While these measures are important, they address only part of the problem. Canada still faces mounting costs and escalating risks from extreme weather, and these steps alone fall far short of what is needed.

Ottawa’s nature strategy is the latest in a series of federal policies that must be turned into concrete programs and actions to address Canada’s vulnerability to extreme weather. Despite the National Adaptation Strategy laid out in 2023, the Trudeau government implemented too little to help Canada adapt to a changing climate. Adaptation has also received insufficient focus under the Carney government beyond what is included in its nature strategy. It has received even less attention across the provinces.

Adaptation is more than protecting natural assets and encouraging greater investment in sustaining natural capital. These measures have undeniable value, but in the absence of robust federal and provincial action, Canada remains exposed to significant risks and escalating costs. Extreme weather can cause loss of life, emergency relocations, widespread property damage and destruction, and lasting health impacts. These economic, financial and health burdens are rising as extreme weather events become more frequent and severe.

Canada can ill afford these increasing losses. Adaptation needs to be a foundational pillar of Canada’s nation-building and economic resilience strategy. This will require much stronger government capacity and sharper policy focus to design and implement effective adaptation programs and practical applications. Meaningful reforms to public-sector budgeting and accounting practices are also essential.

Climate adaptation’s inadequate role in Canada’s policy reset

To understand climate risk policy, it’s helpful to distinguish between mitigation and adaptation. Mitigation means preventing or reducing greenhouse gas emissions that drive climate change. Adaptation refers to protecting or lessening the impacts of climate change and extreme weather on people, communities, businesses and infrastructure.

In practice, mitigation continues to get far more attention and resources than adaptation. Under the Carney government, it remains the main climate focus, even though overall mitigation funding and policy support have fallen compared with the Trudeau era. Since spring 2025, Ottawa’s emphasis has been on carbon capture and electrification, and now on sustaining natural capital, as the primary tools to fight climate change.

In contrast, adaptation spending is much lower, accounting for only a small share of climate-related expenditures in 2025 and early 2026. Despite the compelling merits of more funding and extensive information available to support implementation, adaptation efforts by Ottawa and the provinces remain a fraction of what is needed.

Embedding adaptation as a core pillar of nation-building is essential to support long‑term economic resilience in the face of a changing climate and challenging economic times.

– Kathryn Bakos and James K. Stewart

Inadequate adaptation poses critical risks to the Carney government’s wide-ranging strategy shift on the economy and climate. Improved federal policy, investment and spending in crucial areas such as defence, infrastructure and trade are long overdue and have considerable merit. Yet adaptation has not featured in flagship legislation (e.g., Bill C-5, the One Canadian Economy Act), or in key fiscal policies (e.g., the November 2025 budget and the February 2026 Defence Industrial Strategy).

Without more funding and focus on adaptation, Ottawa and the provinces risk making the impacts of extreme weather even worse. Weak adaptation capabilities and implementation also make it harder to coordinate federal and provincial government programs to boost resilience, attract private investment and improve regulations without harming the environment.

Large and increasing economic and financial costs

Extensive international and Canadian research shows that climate change and catastrophic weather reduce output, or gross domestic product, as well as productivity. Extreme weather events create negative supply-and-demand shocks through multiple interconnected channels. These begin with decreasing an economy’s supply capacity with its existing stock of labour, capital and land. Extreme weather (e.g., floods, wildfires, hail, wind) damages utilities and transportation and communications systems, interrupts and reduces business operations, disrupts product distribution channels, and impedes supply chains.

Extreme weather events also diminish the available supply of capital, land and labour, further constraining output. Weather disasters damage or destroy structures and equipment, reducing both the quantity and quality of facilities, and can accelerate asset depreciation. Events such as major floods and wildfires decrease the labour supply by reducing work hours or preventing work altogether through evacuations, community disruption, increased caregiving demands, and prolonged dislocations to transportation and communications.

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The production and supply repercussions from extreme weather shocks range from major temporary disruptions to devastating harms. The floods in Quebec and Nova Scotia, and the wildfires in Lytton and Jasper, show how communities can be thrown into chaos.

Even when work does not completely stop, extreme heat reduces the effectiveness of workers and their hours worked. Heat stress lowers cognitive and physical capacity, decreasing labour productivity materially starting at temperatures above 25°C. Labour productivity falls more sharply if temperatures rise further, especially at 33°C to 35°C and above. Temperature extremes also boost absenteeism.

Climate disasters also exert a serious toll on the demand side of the economy. They reduce business and household incomes from interruptions to normal activity, damage to physical capital, reduction in labour supply and lower output. In turn, they cause decreased spending by firms and consumers, further reducing GDP.

Longer-term economic and health burdens

While the rebuilding phase after weather emergencies can temporarily – and misleadingly – increase GDP, reconstruction and replacement of damaged infrastructure require funding and resources that could otherwise have been used to maintain operations or expand productive capacity.

Extreme weather also has long-term effects that can persistently reduce productivity. The difficulty of rebuilding can create delays that reduce output for years. Smaller firms are particularly vulnerable. U.S. data show that 40% of small businesses affected by extreme weather do not reopen, and another 25% close within a year of the catastrophe.

Further, extreme weather events place enormous strain on Canada’s healthcare system. As health deteriorates, more people visit hospitals and costs go up. Society’s most vulnerable individuals are disproportionately affected: the elderly, people with pre-existing conditions, pregnant women and those experiencing homelessness. Climate-related disasters are also linked to worsening mental health from the loss of homes, prolonged relocations and financial stresses from costs not covered by insurance.

