A Bigger, Cleaner Power Grid

Canada’s clean energy transition will require electrification across all sectors, and that electricity must be net-zero. The near-complete phase-out of coal-fired electricity generation has already contributed to a 60% reduction of greenhouse gas (GHG) emissions (measured as carbon dioxide equivalent [CO2e]) in the power sector since 2005. Now only 47 Mt of CO2e remain to be mitigated to reach net-zero GHG emissions; however, this must be achieved while doubling (or even tripling) electricity generation by 2050 if Canada’s other sectors are to reach net-zero too. (“Net-zero” means that CO2e emissions are reduced to zero or that any residual emissions are offset by additional, verifiable, and permanent CO2e removals). While the transformation of Canada’s electricity grids in Canada has been impressive, there is still work to do. 

With widespread renewable resources come widespread sustainable jobs. These jobs range from the technicians and engineers who design, implement, and maintain renewable energy generation projects to project managers and construction workers. Much like in the fossil fuel sector, the impact on employment goes beyond direct employment opportunities, as renewable power hubs support related service industries and otherwise boost local economies. Unlike the fossil fuel sector, however, renewable energy hubs will be distributed widely across the country, spreading jobs, wealth, and investment to communities nationwide.

Day-to-Day Benefits for Canadians

Lower prices for households

Technical experts at the CCI and CEAC have found that a net-zero electricity grid would reduce average energy costs for Canadians. The CCI finds that “average household energy spending—on energy bills and the equipment that that energy powers—will decrease by 12 per cent between now and 2050 under a net zero transition”. CEAC estimates that a net-zero grid would save Canadian households CAD 15 billion annually by 2050, with 70% of households saving an average of CAD 1,500 per year. There are several reasons for these consumer cost savings, discussed below. 

Low energy costs

Globally, onshore wind and solar are already cheaper sources of power than new fossil fuel alternatives across their lifespan, and costs continue to fall rapidly as these new technologies expand and develop. Recent data from the International Renewable Energy Agency shows that 81% of newly commissioned renewable power generation in 2023 was cheaper than fossil fuel alternatives. Cost savings like this have meant that renewable power generation saved the global power sector up to USD 409 billion between 2000 and 2023. In Canada, the Pembina Institute’s modelling of New Brunswick, Nova Scotia, and Alberta shows that a non-emitting power grid can provide the same energy services at a lower cost than natural gas-reliant alternatives. 

High energy efficiency

An expanded power grid would also unlock huge efficiency gains across the country, as the CEAC explains: “for most needs (heating and vehicles), electricity can be 2 to 4 times more efficient than the energy sources it will replace”. So, even if electricity rates increase in some parts of the country as the grid absorbs the cost of new infrastructure, consumer costs can still decrease as less energy is used. These cost savings can be multiplied when paired with demand-side management. For example, Nova Scotia’s recent investment of CAD 173 million in demand-side management is expected to save ratepayers CAD 542.8 million over the lifetime of the plan. 

Stable pricing

Renewable power sources, such as hydro, wind, and solar, do not rely on internationally traded fuels like oil and gas. A clean power grid, therefore, can be less vulnerable to rapid price spikes caused by commodity supply shocks beyond Canada’s control, such as those that followed Russia’s invasion of Ukraine in 2022. Low-cost wind and solar generation can be locked in by long-term power purchasing agreements that give grid operators cost certainty, resulting in more stable rates for consumers. Removing the price uncertainty inherent to fossil fuels enables businesses and households to efficiently plan, invest, and budget for their energy needs while freeing governments from spending millions in taxpayer money to protect consumers from sudden price spikes via emergency subsidies. Moreover, when households generate their own renewable energy—through rooftop solar—they can effectively hedge against future fossil fuel price spikes while generating tax-free savings on their electricity bills by selling excess power back to the grid. 

Managing transitions

Some research suggests certain households in Canada may see minor cost increases under a clean power grid, mostly in locations that currently have high rates of natural gas use; however, such risks can easily be offset by smart policy decisions. With lower energy costs across the economy and fewer subsidies required to offset the effects of fossil fuel price spikes, government support can be directed to the small percentage of households that are vulnerable to cost increases, ensuring that a clean power grid brings energy cost savings nationwide.

