From Compliance to Competitiveness: Canada Reframes Carbon Markets and Capital

Last week, the Government of Canada launched two major policy initiatives that together mark a considerable shift in Ottawa's approach to climate policy. The measures reposition carbon pricing and capital mobilization away from compliance mechanisms and toward strategic tools for investment, competitiveness, and capital allocation. These initiatives build on the release of the federal Climate Competitiveness Strategy, which was released under Budget 2025.Specifically, the federal government released:

• A technical discussion paper, Driving Effective Carbon Markets in Canada, alongside a formal engagement on industrial carbon pricing and carbon markets. The consultation seeks input on where and how to update the federal benchmark criteria, as well as options to strengthen price signals and market design as a way to drive decarbonization investment while addressing competitiveness and carbon-leakage risks.
• A next-steps announcement on Made-in-Canada sustainable investment guidelines, including the selection of the Canadian Climate Institute to lead development of a voluntary, science-based taxonomy and the establishment of an independent governance structure to help investors and capital markets clearly identify “green” and “transition” investments.

Key focus areas driving effective carbon markets in Canada:

• Benchmark review: How the federal benchmark can be revised to ensure that industrial carbon pricing systems provide the right incentives for emissions reductions, clean technology investment and competitiveness – both now and in the future.
• Market effectiveness: How carbon markets can be designed to maintain robust demand and credible pricing, including mechanisms to avoid credit oversupply, strengthen predictability and enhance transparency.
• Flexibility and stringency: How to maintain jurisdictional flexibility so that provinces and territories can tailor their respective systems while ensuring minimum standards are sufficiently stringent and aligned with national decarbonization pathways.

The discussion paper seeks feedback on opportunities to strengthen carbon pricing and carbon markets so that they deliver clearer investment incentives, stronger long-term price signals and sustained competitiveness for Canadian industry. It also outlines specific questions regarding design options, such as coverage of activities, price stability mechanisms and how performance standards and crediting approaches influence investment decisions.

‍What does this mean for provinces with their own industrial carbon pricing system?

‍This engagement signals that meeting the federal benchmark will increasingly require jurisdictions to demonstrate that their systems function as effective markets and not simply that they comply on paper. While provinces and territories will retain flexibility over design, the federal government is signalling higher expectations around durable price signals, healthy credit markets, and demonstrable investment impacts.

Over time, jurisdictions may be expected to adjust areas such as stringency trajectories, credit supply and banking rules, or compliance pathways if systems are found to weaken investment incentives or undermine market credibility, reflecting a clear shift toward using carbon pricing as an instrument of industrial and competitiveness policy.

This is an open consultation process, with submissions due on January 30, 2026. An informational webinar has also been scheduled and will take place on January 6th.

‍Sustainable Finance Policy Momentum

Alongside carbon market engagement, the federal government is also advancing work to establish Canadian sustainable investment guidelines (a sustainable finance taxonomy). These guidelines are intended to create credible, science-based classifications of “green” and “transition” activities that align with global standards and enhance the transparency and credibility of climate-aligned capital in Canada.

This initiative is part of the broader effort to:

• Mobilize private capital toward low-carbon infrastructure and technologies,
• Support investor confidence through common definitions and comparability, and
• Align Canadian markets with global sustainable finance practices.

A credible sustainable finance framework will have real implications for capital allocation, affecting cost of capital, investor access, disclosure expectations, and the competitive positioning of Canadian firms engaging in climate transition strategies.

In summary, Canada is actively repositioning carbon pricing and sustainable finance as foundational pillars of industrial competitiveness and capital market strategy, not just climate compliance tools. For Sussex clients, proactive engagement and strategy alignment with these evolving frameworks will be critical for managing risk, capturing investment flows, and optimizing long-term competitiveness in a rapidly decarbonizing global economy.