Escalating fiscal and financial burdens

Governments face rising costs of emergency assistance and infrastructure repairs from extreme weather events, as well as the growing need to invest in resilient infrastructure. However, public-sector budgets distort the substantial net financial and economic benefits of adaptation spending and investment. While budgets capture immediate costs, they fail to reflect much larger future savings. They also overlook key benefits such as more reliable services, fewer delays and reduced productivity losses.

Businesses and households are also facing growing financial pressures from extreme weather. Rising insurance premiums are a huge factor, but they are just the start. Companies must cover costs for immediate repairs, long-term recovery, and investing in more resilient offices, factories, warehouses, and equipment. Households can struggle with limited mortgage options in high-risk areas and out-of-pocket expenses for repairs and rebuilding. These pressures are compounded by time away from home or work, income disruptions and reduced personal productivity.

Extreme weather and insurance losses on the rise

Since 1983, Canada has experienced more than 300 catastrophic weather events – defined as events causing more than $30 million in insured losses ($25 million prior to 2022). In the 1980s, Canada averaged about two catastrophic events per year; today, that figure has climbed to roughly 15 annually.

Adjusted for inflation, annual losses from extreme weather typically ranged from $400 million to $700 million between 1983 and 2008. Over the past 17 years, insured losses from climate-related disasters jumped to average nearly $3 billion annually, with every year but one surpassing $1 billion.

Although total insured losses in 2025 were $2.4 billion, the broader trend of escalating insured losses from extreme weather events is evident – and is accelerating year over year, as shown in the graph below.

Across Canada, the true financial burden of extreme weather extends far beyond insured losses. Uninsured losses, those not covered by insurance, are estimated at roughly three times the amount insurers pay out, reflecting the costs borne by households, businesses and communities.

A select review of major Canadian floods, wildfires and extreme heat events over the past 13 years shows their increasing frequency, severity and rising economic, financial and health costs. Catastrophic weather events have destroyed homes and infrastructure, displaced residents, disrupted transportation and energy networks, and generated billions in economic losses, demonstrating how climate disasters threaten lives, livelihoods and productivity.

Climate adaptation: A core policy need

Despite the urgent need to reduce greenhouse gas emissions – the primary driver of climate change and extreme weather – fossil fuels are expected to remain a central part of the global economy for the foreseeable future, according to analyses by the International Energy Agency (IEA) and the United Nations Environment Programme. Meanwhile, global climate-related losses are rising as shown by catastrophe loss trends over recent decades and are expected to escalate further alongside ongoing fossil fuel use.

Given this reality, climate adaptation is essential to actively manage these risks. According to the Canadian Climate Institute, every dollar invested in adaptation in Canada can generate up to $15 in value – approximately $5 in direct avoided losses (repair and replacement costs) and up to $10 in broader economic benefits, including reduced supply chain disruption and sustained labour productivity.

A 2026 study on proactively upgrading public infrastructure assets to adapt to extreme rainfall and rising heat estimated that Canada could save $10 billion annually in net costs compared to not making these adaptation investments. The savings exceed $5 billion per year relative to a reactive approach, where upgrades are made only at the time of asset replacement.

What Canada should be doing differently

1. Embed adaptation in nation-building and transformational projects
Major projects and infrastructure development are cornerstones of Ottawa’s nation-building strategy. But success critically depends on building right the first time – designing Canadian infrastructure and economic assets to withstand the escalating risks of extreme weather.

Adaptation policies and programs are foundational to Canada’s economic success, resilience and nation-building. Embedding climate resilience into transportation, energy, hospitals, water systems and emergency operations supports public safety and security, growth and incomes. Aligning adaptation investments with Canada’s defence commitments is vital, including upgrading and protecting critical military infrastructure to safeguard it against extreme weather disruptions.

2. Significantly increase government capacity in adaptation
Effective climate adaptation depends on strong, coordinated institutional capacity across both the public and private sectors. The public sector, in particular, needs enhanced capabilities to assess climate risk and design policy that guides investment capital wisely. Greater government expertise is essential to better inform stakeholders and integrate resilience into decision-making across ministries. It is also critical to prevent fragmented and reactive adaptation efforts.

Establishing a National Adaptation Office (NAO), led by a national adaptation director, would enhance leadership and improve coordination and accountability across all levels of government. Incorporating aspects of the Major Projects Office and Defence Investment Agency, an NAO would attract expertise from the non-profit and private sectors. The director of such an office would serve as a clear focal point with authority to provide guidance, deliver analysis and advance national adaptation priorities.

3. Improve fiscal support for adaptation
Investing in resilient infrastructure, strengthening energy grids, and protecting workers can lower future costs from emergencies, repairs and health impacts. Communities and households can be made more resilient through limiting development in high-risk areas, climate-smart construction, and retrofitting existing stock to maintain housing stability.

Fiscal policy can also strengthen public–private collaboration. Ottawa’s nature strategy goal of attracting private and non-profit investment in nature is commendable. Much more can be done to align government budgets with private investment, and encouraging risk-sharing is key. Incentivizing adaptation in business planning will help embed resilience throughout the economy.

4. Adopt natural asset valuation and better accounting
Natural ecosystems – including wetlands, forests and grasslands – provide essential adaptation services such as mitigating floods, moderating heat and aiding water management. The National Infrastructure Council’s 2025 report emphasized their robust economic, fiscal and health benefits. Their role is critical in delivering more resilient infrastructure through nature-based solutions as highlighted in Ottawa’s nature strategy.

