Canada: The New Federal Carbon Pricing Policy - Roadmap To A Pan-Canadian Energy Strategy?

Earlier this month the Federal Government took two major steps towards the implementation of its climate change policy — ratification of the Paris Agreement and a proposed pan-Canadian benchmark for carbon pricing to be implemented by 2018. These changes both address prior commitments and raise outstanding legal and policy issues.

Background to the New Federal Carbon Pricing Policy

At the 2015 United Nations Climate Change Conference in Paris, France ("COP21"), that resulted in the Paris Agreement, Canada committed to a 2030 target of a 30 per cent reduction below 2005 levels of emissions. In the March 3, 2016 First Ministers' Meeting in Vancouver, British Columbia, the First Ministers resolved in a Vancouver Declaration on Clean Growth and Climate Change (the "Vancouver Declaration"), to develop a concrete plan to achieve Canada's international commitments that includes federal action through a Pan-Canadian Framework for Clean Growth and Climate Change, to be implement ed by early 2017. Working groups were set up in four areas, including carbon pricing mechanisms, to provide reports by September 2016. The First Ministers also agreed to meet in the Fall of 2016 to review progress on their Canadian Energy Strategy. The Working Group on Carbon Pricing Mechanisms produced its report. The Government of Canada adopted the Pan-Canadian Approach to Pricing Carbon Pollution.

The Federal Carbon Pricing Policy

In its October, 2016 announcement, the Federal Government supports the following principles of the Working Group on Carbon Pricing Mechanisms:

  • carbon pricing should be a central component of the Pan-Canadian Framework;
  • the approach should be flexible and recognize carbon pricing policies already implemented or in development by provinces and territories;
  • carbon pricing should be applied to a broad set of emission sources across the economy;
  • carbon pricing policies should be introduced in a timely manner to minimize investment into assets that could become stranded and maximize cumulative emission reductions;
  • carbon price increases should occur in a predictable and gradual way to limit economic impacts;
  • reporting on carbon pricing policies should be consistent, regular, transparent and verifiable;
  • carbon pricing policies should minimize impacts on competition a nd carbon leakage, particularly for trade-exposed sectors; and
  • carbon pricing policies should include revenue recycling to avoid a disproportionate burden on vulnerable groups and Indigenous peoples.

The federal benchmark includes the following elements:

  1. Timelines: all jurisdictions will have carbon pricing by 2018.
  2. Common scope. Pricing will be applied to a common and broad set of sources to ensure effectiveness and minimize interprovincial competitiveness effects. At a minimum, carbon pricing should apply to substantively the same sources as British Columbia's carbon tax.
  3. Flexibility between two systems. Provinces and territories will have the flexibility to choose how they implement carbon pricing by (i) an explicit price-based system (as in British Columbia and Alberta), or (ii) a cap-and-trade system (as in Ontario and Québec).
  4. Legislated benchmarks with incremental stringency. For jurisdictions with an explicit price-based system, the initial price will be a minimum $10 per tonne of carbon pollution in 2018 and will rise $10 a year to reach $50 per tonne in 2022.

    a. For Provinces with cap-and-trade the number of available pollution permits will decrease every year, based on both: (i) a 2030 target equal to or greater than Canada's 30 per cent reduction target; and (ii) annual cap cuts through to 2022 that correspond, at a minimum, to the projected emissions reductions resulting from the carbon price set per year in price-based systems.

  5. Revenues. Revenues realized remain in provinces and territories of origin to be used according to their needs, including addressing impacts on vulnerable populations and sectors and supporting climate change and clean growth goals.
  6. Equivalency and application of the federal policy. The Federal Government will introduce an explicit price-based carbon pricing system that will apply in jurisdictions that do not meet the benchmark. The federal system will be consistent with the above principles and will return revenues to the jurisdiction of origin.
  7. Reporting. Provinces and territories are expected to provide regular, transparent and verifiable reports on the outcomes and impacts of carbon pricing policies.
  8. Review. The framework will be reviewed in five years (2022) to ensure that it is effective and to confirm future price increases. The review will account for actions of other countries in response to carbon pricing and permits or credits imported from other countries.