Clean Power can be Reliable  

Reliable technologies

As a baseline, Canada benefits from vast hydroelectric resources that can be used to offer firm, dispatchable power generation that is available almost all the time. Modelling shows that new renewables, such as wind and solar, can meet the rest of expected demand directly when paired with storage technologies, demand-side management techniques, and electricity-sharing infrastructure (interties) between provinces. The reliability and efficiency of these technologies have improved significantly in recent years. The cost of battery storage projects, for example, declined by 89% globally from 2010 to 2023 as technologies improved and manufacturing capacity expanded. Interties between provincial grids, meanwhile, are already an effective option to efficiently share clean electricity supplies across the country, but they require interprovincial agreement and coordination. This is one area where the federal government can play a pivotal role in coordinating with provinces and territories. 

Energy Security

Because clean power grids rely less on imported (or otherwise globally traded) fuels like oil and gas, Canadian governments can have more control over the cost and supply of electricity, even in times of international tensions or economic instability. This means that a well-designed renewable-based power grid not only protects consumers from sudden spikes in electricity costs but also enhances Canada’s energy independence, making the country more resilient in an increasingly volatile fossil fuel economy. This is not to say that clean power projects will not be impacted by global economic shocks—renewable supply chains will often still be global in scope—but rather that the operating costs of such projects, and thus the availability of affordable power for consumers, will be far less sensitive to developments beyond Canada’s control.

Healthier communities

Coal-fired power plants are especially polluting—emitting high concentrations of sulphur dioxide, nitric oxide, and nitrogen dioxide. These pollutants are linked to heart and lung conditions, with young children and the elderly at disproportionate risk. In 2014, it was estimated that Canada’s 14 coal-fired power plants caused 160 premature deaths and 140 hospital admissions, costing the Canadian economy CAD 800 million per year. While natural gas power generation is less polluting than coal, nitric oxide and nitrogen dioxide are still emitted. Switching to clean power generation—which does not emit such pollutants—can lead to significant health benefits for communities exposed to fossil fuel pollution.    

Healthier environments

Fossil fuel power generation also produces pollutants that remain in the local environment. For example, coal-fired power plants release mercury, a toxic, long-lasting pollutant that often contaminates waterways. Mercury poses significant health risks, particularly for young children, as it can impair cognitive function and motor skills when exposure occurs early in life or during fetal development from consuming contaminated fish. In addition, nitrogen oxides contribute to ground-level ozone and acid rain, both of which negatively impact local ecosystems. By switching to clean power generation, such local pollutants can be avoided.  

Key Policies for Federal and Provincial Governments to Develop Canada’s Net-Zero Power Grid

To accelerate Canada’s transition to a clean electricity grid while ensuring Canadians across the country benefit from clean, cheap, and reliable power, coordinated and complementary policies across provincial and federal governments will be needed.

Conclusion 

A clean power grid is an investment and one that will show returns across the country. By expanding and decarbonizing Canada’s electricity sector, Canadian governments can set the foundation for a successful energy transition between now and 2050, all while ensuring that Canadians will have access to clean, affordable, and reliable power for decades to come. No one level of government can complete this task on their own; federal, provincial, and territorial governments must cooperate and form agreements to make the most of Canada’s vast renewable energy potential in terms of both the environmental and economic opportunities that it presents.  

A full list of references can be found here.

Re-Energizing Canada is a multi-year IISD research project envisioning Canada's future beyond oil and gas. This publication is part of IISD's Clean Energy Insights policy brief series under this project, which outlines the benefits of a net-zero economy for Canadians across the country.

1.0 Introduction

As countries increase their climate change mitigation ambitions, they are considering establishing border carbon adjustments (BCAs), a mechanism through which the carbon emissions embedded in certain imports are taxed at the border. Efforts to price carbon domestically can result in displacing economic activity and, therefore, greenhouse gas (GHG) emissions to other jurisdictions with less ambitious climate policies—this is called carbon leakage. Implementing BCAs could complement domestic climate change mitigation measures to avoid leakage.

The European Union (EU) and the United Kingdom are first out of the gate. Under the EU Carbon Border Adjustment Mechanism's (CBAM's) transition period, since 2023, importing companies must report import-embedded emissions; starting in 2026, fees based on said emissions will apply. The United Kingdom will implement its CBAM starting in 2027 without a transitional phase.

