Torys on Budget 2025: the climate competitiveness strategy

Central to the 2025 Federal Budget was a climate competitiveness strategy—a roadmap for Canada’s bid to become a “clean energy superpower”. The strategy focuses on refining Canada’s industrial carbon pricing system, extending investment incentives for clean technologies and improving regulatory clarity through both revisions to existing frameworks and the introduction of new ones.

What you need to know

• Recommitting to industrial carbon pricing. The Budget remains true to Prime Minister Carney’s platform commitment to strengthen industrial carbon pricing across the country. Stating that Canada’s carbon markets are not all functioning as well as they could be, the Budget proposes steps intended to improve price signals and market efficiencies.
• Revisiting complementary policies. The Budget pledges changes to the various greenhouse gas emissions policies that have been designed to complement industrial carbon pricing. These changes may include further consideration of the Clean Electricity Regulations (the constitutionality of which is currently under review); the enhanced regulation of methane emissions from the oil and gas sector and landfills; and updates to the Clean Fuel Regulations to strengthen domestic supply chains.
• Stepping back from the oil and gas emissions cap. The Budget signals a possible end to the controversial proposal for an oil and gas sector emissions cap, assuming the implementation of functioning carbon markets, enhanced oil and gas methane regulations and the deployment of commercial-scale carbon capture and storage.
• Enhancing the Investment Tax Credits (ITCs). The Budget continues support for the Clean Economy ITC program. The Budget commits to enhancing several of the ITCs that are currently in force, and to proceeding with the implementation of the Clean Electricity ITC.
• Developing sustainable investment guidelines. Building on prior commitments, the Budget reaffirms plans to publish made-in-Canada sustainable investment guidelines by the end of 2026. This taxonomy would provide guidance on what qualifies as a “green” or “transition” investment.
• Revising Bill C-59. Amendments to the Competition Act in 2024 introduced provisions requiring substantiation of certain environmental claims. The Budget acknowledges that those provisions have had unintended effects—causing some organizations to slow or reverse their climate-related disclosures—and proposes to remove some aspects of them.

Recommitting to industrial carbon pricing

As we previously discussed¹, following its recent election, the federal government moved quickly to reduce the federal fuel charge (colloquially known as the consumer carbon tax) to $0/tonne, and subsequently introduced legislation that would repeal the program entirely. Nonetheless, the government remains committed to improving industrial carbon pricing, which the federal government regulates through the Output Based Pricing System (OBPS). The federal OBPS applies to industrial facilities in provinces that do not have their own industrial carbon pricing program and, in theory, functions to set the baseline stringency in those provinces that have their own program.

However, the Budget acknowledges that this federal benchmark is not functioning as intended, with compliance credits in certain provinces trading well below the current federal benchmark price of $95/tonne. For example, offsets generated under Alberta’s Technical Innovation and Emissions Reduction (TIER) program have recently been selling for under $20/tonne; certain offsets eligible for use in B.C.’s provincial OBPS program for under $15/tonne; and certain offsets² eligible for use in the linked Québec and California cap-and-trade systems for less than $20/tonne.

The Budget proposes several steps to strengthen industrial carbon pricing:

• The federal government proposes to engage with its provincial and territorial counterparts to set a multi-decade industrial carbon price trajectory that targets a transition to net-zero emissions by 2050. Currently, the federal government has only announced the escalation of its benchmark carbon price until 2030, at which point it is slated to be $170/tonne³. Many market commentators have been calling for longer-term price certainty.
• The federal government will take steps to improve the application of its benchmark for industrial greenhouse gas emissions across the country, a step that has been widely anticipated in the lead-up to the federal government’s review of the equivalency of provincial programs that is scheduled for 2026. These steps may face resistance in certain provinces. Earlier this year, anticipating the scheduled increase of the federal benchmark to $110/tonne in 2026, the Alberta government froze its TIER fund contribution price (which acts as a price cap in that market) at $95/tonne, laying the groundwork for potential federal-provincial debate on further price escalations. Nonetheless, the Budget proposes engagement with provincial and territorial governments, including on the potential for harmonizing and linking provincial carbon credit markets. Harmonizing credit markets is another step that may improve market liquidity but might also be met with resistance from certain provinces that might see capital leave the province in search of lower-cost compliance credits generated in other provinces.
• The Budget also states that the Canada Growth Fund will continue to issue carbon contracts for difference as a means to provide price certainty for investors making large, long-term capital investments. These agreements purport to provide a contractual guarantee of a regulatory carbon price. However, they can be a challenging fit for environmental commodity markets where the emissions reductions, the price of which is being guaranteed, may not have a market price outside of the regulatory program itself.

