Carbon pricing has become one of the most widely adopted policy tools for reducing greenhouse gas emissions, with more than 75 carbon pricing instruments now operating globally, according to the World Bank.
Yet economists have long warned that carbon pricing can produce unintended consequences when applied unevenly across competing jurisdictions. The latest debate in Canada centers on whether higher industrial carbon costs could reduce domestic emissions while shifting investment and production to countries with less stringent climate policies.
The issue, commonly known as carbon leakage, has resurfaced following concerns over the industrial carbon pricing framework outlined in the Alberta and federal government memorandum of understanding. The concept is not new. In testimony before a United Kingdom parliamentary committee in 2021, Mark Carney argued that carbon pricing represents one of the most effective climate policy tools while acknowledging that countries acting ahead of their competitors face the risk of carbon leakage if businesses relocate production to jurisdictions with lower regulatory costs.
Carbon leakage occurs when emissions intensive industries respond to higher domestic compliance costs by moving production elsewhere rather than reducing emissions. The economic implications extend beyond lost investment and employment. If production shifts to regions with higher carbon intensity, global emissions may remain unchanged or even increase despite reductions recorded in the country implementing stricter policies.
This concern forms the basis of a recent analysis by economist Jack Mintz, who examined the long term impact of Canada’s industrial carbon pricing on Alberta’s energy sector. According to the study, the planned industrial carbon price of C$140 per tonne of carbon dioxide emissions, combined with existing business taxes and carbon capture requirements, could significantly increase production costs by 2040.
The analysis estimates production costs could rise by 19.6 percent for oil sands operations, 25.6 percent for conventional oil production, 39.1 percent for natural gas production, and 35.9 percent for electricity generation. Such increases, the study argues, could weaken Alberta’s competitiveness relative to energy producing regions in the United States, where no nationwide carbon tax currently exists.
Higher production costs do not necessarily translate into reduced emissions. Companies generally have three options when carbon prices increase. They can invest in lower emission technologies, absorb the additional costs, or relocate capital toward jurisdictions with lower regulatory burdens. Which outcome dominates depends on technology availability, commodity prices, regulatory certainty, and the relative attractiveness of competing investment destinations.
For sectors such as oil and natural gas, where capital investment decisions often span decades, relatively small differences in expected operating costs can influence where future projects are developed. This is particularly relevant in North America, where producers compete across integrated energy markets while operating under different environmental policy frameworks.
The environmental outcome is equally complex. National emissions inventories measure emissions generated within a country’s borders rather than those associated with consumption or displaced production. As a result, domestic emissions reductions may not correspond to lower global emissions if production shifts to regions with less efficient operations or weaker environmental standards.
This distinction has become increasingly important in international climate policy discussions. Several jurisdictions, including the European Union, have introduced or are developing carbon border adjustment mechanisms designed to reduce carbon leakage by applying carbon related costs to certain imported goods. Such policies seek to level the competitive landscape between domestic producers subject to carbon pricing and foreign competitors operating under less stringent emissions regulations.
Canada’s industrial carbon pricing framework therefore sits at the intersection of climate policy and industrial competitiveness. Supporters argue that rising carbon prices create long term incentives for innovation, carbon capture deployment, and operational efficiency. Critics contend that if competing jurisdictions do not adopt comparable carbon constraints, higher domestic costs may simply redirect investment without delivering proportional global emissions reductions.