In the United States, four proposed bills would impose carbon-related charges on imports: Three would impose a domestic carbon price and levy fees on imports. A fourth would impose border charges but no domestic carbon price. More generally, carbon leakage is becoming increasingly politically salient in the United States, as illustrated by the launch of the White House Climate and Trade Task Force.

Australia and Canada have consulted on a BCA. Such a system has also been mooted in Japan. Chinese Taipei's 2023 Climate Change Response Act includes a BCA, although its 2024 implementing regulation does not yet.

This report contributes to the global BCA discussion by summarizing country-level reports reflecting dialogues conducted in Brazil, Canada (Commission on Carbon Competitiveness, forthcoming), Trinidad and Tobago, the United Kingdom, and Vietnam. These dialogues gathered stakeholders' views from government, industry, finance, labour, academia, and civil society. The dialogues were conducted in 2023 and 2024 by IISD partner organizations: the Centre for Studies in Integration and Development (Brazil), the Commission of Carbon Competitiveness (Canada), the University of West Indies (Trinidad and Tobago), Chatham House (United Kingdom), and the Foreign Trade University (Vietnam).

Given their governments' policy objectives and the characteristics of their international trade, these countries illustrate different aspects of BCA opportunities and challenges. As discussed above, Canada is considering a BCA, while the United Kingdom is already designing specific elements of its system.

As shown in Figure 1, these five countries also exhibit varying levels of exposure to the EU CBAM and other jurisdictions adopting BCAs: Trinidad and Tobago and the United Kingdom appear to be the most exposed to the EU CBAM by share of exports in the covered goods.

Over the last 10 years, the share of CBAM goods exports to the EU has tended to increase for some of the countries covered there. The most recent increase for the United Kingdom was probably temporary: in 2022, lower power generation due to nuclear power plant maintenance in France induced higher British electricity exports. For Trinidad and Tobago, the trend can be linked to a sharp increase in overall EU imports of fertilizers since 2020. For Vietnam, higher iron and steel exports to the EU, which increased threefold between 2019 and 2022, drive this shift, possibly due partly to the 2020 European Union-Vietnam Free Trade Agreement. More broadly, though, the countries covered (except the United Kingdom) export their emissions-intensive products mostly to various markets outside the EU, indicating that regulatory divergence caused by the multiplication of BCAs might create additional challenges for their exports.

2.0 To BCA or Not to BCA? The quest to prevent carbon leakage

International differences in carbon pricing pose a carbon leakage risk: higher carbon prices in a given country induce imports from countries with less stringent environmental policies. Thus, the emissions of the former countries are partially displaced to the latter: they "leak."

Using the example of Canada, we show how BCAs are one of several policy options for addressing this risk.

IISD-supported research shows that Canada faces a high risk of leakage by 2030 under announced climate policies in four sectors (iron and steel, basic chemicals, fertilizers, and pulp and paper) and a medium risk for cement. Announced policies include an industrial carbon price of CAD 170/tonne by 2030. These policies are forecast to substantially impact costs incurred by industries. For the cement industry, announced climate policies, including the Canadian carbon price, will result in a carbon cost by 2030 that is 1.9% of sales value and 14.4% of operating profit margins. This is a substantial increase over 2023 (Figure 3). Note: The costs incurred are only part of the determinants of leakage risks. Trade exposure plays a significant role. Therefore, the most carbon leakage-exposed industries are not necessarily those incurring the highest costs.

BCAs can address this risk by equalizing carbon prices paid by domestic and foreign producers in the importing market: a fee is imposed on imported carbon emissions. A meta-analysis shows that "detailed numerical analyses using multisector, multi-region models consistently find significant potential for BCA to reduce leakage rates." 

BCAs are not simple for the countries adopting them. They may increase consumer prices, be administratively complex, and should be carefully crafted to ensure World Trade Organization (WTO) compliance. Section 3 further explores potential drawbacks and discusses possible remedies. Given those challenges, the Canadian case study assessed the following alternatives to BCAs.

