Carbon Market In Québec: New Draft Regulation Proposes Key Changes To The Cap-and-trade System

On May 20, 2026, Québec released a draft regulation amending its Regulation respecting a cap-and-trade system for greenhouse gas emission allowances.¹ The proposed changes², represent the most significant update to the province's carbon market in years.³ They also reflect Québec's pursuit of formal market linkage with Washington State and the need to complete reforms before the October 2026 provincial election.⁴ Emitters, offset credit project developers and market participants, will feel the significant impact of these changes in short order as the government plans to enact the amendments in fall or winter 2026.

How Québec’s carbon market works

Québec's Cap-and-Trade (C&T) system has been in operation since 2013 and covers approximately 80% of the province's GHG emissions.⁵ Québec linked its system with California in 2014, creating the largest carbon market in North America and the first to be designed and operated by subnational governments from different countries. Born out of the Western Climate Initiative, the system requires covered entities (including industrial facilities emitting 25,000 tCO₂ or more per year, electricity producers and importers, and fuel distributors) to hold one emission allowance for every tonne of GHGs they emit. As of 2025, there are 129 covered entities in the system.⁶ The 2025 cap is 50.31 million tCO₂, declining by 1.235 million tCO₂ annually to reach 44.14 million tCO₂ by 2030, consistent with Québec’s target of a 37.5% reduction from 1990 levels by 2030.

Allowances are distributed through quarterly auctions, jointly administered with California, and through free allocation to emission-intensive, trade-exposed industries. All auction revenues are directed to the Electrification and Climate Change Fund, which finances Québec's 2030 Plan for a Green Economy. In 2025, joint auctions with California generated CA$1.1 billion for Québec.⁷

Covered entities may also use offset credits (representing one tonne of CO₂ reduced or removed through projects outside the C&T system) to satisfy up to 8% of their compliance obligations.⁸ Credits issued by Québec or California are currently treated as fully interchangeable⁹ and can be purchased over-the-counter from the broader market.

Key changes

The draft regulation introduces changes across eight areas:¹⁰

1. Offset credit limits tightened. The total quantity of offset credits an emitter may use drops from 8% to 6% of the GHG emissions to be covered, effective for the compliance period beginning January 1, 2027. The 8% limit is maintained for the current compliance period beginning January 1, 2024.
2. Minimum Québec-issued credit requirement. Beginning with the 2027 compliance period, at least 1% of offset credits used must have been issued by the Québec Minister; that minimum rises to 2% from 2029 onward. This ends the current ability to satisfy offset obligations entirely with California-issued credits and creates a source of demand for domestic credits. The government has indicated that this change is intended to increase the value of Québec-issued offset credits and improve project profitability.
3. Stricter offset project eligibility conditions. For offset project developers, the new requirements also introduce stricter eligibility conditions: carbon capture projects must demonstrate actual storage, elimination or re-use of carbon within Québec; and reduction-related R&D projects must undergo a study of the technical and economic potential of GHG reductions to be eligible.
4. Restructured compliance periods. The current three-year block structure is replaced with a two-year period from January 1, 2027 to December 31, 2028, followed by alternating three-year and two-year periods beginning January 1, 2031. This aligns with proposed changes in California. Several administrative deadlines shift from September 1 to October 1, affecting notices and opt‑out applications.
5. Updated emissions accounting. The draft Regulation updates the definition of “verified emissions,” which are used to determine the amount of greenhouse gas emissions an emitter must cover with emission units under the C&T system. The following are now excluded from the definition: (i) CO2 emissions attributable to the combustion or use of biomethane; (ii) CO₂ emissions that are captured, stored, eliminated, re-used or transferred out of an establishment; and (iii) GHG emissions related to electricity acquired from a US state where producers are subject to a carbon pricing system established by a non-partner entity and are already covered under that system. These exclusions ensure that emissions which are either not released into the atmosphere or already accounted for under another carbon pricing system are not counted again in Québec.
6. Coverage obligation changes. The draft regulation introduces new flexibility for emitters seeking to exit coverage obligations. Emitters whose reported emissions fall to zero may now exit coverage as of January 1 following a notice sent to the Minister by September 1, rather than waiting through the standard three-year below-threshold period. A corresponding provision allows emitters who previously demonstrated their emissions would reach the 25,000 tCO₂ threshold, but who now expect to fall short, to exit coverage obligations by sending notice to the Minister by October 1 of the year preceding the relevant period.
7. Expanded free allocation eligibility. New industrial activities are added to the list eligible for free allocation, including production of aluminum alloys, synthetic olivine sands, titanium tetrachloride and oxychloride, cast iron pipes and fittings, and ferroniobium. Aluminum alloy producers and synthetic olivine manufacturers will receive retroactive compensation for 2024 production.
8. Stricter disclosure and adviser requirements. Investment funds must provide expanded registration information, including their articles of constitution, offering memorandum or prospectus, the identities of fund managers and portfolio managers, and the names of investors holding more than 10% of shares. In addition, the definition of "related entity" has been broadened to capture indirect relationships and advisers retained for C&T compliance must now provide a written undertaking prohibiting disclosure and use of such information.

