Calgary, Alberta (CP) — Federal Liberal Leader Stephane Dion says Canada needs penalties for energy companies that don’t reduce carbon dioxide emissions and water use, especially in Alberta’s booming oilsands region.

“If you do the right thing, you pay less; if you don’t do it, you pay more,” Mr. Dion told a Calgary radio talkshow Friday. “The ones who are doing that will be rewarded and the ones that are not doing that will be penalized in the market where they need to be competitive.”

He said a Liberal government would create a carbon trading market to allow companies that didn’t meet emissions targets to buy credits from firms that came under the standard, he said.

“You will have a regulation that means … the industry will have to decreases their emissions by 10 per cent,” he said as an example. “If you are able to decrease it by 15 per cent, you may sell the extra five per cent cut of emissions on the market to the ones that are unable to reach the target.”

Prime Minister Stephen Harper has rejected the idea of trading carbon credits on the international market.

Mr. Dion also took aim at oilsands giants, saying he would like to remove generous royalty incentives if firms didn’t meet emissions targets that would be set by the government.

“What I will do is I will say to them, ‘I will remove it from you unless you have much lower emissions of CO2 and much less use of water.’

“So they will have an incentive to look for the best technologies and the best industrial processes.”

Energy companies have saved billions of dollars over the last decade under a program that allows them to pay a fraction of normal royalties until their giant oilsands projects are fully capitalized.

The new Liberal leader rejected suggestions that such tough regulations would kill investment in the oilsands — one of the main contributors to Alberta’s record economic growth.

“This is what they are doing in other countries, in Europe, and in some U.S. states now. It’s starting and it’s working very well. It’s time for us to do that in Canada as well,” he said. “Your competitors will have to pay you if you are doing the right thing.”

Mr. Dion said his regulations would be demanding, but reasonable. They would be based on what he planned to do as environment minister before the Liberals were defeated by the Conservatives in the last election, he added.

The Liberal government signed the Kyoto protocol several years ago promising a six per cent reduction below 1990 emission levels by 2012. But federal officials have been dampening expectations recently, pointing out that emissions actually increased 25 per cent during the former Liberal government.

Mr. Harper’s repeated message has been that imposing drastic reductions would devastate the Canadian economy. But the Conservatives have been harshly criticized by environmental groups for taking an approach that is much too long-term.