For example, upstream wetlands reduce flood damage in urban areas by up to 38%, while expanded tree canopies in cities can reduce heat by as much as 5°C. Swamps and marshes in one watershed alone in Ontario provide stormwater management services that would cost more than $1.7 billion to replace with built infrastructure.

Yet federal, provincial, territorial and most municipal accounts overlook natural assets, facilitating their degradation and overuse. This increases climate risk and boosts disaster and replacement costs for households, businesses and governments. Public-sector financial reporting needs to align with new international standards for climate risk and natural asset accounting.

Canada must act

Looking ahead, greater investment in climate adaptation and long‑overdue government strategy for climate-risk management are vital requirements for Canada’s economic success.

Canada must go much further than its new nature strategy to avoid the tragedy of the horizon, as then Bank of England Governor Mark Carney warned in 2015. Climate risks unfold over much longer timeframes than those typically considered by financial markets, policymakers and businesses. By the time the full impacts of these risks are visible, it may already be too late to avoid severe consequences.

Embedding adaptation as a core pillar of nation-building is essential to support long‑term economic resilience in the face of a changing climate and challenging economic times.

Kathryn Bakos is a biologist, the managing director of finance and resilience at the University of Waterloo’s Intact Centre on Climate Adaptation, and chair of the Ontario Biodiversity Council.

James K. Stewart is an economist, a senior fellow at the C.D. Howe Institute, and a member of the Advisory Committee for the Intact Centre on Climate Adaptation.

The post It’s time to address Canada’s major shortfalls in climate adaptation appeared first on Corporate Knights.

In 2018, Chisholm was appointed to the federal government’s Expert Panel on Sustainable Finance to make recommendations on how Canada could meet the enormous challenge of raising capital to fight climate change and build a low-carbon economy. The panel called for sector-by-sector decarbonization plans, corporate climate-disclosure rules and investment incentives for clean energy and fossil-fuel-emission reductions, among other recommendations.

Time is running short to create needed investment flows, said Chisholm, a Royal Bank of Canada board member who served 30 years in New York and London as a senior executive with global banking powerhouse Goldman Sachs. The Finance Department estimates that Canada will need between $125 billion and $140 billion a year of investment to meet its net-zero targets, far more than the $15 billion to $25 billion invested now.

“Emissions are nowhere near what we want them to be,” Chisholm said. “They’re nowhere near what we hope they would be, and they’re nowhere near what we need them to be. Conditions are probably, in some ways, getting worse rather than better.”

Losing race for sustainable economy

Canada’s greenhouse gas emission targets aren’t the only thing at stake, Chisholm said. Much bigger investments are needed to keep up in the global sprint to decarbonize the economy. Canada desperately needs to raise its ambition to play in the “game” of the global sustainable economy of electric vehicles and clean energy, sectors dominated by China and the United States. “We’re not winning this game, and we need to be a lot more aggressive.”

The government has failed to act on a key recommendation in the Expert Panel on Sustainable Finance’s 2019 report to work “deeply hand-in-hand” with Canada’s largest companies on decarbonization plans for their sectors, Chisholm said. “We’re not very far along that path,” he said, adding that government-to-business, government-to-government and business-to-business relationships need to be intensified.

Canada is also lagging behind in planning for the increased electrification of its economy, a key recommendation in the report, which has become more urgent with rising data-centre power demand. “We’re nowhere near the intensification and clarity we need.”

Chisholm was appointed to the expert panel along with three other financial industry heavyweights: Tiff Macklem, now governor of the Bank of Canada; Kim Thomassin, senior executive of the $400-billion Caisse de dépôt et placement du Québec; and Barbara Zvan, now CEO and president of Ontario’s $12-billion University Pension Plan.

After two years of inaction, partly due to the COVID pandemic, the government appointed the Sustainable Finance Action Council (SFAC) in 2021 to implement the expert panel’s recommendations. But the range of activity narrowed over the years. Work on a taxonomy that would provide an official green and transition investment standard for banks, funds and asset managers progressed slowly, bogged down by disagreement over whether to include oil and gas decarbonization projects.

A working group was able to forge a consensus on the taxonomy recommendations in March 2023, and the SFAC wrapped up its work in March 2024. But it wasn’t until just this past October that Finance Minister Chrystia Freeland announced that the taxonomy would go ahead, although even now it is not expected to be fully operational for another year.

Political realities loom over conference

The two-day Sustainable Finance Forum, the third in an annual gathering pulled together by social innovation consultant turned Liberal MP Ryan Turnbull, attracted about 700 consultants, community economic-development organizers, policymakers, climate campaigners, think tank staffers and financiers.

Despite the bleak picture he painted, Chisholm’s remarks were well received by participants in the conference, where Donald Trump’s re-election and the prospect of a Pierre Poilievre government in Canada cast a shadow over the country’s prospects for sustainable finance.

Sustainable-investment incentive programs could be on the chopping block under a Poilievre government, including the $15-billion Canada Growth Fund, carbon-pricing policies and a cap on oil and gas emissions.

In an armchair discussion with Turnbull at the opening of the conference, Prime Minister Justin Trudeau seemed to recognize the frustrations of Canadians who do not support these policies. “It’s understandable – and right now when people are squeezed every single day at the grocery store, in paying the rent, in thinking about whether their job is going to hold them to retirement, what their kids are going to do, it’s really easy to scare people into being even more anxious,” Trudeau said.