Alberta’s parallel reform

The Québec amendments arrive days after Canada and Alberta signed an Implementation Agreement setting out reforms to Alberta's Technology Innovation and Emissions Reduction (TIER) system, the province's carbon pricing regime.¹¹ The agreement responds to market credibility issues: Alberta is currently oversupplied with carbon credits, resulting in a market price below the legislated fund price of CA$95/tonne, meaning emitters can satisfy compliance obligations at a discount simply by purchasing credits on the market. The agreement introduces four main reforms to address this: 1) a new price trajectory rising to CA$115/tonne by 2030 and CA$140/tonne by 2040; 2) a mandatory minimum transfer price for carbon credit transactions starting at CA$60/tonne in 2030; 3) a constrained Direct Investment Pathway, capped at 50% of eligible capital; and 4) jointly offered Carbon Contracts for Difference guaranteeing a minimum credit price on up to 75 million tonnes. The federal government has also agreed to update its carbon pricing benchmark to align with Alberta's new price trajectory, a revision that will affect how Québec's C&T system is assessed for equivalency purposes. The contrast with Québec is telling: where Québec is tightening its system to drive greater reductions, Alberta is opening new commercial pathways through direct investment allowing project proponents to realize immediate value for its projects.

Key issues to watch

Washington State linkage. Québec, California and Washington State jointly developed a draft linkage agreement in early 2026, with Washington closing its public comment period in May. A linked three-jurisdiction market could begin operating as early as 2027. Finalizing the Québec regulatory amendments before the October 2026 election is considered essential, as the remaining steps, namely ratification of the linkage agreement by the National Assembly and a rulemaking process to accept Washington compliance instruments, require a stable regulatory foundation.

Federal benchmark update. As of May 15, 2026, the federal government updated its carbon pricing benchmark to establish a new headline price trajectory for all carbon pricing systems in Canada.¹² The updated trajectory sets prices at CA$95/tonne in 2026, rising to CA$100/tonne from 2027–2029, CA$115/tonne in 2030, and escalating to CA$140/tonne by 2040 (with a 1.5% annual inflationary escalator beginning in 2036). A full, updated federal benchmark incorporating these changes is expected later in 2026. The new trajectory aligns with Alberta’s Implementation Agreement reforms and provides certainty to support major decarbonization projects. The forthcoming full benchmark publication will provide details on how the updated stringency criteria will apply across provincial systems.

Offset credit market. The combination of a reduced overall limit, a new minimum for Québec-issued credits, and tightened project eligibility conditions represents a structural shift in how offset demand will be distributed. Emitters relying on California-issued credits for cost efficiency will need to revisit their procurement strategies for the 2027 compliance period, and project developers should assess whether their existing projects meet the updated storage and R&D study requirements.

Conclusion

Québec's C&T system is one of the province's most important environmental policy instruments, and the proposed amendments represent a significant shift as to how it operates. The comment period regarding the proposed amendments closes July 3, 2026. The range of stakeholders with a direct interest is broad: covered emitters, offset credit project developers, investment funds and advisers active in the carbon market. The process is taking place amid potential market linkage with Washington State, a federal benchmark review shaped by the Canada-Alberta Implementation Agreement, and a Québec provincial election in October. For all those stakeholders, engaging with the proposed amendments now, and understanding their legal and commercial implications, will be essential as the process unfolds.

Footnotes

1. Regulation respecting a cap-and-trade system for greenhouse gas emission allowances, c. Q-2, r. 46.1. ↩

2. The proposed changes stem from a joint review initiated by Québec and California in June 2023 to assess whether the system continues to be an effective mechanism for achieving emission reduction objectives. ↩

3. MELCCFP, "Assessment of the operating parameters of the Cap-and-Trade System." ↩

4. Department of Ecology, State of Washington, "Cap-and-Invest Carbon Market Linkage Updates" (March 2026). ↩

5. MELCCFP, "The Carbon Market, a Green Economy Growth Tool!". ↩

6. International Association for Emissions Trading (IETA), "Quebec's cap-and-trade system at a glance" (September 2025).↩

7. International Carbon Action Partnership (ICAP), "Canada - Quebec Cap-and-Trade System." ↩

8. MELCCFP, "Offset Credits." ↩

9. Dentons, "Understanding Quebec's Cap-and-Trade system for carbon" (October 2, 2023). ↩

10. Draft Regulation to amend the Regulation respecting a cap-and-trade system for greenhouse gas emission allowances, c. Q-2, r. 46.1. ↩

11. Prime Minister of Canada, “Implementation Agreement for the Canada-Alberta Memorandum of Understanding of November 27, 2025" (15 May 2026). ↩

12. Government of Canada, “The federal carbon pollution pricing benchmark” (15 May 2026). ↩