of climate spending. It could start by aggregating information about the outcomes of individual projects funded by federal programs, information that is currently scattered across volumes of documentation that government departments publish every year. It can go further by sharing details that aren’t currently public, like which clean technologies receive the greatest benefit from tax credits and the sectors that are investing the most in those technologies, for example. The federal government’s annual report on tax expenditures might be a useful place to publish this information.

The data we have now offer enough detail for us to see that the government is prioritizing emissions reduction and to follow roughly where the money is going. But more transparency is crucial for understanding the impact of those funds.

Ross Linden-Fraser is a Senior Research Associate at the Canadian Climate Institute.

Arthur Zhang is a Research Associate at the Canadian Climate Institute.