United Nations Framework Convention on Climate Change

Canada is a long-standing participant in the international climate change regime. It signed and ratified the United Nations Framework Convention on Climate Change (UNFCCC) in 1992, and the Convention entered into force for Canada in 1994. As a party, Canada works with other UNFCCC parties to advance global efforts to reduce greenhouse gas (GHG) emissions and respond to climate-related risks.

Canada's participation includes preparing and submitting annual national GHG inventories, periodic reporting on mitigation and adaptation measures, and participation in the transparency and accountability mechanisms established under the Convention and related agreements. Canada also contributes financial and technical support for climate mitigation, adaptation and capacity-building in developing countries, with a particular focus on vulnerable states.

Canada contributes to international climate science, monitoring and research, including through the Intergovernmental Panel on Climate Change (IPCC). These activities inform both domestic policy development and Canada's engagement in multilateral negotiations.

Paris Agreement

Canada was among the 196 parties that adopted the Paris Agreement on 12 December 2015, signing and ratifying it in 2016. The Agreement is the principal international framework guiding Canada's climate commitments and domestic policy.

Canada's participation in regional initiatives occurs primarily at the provincial rather than federal level, reflecting the constitutional division of powers and the significant role provinces play in environmental and energy regulation. Provinces participate in various regional and cross-border initiatives to reduce GHG emissions, co-ordinate climate policy and facilitate emissions trading. Key examples include the Western Climate Initiative, Inc (WCI), the Pacific Coast Collaborative, and the New England Governors and Eastern Canadian Premiers (NEG-ECP) partnership.

Western Climate Initiative, Inc (WCI)

The non-profit WCI administers the joint auctions, market registry and financial services for the GHG emissions-trading programs of its participating jurisdictions, including Quebec and California. Washington State joined WCI in 2021 to support the implementation of its cap-and-invest program, which started in 2023. Since the fall of 2024, WCI has worked with New York State on planning for platforms that could support a future cap-and-invest program.

Pacific Coast Collaborative

The Pacific Coast Collaborative comprises British Columbia, Washington, Oregon, California, and the cities of Vancouver, Seattle, Portland, San Francisco, Oakland and Los Angeles. Its members have set a goal of reducing greenhouse gas emissions by at least 80 percent by 2050 through regional action on power grids, transportation and buildings, alongside initiatives to promote climate resilience.

New England Governors and Eastern Canadian Premiers (NEG-ECP)

The New England Governors and Eastern Canadian Premiers (NEG-ECP) partnership is a long-standing regional initiative involving the six New England states and the provinces of New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island and Quebec. It promotes cross-border co-operation on climate change, energy and environmental issues, including regional emissions-reduction targets, climate action plans and coordinated policy responses. Though it creates no binding legal obligations, it is an important forum for regional cooperation and information sharing on climate-related matters.

Canada's national climate policy is informed by both climate science and its international commitments under the UNFCCC and the Paris Agreement. Scientific assessments - including IPCC reports, Canada's Changing Climate Report and national GHG inventories - inform the development of federal emissions-reduction targets, climate policy and adaptation planning.

Under the Paris Agreement, Canada must prepare, communicate and maintain successive nationally determined contributions (NDCs), and report on its GHG emissions and progress toward its targets within the transparency and accountability framework. Canada's current commitments are to reduce GHG emissions by at least 40-45% below 2005 levels by 2030 and by 45-50% below 2005 levels by 2035, with the objective of net-zero emissions by 2050.

The net-zero-by-2050 commitment is reflected domestically in the Canadian Net-Zero Emissions Accountability Act (SC 2021, c. 22) (Canadian Net Zero Act), which establishes a framework for setting emissions-reduction targets, preparing emissions-reduction plans and reporting on progress toward those targets. These targets are also reflected in a suite of regulations made under the Canadian Environmental Protection Act, 1999 (SC 1999, c. 33) (CEPA) aimed at achieving federal emissions reduction plans.

Role of Carbon Markets and Carbon Pricing

Carbon pricing and markets are also central to Canada's climate policy. The federal approach assigns a cost to carbon while allowing flexibility in how compliance obligations are met, supported by emissions trading, offset credits and other market-based mechanisms that target reductions where they can be achieved most efficiently. Carbon costs and carbon-market opportunities have accordingly become important for project development, investment and transactional due diligence in emissions-intensive sectors.