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Sustainable finance and social innovation can help Canadians “get over this funk,” the prime minister said, arguing that they can help finance businesses that are meeting people’s daily needs while protecting the climate and the economy.

The policies are necessary to help Canadians prosper in a more crisis-ridden future, even though they may seem out of sync with the current funk felt by millions of people, Turnbull says. He serves as parliamentary secretary to both the finance minister and to the innovation and industry minister, an indication of his influence in the Trudeau administration. He has been a dogged advocate of sustainable finance in the government and has built a base of support for it through the annual forum. “I spent two years of my life rallying this forum and using the momentum built in these conversations to get things done,” he says. The delays that Chisholm spoke of were caused by the need to avoid “a quagmire of different kinds of standards and disclosure requirements across Canada,” he says.

“What we’re talking about is creating a resilient economy that can absorb the shocks of other crises that are coming,” Turnbull says, speaking of the strain on Canadians and the limited support for sustainable finance policies. “We need to raise our ambition, which is the exact opposite of what you would think we should do at a moment when Canadians just want us to meet their immediate needs.”

Eugene Ellmen writes on sustainable business and finance. He is a former executive director of the Canadian Social Investment Organization (now the Responsible Investment Association).

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Canada’s new 2030 Emissions Reduction Plan (ERP) is a comprehensive, ambitious and transparent policy roadmap for achieving Canada’s climate goals. It uses credible modelling to demonstrate a path to 2030 targets. It’s a big step forward. 

It’s also not enough. 

Modelling is critical for planning, but it doesn’t reduce real-world emissions, nor does it attain targets. Ultimately, Canada’s success will depend on how – and how quickly – the government puts those policies in place. 

Fortunately, the 2030 ERP is a decent roadmap. According to our independent analysis, the plan will drive emission reductions across all sectors and all major sources of emissions in the economy. 

Unfortunately, Canada has less than nine years to design and implement most of the policies contained in the ERP. Based on our assessment, a full 100 megatonnes of emission reductions – 43% of the needed reductions – are projected to come from policies that have been announced but that still need to be developed and implemented. As Canadian climate policy wonks know all too well, the process of regulatory consultation and design takes time.

The federal government should use the ticking clock to focus its attention on what matters most: the policies that, if designed well, will deliver the lion’s share of reductions required. Here are the five policies that, according to our analysis and modelling, will deliver about two-thirds of the reductions needed to meet Canada’s 2030 emissions targets. 

1. Continued adjustments to the federal carbon price. The government needs to keep ratcheting up the stringency of its carbon-pricing system to deliver more reductions. 
2. Establish an emissions cap for the oil and gas sector. The plan will look to reduce the emissions of the sector to 42% below 2019 levels by 2030, taking into account policy interactions with carbon pricing, methane regulations, et cetera. The cap is low, and it will be a technological and financing puzzle to achieve the aspirations in the ERP. 
3. Design a Clean Electricity Standard. This will aim to make electricity net-zero by 2035 and is a critical step to decarbonizing the rest of the economy. 
4. Finalize the Clean Fuel Standard (this regulation has taken some time to develop) and move to strengthen its stringency well before 2030. 
5. Deploy land-use emission  reduction projects as fast as possible. The ERP relies heavily on nature-based solutions. Canada must move quickly to plant trees, change land-use practices and scale-up workable solutions. 

Focusing on these five planks cuts against the comprehensive ambition of the ERP, which aggregates an astounding number of policies that previously were scattered across a number of federal documents. The sheer number of those policies will drive emission reductions across all sectors and all major sources of emissions in the economy – but it’s double-edged. 

Overlapping policies can interact and sometimes impair performance. That risk, and the overall urgency of bending Canada’s emissions curve, are all the more reason to focus immediately on the big five that can get us most of the way there. If we get these policies right, the rest can fall into place more easily.

So welcome to the decade of climate governance. Canada has a plan. It’s a good one. It’s not perfect, but it doesn’t need to be. Because even though time is short, this is still more a marathon than a sprint. The 2030 ERP is a first step, not a final one. The priority now must be delivery, starting with hammering out the five policies that will get us most of the way there. 

For governments, industry, expert advisors, and climate policy pundits alike, that’s where we now need to turn our attention. 

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Political leaders in the European Union, the United States and Canada are increasingly exploring how they might implement carbon border adjustment measures (CBAMs), also known as carbon border taxes, to allow greater ambition on emission reduction without undermining their economies. Imposing higher carbon costs on industry can result in lower emissions in the home jurisdiction but higher ones elsewhere, resulting in no benefit for the climate. Governments in Canada and Europe currently levy carbon taxes on a small portion of production to avoid that leakage scenario. Border measures would allow them to impose steeper carbon costs while protecting their industry.

In Canada, Prime Minister Justin Trudeau has given his cabinet ministers the task of figuring out how to stop what’s known as carbon leakage, when carbon-emitting industries move abroad to avoid paying penalties. The Liberal government has committed  to raise Canada’s federal backstop carbon price from $50 a tonne in 2022 to $170 by 2030, and that includes the output-based pricing system that applies to large industrial emitters. Provinces that have adopted their own pricing systems to avoid the federal one will be expected to match Ottawa’s price increase.

Canada would be well-served to find co-operative approaches in implementing any border measures, researchers from the Canadian Institute for Climate Choices (CICC) told a webinar on December 15, previewing a report on CBAM co-operation to be released in the coming weeks. That effort is enormously complex, as different jurisdictions – even within Canada – have varying approaches to carbon pricing that make it difficult to make comparisons, the report concluded. At the same time, governments will have to avoid the temptation to wield CBAMs as unfair trade measures that use the climate battle as a pretext for outright protectionism. 

