This article was previously published in the Hill Times.

The new federal government faces urgent challenges on multiple fronts, and climate policy is no exception. Economic uncertainty, courtesy of our neighbour to the south, is roiling markets and slowing investment and growth. Efforts to drop barriers to interprovincial trade are suddenly a priority. So is diversifying international trade; yet even as the U.S. retreats on climate, Europe is holding the line, and China is committing to even stronger action to cut emissions, seize new market share, and claim the field the U.S. is leaving behind.  

All of this means the new federal government should be focused and decisive. As they say, a government with too many priorities has no priorities at all. 

When it comes to climate policy, modernizing industrial carbon pricing should be Canada’s biggest priority, not least because it can help address those economic threats. Moving decisively on industrial carbon pricing can actually increase certainty for business, break down an interprovincial trade barrier, and support export diversification.  

A quick reminder of the stakes: industrial carbon pricing is Canada’s most impactful climate policy, capable of driving more emissions reductions than any other policy. Designed to protect Canadian competitiveness, it also helps to attract investment. And it can insulate Canadian exports against carbon tariffs like those being implemented in the EU and the UK. 

But industrial carbon pricing can only deliver on that potential when working as it’s supposed to. The good news? A few decisive adjustments can ensure that it does. 

First, the federal government can ensure that provincial carbon markets are working. Industrial carbon pricing systems create carbon markets where companies that reduce emissions below a set benchmark can sell those emissions reductions to other companies that emit more than their emissions benchmark. Demand for credits creates big incentives for emissions reductions. However, these credit markets are at risk of credit gluts—and plummeting prices, which means weaker incentives. 

To address this issue, governments should strengthen emissions performance standards predictably over time. The federal government’s carbon pricing “benchmark,” which sets a minimum standard for provincial systems, already includes language requiring systems to be sufficiently stringent, but the federal government can do more to enforce it. That will help industries reduce emissions to compete in alternative markets that are prioritizing carbon competitiveness.

Second, the federal government can support linkage between regional markets, erasing one more provincial trade barrier. Industrial carbon pricing in Canada is actually a mix of provincial systems and a federal backstop. Provincial carbon markets are islands—some with only a few market participants. The result is less liquid credit markets, with less stable credit prices. Linking provincial markets together can create bigger, more stable markets, while making it easier for firms operating in multiple provinces.  

But linking markets only works if provincial systems are harmonized around critical design elements, including stringent emissions standards. Federal efforts to help harmonize provincial systems can create the conditions for linkage.  

Third, the federal government should set clear expectations for the future of industrial carbon pricing in Canada. It’s not just current carbon prices that drive investment, it’s expected future prices; large investments in new equipment can have lives of forty years or longer. Policy certainty is hugely valuable to industry, especially in these uncertain times. 

The federal government can deliver certainty by stabilizing credit markets through tighter performance standards—and transparent market rules and processes for the future. Providing a price trajectory beyond 2030 and establishing broadly-applied carbon contracts for difference would also remove policy risk for investors, helping to unlock growth.

All of this should move faster than planned. Provincial and territorial carbon pricing systems are due for a review in 2026 to set up updates to systems in 2027. That isn’t fast enough. Given the risks to investment that uncertainty creates, the federal government should accelerate this process. 

Modernizing industrial carbon pricing should be at the top of the new federal government’s plans. It’s a highly effective policy and supports national objectives in this new global environment. It’s a critical strategy for winning on emissions reductions, economic growth, interprovincial trade, and international competitiveness.