Environment and Climate Change Canada (ECCC) recently published a discussion paper on “Driving effective carbon markets in Canada” (the Discussion Paper). The Discussion Paper sets out proposed changes to the federal benchmark criteria ahead of the federal government’s review next year. ECCC also launched consultations on the Discussion Paper, seeking comments and responses to questions included in the Discussion Paper from stakeholders.
This bulletin briefly summarizes the key topic areas, current requirements, the federal government’s proposal and considerations, and next steps set out in the Discussion Paper.
Common scope of coverage
Current requirement. The current benchmark requires that carbon pricing systems maintain a common scope, covering, at a minimum, an equivalent percent of combustion emissions as the federal backstop. It also requires market-based systems to cover industrial process emissions, and to limit eligibility for OBPSs, performance rebates, or the free allocation of allowances to sectors that are at risk of carbon leakage and competitiveness impacts of carbon pricing.
Proposals and considerations. ECCC notes that the removal of the fuel charge (see our earlier bulletin here) requires rethinking how scope of coverage should work. The federal government is considering the following three options to modify the benchmark to specify the common scope criteria explicitly to ensure consistent minimum coverage across systems:
- Option 1: A threshold-based approach that would cover all facilities in specific sectors emitting above a certain level annually. Thresholds under consideration are 10kt per year (Option 1A) and 25kt per year (Option 1B). Option 1A would cover a large number of facilities and industrial activities, which would support market function and liquidity, but could create intra-sectoral competitiveness risks in some sectors. Option 1B would reduce these risks by covering fewer industrial activities where there is a significant split between emissions above and below the threshold, but may negatively impact market function and liquidity in smaller provincial systems.
- Option 2: An activity-based approach that would cover facilities undertaking a specific set of activities. This approach would require coverage of facilities emitting 10kt per year or more carrying out activities set out on a prescribed list, with the proposed listed activities being those where the majority of emissions would be covered by the 10kt threshold. This approach is expected to mitigate intra-sectoral competitiveness risks of a 10kt threshold for Option 1A.
- Option 3: A combination-based approach that has features of the threshold and activity-based approaches, with the objective of having the broadest coverage and GHG emission reduction potential. This approach would set a 10kt per year threshold and cover the same activities as Option 1A, as well as require coverage of facilities emitting less than 10kt per year for conventional oil and gas activities.
Maintaining the carbon price signal
Current requirement. The benchmark requires that provinces and territories do not take measures that directly offset, reduce, or negate the signal sent by the carbon price in whole or in part. This includes system design features, direct rebates tied to carbon costs, and any non-pricing measures that cancel out or block the price signal.
Proposals and considerations. ECCC notes that the federal government would maintain the current requirement but is seeking feedback on the impact of proceeds return programs and other government funding for industrial decarbonization. The Discussion Paper provides that such approaches can risk undermining the price signal when funding is used to support ‘business as usual’ investments and also risk undermining market prices for credits by reducing the demand for credits created by compliance obligations, affecting a jurisdiction’s capacity to meet the stringency test described below.
Stringency of output-based pricing systems
Current requirement. The OBPS stringency criterion requires that credit markets are designed to maintain the minimum national carbon price signal, across all regulated emissions. Under the benchmark, systems must align their headline price with the minimum national carbon price, including a key requirement that at the minimum price each year, the forecast expected demand for compliance credits (including offset credits where permitted in a system) must be greater than the expected supply.
Proposals and considerations. The federal government plans to maintain the annual net demand requirement in the benchmark with potential additions aimed at keeping market prices for credits close to the headline price to: (i) address the risk from a large supply of banked credits; and (ii) create a net demand ‘buffer’ requirement, both aimed at keeping market prices for credits close to the headline price.
ECCC notes that market observers have pointed to increasing downward pressure on market prices from the large credit banks that have developed in some systems. The federal government plans to improve the net demand requirement by adding a robust requirement that minimizes the potential negative impacts of banked credits on market prices. The federal government has proposed two new requirements:
- Demand for credits in any given year should be large enough to absorb any credits that would otherwise expire.
- Annual net demand should be maintained at a minimum at one third of the forecast pre-assessment volume of banked credits.
The federal government is also exploring requiring systems to create a minimum amount of net demand, referred to as a net demand ‘buffer’, with the purpose of ensuring that systems are designed to have more demand for compliance credits than supply even in situations with higher-than-expected supply or lower-than-expected demand, which can arise because of uncertainties in decarbonization costs, economic growth, or firm behaviour. ECCC notes that to add this requirement, the annual net demand test would be adjusted to require that forecast demand for credits exceed forecast supply by a given amount each year, scaled to reflect the size of the system.
Stringency in cap-and-trade systems
Current requirement. The Discussion Paper notes that a key difference between the stringency test for cap-and-trade and explicit price-based systems is the test to determine whether a cap-and-trade system has caps that are equivalent to the federal price trajectory. Rather than a price trajectory, for cap-and-trade systems the benchmark requires declining annual GHG emissions caps from 2023 to at least 2030 that correspond, at a minimum, to the annual projected emissions levels if the MNCP were applied in the province or territory over the same time period, based on modeling (the ‘maximum emissions cap’ requirement).
Proposals and considerations. The federal government indicated that the 2022 assessments included only limited consideration of the impact of banked allowances and offset credits as additional sources of supply.
Public reporting
Current requirement. Provinces and territories must publish regular, transparent reports and/or information on the key features, outcomes, and impacts of their carbon pricing systems, as well as on compliance information and carbon market data where publication could enhance accountability, and carbon market function and oversight.
Proposals and considerations. The federal government is considering maintaining current criteria and expanding public reporting requirements to include data on market prices and transaction volumes as well as setting deadlines for reporting to ensure timely information to support stringency. ECCC notes that a key issue, particularly for smaller markets, will be setting requirements that allow for more limited reporting where publication would create competitiveness risks for facilities.
Benchmark assessment process
Current requirement. The current benchmark effectively sets a four-year cycle for assessments, with the federal government having assessed systems in 2022 for the 2023-2030 period and committed to a re-assessment in 2026 for the 2027-2030 period. The federal backstop will remain in place until the next scheduled assessment, with the federal government monitoring provincial and territorial systems and reassessing any major changes in between scheduled assessments to ensure they meet the benchmark criteria, with the ability to stand up the backstop if not.
Proposals and considerations. The federal government is considering whether changes to the benchmark assessment process (e.g., changes to assessment periods, minimum backstop application period, timelines for assessments, publication of benchmark assessment details) are required to increase assurances that systems will remain sufficiently stringent and provide additional certainty for provinces, territories, industry, and investors to support long-term decarbonization projects.
Engagement scope and process
Engagement over the winter will inform an updated benchmark. Interested stakeholders are encourage to provide written comments via email in response to the Discussion Paper by Friday, January 30, 2026. Through winter 2026, ECCC officials will also lead technical engagement with provinces and territories.
ECCC notes that once the updated benchmark is published, the federal government will set out next steps on federal assessments and decisions on where to apply the federal ‘backstop’ OBPS, including engaging on potential updates to the federal OBPS Regulations to strengthen the backstop system.
For assistance with preparing comments or further information on the contents of this bulletin, please contact Lisa DeMarco at lisa@resilientllp.com.