Canada has no express constitutional provision governing environmental protection or climate change. Instead, climate regulation operates within Canada’s federal system, in which legislative authority is divided between the federal Parliament and the provinces under the Constitution Act, 1867. The Supreme Court of Canada has repeatedly held that the environment falls within overlapping federal and provincial jurisdiction. Canada’s climate change regime is therefore grounded in cooperative federalism, with both levels of government regulating different aspects of climate policy. Federal climate legislation may be supported by several heads of power, including the criminal law power and the national concern branch of the peace, order and good government (POGG) power. Most notably, in References re Greenhouse Gas Pollution Pricing Act, 2021 SCC 11, the Supreme Court upheld the Greenhouse Gas Pollution Pricing Act (SC 2018, c. 12, s. 186) (GGPPA), holding that the establishment of minimum national standards of GHG price stringency to reduce GHG emissions falls within Parliament’s national concern jurisdiction while preserving substantial provincial flexibility in implementation.

The most significant recent constitutional development is the Supreme Court’s decision in Reference re Impact Assessment Act, 2023 SCC 23, which held that the “designated projects” scheme of the federal Impact Assessment Act (SC 2019, c. 28, s. 1) (IAA) was largely unconstitutional as an overreach into matters whose environmental, social and economic effects are primarily provincial, while upholding the portions of the Act addressing projects carried out or financed by federal authorities on federal lands and outside Canada. Parliament amended the IAA in June 2024 to respond to the Supreme Court’s ruling but questions still remain as to how the amendments will be implemented in practice to provide greater certainty of process, timelines and designation criteria. Prudent investors should therefore treat the federal–provincial regulatory boundary – and its attendant approval timelines, costs and litigation risk – as a project-specific diligence question at the outset of any Canadian development, rather than a settled matter.

Federal Legal Regime

GGPPA and the Output-Based Pricing System (OBPS)

The GGPPA is the central federal carbon-pricing statute. Part 1 established a fuel charge (administered by the Canada Revenue Agency), and Part 2 establishes the OBPS for large industrial emitters administered by Environment and Climate Change Canada (ECCC) through the Output-Based Pricing System Regulations (SOR/2019-266). The Act operates as a “federal backstop” for carbon pricing: it sets minimum national stringency standards that provincial and territorial systems must meet, failing which the federal system applies.

Compliance obligations under the OBPS may be met with tradeable compliance units representing GHG reductions or removals, which take three forms: surplus credits (created where a covered facility reduces emissions beyond its OBPS requirement); recognized units (issued under a recognized provincial offset regime); and federal offset credits (created by project proponents under government-approved protocols and subject to third-party verification). The Canadian Greenhouse Gas Offset Credit System Regulations (SOR/2022-111) establish the federal mechanism for creating, tracking and using federal offset credits for OBPS compliance. Notably, some but not all provincial credits can be traded federally, and not all federal credits can be traded in provincial systems.

Regulations under CEPA

The legal framework under CEPA serves as the foundation for a number of key federal GHG reduction regulations administered by ECCC.

The first of these regulations to be enacted is the Regulations Respecting Reduction in the Release of Methane and Certain Volatile Organic Compounds (Upstream Oil and Gas Sector) (SOR/2018-66), which serve to regulate methane – a potent GHG and the main component of natural gas – and certain volatile organic compounds in the upstream oil and gas sector. They impose equipment-level and facility-level requirements – including conservation, destruction, and venting limits, leak detection and repair, and pneumatic-device controls – originally targeting a 40-45% cut in upstream methane below 2012 levels by 2025. Amendments introduced in 2025 add, among other things, stricter fugitive-emissions management, venting prohibitions and destruction limits, plus a performance-based compliance option.

The Clean Fuel Regulations (SOR/2022-140) (CFR) are also made under CEPA and require producers and importers of gasoline and diesel (“primary suppliers”) to reduce the lifecycle carbon intensity (in gCO₂e/MJ) of those fuels against a 2016 baseline, by a minimum amount that increases each year from 2023. The obligation applies company-wide, in aggregate tonnes of CO₂e, subject to exemptions. Suppliers comply by creating or acquiring compliance credits (each one tonne of CO₂e) or by paying into a compliance fund. Both primary suppliers and “voluntary credit creators” may generate tradable credits through three categories – reducing a fuel’s lifecycle emissions, supplying low-carbon fuels, and end-user fuel switching. Credit generation follows government-approved quantification and third-party verification, and a credit clearance mechanism lets suppliers that fall short buy pledged credits.

