How to modernize Canada’s large-emitter trading systems
Large-emitter trading systems (LETS) are Canada’s most important climate policy for driving emissions reductions, protecting industry competitiveness, and helping low-carbon projects attract investment. Their design features help Canadian companies remain competitive amid the uncertainty generated by the prospect of tariffs from major trading partners—and their benefits will only grow as other countries adopt carbon tariffs and export markets continue to evolve.
These systems will reduce more emissions than any climate policy in Canada—contributing up to half of national carbon cuts by 2030—without imposing high costs on businesses.
Large-emitter trading systems are powerful but they are not perfect. They would be more effective at protecting competitiveness and reducing emissions if they were modernized. Our research has identified changes that would make sure these systems work together efficiently and slash even more emissions at low cost.
The Canadian Climate Institute conducted an independent assessment of carbon pricing in Canada, focusing on the large-emitter trading systems in place in each province and territory. The assessment builds on work the Institute conducted in 2020-21.
The latest assessment evaluates the effectiveness and stringency of large-emitter trading systems, also known as industrial carbon pricing, and considers their impact on the competitiveness of Canadian businesses. The Institute conducted in-depth reviews of large-emitter trading systems across Canada, verifying research results with federal, provincial, and territorial governments. We also used regionally specific modelling to examine the impacts of LETS under various scenarios.
Comprehensive analysis and findings from the Institute are published in a detailed assessment report. Our top findings and recommendations for strengthening large-emitter trading systems in Canada are presented in a summary report.
Five things to know about Canada’s large-emitter trading systems
- Large-emitter trading systems are effective at reducing emissions
Previous research from the Canadian Climate Institute showed that large-emitter trading systems are Canada’s single most important emissions-reducing policy. This new assessment presents updated modelling that reinforces that finding.
- Provincial and territorial systems are better aligned than they used to be
Our previous assessment found many differences between large-emitter trading systems in different provinces and territories, which made them less effective and increased domestic competitiveness risks. By 2024, provincial and territorial governments had addressed many of these issues.
Minimum national standards set by the federal government have played an important role bringing Canada’s many systems into closer alignment.
- Large-emitter trading systems are protecting industrial competitiveness
Large-emitter trading systems have been designed to create incentives to cut emissions while keeping costs low for businesses. LETS aim to avoid a problem known as carbon leakage, where facilities move their production to jurisdictions with weaker controls on emissions.
The Institute’s assessment finds that large emitters pay a small fraction of the carbon price for their total emissions. This helps avoid carbon leakage by keeping costs low but maintains the incentive to reduce emissions. Our assessment shows LETS lead to low costs overall and limited impacts on profitability, with some sectors even able to earn more than they spend on compliance.
- Large-emitter trading systems lack transparency
Because large-emitter trading systems are complex, it’s important that they be transparent. Participants in carbon markets and the general public should be able to understand how these markets function and what prices they set.
Yet Canada’s LETS are opaque. Regulators publish more information than they once did, but there is still no public data about the prices set in credit markets. Greater transparency would improve the way carbon markets work.
- Updates to large-emitter trading systems can ensure they deliver their full potential
Though large-emitter trading systems are effective, some systems could be much less so by 2030 unless governments update the way that systems operate.
LETS establish markets for trading emissions credits, and the value of these credits represents the reward—and therefore the incentive—for emissions reductions.
In three jurisdictions, LETS are at risk of developing an oversupply of credits that would undermine the value of credits and the incentive to reduce emissions reductions. The projected oversupply is driven by a combination of overly generous performance standards and interactions between climate policies.
Five ways to modernize Canada’s large-emitter trading systems
Fortunately, these problems are fixable.
The recommendations in our summary report present a roadmap to modernize these systems so they deliver on their emissions-reduction potential while protecting the competitiveness of Canadian industries.
- Address the risk of credit market oversupply
The oversupply of credits projected in our assessment would weaken the incentive to cut emissions and undercut the profitability of emissions-reducing projects.
Governments can take a number of actions to improve this situation. Jurisdictions that face the greatest risk of oversupply can tighten emissions performance standards, for example. They can introduce mechanisms like price floors and set limits on credit banking to prevent excessive credit accumulation. And federal, provincial, and territorial governments can collectively address unhelpful interactions between various climate policies to make sure they work effectively in each jurisdiction.
- Align subnational systems to improve effectiveness and ensure fair competition
There are still important design variations between—and even within—different LETS. These variations can distort the market and undermine the reward for reducing emissions. Updates that send more consistent price signals and align the design features of different LETS will enhance system effectiveness.
- Facilitate pan-Canadian alignment for credit trading
Canada has more than a half-dozen trading markets for LETS credits. Fragmented markets have higher compliance costs and are less competitive.
A harmonized, integrated approach across jurisdictions can reduce costs and improve system functionality. Our report recommends preliminary steps that governments can take to prepare for linked systems.
- Enhance system transparency
Greater transparency builds trust and helps businesses determine or ‘discover’ the market value of credits within the trading system. While some governments publish data on their systems, many do not. Systems would be more effective—and easier to understand—if more governments published information on market prices, compliance, and leakage risks.
- Prepare for future challenges
LETS should be integrated with other climate and industrial policies to drive transformational change and prepare for emerging global trade measures. LETS can be a shield against rising protectionism around the world. Governments can better adapt LETS to protect against carbon tariffs and ensure that Canada’s industrial policies and LETS are aligned.
Large-emitter trading systems are working, but can still be improved
Our 2024 Independent Assessment of Carbon Pricing Systems finds that LETS are reducing emissions, protecting the competitiveness of Canadian industry, and working more cohesively than in the past.
Yet these systems can benefit from modernization. The recommendations from our assessment aim to support regulators as they retool their systems so that LETS can continue delivering economic and emissions benefits for the long term.
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