Output-based allocation is like free allocation in the EU's emissions trading system (ETS): Canada's output-based pricing system sets sectoral emissions intensity standards, and GHG-intensive firms must pay when emitting over the standard. They can also purchase credits from firms that emit below the standard. This policy keeps the average costs of carbon low, meaning less impact on prices and less leakage risk. However, it can also blunt the incentives to decarbonize, so the EU is abandoning free allocation and relying instead on the CBAM.

Green industrial policy support: Support for decarbonizing production processes can lower compliance costs with climate policies and thus lower the risk of leakage. However, this approach might be fiscally costly. It also requires strong capacity from policy-makers and institutions to target only specific market failures. In the Brazil dialogue, stakeholders feared that the possible increase in EU subsidies, as the EU is removing free allocation, could be detrimental to the bloc's trading partners. 

Product-based GHG intensity standards: These standards would be a condition for sale on the domestic market and apply to domestic and imported goods, reducing leakage risk. Yet, if implemented in isolation by a mid-sized economy like Canada, this approach might create disincentives for trading partners to export there rather than improve their emissions intensities. The United Kingdom dialogue also expressed doubts about this policy's viability.

In summary, BCAs are not the only response to carbon leakage. While the stakeholder dialogues summarized below focus on BCAs as a policy option, other options exist.

3.0 How to BCA? Stakeholders' perspectives on principles and best practices in BCA design

3.1 What Goods/Sectors Should BCAs Cover?

Both the United Kingdom and EU CBAMs focus on upstream products. The EU CBAM covers aluminum, electricity, cement, fertilizers, iron and steel, and hydrogen. It also includes a few downstream products, such as iron screws and bolts. The UK CBAM is similar, except it also covers glass and ceramics but excludes electricity. 

Both mechanisms may expand to other goods and sectors in the future. By the end of the CBAM's transitional phase (the end of 2025), the EU Commission will evaluate the need to expand it to additional goods and sectors covered by the EU ETS. In the United Kingdom, the public consultation concluded that UK CBAM should allow for coverage expansion in the future.

Some stakeholders fear that expanding the EU CBAM to other sectors covered by the ETS could impact some of their exports, particularly liquefied natural gas and methanol in Trinidad and Tobago, as well as plastics, glass, and ceramics in Vietnam. Stakeholders in Trinidad and Tobago recommend transparent criteria for adding new products subject to BCAs based on pre-defined factors such as emissions intensity and leakage risk. 

3.2 Which Scopes of Emissions Should the BCA Cover?

BCAs can cover direct emissions from the production process (Scope 1); emissions from purchased electricity, steam, heat, and cooling (Scope 2); or various types of Scope 3 emissions (e.g., from purchased input goods or from transport). The EU CBAM currently covers Scope 1 emissions for all CBAM products. It also requires reporting Scope 2 emissions, specifically for fertilizers and cement. It covers specific Scope 3 emissions: emissions from precursors that are themselves CBAM-covered goods. The UK CBAM plans to cover some Scope 3 emissions on select precursors, like the EU CBAM, but all Scopes 1 and 2 emissions.

Some stakeholders oppose broader scope coverage. In particular, according to stakeholders in Trinidad and Tobago, reporting on Scope 3 emissions would be challenging and would require significant efforts from their government to build capacity among firms. 

In other instances, scope expansion is seen favourably, as it may favour national competitiveness: Brazil has some of the cleanest electricity production in the world. If only direct emissions are considered, then the energy-intensive sectors may lose one of their main comparative advantages.

3.3 How Should Embedded Emissions Be Measured and Reported?

BCAs require emissions accounting at the product level. Accounting protocols under national carbon pricing typically measure emissions at the facility level, not the product level. Instead, BCAs inherently focus on the imported products themselves. This can be challenging. The CBAM has had to develop sui generis product-level methodologies. Product-level accounting is also inherently complex for installations that produce many covered products under one roof.

Stakeholders insisted that the EU CBAM should recognize multiple carbon reporting standards. The Brazilian National Confederation of Industry argued that the EU should also accept international reporting standards, such as the GHG Protocol and International Organization for Standardization (ISO) standards, as well as national measurement, reporting, and verification approaches. Stakeholders in Trinidad and Tobago recommended international cooperation to develop new, broadly recognized methodologies to measure and verify product-level emissions.