“Coordinating best practices [on CBAMs] can smooth the protectionist waters,” CICC economist Dave Sawyer said. Through a co-operative approach, governments can maintain competitiveness by ensuring equivalent climate costs while motivating other countries to increase their ambition. 

Former environment minister Catherine McKenna said the trade issues around climate transition are challenging but must be addressed. “It matters because competitiveness matters,” she told the webinar. “It matters because we want to tackle climate change, but we also want to have industries in Canada and we want to have good jobs in Canada.”

The Liberal government is currently developing its approach to carbon border adjustments. In his mandate letter to Finance Minister Chrystia Freeland that was released December 16, Trudeau tasked the minister with working with provinces as well as key trading partners like the United States and the EU on CBAMs.

Trudeau’s instructions to his ministers signalled an unprecedented government-wide effort to combat climate change. Freeland is charged with a host of policies to ensure that financial markets and pension funds put climate change risks and opportunities front and centre in their decision-making. Environment Minister Steven Guilbeault and Natural Resources Minister Jonathan Wilkinson have lengthy to-do lists, grounded in the Liberal commitment to reduce emissions by at least 40% by 2030 from 2005 levels and achieve net-zero by 2050. Their remit includes setting greenhouse-gas-reduction targets for the oil and gas sector and putting the country on track for a fossil-free power grid by 2035. Guilbeault is also tasked with producing the country’s first strategy on climate adaptation by the end of 2022.

Coordinating best practices [on CBAMs] can smooth the protectionist waters.

– Dave Sawyer, economist, Canadian Institute for Climate Choices

Every minister in an economic portfolio had climate-related priorities. Infrastructure Minister Dominic LeBlanc is to oversee an effort to establish a “buy clean” strategy that would support the use of made-in-Canada, low-carbon products in Canadian infrastructure projects. Innovation, Science and Economic Development Minister François-Philippe Champagne is tasked with promoting the country’s cleantech sector and the electric vehicle supply chain, including establishing new rules around foreign investment in the critical mineral sector. 

Freeland’s mandate on CBAM suggests the federal government will apply a carbon tariff on imports from countries “that are not doing their part to reduce carbon pollution and fight climate change.” The measures would apply specifically to carbon-intensive goods such as steel, cement and aluminum, the letter said.

The tricky business of determining which countries are “doing their part” in cutting emissions will be fraught with tensions and international rivalries, particularly given the long-standing principle at the United Nations that developed, emerging and least-developed countries have differing responsibilities for climate action.

EU championing carbon border measures 

The EU is leading the charge on CBAMs as it drives greater climate ambition and a rising carbon price. New German Chancellor Olaf Scholz is a champion of carbon border measures and pledges to help push such measures through the European Parliament.

The Canadian government has begun to assess the impact that the adoption of carbon border measures would have on exports to the EU, said Marie-France Paquet, chief economist at Global Affairs Canada. If the Europeans acted alone, it would result in tariffs on Canadian exports averaging 0.54% – higher than the average levies for the U.S., Australia or Japan, Paquet told the webinar. In a joint approach, that average tariff would drop to 0.15%, and Canadian exports to Europe would increase, she said.

Germany is taking over the presidency of the G7 in January, and Scholz is expected to push members to work together on carbon border measures, Ambassador Sabine Sparwasser told the webinar.

Germany and the EU have set out to rapidly transform their economies from a reliance on fossil fuels to clean energy, the ambassador said. “With this agenda, we do need to look at good ways of keeping our economies competitive and at good joint ways of avoiding carbon leakage within the EU and with very like-minded partners.”

Cooperation with the United States – which is by far Canada’s leading trading partner – would be tougher because it has no national carbon price and instead relies on a raft of state and federal regulations, pricing systems and subsidies. At the same time, Canada’s own climate strategy goes well beyond pricing to include a host of regulations, such as the Clean Fuel Standard.

The U.S. and EU announced at November’s UN climate summit in Glasgow, COP26, that they intended to negotiate a CBAM for trade in aluminum and steel.

It is impossible to overestimate the enormity of the challenge, even in reaching agreement with the EU, Sawyer said. Governments will have to ensure consistency regarding how carbon intensity in industry is measured and in assessing what climate-related costs are imposed by governments. 

It matters because competitiveness matters.

-Catherine McKenna, former minister of environment and climate change

The Canadian system alone is a patchwork of federal and provincial policies, noted Ken Boessenkool, a former Conservative Party strategist and a lecturer at the Max Bell School of Public Policy at McGill University.

“Each province has addressed the competitiveness issue in a different way,” Boessenkool said. “That will be a challenge when you want to put on top of it a single carbon border adjustment.”

Under the output-based pricing system adopted by Ottawa and provinces like Ontario and Alberta, industry pays the carbon levy on a small percentage of emissions. The approach avoids adding undue costs to industry while encouraging the companies to cut their emissions. But each province has its own procedures to determine what output will be taxed. Under a cap-and-trade approach used by Quebec and Nova Scotia, companies get free allowances up to a cap, again effectively paying only a small percentage of their output.

The EU has an emissions trading system, and the goal is to drive down the amount of free allowances provided in order to reduce emissions by 55% by 2030 and to zero by 2050, said Susanne Droege, a researcher at the German Institute for International and Security Affairs. 

To protect its industry from resulting climate costs, the EU has introduced legislation with carbon border measures to be phased in over 12 years. It would cover steel, aluminum, cement, fertilizers and electricity from non-EU countries.

