Canada’s climate plans are a PR front for a carbon-export economy: its oil sands are distorting the economy and derailing any hope for transition. The country’s upcoming election reveals how far leaders are from reversing course.
Commentators are treating Canada’s current federal election as a case study in the “Trump effect.” Until a few weeks ago, the Conservative Party dominated the polls — thanks in part to Pierre Poilievre, whose churlish mimicry of MAGA rhetoric included claims of a nonexistent immigrant crime wave and accusations that every part of government is broken. But after Donald Trump mused provocatively about annexing Canada and imposed new tariffs on Canadian goods, voters have swung overwhelmingly toward the Liberal Party.
Under Mark Carney, the Liberals are trying to position themselves as moderate yet assertive defenders of Canadian national interests. Carney has scored points by rapidly imposing retaliatory tariffs on some US-made cars, and signaling an interest in strengthening ties to Europe. Meanwhile, support for the social democratic New Democratic Party (NDP) — a partner in the last Liberal-led minority government — has collapsed so dramatically that polls project them to win as little as 1 or 2 percent of the seats in parliament.
The panicked retreat to the center is clearly a response to Trump’s belligerence. But this election also highlights the visionlessness of Canadian economic policy. Both the Liberals and the NDP have long pledged to make Canada less dependent on fossil fuels, especially the catastrophically polluting Alberta oil sands. Now, they also want to reduce dependence on American imports. Yet neither party has offered a serious account of how these goals might be realized. Instead of detailed platforms, they’ve relied on platitudes about tax cuts and job creation.
Ottawa’s aversion to risk on industrial policy appears stronger than ever — despite growing pressure for change. Over the past twenty-odd years, Canadian governments have occasionally expressed real interest in a green transition, but their capacity to deliver was constrained by the North American Free Trade Agreement’s (NAFTA) limits on state support for renewables. In the meantime, the oil and gas sector has only grown in size and political clout. Since NAFTA’s renegotiation under Trump’s first term, some policy space has opened up. But the oil-driven price shock of the past few years has made governments more nervous than ever about restraining fossil fuel production. The ironic result is that policymakers now have more room to act — but less will to do so.
A Resource Curse With Canadian Characteristics
Our current circumstance presents a new variation of a long-standing problem: weak manufacturing capacity and a deep reliance on resource extraction. In some respects, this resembles the resource curse — the pattern in which resource-rich countries underinvest in other sectors — but with distinct Canadian characteristics.
From the mid to late twentieth century, Canada moved away from primary product dependency and developed a modest manufacturing base for higher-value finished products, though much of it was built with the backing of US capital. Since 2000, however, much of that progress has been reversed by the rise of Canada’s export-oriented carbon sector. As a result, Canadian policymakers now confront a double bind: diminished capacity in innovative industries and heavy reliance on fossil fuel production, especially in Alberta and Saskatchewan.
To understand how we got here, it helps to take a long view. In the nineteenth century, colonial economists like John Rae broke from London’s free-trade consensus and argued that industrialization in British North America required protectionist policies. The problem of industrializing the frontier was also central for Edward Gibbon Wakefield, who suggested that Canadian manufacturing would fail so long as settlers could claim cheap land of their own — an idea that Karl Marx highlighted in his discussion of dispossession and proletarianization.
Federal leaders took some of Rae’s advice but none of Wakefield’s. Beginning in the 1870s, they implemented a protectionist plan and aggressively promoted the Western settlement under what became known as the “National Policy.” This strategy led to the flourishing of resource extraction in mining, lumber, and coal, alongside petroleum from the Sarnia area in southwestern Ontario, which has some of the oldest commercial oil wells in the world. By the 1920s, political economists Harold Innis and W. A. Mackintosh had formulated the “staples thesis” — the idea that Canada’s economy, class structure, and political culture were shaped by its dependence on exporting raw materials like fish, fur, lumber, and minerals, rather than developing domestic industries.
