Key Takeaways

• Who will replace Trudeau is unclear. Mark Carney and Chrystia Freeland lead the list of contenders.
• Change in Liberal leadership is not expected to have any significant impact on the broader clean fuels and carbon markets in the Canada in the next few months.
• Liberals may try to reinvent their climate platform with a new leadership as the impending election becomes a reality.
• If a Conservative-led government is formed in 2025, they will try to deliver on their promise to repeal consumer carbon pricing but the federal climate policies like the CFR, OBPS could also be under stress. But there is some optimism.
• Provincial efforts like Alberta’s TIER and BC’s LCFS are expected to continue, though future ambition may be altered by the changing policy winds at the federal level.

Prime Minister Justin Trudeau’s expected resignation on January 6, 2025 has set the stage for a political shift that will likely reshape Canada’s climate and energy policies. Over the years, Trudeau’s administration pushed forward ambitious measures to combat climate change, from carbon pricing mechanisms to clean fuel initiatives. The transition in leadership for the Liberal party is not expected to change the current administration’s climate policies. However, a conservative-led government, which is looking more and more likely, could put the Liberal party’s climate policies, such as the consumer carbon tax, recently introduced Oil and Gas Cap, Clean Fuel Regulations (CFR), Output-Based Pricing System (OBPS) and associated federal carbon offsets program, at risk of being changed or repealed outright. Provincial programs like Alberta’s Technology Innovation and Emissions Reduction (TIER) system, Quebec’s cap and trade and British Columbia’s Low Carbon Fuel Standard (BC LCFS) may not be directly impacted but may see receding ambition in future years. All that said, there are signs of resilience and optimism for Canadian climate policy in the face of change, as also indicated by Former Conservative Leader, Hon. Erin O’Toole at cCarbon’s Canada Clean Fuels and Carbon Markets Summit in Toronto in November 2024.

Uncertain Path for Canada CFR

The CFR, designed to cut carbon intensity in transportation fuels, has created a demand flywheel for low carbon fuels like renewable diesel and renewable natural gas (RNG), as demonstrated by data ECCC published in June 2024. However, with Trudeau’s exit, the program’s future hinges on the political direction of the next government. Conservative leader Pierre Poilievre, a critic of federal carbon policies, could scale back the CFR, potentially disrupting Canada’s burgeoning clean fuels market. Despite political uncertainties, provincial governments like British Columbia and Quebec remain staunch supporters of clean fuels and EV policies. Further, private capital has hitched the ride on that flywheel, gaining momentum thanks to the strengthening Clean Fuels Standards policies at the State level in the US.

Despite relative stability in late 2023 and early 2024, CFR credit prices have trended downward in the second half of 2024. Last quarter i.e. Oct’24-Dec’24 , the average . Trading volumes remain low across most segments, underscoring the CFR market’s early-stage development. With political uncertainty looming, investors and market participants remain cautious, assessing the risk of deregulation. cCarbon has provided a comprehensive supply-demand projection in our 2030 CFR Outlook, in light of changing federal politics.

Figure 1: Canada CFR Credits by Compliance Categories. Source – CFR Credit Market Report | June 2024 | cCarbon

British Columbia Leading by Example

BC LCFS is considered one of Canada’s most successful climate initiatives, successfully reducing the carbon intensity of fuels for over a decade, and the federal-provincial collaboration under Trudeau’s government has supported BC’s efforts. BC NDP leadership is unlikely to change that dynamic, but a conservative government is bound to take a different approach. However, with the recent BC NDPs majority, although razor-thin, the province’s commitment to the LCFS will remain for the next few years.

Output-Based Pricing System (OBPS) at a Crossroads

While consumer carbon pricing is definitely on the chopping block for a conservative government, the OBPS, a framework to incentivize emissions reductions among large industrial emitters, could also be targeted by a conservative government. However, there is a growing consensus among the industry players, which also emerged during CFCM 2024, that the OBPS program will likely stay in some shape or form, with industries already having integrated the OBPS into their operations. Further, in response to the federal OBPS, several Provinces have started putting their own OBPS programs in place. This combination will make yanking the industrial carbon pricing rug out less simple and potentially less popular for conservatives as pulling the plug on consumer carbon pricing.