The legislation was drafted with an inward focus on European industry, and “there was not much dealing with the international ramifications,” Droege said. But trading partners – from Ukraine and Russia to the U.S. and China – are now engaging in the debate.

Leading politicians in Europe, including Germany’s Chancellor Scholz, have acknowledged the EU will not be able to go it alone in establishing a workable carbon border regime and will need partners. Scholz is looking to establish “climate clubs” – countries with high mitigation ambitions – to work together on trade issues. It’s a club from which Canada cannot afford to be excluded.

With the support of the Embassy of the Federal Republic of Germany in Canada.

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In the election campaign, the Liberals made some bold climate-change promises, including capping greenhouse gases (GHGs) from the oil and gas sector, forcing the industry to make big reductions in its methane emissions, and ensuring the country’s electricity sector becomes carbon-neutral by 2035. 

The specific planks – along with many other commitments – are meant to put meat on the bones of the Liberal government’s commitment to the UN in July that Canada will reduce its GHG emissions by 40 to 45% below 2005 levels by 2030, on the road to net-zero carbon by 2050.

Trudeau fell short in his bid for a majority government as many critics questioned the need for the summer election call during the fourth wave of the COVID-19 pandemic. However, the Liberals can count on support from the New Democrats, Green Party and Bloc Québécois for ambitious climate action at home and on the world stage. 

For many voters, the election was less about climate change and more about a rising cost of living and affordable housing. To maintain support for costly climate policies, the Liberals will have to ensure that Canadians don’t feel overwhelmed by the wrenching transition ambitious climate action will entail.

Still, Canada – led by a reinstated Prime Minister Trudeau – has a key role to play in getting the world on a better track. 

As Canadians were casting their ballots Monday, UN Secretary General António Guterres and British Prime Minister Boris Johnston kicked off “climate week” in New York by hosting a closed-door session of world leaders to address shortfalls in GHG targets and climate finance.

A UN analysis of countries’ emission-reduction pledges – known as nationally determined contributions, or NDCs – concluded that the world remains far off track to meet the Paris Agreement goal of holding the global increase in average temperature to 1.5°C, or even 2°C. 

After reviewing all the updated NDCs submitted this year, the UN’s Intergovernmental Panel on Climate Change said the new targets would still leave the world on pace for a 2.7°C increase in average global temperature by 2100 – and that assumes the leading countries actually meet their commitments.

To maintain support for costly climate policies, the Liberals will have to ensure that Canadians don’t feel overwhelmed by the wrenching transition it will entail.

Gathered in New York for the opening of the General Assembly, Guterres and Johnson made it clear that all nations have to step up their ambition and action. The re-elected Liberal government can provide international leadership, but only if Canada is meeting its own obligations. 

To date, the federal and provincial climate policies have failed to stop the inexorable rise in GHG emissions, which are believed to have fallen in 2020 as a result of the pandemic only to rebound this year as the economy recovered. In 2015 – the year in which the Liberals were elected – Canada had emissions of 723 megatonnes; that climbed to 730 in 2019. In a report this month, Climate Action Tracker said Canada’s policies are “highly insufficient” to meet its commitments. 

Clearly, it takes time to develop policy, enact it and then see its impacts. The stubbornly high emission levels, however, illustrate the enormous challenge in achieving a transition that requires major changes to the country’s energy production and consumption.

With the election win, the Trudeau government can be expected to move quickly to legislate the planned increase in the carbon price from $50 per tonne next year to $170 in 2030, through yearly increments of $15. That higher levy will drive up the cost of gasoline, heating fuels and electricity fired by fossil fuel for Canadian consumers and businesses.

The Liberals have said they will continue to provide rebates to families to compensate them for the higher carbon price – an average family of four in Ontario will collect roughly $2,018 annually from the rebate by 2030. However, small businesses and the not-for-profit sector will see their costs rise significantly.

The minority Liberal government will also have to enact measures to reverse the dramatic increase in emissions seen from the oil and gas industry over the past 15 years. In its platform, the Liberal Party said emissions from the sector must not rise above current levels and promised to set targets for GHG reductions in the industry for 2025 and 2030 consistent with a path to net-zero by 2050.

That won’t be easy. Any policies aimed at achieving the pledge will almost certainly provoke a backlash from oil- and gas-producing provinces unless accompanied by massive aid for both the companies and their workforces (including retraining and financing the adoption of new technology). Industry critics, on the other hand, will loudly oppose any further subsidies for oil and gas producers, even if they help reduce emissions from production.

The Liberal pledge to make the electricity system emissions-free by 2035 will conflict with plans in some provinces to use natural gas as a replacement for coal or to back up intermittent renewable sources like solar and wind.

As a wealthy country with one of the world’s highest rates of GHGs per person, Canada has a special responsibility to address climate change, even though it accounts for only 1.6% of global emissions. Failure to meet the Liberals’ lofty promises would once again undermine Canada’s reputation, which has suffered from broken commitments in the past and the rapid expansion of the oil sands, known throughout the world as one of the most carbon-intensive sources of oil.

In a report this month, Climate Action Tracker said Canada’s policies are “highly insufficient” to meet its commitments.

In the past six years of Liberal government, Canada has staked out a leadership position on climate change internationally. Ottawa joined with the U.K. in establishing the Powering Past Coal Alliance, which encouraged countries around the world to phase out reliance on coal-fired power.