Finalised in December 2024, the Clean Electricity Regulations (SOR/2024-263) also belong to the suite of emission-reduction regulations made under CEPA and drive the electricity sector toward a net-zero grid by prohibiting excessive CO₂ emissions from fossil-fuel-fired generation. They are technology-neutral, setting an annual emissions limit for covered generating units based on generating capacity. Emissions requirements are set to begin in 2035 and reach net-zero by 2050, with compliance flexibility through bankable and tradeable compliance credits and offset credits. The federal government recently suspended these rules in Alberta following significant provincial opposition and has announced its intention to adjust the regulations to provide greater flexibility to maintain reliable and affordable energy costs for Canadian families.

Provincial Legal Regimes

British Columbia

British Columbia’s Output-Based Pricing System (BC OBPS), under the Greenhouse Gas Industrial Reporting and Control Act (SBC 2014, c. 29), took effect April 1, 2024 (replacing the CleanBC Industrial Incentive Program) and – following repeal of the consumer carbon tax on 1 April 1 2025 – is the province’s principal industrial carbon-pricing mechanism. It generally applies to facilities emitting at least 10,000 tonnes of CO₂e annually, assigning emissions limits by product-specific intensity benchmarks; facilities below their benchmark earn credits, and those above meet the shortfall with eligible credits, offset units or payments to the Province, subject to monitoring, reporting and third-party verification.

British Columbia also operates a Low Carbon Fuel Standard under the Low Carbon Fuels Act (SBC 2022, c. 21), as amended and modernised from 1 January  2024, requiring transportation-fuel suppliers to reduce the lifecycle carbon intensity of the fuels they sell through a market-based credit system rewarding lower-carbon fuels such as renewable diesel, ethanol, renewable natural gas, hydrogen and electricity.

Alberta

Alberta was the first jurisdiction in North America to implement a binding carbon-emission-reduction regime, which currently takes the form of the Technology Innovation and Emissions Reduction Regulation (Alta Reg 133/2019) (TIER). TIER is a facility-specific OBPS regime. Facilities that annually emit more than 100,000 tonnes of CO₂e or import more than 10,000 tonnes of hydrogen, or that voluntarily opt into the TIER regime, must reduce their annual emissions intensity (emissions per unit of production) pursuant to the least stringent of either a High Performance Benchmark or a Facility Specific Benchmark. Compliance can be achieved through physical abatement of emissions and/or “trueing up” the obligation by applying emission offsets, emission performance credits (EPCs), fund credits, sequestration credits (an emission offset derived from geological sequestration – stackable with CFR compliance credits), and capture recognition tonnes (converted from a sequestration credit and usable only by a facility that captured and exported the CO2).

Emission offsets and EPCs are recorded and tracked in the Alberta Emission Offset Registry and the Alberta Emission Performance Credit Registry, respectively. Transactions are bilaterally negotiated, with no prescribed pricing but some practical pricing implications.

Saskatchewan

Saskatchewan’s climate policy is anchored by Prairie Resilience: A Made-in-Saskatchewan Climate Change Strategy (December 2017), a provincial framework outlining Saskatchewan’s approach to climate change mitigation and adaptation, supported by a Climate Resilience Measurement Framework tracking progress across natural systems, infrastructure, economic sustainability, community preparedness and measuring, monitoring and reporting.

Saskatchewan’s OBPS program, established under The Management and Reduction of Greenhouse Gases Act (SS 2010, c. M-2.01), requires regulated facilities to meet emission-intensity standards. Below-limit emitters earn tradable performance credits, while those above may buy credits or pay into the Saskatchewan Technology Fund. The province paused the industrial carbon tax rate under its OBPS program in April 2025 but regulated facilities are still required to submit emissions reports.

Ontario

Ontario’s Emissions Performance Standards (EPS) program (in force since 1 January 2022) regulates GHG emissions from large industrial facilities in the manufacturing, resource and electricity-generation sectors, assigning each an annual limit under performance standards that tighten yearly.

Registration is mandatory for facilities that meet the definition of an “EPS facility”, which generally includes those engaged in a covered industrial activity that have reported at least 50,000 tonnes of CO₂e emissions in any year since 2014. Smaller facilities emitting at least 10,000 tonnes, newly built facilities, or those completing eligible modifications may voluntarily opt in. A facility with a compliance obligation can meet EPS by reducing emissions or acquiring compliance instruments consisting of: excess emissions units (generally non-tradeable units purchased from the Ontario government at a rising price) or emissions performance units (tradeable, bankable units awarded to facilities that emit below their limit). Compliance-payment revenue is reinvested in emissions-reduction projects at eligible facilities, helping them stay competitive while lowering emissions.