Brazilian stakeholders also criticized the EU CBAM for the stringency of the carbon measurement process. One of the three monitoring methodologies for direct emissions under CBAM is a measurement approach involving continuous monitoring that does not allow for in-house laboratory measurements. Stakeholders argued that this approach is extremely restrictive compared to the methodologies practiced by the Brazilian industry. 

Default values can represent a practical alternative to costly and complex emissions measurement. In the EU CBAM's transition period, reporting can rely on default values estimated for each product and trading partner. Yet, from 2025, default values can only be used for input goods (precursors) and cannot represent more than 20% of embedded emissions. The EU CBAM default values are set relatively high to encourage the use of actual data. In the case of electricity, all emissions are estimated based on default values reflecting average intensity. Instead, the British government plans to give importers the freedom to choose between actual data and default values. This is in line with requests by most stakeholders at the government's consultation. The dialogue in Trinidad and Tobago highlighted that default values are an essential alternative to actual data, but some stakeholders worried that said default values might be set at a punitively high level.

3.4 How Should BCA Revenues Be Used, and How Can Those Negatively Affected Be Supported?

Several stakeholders in Brazil, Trinidad and Tobago, the United Kingdom, and Vietnam have advocated for BCA revenue to be allocated to decarbonization and mitigating the adverse side effects of BCAs. This contrasts with the current plans of the EU and the United Kingdom, which intend to allocate this revenue to their general budgets.

Yet, the question of repurposing funds for decarbonization also poses equity concerns. Stakeholders in Brazil feared that using revenues to decarbonize domestic industries in countries applying BCAs would increase the competitiveness gap vis-à-vis exporting companies from other jurisdictions.

3.5 How Should Foreign Action Be Credited?

Should the BCA charge be lowered to account for a carbon price paid in the country of export? With the EU CBAM and the UK CBAM, explicit carbon prices paid for in the origin country are deducted from the CBAM fees (i.e., any tax or ETS fee targeting carbon explicitly—but not excise fuel taxes).

Stakeholders in Trinidad and Tobago advocated for a broader recognition of decarbonization efforts, including those linked to non-price-based climate policies. Such policies included regulations that impose a cost on producers.

Brazilian stakeholders have also called for carbon capture, utilization, and storage (CCUS) to be accounted for when measuring and reporting emissions. CCUS consists of the on-site capture of emissions. Brazilian stakeholders argued that CCUS was necessary for hard-to-abate sectors. Under the EU CBAM, CCUS can be considered when calculating embedded emissions in CBAM goods, as long as specific criteria are satisfied. These criteria primarily require that the captured carbon dioxide is either used to manufacture products where it is permanently chemically bound or transferred to a long-term geological storage facility. Brazil’s National Confederation of Industry, in its submission to the European Commission's 2023 call for feedback on the EU CBAM implementing regulation, contended that provisions regulating CCUS may hinder the accounting of this technology. Note: One should note that, while this critic was aimed at the draft and not the official implementing regulation, the two versions are similar when it comes to CCUS provisions, as laid out in point B.8.2. of Annex 3.

Finally, the dialogues in Vietnam have revealed the importance of carbon offset mechanisms to the country’s decarbonization policies. Offsets consist of compensating emissions with reductions in emissions achieved by some entity outside the facility. Currently, the EU CBAM and the UK CBAM do not recognize offsets, as their respective ETSs do not recognize them either. While specific offsets could be used for EU ETS compliance until 2020, this is no longer the case due to concerns regarding their reliability. 

3.6 Should Some Countries Be Exempted Based on Their Development Level?

There are no plans to exempt any countries, depending on their development level or other circumstances, from the EU CBAM or the UK CBAM.

Stakeholders across various countries' dialogues suggested exempting developing countries, specifically least developed countries. The dialogues in Vietnam highlighted that the principle of Common But Differentiated Responsibilities, enshrined in Paris Agreement Article 2, stipulates that development status should be reflected in each country's mitigation obligations. In Trinidad and Tobago, stakeholders argued that Small Island Developing States should receive specific exemptions. 

