In May, the federal government lowered the planned trajectory for Canada's industrial carbon price . The system puts a price on greenhouse gas emissions to give companies a financial incentive to reduce their emissions.
Author
- Longzhou Wang
Assistant Lecturer, Alberta School of Business, University of Alberta
Under the revised schedule, the headline industrial carbon price stays at $95 a tonne this year and reaches $115 by 2030, well below the $170 previously scheduled for that year .
Industry groups welcomed the lower trajectory , saying it would reduce costs and give producers more time to adapt. Environmental groups criticized it , arguing that a lower price would weaken the incentive to reduce emissions.
The disagreement reflects a familiar concern about environmental regulation: higher compliance costs can make domestic firms less competitive, particularly when producers elsewhere face less stringent environmental standards. Businesses have long argued this can lead to lost market share, production and employment.
My research on Chinese exporters suggests the level of an environmental requirement alone does not determine how firms respond. Whether firms have the capacity and opportunity to adjust to the requirement matters, too.
A case study from China
I studied how Chinese textile exporters responded when environmental regulations became more stringent, using a change in wastewater standards in Jiangsu province as a natural experiment.
The setting was Lake Tai , one of China's largest freshwater lakes and the centre of the country's dyeing industry. Textile dyeing produces heavily polluted wastewater, and by the 2000s the lake was extremely polluted.
In 2005, Jiangsu province responded by tightening the wastewater standard for dyeing firms around the lake. The new rule cut the permitted concentration of chemical oxygen demand - a standard measure of organic pollution - from 180 milligrams per litre to 100.
Firms across the provincial line in Zhejiang and Shanghai made the same products for the same buyers but were not subject to the new standard. This allowed me to compare firms facing the new requirement with otherwise similar firms that were not.
I matched the policy change to Chinese customs records showing what each firm shipped, to which country and at what price.
How firms adapted
The first rule prompted the regulated exporters to adapt. The quality of what they sold abroad improved by 4.8 per cent relative to their unregulated neighbours.
They installed more advanced equipment, increased spending on innovation, shifted their product mix towards higher-quality goods and improved their productivity. Their costs increased and employment fell, while the quality of their exports improved.
A second round of wastewater regulations followed after a severe algal bloom in Lake Tai in 2007 triggered a drinking-water crisis in Wuxi and brought the lake's pollution problem to national attention . The new standard was considerably stricter. This time, export quality fell by 9.3 per cent.
The stricter standard changed how much firms could produce, and it hit the highest-quality producers hardest. Firms producing the highest-quality goods cut production most sharply because meeting the tighter standard used up capacity they had spent years building.
The two episodes suggest that the effect of an environmental requirement depends not only on how stringent it is, but also on whether firms have a way to meet it.
What this means for Canada
There are important limits to what my research can tell us. This was a different country, a different pollutant and a different industry two decades ago, and Chinese dyeing mills are not Canadian steel plants. My results cannot tell Ottawa what the carbon price should be.
But the research does show what can happen when firms face increasingly demanding environmental requirements. For Canadian companies, the effect of the carbon price will depend partly on how easily they can adapt. Some industries have commercially available technologies for cutting emissions, while others face more expensive or technically difficult changes.
A large integrated producer may have more capacity to finance new equipment than a smaller regional company. The compliance timeline will matter as well, as replacing equipment when it reaches the end of its useful life is easier than having to replace it years early.
The answers are likely to differ across industries. A cement producer and an aluminum producer face different technical constraints, as do a large integrated company and a smaller regional producer. A carbon price can set the incentive to reduce emissions, but it cannot determine whether the technology, financing and time needed to respond are available.
A changing market
The stakes are higher than they were a few years ago. The European Union's carbon border adjustment mechanism entered its definitive phase on Jan. 1, 2026 , and importers must now account for the emissions embedded in iron and steel, aluminum, cement, fertilizers, electricity and hydrogen. Britain's version is scheduled to begin on Jan. 1, 2027 .
For Canadian exporters in those sectors and for a country looking for customers outside the United States, reducing emissions is becoming a condition of market access rather than a domestic compliance cost. A firm that responds to carbon pricing by producing less may reduce its emissions, but it may also have less to sell.
Canada has now settled its carbon pricing number through 2030. Whether that price leads Canadian firms to invest, adapt or scale back will depend partly on what options they have for meeting it.
Longzhou Wang does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