Québec

Quebec’s cap-and-trade system (C&T System) encourages businesses to reduce their GHG emissions by setting a price on carbon. It is made up of three main features.

First, it caps emissions: the government sets an annually declining maximum, and emitters must surrender one “emission allowance” per tonne emitted.

Second, participants obtain emission rights by free allocation, quarterly government auctions or secondary-market purchases (the system also covers transportation and heating fuels, so fuel prices rise for consumers too).

Third, revenues are reinvested to combat climate change in Quebec. The C&T System creates a large amount of revenue, which the province uses to fund part of its climate action.

New Brunswick, Nova Scotia and Prince Edward Island (PEI)

Under New Brunswick’s OBPS, facilities emitting 50,000 tonnes or more of CO₂e annually must meet the system’s performance standards (those emitting 10,000-50,000 tonnes may opt in), with a compliance obligation for any shortfall, aiming to reduce emissions while maintaining competitiveness and limiting carbon leakage. Regulated facilities register, set a product baseline intensity and file annual verified-emissions and compliance reports.

Nova Scotia’s OBPS targets a 53% GHG reduction by 2030 and net-zero by 2050, using the federal carbon price to drive reductions among large emitters while preserving competitiveness. Registered facilities meet a manufacturing performance standard: below-standard emitters earn tradable or bankable performance credits, while those above pay the federal price per excess tonne or buy credits. As in New Brunswick, facilities over 50,000 tonnes are mandatory participants and those emitting 10,000-50,000 may opt in.

Rather than an output-based pricing system, Prince Edward Island focuses on emissions tracking, using ECCC’s National Inventory Report for official data. Its Net-zero Carbon Act (SPEI 2020, c. 90) targets GHG emissions below 1.2 megatonnes of CO₂e per year from 2030, and carbon neutrality by 2040, a decade ahead of the federal 2050 goal.

Federally, the GGPPA and OBPS are regulated by the Minister of Environment and Climate Change, supported by ECCC, with carbon-pricing policy and the national benchmark set by the Department of Finance. Each province’s respective regime is generally governed by the provincial department in charge of climate change measures.

Assessed against their constitutional and administrative mandates and their technical capacity, the current allocation of authority is, on balance, well-matched to the jurisdictionally shared character of climate change while acknowledging regional differences in energy resources and industries.

Climate-focused and climate-related litigation is a growing and significant, though still developing, feature of Canada’s legal landscape. The principal categories include constitutional and public-law challenges to government climate action or inaction; federalism litigation over carbon pricing and regulatory authority; and a growing body of regulatory-disclosure, ESG and greenwashing claims. Litigants typically include youth and public-interest claimants, Indigenous peoples, governments, regulators and enforcement bodies.

Youth and public-interest claimants have driven some of the leading constitutional cases in Canada. In Mathur v Ontario, 2024 ONCA 762, the Ontario Court of Appeal set aside the dismissal of a Charter challenge to Ontario’s weakened 2030 emissions target and remitted the matter for reconsideration, holding that Ontario had voluntarily assumed a positive obligation to address climate change consistent with the Charter. In La Rose v Canada, 2023 FCA 241, the Federal Court of Appeal allowed the youth plaintiffs’ section 7 Charter claims to proceed, with an eight-week trial now set to begin in October 2026. La Rose was heard and decided together with a parallel challenge advanced by Indigenous claimants in Misdzi Yikh v Canada, but that claim remains at an earlier procedural stage following a further motion to strike.

Indigenous peoples are a distinct and increasingly influential category of litigant in the climate-related legal landscape, advancing claims through two channels. First, Indigenous groups – such as the Misdzi Yikh claimants – may bring constitutional claims to press for more ambitious federal climate action. Second, and of greater day-to-day significance for investors and industry, Indigenous rights-holders are central parties in litigation over the resource, energy, transmission and infrastructure projects through which the climate transition is delivered. Section 35 of the Constitution Act, 1982 protects Aboriginal and treaty rights, and the Crown’s duty to consult and, where appropriate, accommodate those rights – rooted in the honour of the Crown and triggered whenever the Crown contemplates conduct that may adversely affect asserted or established rights. Section 35 rights may provide a basis for challenging project authorisations and, where consultation is found wanting, delaying or quashing them. This same rights framework is, however, as much an opportunity as a risk: Indigenous equity ownership in major energy and infrastructure projects – supported by federal and provincial loan-guarantee programs – has made early engagement and partnership a core project-de-risking and value-creation strategy.