The dialogues in Vietnam stressed that historical emissions should be considered when determining a given country's obligations under BCAs. They highlighted that the EU and the United Kingdom accounted for 22% of global historical emissions since 1751, whereas China was only responsible for 12.7% of the total.

Beyond these general design features, more specific aspects emerged in the dialogues in Canada and the United Kingdom: They relate to BCA phase-in (Box 1) and the possibility of imposing BCA fees from a given emissions intensity threshold (Box 2).

4.0 How to React and Adapt to BCAs: Stakeholders' perspectives on policy responses from countries affected by their trading partners' BCAs

4.1 Raising Awareness

Participants in Trinidad and Tobago and Vietnam presented awareness raising as a cornerstone of preparing their trading partners' BCAs. Business associations played a crucial role in these efforts. Sometimes, they cooperated with international partners, such as the EU and the Caribbean Export Agency. According to some stakeholders in Vietnam, awareness raising remains a challenge and should be amplified.

4.2 Developing/Accelerating Domestic Carbon Pricing

Some stakeholders in Brazil, Trinidad and Tobago, and Vietnam consider developing or accelerating domestic carbon pricing as an effective policy response to BCAs. It has the advantage of lowering BCA fees incurred by exporters and retaining the revenue in the country of export. It also prepares firms by requiring them to measure and report their emissions. Vietnam plans to initiate an ambitious pilot carbon credit exchange in 2025.

4.3 Challenging BCAs Legally

There are concerns about BCAs' compatibility with international trade law. 

According to the European Commission, the EU CBAM has been designed to be compatible with WTO rules. Similarly, the dialogue in the United Kingdom pointed out that legal analysis undertaken by the industry, particularly steel, concludes with the compatibility of EU CBAM and WTO rules. However, stakeholders in Trinidad and Tobago believe it may violate the General Agreement on Tariffs and Trade principles of non-discrimination by treating nations differently, particularly between EU member states, European Free Trade Association countries, and others. Moreover, in Vietnam, stakeholders suggested that the EU CBAM may also violate the EU-Vietnam Free Trade Agreement. Yet, stakeholders in Vietnam also pointed out that resolving those issues through dispute settlement might be lengthy and ineffective.

A radical response to BCAs can also be fully integrating pricing systems across countries. As this option is inherently politically challenging—it has only been achieved once between two particularly close trading partners—it is presented separately in Box 3.

5.0 The Way Forward

Dialogues with stakeholders across Brazil, Canada, Trinidad and Tobago, the United Kingdom, and Vietnam illustrate how BCAs can represent a response to carbon leakage risk. Yet many questions remain regarding their acceptability and fairness. 

While BCAs are intrinsically unilateral measures, stakeholders have called for their implementation to be accompanied by multilateral discussions at international forums such as the WTO or the Organisation for Economic Co-operation and Development. Dialogues in Trinidad and Tobago and Vietnam highlighted the need for global coordination on reporting standards. Brazilian stakeholders advocated for partnerships with other developing countries to face BCA related challenges. 

In this context, technology transfers are sometimes seen as a central aspect of international cooperation. Stakeholders in Trinidad and Tobago described technology transfers as the most critical aspect of the BCA debate. Vietnamese participants stressed its role in decarbonizing power generation and improving the energy efficiency of industrial processes.

The dialogues across all five countries reflect that BCAs are increasingly seen as an inevitable trend one needs to get right rather than oppose. Developing common principles to guide the design and implementation of BCAs will ensure they achieve their objective of mitigating carbon leakage without causing unnecessary trade frictions.

A full list of references can be found here.

Summary 

• Fossil fuel prices are volatile and impact not only the price of energy services but also many non-energy items. Energy prices are a key driver in determining the inflation rate but are also the most volatile component of Canada’s overall inflation.  From February 2021 to June 2022, energy prices accounted for a third (33%) of Canada’s overall inflation. 

• Oil and gas price shocks are not new, and energy-driven inflation will keep occurring if Canada continues to be dependent on fossil fuels. Fossil fuel price volatility will continue, driven by geopolitical conflicts, climate-related disruptions impacting both supply and demand, and increased integration of regional natural gas markets with global liquified natural gas (LNG) markets.  