Revisiting complementary policies

The Budget pledges changes to the various emissions reduction policies that the federal government has adopted or proposed to complement industrial carbon pricing, including the following:

• Further consideration of the Clean Electricity Regulations (CER), which are currently the subject of a reference case before the Alberta Court of Appeal. This case, brought by the Government of Alberta, asks the Court to determine whether the regulations unconstitutionally exceed the legislative authority of the Parliament of Canada. With this backdrop, the Budget ambiguously says that the federal government will work with provinces and territories to advance the emissions reduction goals of the regulations as electricity demand grows. The hearing of the reference case is targeted to occur in June 2026.
• Enhanced regulations covering methane emissions from the oil and gas sector and landfills. The Budget also says the federal government will work with provinces and territories to negotiate equivalency agreements to allow for the substitution of provincial rules where appropriate. In this regard, the government has proposed amendments to the Canadian Environmental Protection Act, 1999 to remove the current limit on the tenure of such equivalency agreements.
• Updates to the federal Clean Fuel Regulations (CFR) to “strengthen domestic supply chains, and support jobs in agriculture, forestry and waste sectors”. Although the Budget is unclear on the nature of these updates, the current CFR have provided significant incentives to U.S.-based producers of biofuels, who can earn tradable credits for the import of those fuels into Canada. The Budget indicates that targeted amendments to the CFR will be designed to support the domestic biofuels industry, which might be a sign that the government will limit crediting opportunities for foreign importers or provide greater crediting opportunities for domestic suppliers.

Stepping back from the oil and gas emissions cap

The Budget signals the federal government is stepping back from the controversial proposal for an oil and gas sector emissions cap, which was discussed in a December 2023 regulatory framework and tabled in November 2024 draft regulations. The proposal has fueled considerable inter-provincial friction. However, the Budget is careful not to abandon the concept completely. Rather, it indicates that if the country has well-functioning carbon markets, enhanced oil and gas methane regulations and the deployment of commercial-scale carbon capture and storage, the oil and gas emissions cap would not be needed as it would have marginal value in reducing emissions at that point.

Enhancing the Investment Tax Credits

The Budget continues to position the Clean Economy ITCs as a cornerstone of Canada’s clean-energy industrial strategy. Notably, the Budget confirms forthcoming legislation that would implement the Clean Electricity ITC, which would be the last of the originally proposed suite of ITCs to be enacted. The Budget also proposes to remove the conditions imposed on provincial and territorial governments for their Crown corporations to be eligible for this ITC.

The Budget also promises changes to some of the existing ITCs:

• The Budget proposes to extend, by five years, the availability of the full credit rates for the Carbon Capture, Utilization, and Storage (CCUS) ITC, which would apply from 2031 to 2035. Credit rates would remain unchanged from 2036 to 2040.
• The Budget proposes to expand the list of critical minerals eligible for the Clean Technology Manufacturing ITC to include antimony, indium, gallium, germanium and scandium, in order to support investments in the extraction, processing and recycling of co-product and by-product critical minerals.

Developing sustainable investment guidelines

As we previously discussed⁴, on October 9, 2024, the Government of Canada announced the details of a governance framework, priority sectors and timelines for the development of Made-in-Canada sustainable investment guidelines, otherwise known as a taxonomy, for voluntary adoption by financial market participants. As proposed, these guidelines would create a classification system based on independent climate science and sectoral expertise to provide market participants with guidance on what economic activities should be considered sustainable. Since that announcement, little progress has been made in developing the guidelines. However, the Budget reconfirms the government’s support to develop the guidelines by the end of 2026, focusing on a taxonomy for labelling “green” or “transition” investments. The government plans to select and announce, by the end of 2025, an external organization with the expertise to develop the sustainable investment guidelines.

Revising greenwashing provisions and associated guidance

As we previously discussed⁵, the 2024 amendments to the Competition Act—popularly known as the “greenwashing provisions”—have dominated Canada’s climate-disclosure discourse. The Budget concedes that these changes have created uncertainty for investors and have created a chilling effect on some corporate disclosures.

The Budget, therefore, announces the government's intention to amend the Competition Act to remove some aspects of these provisions, while maintaining protections against false claims. In particular, in the Budget, the government proposes to amend the Competition Act to update the greenwashing provisions by removing the requirement for businesses to substantiate their environmental benefit claims based on internationally recognized methodology standards and the ability for third parties to bring cases directly to the Competition Tribunal for greenwashing complaints. The details of these amendments remain to be seen.

What’s next

While the Budget sets out a broad climate agenda, it provides few concrete timelines. Many initiatives—particularly those involving carbon pricing and regulatory harmonization—depend on provincial and territorial cooperation.

Nonetheless, the Budget’s central message is clear: Canada intends to compete globally as a clean-energy superpower. This signals both opportunity and transition—an evolving policy landscape designed to blend climate ambition with industrial pragmatism.