A proposed lower threshold for mandatory participation in Canada’s industrial carbon market could bring some commercial and institutional campuses into the mix along with a broader range of suppliers to the buildings sector. A Canadian government discussion paper, released Dec. 19, seeks feedback on possible adjustments to the stringency standards that establish key elements of the federal benchmark and provincial/territorial carbon pricing systems.
It presents four potential approaches for determining subject participants, three of which would target facilities that emit a minimum of 10,000 tonnes of carbon dioxide equivalent (CO2e) per year, while one would set the bar at 25,000 tonnes of CO2e per year. Either trigger point for compliance would be a significant drop from the current 50,000-tonne threshold.
The proposals come as part of a regular review process and as a follow-up on the promise to strengthen industrial carbon pricing, which the government made when it cancelled the consumer surcharge on fossil fuels in March 2025. The discussion paper flags “hospitals and other non-industrial buildings” as examples of non-industrial sectors that are expected to be exempt from the proposals, but it also obliquely refers to commercial and institutional real estate in arguing why updated parameters for the regulated carbon pricing system are needed.
“These criteria were designed when the fuel charge was still in place, and facilities not subject to industrial pricing systems were instead subject to the fuel charge,” it states. “The removal of the fuel charge requires rethinking how scope of coverage should work.”
Elsewhere, the list of emission sources that carbon pricing systems would be required to cover includes “stationary fuel combustion” (at the top of the list) and “on-site transportation” with seven other activities that are more commonly exclusive to industrial/manufacturing operations or solid waste management.
“The paper states only that sectors that are ‘generally considered non-industrial’ would be excluded. It’s not saying that all commercial and institutional facilities are automatically excluded,” observes Bala Gnanam, vice president of sustainability, advocacy and stakeholder relations with the Building Owners and Managers Association (BOMA) of Canada. “I suspect large campuses around 5 million square feet or more could come under this.”
“I could definitely see large cogeneration systems being covered,” adds Eric Chisholm, a principal with the engineering and sustainability consulting firm, Purpose Building Inc.
Competitive concerns
The discussion paper more explicitly acknowledges the risk of creating a competitive advantage within various industry sectors for CO2e emitters that fall under the threshold for required participation in the carbon market. That concern underpins the proposed option to set the mandated entry level at 25,000 tonnes, which would capture “fewer industrial activities where there is a significant split between emissions above and below the threshold” but also reduce the number of participants, potentially undermining optimal market functioning.
Alternatively, a proposed “activity-based” approach would be scoped to specific sub-sectors where it’s calculated that facilities outputting upwards of 10,000 tonnes of CO2e annually account for at least 75 per cent of emissions. (Various supporting assets for the oil and gas sector, dubbed “petrinex” facilities, that individually emit less than 10,000 tonnes annually would also be included.) This option would appear to definitively exempt commercial and institutional buildings, but the discussion paper does specify the producers of many common building materials, including: iron; steel; aluminum; cement; gypsum; polystyrene foam products; brick; and glass.
Finally, there is a combo option that would encompass all facilities within specified industry sectors that emit a minimum of 10,000 tonnes of CO2e annually, and smaller oil and gas petrinex facilities. This approach is projected to address facilities that collectively generate about 284 megatonnes (284 million tonnes) of CO2e per year, or 41 per cent of total Canadian emissions, while the loosest approach of setting the threshold for market participation at 25,000 tonnes would target 264 megatonnes (264 million tonnes) or about 38 per cent of total Canadian emissions.
“All options would cover the majority of Canada’s industrial emissions (75 to 80 per cent) and a large number of facilities,” the discussion paper states. “The options vary by the extent to which they balance GHG reduction potential with competitiveness and carbon leakage risks, the number and diversity of market participants that would be covered (which influences market function and liquidity), and in regulatory complexity.”