• At the same time, the levelized cost of electricity from renewable energy has now dropped below that of fossil fuels, indicating a clear cost savings alongside improvements in efficiency. Recent analysis has estimated that Canada could save up to CAD 15 billion per year in total energy costs by transitioning its electricity grids to net-zero by 2050, saving most Canadian households an average of CAD 1,500 annually in energy costs.  

• Policies that discourage the use of oil and gas (e.g., carbon pricing) and encourage fuel switching and improved efficiency (e.g., funding electric vehicles and heat pumps) will help Canadians save money and insulate the economy from fossil-fuel-driven inflation. Creating favourable investment conditions for renewable energy and enhancing the capacity and flexibility of the electricity grid should be a priority for federal and provincial governments, as these investments are crucial to support electrification and reduce dependency on fossil fuels. 

• Contrary to arguments that climate policy makes life less affordable, it is fossil fuels that keep consumers stuck on an energy price rollercoaster. There will be regional differences in costs for consumers during the transition from fossil fuels to clean energy. It is imperative for governments to recognize this and take measures to mitigate impacts on access and affordability in regions negatively impacted by price changes. The federal government can play a role in helping minimize any potential cost increases for consumers in regions where there is currently strong reliance on fossil fuels for electricity.

Introduction 

Public discourse in Canada is currently dominated by concerns about affordability. Canadians have experienced historic inflation and price increases in the most essential areas of life—food, shelter, and energy. However, there is a key element to price inflation that often gets overlooked: the significant impact of oil and gas prices. Canada’s energy use is highly dependent on fossil fuels, meaning that the price of energy services, such as transportation, home heating, and power, are impacted by international fossil fuel markets. Non-energy items, such as food and various durable goods and services, are all impacted by oil and gas price changes.  

Price spikes for oil and gas are nothing new, but as climate change worsens, risks to fossil fuel assets and supply chains increase. As global demand for fossil fuels declines, market responses, geopolitics, and possible imbalances in supply and demand could all potentially increase oil and gas price volatility. Transitioning energy systems away from fossil fuels can not only insulate against volatile fossil fuel prices and energy-driven inflation, but it can also reduce energy use and overall emissions. Well-designed climate policy can be a win–win for Canadians, supporting affordability while also building a net-zero economy.  Given the importance of energy to price stability, governments should enact policies and foster investment climates that support a transition away from fossil fuel energy dependence.  

The Fuel Price Rollercoaster  

Fossil fuel prices are known for volatility (see Figure 1). This volatility is largely unavoidable as oil and gas are subject to the boom-and-bust commodity cycle. International conflicts further contribute to this volatility, as demonstrated by ongoing conflicts in the Middle East and Russia’s invasion of Ukraine.

Figure 1. Oil and gas price volatility over time   

Historically, natural gas markets have been regional and, as a result, better insulated from global price shocks. However, this is changing due, in part, to the growth of transcontinental and international pipelines for exporting natural gas resources. Increased integration between regional natural gas markets and the global liquified natural gas (LNG) market also means that fluctuations in the latter can impact regional prices. For example, a surge in demand for LNG exports elsewhere in the world (e.g., extreme weather event, geopolitical conflict) could create a price spike in North American gas prices as domestic supply drops to meet export demand. This would mirror the experiences in the United States and Australia, both of which have seen domestic energy bills climb after natural gas exports increased. 

In Canada, consumer reliance on fossil fuels magnifies the impact that price spikes and supply disruptions have on the economy. In 2022, the main sources of primary energy consumed in Canada were natural gas (38.1%), refined petroleum products (35.0%), followed by electricity (23.5%). Many provinces still rely heavily on fossil fuels for their power production. While provincial policy and market design drive electricity rates, fossil fuel prices also directly influence the cost of electricity generation.  

Mirroring global markets, fossil fuel prices in Canada are susceptible to large fluctuations (Figure 2).  Canada’s energy reliance on fossil fuels means that energy prices are the most volatile component of overall inflation in the country by a significant margin, noting it far outstrips goods, foods, services, and shelter by a wide margin both in terms of positive and negative influence on inflation (Figure 3). The impact of energy price volatility is also evident in United States and European Union inflation data, where natural gas, oil, and petroleum products account for approximately 70% of total energy consumption. 

