Study of Chinese textile rules shows carbon price effect hinges on firms' ability to adapt

The federal government revised its industrial carbon pricing plan in May, keeping the price at $95 per tonne this year and setting a target of $115 by 2030, a reduction from the earlier $170 goal. This change prompted contrasting reactions from business and environmental advocates. Industry representatives said the lower trajectory would ease costs and allow more time for adaptation. Environmental groups countered that a weaker price signal would diminish the incentive for companies to lower their greenhouse gas emissions.

This debate centres on a persistent worry that stricter environmental rules can hurt the competitiveness of domestic companies, especially when foreign rivals operate under looser standards. Research by University of Alberta assistant lecturer Longzhou Wang indicates that a regulation's outcome is shaped by more than its strictness. "My research on Chinese exporters suggests the level of an environmental requirement alone does not determine how firms respond," Wang said. "Whether firms have the capacity and opportunity to adjust to the requirement matters, too." Wang analyzed the response of Chinese textile exporters to two tightening rounds of wastewater standards around Lake Tai in the 2000s. The first change in 2005 lowered the allowed chemical oxygen demand in wastewater from 180 to 100 milligrams per litre for firms in Jiangsu province. Exporters just across the border in Zhejiang and Shanghai, making identical products for the same buyers, were not bound by the new rule, providing a control group.

By linking the policy shift to customs data, Wang found the initial regulation spurred adaptation. The quality of exports from the regulated firms rose by 4.8 per cent compared to their unregulated neighbours. These companies invested in better equipment, boosted innovation spending, moved their product lines toward higher-quality items and saw productivity gains. While their costs went up and employment dropped, the quality of their overseas sales improved.

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A second, far stricter regulation was imposed after a 2007 algal bloom caused a drinking water crisis in Wuxi. Under this tougher standard, the export quality of the affected firms declined by 9.3 per cent. The rule altered production capacity and had the strongest impact on top-tier producers. "Firms producing the highest-quality goods cut production most sharply because meeting the tighter standard used up capacity they had spent years building," Wang's research concluded.

The contrasting results from the two regulatory episodes highlight that the impact of an environmental rule relies on both its stringency and the feasibility of compliance for businesses. Wang cautions against direct application to Canada's carbon price, noting the study involved a different nation, pollutant and industry twenty years ago. "Chinese dyeing mills are not Canadian steel plants. My results cannot tell Ottawa what the carbon price should be," he said.

Nevertheless, the research illustrates potential outcomes when companies confront rising environmental demands. The influence of Canada's carbon price on firms will be influenced by their adaptability. Some sectors have ready-made technologies for emission reductions, while others confront costlier or more complex changes. A major integrated producer likely has greater financial resources for new equipment than a smaller regional operator, and the timing for compliance is also a factor. "The answers are likely to differ across industries," Wang said. "A cement producer and an aluminum producer face different technical constraints, as do a large integrated company and a smaller regional producer. A carbon price can set the incentive to reduce emissions, but it cannot determine whether the technology, financing and time needed to respond are available."

The context for Canadian exporters is shifting with new international carbon rules. The European Union's carbon border adjustment mechanism started its definitive phase on Jan. 1, 2026, requiring importers to account for emissions in goods like steel, aluminum and cement. A similar British system is set to begin on Jan. 1, 2027. For Canadian companies in these sectors seeking markets beyond the United States, cutting emissions is evolving from a domestic cost into a prerequisite for market entry. A firm that reduces output in response to carbon pricing may lower its emissions but also have fewer goods to sell. With Canada's carbon price now set through 2030, whether it drives investment, adaptation or contraction will partly hinge on the options available to firms.

With files from Mirage News and The Conversation