The $600M cost of Danielle Smith’s carbon deal with Ottawa

Alberta Premier Danielle Smith on Friday was quick to tout the potential economic benefits of her latest pipeline deal with Prime Minister Mark Carney. Beneath those headline claims, however, is a much less visible $600-million cost.

At least, that’s how much Alberta taxpayers could be asked to pay in order to prop up Smith’s new memorandum of understanding (MOU) with Ottawa that, among other things, promises to ratchet up carbon taxes to $130 per tonne by 2040. Under Friday’s agreement, Alberta and the feds promised to spend up to $1.2 billion toward that end, splitting the cost equally between both parties.

The expense underscores the cost Smith seems prepared to shoulder in order to finalize her MOU with Carney, which is widely viewed as a landmark effort to repair the fractured energy relationship between Alberta and the feds.

First outlined in November 2025, the MOU includes a long list of energy policies and infrastructure investments aimed at finally unleashing Alberta’s natural resources and turning Canada into an energy superpower. At the core of the deal, Alberta has agreed to hike industrial carbon taxes to $130 per tonne and facilitate the construction of a $20-billion carbon capture and storage project. In exchange, Carney has said he would support the construction of a new oil pipeline to the West Coast.

Observers have long wondered who would cover the cost of the stricter carbon regime, particularly given that the province’s oilsands industry has increasingly claimed that higher carbon taxes would make it uncompetitive with other producers.

And while Friday’s deal will force large emitters like oilsands facilities and petrochemical plants to pay higher carbon taxes, the province is also now promising to spend up to $600 million to soften the blow.

Alberta has forced large companies to pay industrial carbon taxes since 2007. Today, the province administers those taxes under its Technology Innovation and Emissions Reduction (TIER) regulatory system. Within TIER, companies are also eligible to acquire carbon credits on a per-tonne basis in exchange for meeting certain CO2 emissions reductions targets. They can buy and sell those credits as needed.

While carbon credits are designed to be roughly equivalent to the rate of carbon taxes, low environmental standards under TIER have led to a prolonged oversupply of those credits, driving down their value in recent years. Currently, TIER carbon credits are trading at around $40 per tonne, far below the $95-per-tonne carbon tax rate.

To fill the gap — or, to ensure that heavy emitting companies receive a higher price for the carbon credits they accrue — the provincial and federal governments will simply pay the difference, up to a maximum cap of $1.2 billion, or 75 megatonnes worth. Those payments will come in the form of financial instruments called carbon contracts for difference (CCFDs), according to Friday’s agreement.

Dave Sawyer, an economist at the Canadian Climate Institute, said costs are likely to fall on public coffers due to the structure of Friday’s agreement.

“The way they’ve designed this thing, there’s a higher risk that taxpayers will be on the hook,” he said.

That’s largely because of a part of carbon policy known as “stringency,” which sets the terms of the CO2 targets companies have to meet under TIER. Under Friday’s agreement, the rate at which stringency rates, or the proportion of emissions that are subject to carbon taxes, expand each year was cut from four per cent down to two per cent.

According to Sawyer, that lower stringency means that more companies will likely be acquiring credits rather than buying them from the TIER market, which could further push down credit values and force the government to pay more to maintain its stated floor price.

In Friday’s agreement, the two parties agreed to maintain a carbon credit floor price of $60 per tonne by 2030, ramping up to $110 per tonne by 2040.

Carney has long been a supporter of the theory behind carbon markets, which aims to ascribe value to CO2 that in fact holds no real-world value.

Contracts for difference are viewed by some policymakers as a necessary cost toward trying to establish carbon trading markets which, the theory goes, can help create a financial incentive for companies to reduce emissions. Under such a system, companies are rewarded with a guaranteed carbon credit value for the CO2 emissions they cut from their operations, thus giving them reason to invest in decarbonization technology.

• Ottawa, Alberta agree to path on approving new oil pipeline by September 2027
• Alberta and Ottawa want 'win-win' on industrial carbon tax, as pipeline deal inches closer, Smith says

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