Figure 2. Fossil fuel price volatility in Canada 

Figure 3. Energy price changes compared to overall inflation in Canada 

Fossil fuel price volatility is expected to continue and worsen as climate-related disruptions impact infrastructure, supply, and demand. For example, the polar vortex of 2021 that reached as far south as Texas and the Gulf of Mexico brought winter storms to regions not equipped to manage sustained freezing temperatures. Texas’s electricity grid relies heavily on natural gas, but due to frozen equipment, gas transmission was restricted while extreme cold shut down 25 refineries in the Gulf of Mexico region. Increased demand and reduced supply led to gas price spikes in Texas and throughout North America, including Canada.

The Canadian wildfires of 2016 and 2023 also abruptly impacted North American oil prices. In both years, oil prices (West Texas Intermediate) surged due to lowered production levels, although prices fell again when production came back online. Wildfires that disrupt the oilsands can also create price volatility in the other direction. Alberta oilsands operations account for more than 25% of Canadian natural gas demand, and when that demand is disrupted, intra-Alberta natural gas prices drop. For example, the month prior to the 2016 wildfires, intra-Alberta gas traded at CAD 1.08 per gigajoule (G); in May, it dropped to a record low of CAD 0.58 per G before rebounding to CAD 2.77 per G when production recovered.  

Alongside the growing risks of climate events, as global demand for fossil fuels declines, market responses and potential imbalances in supply and demand could increase price volatility. Similarly, ongoing geopolitical tensions and lower levels of global cooperation increase the risk of market disruptions and price shocks. Shoring up investment in reliable, efficient, and low-cost energy sources is essential to mitigate the impact of inevitable global fossil fuel price fluctuations.

Increasing Affordability With Clean Energy Transition 

Canada can mitigate future inflation and help make life more affordable for Canadians by supporting a transition away from fossil fuels. In fact, putting the global energy system on a path to net-zero by 2050 could reduce energy operating costs by more than half by 2035. There is opportunity to lower energy costs by reducing the overall amount of energy used through more energy efficient technologies or by changing behaviour (e.g., driving less). Electrification of transportation, heating, and cooling can also save money. This is in part because electric vehicles and heat pumps provide significant efficiency gains over their fossil fuel counterparts—they use less energy to provide the same service. Therefore, government policies that support and incentivize fuel switching, energy efficiency, and changes in behaviour will help smooth and accelerate the transition away from fossil fuels.  

Options for cheaper and cleaner energy are reliant on the availability of infrastructure and services such as efficient public transportation, electric vehicle charging infrastructure, and clean, reliable electricity supply. Although significant investment is required to build supportive infrastructure and services, it is a long-term investment that can both boost Canada’s economy and lower the costs that Canadians pay for the services they need. It is also a prudent investment as the costs of clean energy are falling below the costs of fossil fuel energy and are expected to continue falling.  

Conclusion 

Overdependence on fossil fuels, which are volatile and tend toward high costs, is a problem for Canadian consumers, inflation, and affordability. Record inflation has been driven in large part by oil and gas price increases that have spilled over into other areas of the economy sensitive to energy inputs. By reducing its dependence on fossil fuels, Canada can fight climate change and inflation in a way that supports affordability, shielding consumers from energy price fluctuations by transitioning toward the use of clean and efficient energy sources that have lower and more stable prices. 

Governments have a role to play to strategically discourage the use of fossil fuels through policies such as carbon pricing, fuel taxation, and fossil fuel subsidy reform. By doing so, they can generate revenue to further support efforts that enhance affordability and incentivize cost-saving by switching away from fossil fuels and the resulting energy price fluctuations.  Contrary to arguments that climate policy makes life less affordable, it is fossil fuels that keep consumers stuck on an energy price rollercoaster. Renewable and electrified energy sources are not only good for the climate, but they also save people money through lower costs and improved efficiency.  It is incumbent on governments to champion policies that expedite the transition to more affordable, efficient, and clean energy in a way that focuses on affordability for Canadians, now and for the future.

A full list of references can be found here.

Re-Energizing Canada is a multi-year IISD research project envisioning Canada's future beyond oil and gas. This publication is a part of The Bottom Line policy brief series, which digs into the complex questions that will shape Canada's place in future energy markets.