Greenwashing claims in Canada have also been materially impacted by amendments to the Competition Act (RSC 1985, c. C-34) enacted through Bill C-59 (the Fall Economic Statement Implementation Act, 2023), which became law in June 2024 and introduced express provisions requiring environmental claims about products and businesses to be adequately substantiated. The Competition Bureau issued final guidelines on environmental claims in June 2025.

Participants in Canada are free to transact in voluntary carbon credits issued under independent standards such as Verra’s Verified Carbon Standard or the Gold Standard. Although Canada’s voluntary carbon market (VCM) is smaller than its compliance counterpart, voluntary frameworks remain a key mechanism for driving innovation and financing GHG emission reductions and removals outside the compliance space. The Canadian VCM encompasses a diverse range of project types, including nature-based solutions (afforestation, improved forest management and wetland restoration), methane capture and destruction, landfill gas recovery, agricultural practices, carbon capture and storage, and emerging carbon-dioxide-removal technologies.

Currently, there is no indication that Canada has plans to introduce legislation to regulate the domestic voluntary carbon market. To date, Canada has focused on protocol-based compliance and offset infrastructure rather than direct regulation of VCM transactions. It is likely that Canada’s VCM will continue to be guided by compliance market design, climate disclosure requirements, greenwashing regulations and possible implementation of Article 6 mechanisms.

The voluntary market remains distinct from Canada’s federal and provincial compliance carbon-pricing systems, so voluntary carbon credits are not directly fungible into domestic compliance schemes. To be accepted as an eligible offset unit for compliance purposes under a domestic compliance scheme, a carbon credit must be expressly recognised by that scheme.

Canada does not have a single public portal dedicated to VCM information, but publicly available information comes from official Canadian government sources, guidance on legal and regulatory risk, and independent market resources.

A central trade consideration of carbon pricing for Canada is maintaining the competitiveness of Canadian businesses while reducing emissions. This rationale was decisive in the April 2025 removal of the consumer fuel charge: the Part 1 fuel-charge rates in Schedule 2 of the GGPPA were set to zero, while industrial carbon pricing under the OBPS was retained. The stated objective was to refocus the federal system on industrial pricing – identified in the regulatory rationale (citing independent research) as the main driver of carbon-pricing-related emissions reductions to 2030 – while protecting emissions-intensive, trade-exposed industry against the competitiveness and carbon-leakage impacts of a domestic carbon price. The OBPS keeps a price signal on large emitters and encourages the transition to low-carbon technologies without exposing those sectors to leakage risk.

The most significant external driver of this competitiveness calculus is now the EU Carbon Border Adjustment Mechanism (CBAM). CBAM places a carbon price on imports into the EU of certain carbon-intensive goods (iron, steel, cement, fertilisers, aluminium, electricity and hydrogen) so that non-EU producers face carbon costs comparable to EU producers, addressing carbon leakage. After a transitional reporting phase that began on 1 October 2023, the definitive regime started on1 January 2026. Critically for Canadian exporters of these products, where a carbon price has already been paid in the country of production, the corresponding amount may be deducted from the CBAM obligation. A credible domestic carbon price therefore reduces the CBAM cost borne by Canadian goods entering the EU, reinforcing the rationale for retaining industrial carbon pricing even after the consumer charge was removed.

Canada has itself examined border carbon adjustments (BCAs) but consultation on that issue has been archived, and there does not appear to be a live federal BCA workstream.

Canada is moving toward a more structured sustainability-reporting regime. Building on IFRS S1 and IFRS S2, which built on the recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD), the Canadian Sustainability Standards Board (CSSB) issued the Canadian Sustainability Disclosure Standards – CSDS 1 (General Requirements for Disclosure of Sustainability-related Financial Information) and CSDS 2 (Climate-related Disclosures) in December 2024, effective for reporting periods beginning after 1 January 2025. These as-yet-voluntary standards for Canadian issuers other than financial institutions are closely modelled on the IFRS standards, so companies reporting under them meet substantially similar requirements in the Canadian context.