In a pre-recorded message to the UN meeting in New York, Chinese President Xi Jinping said his country would no longer finance the construction of coal-based power plants abroad, which represents a major victory in the powering-past-coal effort. However, Beijing remains committed to coal-fired electricity at home. 

In July, Environment Minister Jonathan Wilkinson and his German counterpart were chosen to co-lead a process aimed at securing greater commitment from developed countries to deliver on their commitment of US$100 billion in climate financing for developing countries. 

Canada has pledged $5.3 billion (Canadian) toward that global commitment. The Biden administration announced it would seek approval from Congress to double its climate financing to US$11.4 billion annually.

Countries’ representatives are now preparing to gather in Glasgow in early November for the 2021 Conference of the Parties. COP26 president Alok Sharma – who also serves as the U.K.’s Minister of State at the Cabinet Office – says it’s critical that we achieve significant progress on climate financing to help developing countries prepare for the inevitable impacts of climate change and reduce emissions in order to limit the damage. Tellingly, these countries won’t be adequately represented at COP26 because of vaccine inequity.

In 2015, a newly elected Trudeau arrived at the Paris climate summit with a promise that Canada was “back” and ready to forge an ambitious role in battling climate change after 10 years of resistance from former Conservative prime minister Stephen Harper. 

Since then, the Liberal government has made considerable progress, including being re-elected on its platform that proposed a large increase in the carbon prices. 

Now it must work with other parties – including the Conservatives where possible – to ensure the path to a net-zero carbon economy is secured domestically and work with global leaders to meet the goal of the Paris Agreement. The growing urgency of the climate crisis makes clear the inadequacy of half measures.

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Some might assume that a higher carbon price reduces the need for other policy approaches. Commentator Andrew Coyne has taken the market-fundamentalist position that a higher carbon price should be Canada’s single climate policy, and governments should do little else. However, the plan to increase the carbon price creates an urgent need for a robust “green industrial policy.”

That’s the approach in which governments actively guide the economy toward net-zero greenhouse gas (GHG) emissions (or beyond). Rather than simply sending signals to the market, industrial policy recognizes that governments co-create development pathways with the private sector through strategies customized to unique regional and sectoral contexts. Green industrial policies include the Energiesprong project to transform building retrofits, the U.S. SunShot Initiative and the role public investment banks play in deploying sustainable energy.

Lack of explicit industrial policy doesn’t mean state direction is absent – it often means incumbents with the greatest political power have captured government decision-making, which maintains a status quo rather than producing activist industrial policy. The persistence of fossil fuel subsidies is an implicit industrial policy, just not a transformative or environmentally friendly one.

A green industrial policy is urgent because without it, the carbon price is unlikely to receive enough political support to reach its 2030 level or to induce the changes required for a net-zero economy. Here are five reasons why.

1. Political support depends on economic security and access to new services

While commentators like Andrew Coyne hope to see right-wing parties propose a market-fundamentalist position with a carbon price higher than $170 per tonne, we are more likely to see conservative movements exploit people’s economic insecurities by directing their anger against carbon pricing (as we’ve seen in Ontario, Alberta, France and the U.S.).

The federal government will issue quarterly “rebates,” promising to put more money in the pockets of average Canadians paying the carbon tax. This does not prevent people from worrying about how they will pay their monthly bills, however, especially if they have precarious incomes.

Inequality and precarious economic situations also make “the average” a poor indicator. For instance, rural and low- to middle-income households can consume more energy because they live in inefficient and substandard housing – or worse, they’ll avoid heating and cooling at healthy levels to make bills affordable.

The ultimate distributional consequences of carbon pricing depend not only on rebate policies, but on the availability of carbon-reducing services – which often are not adequately provided by markets. There is an urgent need for the government to support universal access to a new suite of carbon-cutting services like building retrofits customized for low- to moderate-income earners and public transit.

Consider that supporting large-scale building retrofits will require a transformation of business models in the sector. Rethinking service provision in a low-carbon economy also demands a renewal of the public sector to be more responsive to citizens’ needs and agile in creating new designs. This is the domain of industrial policy.

A green industrial policy should also guarantee that “good jobs” are available for anyone who wants to build a career in the net-zero economy. Market forces or untargeted pricing and subsidy policies do not create jobs for the people and places that need them most. Active labour-market policies that focus on what individuals need to transition to new careers, and customized technological advice and barrier elimination for firms, work best.

We cannot let carbon pricing become the lightning rod for legitimate anger over inequality and economic insecurity. An industrial policy that creates green services and good jobs will promote economic security, which will give people the tools they need to react to the carbon price by reducing emissions. The alternative is political mobilization against the carbon pricing policy.

2. We need more information

The carbon price conveys information to consumers and businesses about what choices to make in existing markets through prices, but economic decisions require more information.

Pricing information is insufficient because a net-zero-emissions economy requires doing things we have never done before. This concerns not only new technologies, but figuring out how to deploy existing technologies (e.g. insulation and electric vehicles) at unprecedented scales. Such an endeavour requires information about local economic structures, supply chains, cultures and transformative combinations of technologies. This information is conveyed by people and organizations sharing complex ideas in networks rather than prices.

Governments provide valuable information to these networks about things like new technological potentials and regulations. And if governments do not actively participate alongside private sector firms and civil society in these networks, they will lose the ability to understand economic change processes and how to direct them toward net-zero emissions.

There is a caricature of “industrial policy” involving an all-knowing state setting rigid directions. A modern industrial policy approach understands that economies are beset by fundamental uncertainty, requiring governments to lead a process of discovery that taps information from markets and society.

