Sharan Kaur: Ottawa and Alberta just struck a carbon deal that could actually move the needle

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Sharan Kaur served as the deputy chief of staff for former Liberal finance minister Bill Morneau and is currently a principal at Navigator.

Alberta and Ottawa just did something nobody expected, and it actually matters. For years, the story of Canadian climate policy has been a familiar one: Ottawa sets ambitious targets, Alberta pushes back, and the country lurches forward with neither the unity nor the urgency the moment demands. Today, that story finally has a new chapter.

Under the Canada-Alberta MOU (memorandum of understanding) announced last November, today, Canada and Alberta announced a landmark agreement on industrial carbon pricing, and if the details hold, it represents the most significant, positive realignment of federal-provincial climate relations in a generation.

Fixing a broken market signal

Let’s be honest about what’s being fixed here. The existing system wasn’t working, not in today’s environment. Carbon credits in Alberta were trading at roughly $20 per tonne before this MOU was negotiated; a full $75 below the current federal standard. That gap wasn’t a technicality. It was a signal that what looked like serious climate policy on paper was producing almost nothing in practice – meaning that it wasn’t good policy. The market was oversaturated, prices were too low to meaningfully reduce emissions, and heavy emitters had little reason to do more than the bare minimum.

The Canadian Climate Institute has estimated that more than 70 major decarbonization projects stand to benefit directly from effective industrial carbon pricing. Some of those projects, the ones that could define Canada’s clean industrial future, are at risk without a credible pricing signal. A carbon market trading at $20 a tonne is not a credible pricing signal. It is a suggestion whereas today’s announcement is something considerably more serious.

Under the MOU, Canada and Alberta are targeting an effective industrial carbon price of $130 per tonne by 2040. That is 6.5 times the effective trading price that existed before this agreement was struck. The path to get there is structured and escalating: a headline price of $100 per tonne in 2027, rising to $130 per tonne by 2035, with a 1.5 per cent annual inflationary escalator beginning in 2036. Stringency rate benchmarks — which can be thought of like a price floor — will be embedded throughout to ensure continued pressure on Canada’s largest emitters year over year.

Surprising shift in strategy

The political significance of this is hard to overstate. Premier Danielle Smith froze Alberta’s carbon price at $95 per tonne just one year ago, a move that was widely read as a declaration of war on federal climate ambition and a signal to her base that Alberta would not be dictated to by Ottawa. That she is now party to an agreement with a clear trajectory beyond $95, anchored in federal alignment, is a genuine shift. Whatever drove it — the new tone in Ottawa, the economic case for carbon markets, or the politics of a province watching decarbonization investment flow elsewhere — the result is the same: a deal that neither side seemed capable of reaching 12 months ago.

This is what mature federalism can look like when the incentives align, and the political will is present. It is not a capitulation by either side. Alberta retains its own system and its own identity as a carbon pricing pioneer. It has, after all, had industrial carbon pricing longer than almost anywhere in North America. Ottawa gets the alignment and ambition it needs to make the national framework credible and to unlock major emissions-reducing infrastructure like the Pathways Project. And Canada gets what it has been missing: a carbon price that might actually move the needle.

There will be critics on both sides. Some in the environmental community will note that 2040 is a long way away, and that price floors without adequate enforcement mechanisms are only as strong as the governments that maintain them. They are not wrong to be watchful but they must also acknowledge that we are in unprecedented times. Some in Alberta’s conservative movement will frame this as a surrender to federal overreach. That framing is tired and, more importantly, incorrect; Alberta negotiated this, Alberta’s interests are embedded in it, and Alberta’s industrial sector is better positioned with a clear, predictable pricing trajectory than with ongoing uncertainty.

Making up for lost time

The harder truth is that Canada has wasted years of potential decarbonization investment on this fight. Every year that federal and provincial carbon frameworks were misaligned was a year that investors hedged, projects stalled, and emissions continued. The MOU doesn’t recover that lost time. But it does, if implemented faithfully, begin to close the gap between Canada’s climate ambitions and its climate reality.

Today we are looking at a shift in the relationship between Alberta and Ottawa, we are looking at the stringency benchmarks, the enforcement mechanisms, the language around compliance flexibility. The architecture matters. But do not miss the forest for the trees: Canada and Alberta reaching a landmark agreement on industrial carbon pricing is not a small thing. In a country that has often struggled to speak with one voice, it may be exactly the signal the market and the world has been waiting for.