Escaping the Staples Trap
At the same time, American industry began to establish a network of branch plants in Canada: oil refining and petrochemical production in Sarnia, aluminum production in Quebec, and a vast automotive industry in Ontario. These industries would grow substantially during and after World War II, as Canadian economic policy moved away from the settler orientation of the National Policy and toward a form of Keynesian industrial capitalism.
By the 1960s and ’70s, however, concerns emerged that the strategy of welcoming foreign direct investment had been too successful: US capitalists owned many of Canada’s high-value industries. At the same time, the strategy had failed to modernize the economy overall, with the bulk of Canadian exports still consisting of raw materials.
The school of “new Canadian political economy” began to theorize this problem, arguing that Canada shared more in common with underdeveloped countries in Latin America than the industrial superpowers powers of Britain and the United States. Kari Polanyi Levitt, drawing on these parallels, described Canada as the “the world’s richest underdeveloped country.” Similarly, Innis’s student Mel Watkins warned that free trade could lock countries like Canada into a growth-inhibiting “staples trap.” In 1969, Watkins joined the Waffle, a left-nationalist faction within the NDP, whose manifesto lamented that “Canada has been reduced to a resource base and consumer market within the American Empire” — part of a broader discourse surveyed by Leigh Phillips.
Though the Waffle was on the fringes of Canadian politics — and was soon effectively expelled from the NDP — its concerns about the subordination of Canadian industry were shared by the government of Pierre Trudeau. In the 1970s, Trudeau would respond to the recommendations of a 1968 commission chaired by Watkins by creating the Canadian Development Corporation and establishing a foreign investment review board. These measures were part of a broader effort to “Canadianize” the economy. While US foreign investment did not decline substantially, the interventionist approach succeeded in diversifying Canada’s manufacturing base. Publicly owned corporations, R&D programs, and growing access to the US market all contributed to this process.
The result was a robust expansion in Canada’s higher value-added sectors: automobiles, aerospace, machinery, electronics, and consumer products. Whereas primary products — agriculture, energy, mining, and forestry — represented more than 60 percent of exports in the 1970s, that share had dropped to 43 percent by the end of the century.
Getting Trapped Again
But this progress was short-lived. After 2000, the rising price of oil reversed it entirely. As Jim Stanford (a student of Watkins) has argued, rising prices pushed up the value of the Canadian dollar (CAD), making other manufactured goods less competitive in international markets.
Several earlier developments generated these vulnerabilities. One was the deep entrenchment of trade liberalization following the 1994 implementation of NAFTA. Whereas a low CAD had once supported domestic industry, the new dynamic worked in the opposite direction. Relatedly, many of the manufacturing support programs designed in the 1970s were dismantled over the subsequent two decades.
More importantly, postwar industrial policies never aimed to move Canada decisively away from primary products. Instead, they sought to promote exports in general — and policies that promoted fossil fuels proved to be the most resilient and effective. While Denmark responded to the oil shock of the 1970s by investing in what was then the long-shot prospect of wind power, Canada bet on another long shot: the Alberta oil sands. Half a century later, both gambles have paid off.
At first, extracting petroleum from the heavy bitumen was so expensive that Alberta’s government-led research initiatives failed to attract the 50 percent industry support required by the policy. In response, the province broke its own rules and unilaterally funded the R&D, eventually developing the energy-intensive technique of steam-assisted gravity drainage, which made large-scale oil sands development commercially viable.
As the industry scaled up, it reshaped Canadian manufacturing. Like any oil-exporting country, Canada saw its currency appreciate alongside global oil prices. The rise of the CAD was driven not just by direct demand for Canadian oil, but also by soaring profits in the oil sector — already among the highest in the country — which attracted foreign investment into Canadian equities. The first figure below shows oil exports as a percentage of total exports alongside the value of the CAD in USD. They are clearly linked, but both are largely determined by global oil prices: rising demand from China after 2000 pushed prices upward, the 2008 global financial crisis brought them down, they rebounded, and then fell again after 2014 due to a global oil glut.