While carbon pricing is a great tool to convey important information through markets, we must recognize that it is a one-dimensional signal about what to do (don’t buy or produce things with high emissions). It offers little guidance about the best way to do this. Industrial policy facilitates the sharing of more complex information about net-zero solutions, which will create a stronger reaction to any carbon price.

3. Carbon pricing pushes, while industrial policy steers

Carbon pricing pushes toward reducing emissions, but it does not steer toward the most promising social and technological futures. There is a danger that economic decisions that pass a cost-benefit test with a carbon price (e.g. a pipeline or new highway) are legitimized, when they could pull us toward dead ends that put net-zero emissions out of reach. If we are moving toward a dead end, the political interests dependent on carbon pollution are likely to more strongly mobilize to weaken carbon prices. Industrial policy concerns itself with the direction of economic change – it can navigate and steer while carbon pricing pushes.

An industrial policy approach also gives policy-makers more tools and greater flexibility, which will be particularly useful during unanticipated shocks. Note that governments stalled planned carbon-pricing increases in reaction to the pandemic. But the pandemic also created opportunities to invest in active transportation infrastructure and a green recovery strategy. Future shocks are inevitable, and when they come, we will need public sector institutions with diverse solutions readily available.

Also, while carbon pricing provides a push, we need zero-carbon strategies to take flight – deploying solutions like building retrofits, renewable energy and industrial decarbonization at scales never before achieved. The history of transitions shows that such take-offs are not created by price changes alone. They require new combinations of technologies, changes in regulatory systems to complement new technologies, and a new “common sense” about how to produce things and what constitutes a good life. Such systemic changes are not triggered by risk-averse firms, acting independently. The public sector has the role of monitoring larger systems and creating new societal bargains, and it has the ability to take the risks associated with pushing technological and organizational frontiers.

4. While carbon pricing is broad, industrial policy is targeted

Carbon pricing works best when it provides a broad and uniform price signal; however, the price will have unique impacts on different sectors and regions.

While a high carbon price may create major changes in sectors like electricity, it may have minimal impact in decentralized and less coordinated areas such as housing or agriculture. An industrial policy approach will introduce new technologies and business models in strategic sectors and enable them to react to the carbon price by producing less carbon instead of opposing the policy change.

In Canada, we will also see a variety of regional transitions instead of a national one. Quebec’s history with hydroelectric power creates different net-zero pathways compared to Alberta’s history of oil and gas development. A regionally differentiated policy is important because we cannot escape the politics of federalism, and opposition to carbon pricing is coming from regional political interests. The more a green industrial policy can identify and support promising net-zero pathways that build from pre-existing regional assets, the better the chance of building supportive political coalitions for more climate action in the regions themselves.

5. Industrial policy defines the Canadian role in a net-zero economy

Democratic deliberations about what type of society we want should be more comprehensive than the decision to change prices and let markets figure it out. There are many reasons why Canadians might desire a different bundle of net-zero solutions than the ones induced by a higher carbon price. Perhaps we want to avoid the risks associated with nuclear waste, or we wish to deploy clean energy in a way that also encourages reconciliation with Indigenous Peoples? Good industrial policy considers how societal aspirations should influence the direction and character of economic development.

In addition, market-based policies do little to ensure Canada benefits from a net-zero transition. Finding the areas where Canadians can make the greatest contribution is important for the global transition, and to reinforce political support for the transition at home. While carbon pricing sends a signal for Canadian solutions-providers to search in new directions, an industrial policy leads this search by creating the space for learning, experimentation and scale-up. We should consider, for instance, how Canadian capabilities in areas such as software and battery systems could create a less dependent relationship with international automakers; how Canadian oil and gas capabilities could promote the development of geothermal, advanced materials and green hydrogen; and how to make energy-efficient housing for our cold climate.

There are parallels here to Canada’s free trade debate. Free trade opponents were concerned that market processes, left to themselves, would exacerbate Canadian dependence on natural resources and foreign technology (a trajectory that has strengthened Canada’s carbon lock-in). A proposed middle path (not taken) was to ensure a robust Canadian industrial policy alongside freer trade. Today, we need a green industrial policy to make sure Canada thrives under a carbon price.

An urgent need for green industrial policy

Environment Minister Jonathan Wilkinson described the new climate plan as an “industrial policy.” This seems to refer to building Canadian manufacturing capabilities in low-carbon supply chains. The concepts outlined above are broader – concerning the government’s role in directing and shaping markets, and embedding market processes in society’s need for economic security and democratic participation.

The new carbon-pricing regime will not launch until 2023, and the $170 price will come into effect in 2030. There are several elections and unexpected events likely to occur between now and then.

To reinforce the carbon-pricing commitment, we need action on developing a more robust green industrial policy this year. This means a bold commitment to long-term public investment to support economic security and the green recovery. It also means developing more specific challenges and missions to set the right direction, such as zero-carbon retrofits of all buildings – with specific focus on low- to moderate-income households. Canada also needs to renew its public sector capabilities and institutions to effectively implement an industrial policy.

Carbon pricing and green industrial policy are complements rather than substitutes, and a meaningful rise in a carbon price makes the need for a well-informed, equality-enhancing, targeted and democratic Canadian green industrial policy only more urgent.

A version of this article first appeared at broadbentinstitute.ca.

Brendan Haley is a Broadbent Institute Policy Fellow. He wrote a PhD thesis on low-carbon transitions in the Canadian context and is the author of a Broadbent Institute report on a Green Entrepreneurial State in Canada.

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