Canada Details Federal Carbon Pricing System in Face of Increasing Opposition
October 26, 2018
On October 23, 2018, the Government of Canada announced additional details regarding the federal carbon pricing system and published draft regulations amending the Greenhouse Gas Pollution Pricing Act (Act). A federal fuel charge of C$20 per tonne of carbon emissions will come into effect in Manitoba, New Brunswick, Ontario and Saskatchewan in April 2019 and in Yukon and Nunavut in July 2019. A separate carbon pricing system for industrial emitters will also come into effect in January 2019. While it was initially meant as a backup plan for the few jurisdictions that did not implement their own carbon pricing mechanisms, once in force, the federal carbon pricing system will apply to almost half of the Canadian population. Despite the recent federal announcement, the Act faces an increasingly uncertain future with legal challenges working their way through the courts in Saskatchewan and Ontario, and increasing opposition in Alberta, Manitoba and New Brunswick. With a federal election a year away, it remains to be seen what role federal carbon pricing will play in the future.
In December 2016, the federal government, along with most provinces and territories agreed to the Pan-Canadian Framework on Clean Growth and Climate Change (Framework) to meet greenhouse gas emissions (GHG) reduction targets. Federal carbon pricing was a key component of the Framework. In May 2017, Environment and Climate Change Canada released the Technical Paper on the Federal Carbon Pricing Backstop. For more information on this technical paper, please see our May 2017 Blakes Bulletin: Canada Publishes Technical Paper, Reveals Federal Carbon Pricing Plan. In June 2018, the Act received royal assent, which established the legal framework and authority for the federal carbon pricing system.
On October 23, 2018, the federal government released a set of draft regulatory proposals under the Act, listing the jurisdictions in which the fuel charge will apply and the rates at which it will apply. Specifically, the government released draft amendments to the Fuel Charge Regulations and draft regulations amending Part 1 of Schedule 1 and Schedule 2 of the Act.
The Act and the draft amendments and regulations contain a variety of measures, the most noteworthy of which include:
CARBON TAX BEGINNING AT C$20/TONNE IN 2019
The federal carbon pricing system will be composed of two elements: 1) a carbon levy or tax on fossil fuels (to be administered by the Canada Revenue Agency), and 2) an output-based pricing system for emissions-intense industrial facilities (to be administered by Environment and Climate Change Canada).
According to the draft regulations, the carbon tax on fossil fuels will be C$20 per tonne of carbon emitted (or cap and trade equivalent) in 2019, with this tax increasing by C$10 per year to C$50 per tonne in 2022. As different fuels generate different amounts of GHG emissions, the carbon tax rate must be translated based on the type of fuel used. For example, a tax of C$20 per tonne of emissions will translate to a tax of C$0.0442/L on gasoline and C$0.0310/L on propane.
Any carbon tax owing in applicable provinces and territories would generally be paid by fuel producers and distributors to the Canada Revenue Agency on a monthly basis, and would be passed on by these producers and distributors to consumers.
WHICH JURISDICTIONS ARE SUBJECT TO THE FEDERAL TAX?
As a “backstop” regime, the federal carbon pricing system will only apply in provinces and territories that do not have a carbon pricing system that aligns with the federal benchmark as of 2019. Those jurisdictions are identified in the draft regulations as Saskatchewan, Manitoba, New Brunswick, Ontario, Yukon and Nunavut.
Alberta, British Columbia, Quebec, Nova Scotia, Newfoundland and Labrador, Prince Edward Island, and the Northwest Territories will not be subject to the federal carbon pricing system for 2019. These jurisdictions already have carbon pricing systems in place, or plan to implement carbon prices that the federal government says will meet the federal standard. For example, Alberta, British Columbia and Quebec have carbon pricing regimes in place that meet or surpass the federal benchmark, and will not need to be concerned about the federal tax until at least 2021, when it ratchets up to C$40 per tonne. Currently, Alberta’s carbon tax is set at C$30 per tonne (in addition to its large industrial GHG emissions program). British Columbia’s carbon tax is at C$35 per tonne, and Quebec has a cap-and-trade system that the federal government has evaluated to be equivalent to the federal standard. Nova Scotia is set to implement a cap-and-trade program, and Newfoundland has increased its existing tax on gasoline and diesel to conform to the federal minimum and has added a performance-based carbon reduction system for large industrial emitters. The Northwest Territories is introducing a carbon tax on fuels effective July 1, 2019 based on C$20 per tonne, and Prince Edward Island is implementing a carbon plan that will meet the federal standard, but has asked the federal government to apply the federal backstop to large industrial emitters in that province.
The government has committed to returning proceeds from the federal carbon pricing system to the province or territory of origin. In the Yukon and Nunavut, jurisdictions that chose to opt-in to the federal system, the carbon tax proceeds will be returned directly to those governments. In Saskatchewan, Manitoba, New Brunswick, and Ontario, 90 per cent of the revenues generated by the federal carbon tax on fuel are expected to be returned to individuals via an annual carbon rebate, called Climate Action Incentive payments. The amount of this rebate will vary by household size and by province, in order to account for differences in provincial energy supply mixes (and correspondingly disproportionate burden of the tax). The remaining 10 per cent will be used to support organizations that cannot pass the cost of the fuel charge onto consumers, such as small businesses, schools, municipalities, non-profits and Indigenous communities.
In Saskatchewan, Manitoba, New Brunswick, and Ontario, the federal government has yet to confirm the details about the usage of revenues generated by the output-based pricing system for industrial emitters. However, the revenue will be used to support future climate initiatives in the jurisdictions in which the revenue is raised.
COMMENTARY AND CONCERNS
While the federal government advocates for the federal carbon pricing system, it is not without controversy. The rebate program has been criticized because it will not be paid out based on a particular household’s carbon footprint. Instead, it will vary by household size. Furthermore, because the amount of the rebate will vary by province, the rebate will not be equally applicable across the country. Another concern is the tax may be ineffective at actually reducing carbon emissions. In that regard, the Intergovernmental Panel on Climate Change recently stated that for a carbon tax to be effective, it would have to be at least US$135/tonne by 2030 and rise significantly thereafter. Accordingly, the rebate program is seen by many as more akin to a commodity sales tax and income redistribution scheme rather than a rebate tied to reduced carbon emissions.
The federal carbon pricing system faces increasing provincial opposition and an uncertain future. Despite the majority of the provinces and territories having previously signed onto the Framework, their support for the Framework and the federal carbon pricing system has dissolved throughout 2018. In April 2018, Saskatchewan launched a legal challenge to the federal carbon tax, and in July 2018, Ontario announced it would intervene in support of Saskatchewan. In August 2018, the Government of Ontario announced its own legal challenge to the plan. The provinces have raised a number of questions, arguments and concerns, including whether:
- The carbon tax actually constitutes a tax
- The federal government has the constitutional authority to impose a carbon tax in a province over matters that are under provincial jurisdiction
- The federal government has the authority under the Constitution to implement a carbon tax regime in some provinces but not others, resulting in differential treatment between the provinces based solely on how different provinces regulate their own affairs.
In addition to the legal challenges, the Premier of Alberta recently declared Alberta’s intention to pull out of the Framework and not increase its carbon tax above C$30 per tonne. In October 2018, the Government of Manitoba likewise abandoned its carbon pollution pricing system, which it had been developing since October 2017. The opposition party in New Brunswick has also expressed an intention to withdraw from the Framework should it eventually form the next government in that province.
With a federal election coming up in 2019, carbon pricing will likely be a key election issue. It remains to be seen what role federal carbon pricing will play in the future.
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