Canada Considers Dropping Oil and Gas Emissions Cap in New Climate Budget

Canada may abandon its planned cap on oil and gas emissions in favor of other climate tools, including a stronger industrial carbon pricing system and expanded carbon capture and storage (CCS) deployment, according to Prime Minister Mark Carney’s first federal budget released Tuesday.

The budget document states that under these strengthened measures, the emissions cap “would no longer be required as it would have marginal value.” The cap, initially proposed under former Prime Minister Justin Trudeau, was not legislated and was set to take effect in 2030. It has faced strong opposition from energy companies and the province of Alberta, who argued it would limit production and harm competitiveness.

Carney’s government said it will instead pursue a “pan-Canadian agreement” to align provincial carbon pricing with federal standards. Provinces that fail to meet federal benchmarks-such as Alberta, which has frozen its carbon price, and Saskatchewan, which currently lacks one-would face the application of Ottawa’s industrial carbon price.

Industry groups welcomed the possible shift. “If you’re talking about a choice between that or strengthening the industrial carbon price, I think the latter would be the preferred choice,” said Mike Holden, chief economist at the Business Council of Alberta.

The budget also extends tax incentives for CCS projects, highlighting the C$16 billion Pathways Alliance initiative as “potentially transformative.” Amendments are planned to clarify greenwashing laws that oil firms say have caused investment uncertainty.

While critics accuse Carney of softening Canada’s environmental stance, the government insists the new approach will balance climate action with economic stability and investor confidence.

Dropping the O&G emissions cap materially reshapes stranded-asset calculations and TCFD-aligned disclosure narratives for Canadian energy companies and their lenders - and CCS incentives on top don't fully substitute for a cap in investor conversations. Our climate-action and sustainability-due-diligence teams help clients evaluate what this policy retreat means for portfolio exposure and long-term transition credibility.