COMMENTARY: Ottawa-Alberta Deal Continues to Strangle Energy Sector With Red Tape – Fraser Institute

By Julio Mejía and Elmira Aliakbari

 

The Smith and Carney governments recently reached an agreement on the next steps for a potential new pipeline that could connect Alberta oil and gas to Asian markets. But the price Alberta will pay is steep: a higher industrial carbon tax and renewed support for the costly Pathways carbon-capture project, both of which will erode the competitiveness of Alberta’s energy sector.

Alberta’s industrial carbon tax system sets greenhouse gas emissions limits for large facilities (e.g. oilsands operations and refineries). Firms that exceed those limits must either pay a fee to the government or buy credits from companies that emit less than allowed or undertake emissions-reduction projects. Either way, they face a cost for their emissions. In May 2025, the Alberta government froze its industrial carbon tax at $95 per tonne of carbon emissions, breaking from the federal path that would have reached $170 by 2030. But under the new agreement (which builds on last year’s memorandum of understanding), Alberta’s effective carbon tax will reach $130 per tonne by 2040.

But again, despite a longer timeline or lower price, the tax will make Alberta less attractive to investors while delivering little environmental benefit. Why? Because a tax set at $170 per tonne by 2030 was projected to reduce global emissions by less than 0.17 per cent, so a slower increase to $130 by 2040 will achieve even less.

Worse, with oil and gas demand projected to rise over the long term, the carbon tax could easily strangle additional Alberta oil production. No other major energy-producing country imposes a comparable burden on carbon-intensive industries such as oil and gas. Raising the cost of investing in Alberta’s energy sector will simply shift investment to regions with more competitive tax and regulatory environments where energy is often produced with higher emissions, such as Latin America the Middle East or the United States. And emissions cross borders regardless of where they originate.

Oil shocks in recent years, from the Ukraine war to the Iran war, have shown the importance of energy security. Bond yields moved higher in the last few days as investors worried about the further impact of higher oil prices on the economy. A strong energy sector is vital for this country. But a continued stranglehold is the last thing Alberta’s energy sector needs as it already struggles to attract investment to build projects, expand good-paying jobs and compete globally. Over roughly the last decade, investment in Alberta oil and gas has plummeted from $64.7 billion in 2014 to $25.4 billion in 2024—a 61 per cent fall (inflation-adjusted). Preliminary data suggest 2026 will bring little improvement.

The agreement also confirms Alberta’s commitment to stricter methane rules—with a target of reducing oil and gas methane emissions by 75 per cent below 2014 levels by 2035—and makes any potential pipeline dependent on the multibillion-dollar Pathways carbon-capture and storage project.

The Pathways project would require more than $24 billion in industry investment before 2030 including approximately $16.5 billion for the proposed network that would move captured carbon emissions from oilsands facilities to underground storage locations. Adding carbon-capture technology could substantially increase production costs and potentially nearly double the break-even cost of oilsands projects.

Higher costs will make Alberta’s energy sector less competitive and further push investment out of the province. With this new agreement, the Smith and Carney governments have simply committed to a slower path toward the same destination—weaker investment at home, and energy production pushed elsewhere to benefit other countries.

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