Julio Mejia and Elmira Aliakbari are analysts at the Fraser Institute.Last year, as part of the “Memorandum of Understanding” (MOU) between Ottawa and the Alberta government, Alberta agreed to increase its industrial carbon tax by April 1. But raising the tax will increase production costs and deepen an investment downturn in the energy sector. In other words, policymakers in Alberta and Ottawa should understand that Canada’s ability to attract investment is at stake.For the past decade, Ottawa’s policy regime has weighed heavily on the energy sector. Between 2014 and 2024, investment in Canada’s oil and gas plummeted from $84.0 billion to $35.7 billion — a decline of 57.5% (inflation-adjusted). And even with a modest rebound projected for 2026, preliminary data suggest investment will remain below 2024 levels. The result is fewer resources to explore new reserves, develop projects, expand critical infrastructure, and reinforce Canada’s largest export sector. It also means fewer high-paying jobs and less economic growth, which will make it harder to improve living standards for Canadians. According to the MOU, the agreement aims to establish Canada as a “global energy superpower” while at the same time forcing Alberta to increase its industrial carbon tax to a minimum of $130 per tonne of CO2 emitted — up 37% from the current $95 per tonne. And because it’s a minimum, the tax may increase further in the future. The Smith government and the Carney government are currently negotiating the terms of the increase. But early discussions suggest the tax would first rise to about $120 per tonne — an intermediate step that’s already raised concerns within the industry. According to recent reports, such a tax could add roughly $20 to the cost of producing a barrel of oil. An extra $20 in costs per barrel will significantly reduce potential returns, weakening the case for investing in new infrastructure and expanding energy production..Alberta’s industrial carbon tax operates within Canada’s broader federal carbon tax framework. Unlike the federal consumer carbon tax (on fuels such as gasoline, diesel, and natural gas), which the Carney government eliminated last year, the industrial carbon tax applies to large facilities, including oilsands operations and refineries. Companies face a government-set carbon emissions limit and must pay a fee or purchase credits if they exceed it. Higher industrial carbon taxes raise production costs, which can ultimately be passed on to Canadians through higher prices and reduced investment that creates jobs.And that’s not the only additional cost looming over Canada’s oil and gas sector under the MOU. The Alberta government must also secure a binding agreement with oil producers to scale up “carbon capture” and sequestration technology, which stores CO2 underground.According to RBC, deploying this technology could require up to $32.5 billion in industry investment through 2030. And fully decarbonizing oilsands production — which accounts for nearly 85% of Alberta’s oil output — could cost an estimated $23 per barrel, depending on the method of production. Together, higher carbon taxes and costly decarbonization requirements significantly increase the cost of producing energy in Canada, raising the bar for investment when global demand for oil and natural gas is on the rise.Few major oil-producing countries pair high carbon prices with ambitious decarbonization requirements at levels comparable to those of our country. In a global market where investors have options, increasing the cost of producing, processing, and transporting oil and gas in Canada will keep pushing investment elsewhere — particularly to places without these costly policies, such as the United States, Latin America, and the Middle East. Rather than reinforcing Canada’s position as a global energy superpower, higher carbon taxes and costly carbon capture commitments may push our country in the opposite direction. Premier Smith’s deal with Prime Minister Carney may make a bad investment problem even worse. Julio Mejia and Elmira Aliakbari are analysts at the Fraser Institute.