Alberta’s TIER Program: A Provincial Steady Hand

Alberta’s TIER system, which predates the OBPS, is viewed as a market-friendly alternative to federal policies. If the federal government flips Conservative, the Alberta TIER program is likely to remain stable and there is unlikely to be any direct impact. Additionally, the latest compliance report revealed that the usage of Offsets and EPCs, the market-driven components of the TIER program, were up 4 times, which signals increasing liquidity. Given the industry buy-in for the program, and Alberta’s commitment to becoming a global hub for CCUS, the TIER program will very likely continue to be the mechanism to drive investment in those technologies.

Figure 2: Offset and EPC Usage Increased 4x in Compliance Report 2023. Source: Historic Compliance Analysis | cCarbon

While TIER market participants are unhappy with the recent federal oil and gas emissions cap, Premier Danielle Smith has formally opposed it, describing it as unconstitutional, harmful to Alberta’s economy, and an overreach of federal jurisdiction. Pierre Poilievre’s Conservatives have also voiced their opposition, making its repeal likely if they take power. As such, Alberta is expected to welcome its removal.

Federal and Provincial Offsets Programs: Navigating Uncertainty

Offsets programs, including the federal Greenhouse Gas Offset System and Alberta’s TIER offsets market, are vital for helping industries meet emissions targets.  These initiatives have spurred investments in projects like agriculture, renewable energy and others. However, political and regulatory changes can create uncertainty for project developers and investors, influencing the attractiveness and viability of the different offset opportunities in Canada.

While provincial offset demand drivers like those in Alberta and Quebec will remain unaffected by any Federal leadership changes, the big question is whether the Federal OBPS will remain intact.

Figure 3: Canada Offset Issuances and Retirements. Source: Comparing Canada Offset Opportunities: Federal, Alberta, Quebec, British Columbia and Voluntary

If the Federal OBPS stays, investment in offsets outside of the pre-existing provincial programs will continue. Compliance demand, coupled with growing corporate demand for high-quality offsets driven by net-zero commitments, and international offsets demand driven by the Paris agreement, will only help grow interest and investment in Canadian offsets opportunities.

It is worth noting that the Federal offset system in Canada has been designed not only to support compliance for the Federal OBPS but also seen to play a key role in future compliance programs, such as the oil and gas emissions cap and the clean electricity regulations. If the Conservatives were to take power, one of their likely moves would be to repeal or scale back the oil and gas emissions cap, which could dampen the demand signal for Federal offsets.

Navigating the Broader Market Impacts

In the wake of Trudeau’s departure, Canada’s clean fuels and carbon trading markets may experience short-term volatility, resulting less from the impact of leadership change but more from the wake of an early election possibility, which Canada has been dodging successfully for the last several months. Investors could adopt a wait-and-see approach as new policies emerge, while the hope of climate deregulation might provide a boost to the oil and gas sector.

However, the underlying momentum in clean energy innovation and provincial leadership provides a counterbalance to federal uncertainties.

The Road Ahead

As the Liberal party navigates the complexity of finding new leadership at the outset of an election year, Mark Carney, previous governor of the Bank of Canada and a strong climate finance advocate, has indicated he is considering running. If he were to step into Trudeau’s role, his proven track record for supporting market-based mechanisms would not guarantee the continuation of programs like the CFR, OBPS, and offsets systems but he could take measures to make them more resilient against future dismantling efforts. Although, Poilievre has already started attacking Carney as another champion of “carbon tax and other inflationary polices” led by Trudeau. This could mean Carney, or whoever, takes the helm, will try to take a different approach at pushing Canada’s climate agenda ahead.

While challenges lie ahead, strong provincial policies, private sector investments, and international climate obligations offer some foundations for optimism that climate-related progress will not disappear completely. The next chapter of Canada’s clean energy transition will depend on leadership that balances economic growth with environmental responsibility. No matter what the new climate order may look like in Canada in the next 6-months, CFCM 2025 will remain Canada’s premier gathering to get the latest insights and outlook from, and network with the carbon and clean fuels experts. Stay tuned here for more details.

CC.info Readers Digest

Canada CFS Dashboard | cCarbon

BC LCFS Dashboard | cCarbon

Alberta TIER Dashboard | cCarbon

Analyst Contact

• Mitul Kaushal (mkaushal@ckinetics.com)
• Sai Rohit (srohit@ckinetics.com)
• Rohan Singh Nongpiur (rsnongpiur@ckinetics.com)