The damaging effects of this dynamic soon became apparent. As early as 2013 — when prices were booming — Stanford and his coresearchers observed that for every dollar increase in petroleum exports, exports in all other goods fell by $8.50. In other words, oil export growth, because of its tight link to currency appreciation and profit flows, came at the expense of Canada’s broader trade balance. Consequently, the non-fossil manufacturing didn’t just shrink in relative terms — it declined in absolute terms, with job losses across all provinces far outweighing the jobs created in the oil patch.
The second figure provides another view of these outsize impacts, charting the steep decline in non-fossil manufacturing as a share of GDP after 2000, alongside the growth of a bottom-feeding oil and coal sector. (Tellingly, while Canada has reduced domestic coal consumption, it continues to extract coal at scale — exporting approximately 80 percent of it.)
Suffering more than a generic resource curse, Canada has given itself a case of “Dutch disease,” whereby a country’s resource economy directly undermines its manufacturing base. As Stanford puts it, since 2000, Canada has experienced a “resource-led deindustrialization” and what amounts to a “qualitative step backward” in its economic development.
Fueling the Problem
This is all to say nothing of the damage the oil sands are doing to the planet, the scale of which is difficult to fathom. The industry has long acknowledged that a barrel of Albertan oil is more polluting than conventional oil, but its own estimates consistently understate the problem. One mind-bending study published last year in Science found that total emissions from the oil sands appear to be 19 to 63 times larger than the industry-reported values.
Yet despite years of warning from the scientific community, Ottawa has no plan to mitigate this catastrophe. On the contrary, a recent analysis estimates that the federal government handed the industry over $7.3 billion in 2023 alone. That’s on top of the billions already spent over the years — including $34 billion to complete the Trans Mountain pipeline, which came online two years ago.
Throughout his time in office, Justin Trudeau often claimed — with a telling look of uncertainty in his eyes — that support for the industry was part of a necessary long game. “You can’t make a choice between what’s good for the environment and what’s good for the economy. We can’t shut down the oil sands tomorrow. We need to phase them out,” he would say. The implication was always the same: that these policies were needed to win over Western voters (which he never did), or that oil sands revenues were necessary to finance a green transition (a claim that is untrue in many respects). His centerpiece policy was a carbon tax — modest, progressively redistributive, and increasingly unpopular thanks in part to Poilievre’s shrill and relentless attacks in parliament. Carney has already scrapped the tax, a move that has helped to sideline the Conservatives.
Trudeau also failed to pair the carbon tax with meaningful efforts to expand regional rail, reduce automotive dependency, or promote renewable electricity production in Alberta and Saskatchewan. This meant that Conservative complaints about paying more for gas have had an intuitive resonance for some voters — especially since the price bump that began in 2020.
As Douglas Macdonald argues, a key structural obstacle is that Canadian provinces — like American states — control energy policy. Alberta and Saskatchewan have used this jurisdiction to successfully undermine multiple federal initiatives in recent decades. If Ottawa wants to make any real progress, the next federal government will need to do more than articulate a vision for transition; it will have to find a way to override the industry-aligned provincial governments in the West.
As noted, the demise of NAFTA has opened unique opportunities for progress on the climate front. Whereas provisions for investor-state dispute settlement once limited Canadian governments’ ability to pursue green industrial policies, Ottawa’s reluctant break from Washington has at least created some space for industrial sovereignty.
But to exercise that sovereignty effectively, the next government will need to unravel past mistakes and advance a far more ambitious plan than anything currently on offer. Carney may understand climate change better than most politicians, but his platform offers little more than token incentives for home energy efficiency and a vague reference to UK-style “carbon contracts for difference” — with no explanation of how they’ll be coordinated with provinces.
We have every reason to doubt, then, that the next government will outperform the last on climate policy. The NDP, meanwhile, will enter the next parliament significantly diminished — the just deserts of a party that has drifted away from its base and, at the urging of lawyers and consultants, made itself almost indistinguishable from the Liberals. If the party wants to survive, its next leaders will need to embrace a vision of aggressive retooling and ambitious market intervention — the kind already outlined in hundreds of high-quality white papers by progressive policy analysts. Only then will they be able to present a credible enough alternative to prod the next government into action.