The rapidly evolving global trade environment demands strategic tools that enhance Canadian competitiveness while positioning industry to compete in carbon-constrained markets. Canada’s large-emitter trading systems (LETS)—including Alberta’s TIER system and federal output-based carbon pricing—boost competitiveness at an impressively modest cost: just a Timbit per barrel.
In this piece, we first examine the escalating global trade challenges—emerging both from the United States and from Europe, in different ways—and their implications for Canadian industry. Next, we explore how LETS have built-in features that enable industries to weather trade storms and grab market share. Finally, we conclude by recommending that, while the large-emitter trading systems are not without flaws and could benefit from modernization, they remain a robust tool for adapting to uncertain times and positioning industry to compete globally.
These are big advantages for a set of systems that are expected to be the single-largest driver of emissions reductions in Canada.
Large-emitter trading systems guard against the threat of carbon tariffs
In today’s volatile trade environment, aggressive measures—from U.S. protectionist tariffs during the Trump era, such as the White House Reciprocal Trade and Tariffs Article, to rising carbon tariffs in the EU—drive up the price of Canadian goods in export markets. Higher tariffs impact Canadian producers in two fundamental ways: they reduce overall market demand by raising prices and they put Canadian products at a disadvantage compared to cheaper international alternatives, effectively reducing the domestic market share. In time, these markets will reach a new equilibrium as firms adapt by lowering prices, but overall, a net loss in market share, revenue, and profit is anticipated.
Carbon tariffs—such as the EU’s Carbon Border Adjustment Mechanism (CBAM), taking effect in 2026, and the proposed U.S. PROVE IT Act—follow a similar market impact logic. The CBAM functions by comparing the carbon costs imposed on domestic EU producers with those imposed in exporting countries. In Canada, LETS programs impose carbon costs on facilities that export, but these costs are generally lower than those in the EU. This cost differential is calculated and applied at the border as an extra tariff, effectively putting an additional burden on Canadian goods.
Canadian trade volumes covered by the CBAM shows that about $3.8 billion in annual Canadian exports across 81 products face an additional $64 million in annual tariffs due to mismatched carbon costs—a 1.6 per cent price increase in the EU market. This tariff-driven cost hike is likely to erode market share as EU consumers shift away from higher-priced Canadian products. Economic analyses suggest that the CBAM cost increase of 1.6 per cent on Canadian goods could trigger around a 2 per cent drop in demand, equating to roughly $78 million in lost exports annually.
The market share loss would be closer to $100 million if Canada did not have LETS.
With CBAM’s scope expanding, the potential risk grows on Canada’s $31 billion of EU exports. The proposed PROVE IT Act, which has garnered bipartisan support, does not impose a carbon price on U.S. producers. Instead, it mandates the collection of detailed information on the carbon content of a wide range of imported products. If enacted, Canadian producers would be required to report the carbon content of their goods—initially affecting roughly 30 to 40 per cent of all exports to the U.S., including oil, gas, and most major commodities. It is widely believed that this data collection is a first step in imposing a carbon border tariff on imports, effectively compounding the Trump tariffs.
Large-emitter trading systems protect exports at the cost of a Timbit per barrel
At the nominal cost of just a Timbit per barrel, LETS transforms minimal compliance expenses into a potent tool supporting investment and market expansion. Consider the real-world numbers: with Western Canadian Select oil trading at about C$83 per barrel and credit prices well below the headline carbon price, the LETS compliance cost for oil sands amounts to roughly 30 cents per barrel (the cost of a Timbit). For other emitters nationally, costs average less than $5 per tonne of CO2e, compared to the headline carbon price of $95 per tonne—resulting in virtually no reduction in profit margins (36.1 per cent to 36 per cent), or 8 cents a barrel accounting for tax and royalty interactions, credit sales, and government subsidies.
Moreover, these costs are likely overstated, as evidenced by Alberta’s credits now trading at $27. Sothe true price impacts are far lower than the headline figures suggest.
With significant government support for technology deployment and credit risk guarantees, LETS further slash investment costs, arming Canadian industries to lead in global markets.
Protecting against trade pressures is built into large-emitter trading systems
Built-in system resilience is a cornerstone of LETS, providing Canadian industries with a robust and adaptable framework to navigate fluctuating market conditions. LETS deliver four key strategic advantages that are useful as trade pressures mount:
- Avoidance of border carbon adjustments: LETS helps Canadian companies evade punitive border measures by closing the gap between priced emissions in Canada and the European Union. LETS empowers Canadian companies to neutralize border carbon adjustments and seize market share—ensuring domestic capital stays home.
- Robust banking provisions: Robust credit banking under LETS provides firms with a tactical reserve, enabling them to maneuver and capitalize on emerging opportunities even in volatile conditions This safety net improves cash flow and reduces risks during downturns and market fluctuations. By drawing on stored credits when needed, firms can avoid extra compliance spending—potentially reducing costs to zero in challenging times—and maintain financial stability. In Alberta, for instance, there are currently enough banked credits to cover three years’ worth of compliance (60 megatonnes banked vs. 20.1 megatonnes owed annually). Depending on the credit price, this provides firms with a C$2 to C$6 billion buffer to weather potential tariff disruptions.
- Built-in flexibility for production and commodity cycles: With facility compliance targets set on a per unit of production basis, LETS automatically adjusts compliance costs with production levels, ensuring they remain proportional to output during challenging economic periods.
- Investing for the long-term: These systems drive targeted investments to lower the emissions intensity of production, increasing carbon productivity, and positioning industries to compete effectively in carbon-constrained markets.
The path forward means these systems will become more essential over time
By leveraging these robust domestic large emitter systems, Canada can protect its export-driven economy while positioning industries to compete in the global low-carbon transition. The design features of LETS—evidenced by minimal profit impacts and substantial credit banking—demonstrate that smart carbon policy can yield strategic advantages at manageable costs. As export markets rapidly change and new border measures and tariffs emerge, these benefits will only grow in value, making LETS an essential tool for Canadian competitiveness.