The Office of the Superintendent of Financial Institutions (OSFI), Canada’s federal solvency and prudential regulator for banks, insurers and trust companies, has published Guideline B-15: Climate Risk Management (OSFI Guideline), which outlines OSFI’s expectations for federally regulated financial institutions (FRFIs) in managing climate-related risks.

The Guideline expects each FRFI to achieve three core outcomes:

• understand and mitigate the potential impacts of climate-related risks on its business model and strategy;
• maintain governance and risk-management practices to manage climate-related risks; and
• remain financially resilient through severe but plausible climate-risk scenarios and operationally resilient in the face of climate-related disasters.

The Guideline requires FRFIs to publish climate-related risk-management reports with prescribed disclosure, including information aligned with the CSSB’s final sustainability and climate-related disclosure standards. Canada’s largest financial institutions began reporting under the OSFI Guideline for their 2025 fiscal years.

The Autorité des marchés financiers (AMF), Quebec’s financial-sector regulator, has adopted a climate-risk-management guideline substantially similar to the OSFI Guideline, applying to Quebec financial institutions for which the AMF is the principal solvency and prudential regulator.

For Canadian listed companies (reporting issuers) generally, the Canadian Securities Administrators paused its proposed mandatory climate-related disclosure rule (NI 51-107) on 23 April 2025, citing recent US and global developments and competitiveness concerns; issuers nonetheless remain subject to existing continuous-disclosure obligations to disclose material climate-related risks (CSA Staff Notices 51-333 and 51-358), and are encouraged to use the CSSB standards voluntarily.

Directors may face liability for failing to properly manage climate-related risks, principally through their duties to the corporation. Under the CanadaBusiness Corporations Act (RSC 1985, c. C-44), directors must act with a view to the best interests of the corporation, and the statute expressly provides that, in considering those interests, directors may consider the environment. A director who fails to take the environment into account may, in appropriate circumstances, be exposed to a claim that they have not met their duty of care.

Liability can also arise under environmental statutes. Under CEPA, a director who directed, authorised, assented to, acquiesced in or participated in the commission of an offence under the Act is liable for that offence. Directors who ignore climate-related and nature-related risks could face personal liability – for example, where they fail to prevent environmental harm, fail to ensure the corporation meets its regulatory obligations, or fail to act when they know or ought to know of environmental risks.

In R v Mossman, 2026 BCCA 75, the British Columbia Court of Appeal confirmed that a director’s knowledge is not required to establish liability for an offence under BC environmental legislation. Directors may therefore be held liable for the climate change impacts of their companies even where they have no knowledge of the offence.

Shareholders may be exposed to liability where they have active management, care or control of the property, business or financing relevant to environmental-risk management and the corporation fails to comply with its environmental obligations; a shareholder that is also a secured creditor may face additional exposure. For parent companies, liability for environmental violations by subsidiaries is possible but generally arises only where the corporate veil is pierced, or through broad statutory provisions that can reach shareholders or parent companies that own, control or manage contaminated property.

The first is sustained domestic and international pressure to act, reinforced by IPCC conclusions, international negotiations, and mounting evidence of climate impacts on health and safety, the economy, natural resources and ecosystems. Related to this is Parliament’s movement to recognise the right to a healthy environment, reflected in the 2023 amendments to CEPA (Bill S-5, SC 2023, c. 12) – the first recognition in federal law that every individual in Canada has a right to a healthy environment – with the implementation framework following in 2025.

The second is an affordability and competitiveness counter-narrative that has lately gained the upper hand. Cost-of-living concerns, crystallised in the “axe the tax” campaign against consumer carbon pricing, culminated in the removal of the federal consumer fuel charge in April 2025. In parallel, an energy-security and industrial-competitiveness narrative – sharpened by international trade tensions – is pressing governments to pair emissions reduction with growth and major-project development.

In Canada, there is no general legal requirement to conduct climate-change due diligence in M&A, financing or property transactions. It is therefore absorbed within a broader, risk-based environmental review rather than conducted as a stand-alone exercise, with the climate and environmental risks arising over the life of a project or asset assessed alongside other environmental risks. While there are regimes for assessing a project’s impact on climate change, or climate change’s impact on a project, these do not impose any transactional diligence obligation. However, in carbon-exposed sectors such as oil and gas, power generation and heavy industry, climate due diligence has become effectively standard, and a purchaser of shares or assets will typically review the matters set out below.