Price signal impediments
The discussion paper also addresses some identified challenges related to the quantity and price of carbon credits and the effectiveness of current price signals for influencing investment in decarbonization. Although the benchmark carbon price — currently $95/tonne until Apr. 1, 2026, when it’s scheduled to increase to $110/tonne — is consistent nationwide, there are some considerable discounts within the various output based pricing systems (OBPS) that are in place in every province/territory except Quebec and Northwest Territories.
Each carbon credit represents one tonne of carbon that is reduced, avoided or removed from the atmosphere, but few regulated market participants are paying full price to counterbalance emissions that exceed their allowable benchmark. In turn, it’s less lucrative for market participants to sell carbon credits earned from coming in below their mandated emissions intensity level, and there is less incentive for potential developers of emissions reduction projects to embark on credit creation.
“It’s a very fragmented system, and provinces have different rules and different supply and demand for credits,” Adi Dunkelman, director of policy and strategy with the carbon market advisory firm, Clear Blue Markets, told attendees at The Buildings Show in Toronto last December. “If you’re in Ontario and you’re generating a credit, you can sell it for $72, but if you’re in Alberta, the value of your credit is $18. This is something that the federal government is trying to change up and harmonize because this is not a system or a market that can support decarbonization.”
The discussion paper attributes the discrepancies to a credit glut, which is particularly pronounced in some provinces, and outlines proposed mechanisms to help rebalance supply and demand. This would require carbon pricing systems to put a buffer in place to ensure that demand for compliance credits exceeds supply, taking into consideration the volume of banked, unused credits in the market.
“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,” the discussion paper proposes. “This could increase certainty for regulators and stakeholders that market prices are likely to stay close to the headline price, and therefore incentivize decarbonization investments up to that price level. However, the additional level of compliance obligations required to create the buffer could increase overall compliance costs for facilities.”
Respondents are asked to comment, and also provide input on provincial programs that provide carbon price rebates to regulated market participants on the condition that the funds are invested in decarbonization projects in their facilities. The discussion paper expresses skepticism about the latter initiatives, which are known as emissions reductions accounts (ERAs), citing the risk that rebates could be misdirected to other kinds of capital projects and/or subsidize investment that stronger market signals would otherwise inspire without incentives.
Options for non-regulated players
Regulated markets still typically offer better yields for third-party developers of carbon reduction projects than voluntary markets, where Dunkelman noted that offset credits might be selling at rates as low as $5 per tonne. However, voluntary markets have a wider scope of opportunity, allowing for offset credits tied to renewable energy and energy efficiency projects that aren’t yet recognized in Canada’s regulated markets.
In each scenario, governments (regulated markets) or governing bodies (voluntary markets) set the rules for offset credits, but all credits related to any qualified project must be sold into one market to avoid the possibility of double-counting. Currently, there are somewhat contrasting supply-and-demand dynamics in the separate, but parallel forums.
“Right now we’re seeing a little bit of a dip in issuance in the voluntary market. There’s a lot of change occurring in the methodologies so project developers are waiting to get more guidance,” Dunkelman reported. “But we’re seeing a historical high in retirement that says people are still buying credits to offset their emissions against the voluntary market.”
Meanwhile, removal of the fuel surcharge largely eliminated the rationale for voluntary participation in Ontario’s regulated carbon market — an option that’s open to facilities with 10,000 to 49,999 tonnes of annual CO2e emissions.
“When we did have a fuel surcharge, smaller emitters may have chosen to be regulated under the compliance market to reduce costs, but now they’re opting out,” Dunkelman said. “If you’re not forecasting to generate credits and you’re going to have long-term costs then there’s not really a value to remain in the program.”
Feedback on the federal discussion paper can be submitted until Jan. 30, 2026.
“While it is beyond the scope of this paper to provide options on the price trajectory, the Government recognizes that it will be important to address and welcomes input on that topic,” it advises. “The Government is also interested in stakeholder views on whether additional changes to the benchmark criteria are needed beyond those presented in this paper.”
