Canada considers lowering industrial carbon market thresholds to boost decarbonisation efforts

A federal discussion paper released on Dec. 19 proposes lowering the threshold for mandatory participation in Canada’s industrial carbon market, a change that could pull larger commercial and institutional facilities, and a broader range of building-sector suppliers, into regulated pricing systems. According to the discussion paper published by Environment and Climate Change Canada, officials are seeking feedback on four approaches to revising the “stringency standards” that underpin the federal benchmark and provincial/territorial carbon pricing regimes. Responses are due by Jan. 30, 2026.

Under three of the options, facilities emitting a minimum of 10,000 tonnes of CO2e per year would be captured; a fourth would set the entry point at 25,000 tonnes. Either level would represent a substantial reduction from the current 50,000-tonne threshold. The paper says the options “vary by the extent to which they balance GHG reduction potential with competitiveness and carbon leakage risks, the number and diversity of market participants that would be covered (which influences market function and liquidity), and in regulatory complexity.”

The proposals follow the federal government’s pledge to strengthen industrial carbon pricing after it cancelled the consumer fuel surcharge in March 2025. According to the government, the removal of the fuel charge has changed the policy context: “These criteria were designed when the fuel charge was still in place, and facilities not subject to industrial pricing systems were instead subject to the fuel charge. The removal of the fuel charge requires rethinking how scope of coverage should work.”

Who might be brought in

The discussion paper flags hospitals and “other non-industrial buildings” as examples of sectors that would be exempt, but it also makes clear the term “generally considered non-industrial” would not mean all commercial and institutional real estate are automatically excluded. Bala Gnanam, vice president of sustainability, advocacy and stakeholder relations with the Building Owners and Managers Association (BOMA) of Canada, said: “I suspect many large office buildings, 500,000 square feet or greater, and large retail malls could come under this.”

Officials set out three principal approaches beyond a single-size threshold. An activity-based option would scope regulation to specific sub-sectors where facilities emitting more than 10,000 tonnes annually account for at least 75 percent of sector emissions; that approach would appear to exempt most commercial and institutional buildings while explicitly including producers of building materials such as iron, steel, aluminium, cement, gypsum, polystyrene foam products, brick and glass. A combination approach would capture all facilities within specified sectors that emit at least 10,000 tonnes annually, plus smaller oil and gas “petrinex” support assets; modelling in the paper suggests that option could address roughly 284 megatonnes of CO2e per year, or about 41 percent of total Canadian emissions. The loosest approach, with a 25,000-tonne threshold, would target about 264 megatonnes, or roughly 38 percent.

Market liquidity, competitiveness and leakage

A core policy tension in the paper is trade‑offs between market liquidity and competitiveness. Officials note that raising coverage by lowering the threshold increases the number and diversity of participants, improving market function and liquidity, but could also impose higher compliance costs on more facilities and risk disadvantaging firms that fall below any new threshold. That competitive concern is the rationale for the 25,000-tonne option, which would capture fewer facilities where emissions are split above and below a trigger point.

The paper also recommends changes intended to tighten credit markets and strengthen the price signal available to emitters. The government proposes requiring systems to include a buffer so forecast demand for compliance credits exceeds forecast supply each year, taking into account banked, unused credits. “This could increase certainty for regulators and stakeholders that market prices are likely to stay close to the headline price, and therefore incentivize decarbonization investments up to that price level. However, the additional level of compliance obligations required to create the buffer could increase overall compliance costs for facilities,” the paper says.

Price signal problems, provincial variation

Industry experts and market advisers have warned of fragmented price signals across Canada’s patchwork of output‑based pricing systems (OBPS) and provincial mechanisms. The federal benchmark price is currently $95 per tonne until 1 April 2026, when it is scheduled to increase to $110 per tonne, but provinces apply different discounts and rules. “If you’re in Ontario and you’re generating a credit, you can sell it for $72, but if you’re in Alberta, the value of your credit is $18. This is something that the federal government is trying to change up and harmonize because this is not a system or a market that can support decarbonization,” Adi Dunkelman, director of policy and strategy with Clear Blue Markets, told attendees at The Buildings Show in Toronto in December.

The discussion paper attributes price divergences to a regional credit glut and proposes measures to rebalance supply and demand. It also solicits input on provincial programs that rebate regulated participants on the condition that funds be invested in facility decarbonisation projects, so‑called emissions reductions accounts (ERAs), while cautioning that rebates risk being misdirected to other capital projects or could subsidise investments that stronger market signals would otherwise stimulate.

Voluntary markets, removals and project viability

Officials and market participants note that voluntary carbon markets remain an alternative for non‑regulated players and for project types not yet recognised in regulated systems, such as many renewable energy and certain energy-efficiency offsets. Dunkelman said voluntary markets are seeing a dip in issuance as methodologies evolve, even as retirements are historically high, suggesting continued buyer demand. He also observed that the removal of the fuel surcharge has reduced incentives for smaller facilities previously choosing voluntary entry into compliance markets in some jurisdictions, potentially lowering voluntary participation in regulated forums.

Policy context and external critiques

The discussion paper is part of a broader policy push. In November 2025 the federal government announced a package intended to strengthen industrial carbon markets, including development of a post‑2030 carbon pricing trajectory to underpin a net‑zero transition by 2050 and steps to ensure provincial systems meet any updated federal benchmark. According to government material, regulated systems recognised under the federal standard include output‑based pricing, carbon levies and cap‑and‑trade, each designed to create incentives for continuous improvement in emissions performance.

Not all stakeholders welcome provincial departures from tighter rules. The Pembina Institute criticised Alberta’s decision to freeze TIER at $95 per tonne, saying the move undermines market integrity and investment certainty. The institute warned that such freezes could reduce the value of credits and cause project delays or cancellations.

Implications for building owners and decarbonisation planning

For owners and managers of large commercial and institutional buildings, the proposed changes would carry practical consequences. Expanding coverage to a 10,000‑tonne threshold or adopting activity‑based scoping that includes building-material producers would broaden the range of organisations engaged with compliance markets, potentially increasing demand for verified credits and altering the economics of on‑site abatement investments versus credit purchases. But tighter supply controls and higher compliance obligations designed to sustain market prices could also raise compliance costs.

The government’s discussion paper does not propose changes to the headline price trajectory in this consultation, but it explicitly welcomes input on price pathways and whether further changes to benchmark criteria are required beyond the options presented.

Next steps

The federal consultation is open until Jan. 30, 2026. According to the government, comments will inform updates to the benchmark standards and related rules, which the federal announcement of November 2025 framed as necessary to provide stronger, more predictable price signals and to apply the federal backstop promptly where provincial or territorial systems fall below the updated benchmark. Industry, provincial authorities and market developers will be watching closely: revisions to thresholds and market design could reshape credit supply, decarbonisation incentives and the competitiveness calculus across Canada’s industrial and broader built environments.