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Canada has ratified the Kyoto Protocol while the United States has not; and Canadian industrial producers have expressed their concern with respect to the negative impact of this on competitiveness. To alleviate this concern, the Government of Canada is proposing to cap the price of greenhouse gas (GHG) emission permits and to allocate emission permits on the basis of output. We analyze how such a scheme could affect electricity production and trade between Ontario, Quebec, New Brunswick, New England, and New York. We find that the approach of the Canadian government has little effect on electricity production and trade; it also fails to reduce GHG emissions. if the allocation and production of emission permits were unbundled and if Canadian electricity producers were facing a permit price of $15 per tonne of CO2, then the effect in Canada would depend on how limiting were the constraints on GHG emission in the US region. The impact on total GHG emissions remains small because of production substitution between the various regions. [ABSTRACT FROM AUTHOR]