Brendan Frank is Clean Prosperity’s Vice President of Policy.

After two decades of limited progress, the idea of breaking down interprovincial trade barriers and linking Canada’s patchwork of provincial carbon markets suddenly has tailwinds. In July, the premiers and the Prime Minister agreed to launch a new working group to “explore different models of linking carbon markets across Canada”. This group will table a workplan by July 2027. 

As the U.S. continues to escalate its trade war, removing unnecessary interprovincial trade barriers has never been more urgent. But the politics of linking are tricky. Everyone wants to be an exporter of carbon credits; nobody wants to be an importer. While the European Union has managed to make this work across more than 30 countries, Canada remains split into a patchwork of nine different markets. 

What is carbon market linking?

In Canada, industrial emitters operate under provincially administered carbon markets. The federal output-based pricing system (OBPS) remains a backstop, opt-in model, which Manitoba, PEI, Yukon and Nunavut have opted into. 

Larger, more liquid carbon markets would be better for firms and for emissions reductions. Every jurisdiction has its own mix of cheaper and more expensive abatement opportunities. These opportunities are unevenly distributed across provinces. 

If markets are linked, firms have a larger pool of cheaper opportunities to choose from, so we get more emissions reductions (abatement) for the same or even lower cost.

The challenge: bilateral linkage falls short

To better understand the implications of linking, we modelled three provincial markets: British Columbia, Alberta, and Ontario. We pulled together marginal abatement cost curves that estimate the cost and emissions-reduction potential of different technologies, regional carbon market data, and a Large Emitter Market Simulator model from EnviroEconomics to simulate market conditions through 2032. Because market rules are in flux and will remain so until at least the end of the year, we used 2025 market rules as our baseline. The results are illustrative and directional, not definitive.

We first ran status quo scenarios where each market operates independently, then ran scenarios permitting interprovincial trade of credits. We linked up two markets to start (B.C. and Alberta) and then all three markets. 

Our B.C.-Alberta bilateral linkage scenarios produced minimal interprovincial trade. Their market design rules are different enough to actually prevent interprovincial credit trading. Because of B.C.’s tight credit usage limit (firms can meet 30% of a compliance obligation with credits and must purchase the rest directly from the B.C. government), the market is creating credits faster than it can redeem them. No external supply is needed. 

B.C. carbon credits are trading at more than double the value of credits in Alberta’s Technology Innovation and Emissions Reduction (TIER) market, where credits trade for about $30/tonne. TIER also has a much higher credit usage limit (90%). So linking the two markets could produce a flood of credits for B.C. firms that want to build up large banks, eating into the premiums that B.C. firms command for credits on the open market.

The solution: pursue multilateral linkages to reduce costs

Multilateral linkage, on the other hand, leads to convergence of credit prices across B.C., Alberta, and Ontario. Our modeling that links up the three markets produces significant trade volumes across borders of roughly seven million credits per year. 

This has two important effects:

• Cost reductions: Aggregate compliance costs fall over time rather than rise, which is what happens in unlinked scenarios. 
• Increased emissions reductions: Emissions abatement increases relative to unlinked scenarios as prices converge. We see 84% more cumulative abatement with linked markets, with the vast majority of incremental abatement concentrated in Alberta.

Total net costs incurred by emitters across scenarios*

*costs do not take revenue recycling into account

There are many intuitive options for provinces to band together, for example regionally, in Western Canada or Atlantic Canada. But a market where all provinces participate would yield the greatest benefits.

What comes next

The theory that linking can reduce costs and increase emissions reductions is strong, and our modeling backs up the theory. Successfully knitting together Canada’s patchwork of carbon markets is no small task, but the long-term benefits are clear: lower compliance costs, more liquidity and market flexibility, greater durability, and payoffs that compound over time.

To overcome political hurdles and seize the benefits of linking as quickly as possible, the working group should prioritize three key steps when they meet in September: 

1. Stick the landing on the federal benchmark

The rules of the markets that are linking up will determine the scale of the benefits. The revised federal benchmark, coming in late 2026, stands to significantly reshape provincial OBPS markets. Big-picture questions around coverage standards, the headline price, banking rules, and stringency should be answered by the benchmark.

The federal benchmark will also need to weigh in on novel design elements, most notably price floors. These new federal rules must be conducive to linking. A poorly-designed price floor could disincentivize trading and create some perverse incentives. Even worse, a series of poorly-designed and incompatible price floors across provinces could render linking irrelevant. Consistent rules can help ensure a more dynamic market with more interprovincial trade.

2. Harmonize markets as much as possible prior to linking

Ideally, the provinces would incorporate elements needed for linking in one fell swoop, as part of their responses to the benchmark. In practice, stage-gating may be needed. Provinces have discretion on the specifics of market design. Coverage thresholds, market transparency, banking rules, credit usage limits, and monitoring, reporting and verification are all examples of design elements that don’t need to be perfectly harmonized for linking to work. But ensuring they sit in a fairly narrow range across provinces would make any linking pact more durable.

The federal government could consider nudging the provinces along by rewarding additional incremental actions on harmonization and linking. For instance, incentives could be offered for provinces that alter their regulations to enable mutual credit recognition or initiate the first interprovincial pilot program.

3. Pilot interprovincial credit trading projects in 2027

Quick wins and proof of concept can help credit market linkages gain momentum. Industries and elected officials need to see and feel the benefits. Public servants will need to get a handle on the backend administration, and each other’s monitoring, reporting, and verification protocols.

Luckily, the provinces are not starting from scratch. There is already some one-way linking between Alberta’s TIER, the B.C. OBPS, and the federal OBPS. Provinces should use the “recognized units provision” under the federal OBPS as a template, and quickly identify potential dance partners for pilot projects.

_{Photo credit: tillsonburg from Getty Images Signature}