Carbon-cost exposure is usually the central focus. For a large industrial target, the primary focus relates to compliance under federal and provincial OBPS regimes – the applicable standard, any excess-emissions obligations, and the extent to which carbon costs can be passed through in offtake and commercial contracts – together with compliance under the CFR. For upstream oil and gas, additional diligence considerations relate to methane regulations, including the abatement capital expenditure needed to meet the tightening 2028–2030 requirements, and the status of the federal-provincial equivalency agreements. Closely related to these compliance considerations is diligence on carbon credits and offsets: the existence, validity and transferability of compliance units, surplus credits and offset credits, which may be material assets or liabilities depending on the target’s compliance position.

A purchaser will also review the target’s permits and approvals, including any IAA designation or approval status and the conditions attached to federal approvals, alongside the relevant provincial authorisations. These are assessed together with the physical climate risk (such as flood, wildfire and extreme-weather exposure) and transition climate risk (regulatory, market and technology shifts) over the life of the asset, and the stranded-asset and decommissioning or abandonment liabilities that those risks may accelerate.

ESG-disclosure exposure is an increasingly important strand of diligence, including greenwashing risk: the June 2024 amendments to the Competition Act introduced specific provisions on environmental representations, reinforced by an expanded private right of access to the Competition Tribunal, which heighten the risk attached to a target’s environmental and climate claims.

When taken collectively, these findings drive deal mechanics related to the representations, warranties and indemnities addressing environmental compliance and, increasingly, specific climate-related or carbon-related covenants (for example, on compliance-unit transfers, carbon-cost allocation or emissions performance) negotiated to allocate these risks between buyer and seller.

Canada provides extensive policy, regulatory and fiscal support for the uptake of renewable and clean-energy technologies, combining federal tax measures, federal and provincial funding programs, and regulatory drivers. Support operates across the investment chain: rebates and grants for specific technologies, program funding for renewable energy projects, refundable tax credits for investments in certain clean-energy property, and de-risking instruments for large decarbonisation projects.

The principal support, now central to clean energy investment decisions in Canada, is a suite of federal clean economy investment tax credits (ITCs). The amount of the ITCs is calculated based on a specified percentage of the capital cost to acquire eligible capital property. The ITCs are refundable and generally deliver support earlier in a project’s life than Canada’s capital cost allowance system. There are currently five ITCs enacted in Canada:

• the clean technology investment tax credit supporting investment in clean technology property including renewable and low-emitting generation equipment, small nuclear energy property and energy storage equipment;
• the clean electricity investment tax credit supporting investment in clean electricity property including low-emitting generation equipment, energy storage equipment, large nuclear energy property and inter-provincial transmission;
• the clean hydrogen investment tax credit supporting investment in clean hydrogen production;
• the clean technology manufacturing investment tax credit supporting investment in the manufacture of clean technology property as well as critical mineral extraction and processing, and
• the carbon capture, utilisation and storage (CCUS) investment tax credit.

The electric vehicle supply chain investment tax credit was announced by the federal government in 2024 but has not yet been enacted. The federal government recently reaffirmed its commitment to advancing Canada’s electricity grid, delivering clean power and reducing emissions, including by extending the clean electricity investment tax credit to eligible intra-provincial transmission equipment. Provincial measures may complement the federal framework, with some provinces offering their own renewable-energy and CCUS incentives that may, in certain circumstances, be layered on the federal incentives for a single project.

Federal and provincial support extends well beyond renewable generation to other forms of climate-friendly investment, including CCUS, industrial decarbonisation and clean infrastructure. This support combines tax incentives (notably the refundable CCUS investment tax credit), financing and de-risking instruments, regulatory and procurement measures, and an emerging sustainable-finance architecture.

The Canada Growth Fund, an arm’s-length federal investment fund, plays a distinct, financing-side role. Among its instruments, it uses carbon contracts for difference to guarantee a future carbon price and pay the proponent the difference if the market carbon price falls below the contracted level, thereby de-risking the carbon-price exposure of large decarbonisation projects, including CCUS, and improving their bankability.

Canada is also developing a voluntary national sustainable-finance taxonomy intended to identify and mobilise climate-aligned investments. The framework is being developed by an independent council (co-hosted by Business Future Pathways and the Canadian Climate Institute) and aims to define activities that support Canada’s net-zero by 2050 targets, prevent greenwashing, and ensure alignment with international commitments.