Implications

The Government of Canada's clear message is that an economy-wide carbon pricing is the most efficient way to reduce greenhouse gas emissions. The assumption is that pricing pollution will drive innovative solutions to provide low-carbon choices for consumers and businesses, clean growth and the creation of jobs for the middle class to support the transition to a low-carbon economy. The federal policy is also based on the fact that British Columbia, Alberta, Ontario and Québec, representing over 80 per cent of the Canadian population, have already introduced carbon pricing and the same principles should apply to the remaining 20 per cent.

While a laudable effort on the part of the Federal Government to take on leadership on climate change issues, given the controversies in the context of energy development projects, several potential concerns are flagged as set out below.

It is unclear if or how exemptions will be harmonized. While the principles support a flexible approach that recognizes carbon pricing policies already implemented or in development by provinces and territories, the federal policy proposes pricing that will be applied to a common and broad set of sources (based on British Columbia's carbon pricing system) to minimize interprovincial competitiveness. To the extent that jurisdictions already implementing carbon policies exempt some of the sources, it appears that they may be required to amend their carbon regimes to comply with the federal policies.

For interprovincial competitiveness and levelling the field, provinces may be seeking recognition or some form of credit for previous emission reduction actions. This is particularly so given that they will have to comply with the federal incremental stringent benchmark of $50 per tonne in 2022. The implementation of incremental stringency across board may have different impacts in different provinces as a result of the diverse economies across the country. It is possible that the federal backstop encourage s some provinces not to legislate at all now and encourage s forum shopping by investors in the meantime.

  • It is unclear how the benchmark price was realized, the role of the market in setting the benchmark price, and the mechanism for enforcement where the federal policy applies.
  • There is limited clarity on how two different pricing methods — carbon tax and cap-and-trade — may be consistently measured for compliance purposes. In fact, the efficacy of carbon tax to reduce emissions has been questioned. There is a view that carbon tax would have to be massive in order to change behavior and achieve any significant emissions reductions.
  • It is also unclear how imported carbon products are impacted under the federal rules, such as imported fuel. In a jurisdiction that imports fuel, the impact of carbon pricing might be less than in a province that produces fuel, leading to competitive advantages.
  • In respect of international competitiveness, the federal policy may have negative impacts on emission heavy and trade sensitive industries' ability to be competitive locally and internationally. Small and mid-sized oil and gas producers have indicated that a new federal carbon cost will impact their competitiveness because energy majors can more easily price a carbon tax into the cost of their operations. Also, provinces with larger shares of Canada's international trade industries are disadvantaged over their counterparts in Canada and internationally.
  • Next to be considered is the elephant in the room. There is uncertainty as to how the Federal Government's leadership on climate change will mesh with recent issues facing Canadian pipeline development, energy market access and energy regulators. This is hinted in Alberta Premier's response to the federal carbon pricing. In principle, the Government of Alberta supports a common price that ensures that no one is penalized economically. However, the Government of Alberta will not be supporting the Federal Government's proposal absent serious concurrent progress on energy infrastructure, to ensure that Alberta ha s the economic means to fund these policies. Also, Saskatchewan's Premier, Brad Wall, in his response stated that Saskatchewan, already hurting from a downturn in commodity prices, will be a less competitive place to do business because of its trade-exposed resource industries. The carbon tax will impede Saskatchewan's continuing efforts to export high quality products to global customers. Saskatchewan is investigating all options open to it to mitigate the impact of what the Premier refers to as "one of the largest national tax increases in Canadian history." In British Columbia, which has had a revenue neutral carbon tax (meaning there have been cuts to other personal taxes based on the money collected from the carbon tax) in place since 2008, Premier Christy Clarke has said she will raise the carbon tax from its current level of $30 to meet the federal benchmark when other provinces take action. Premier Clarke, who is looking to grow LNG production in the province, has been clear that B.C. will not raise its tax until other provinces "catch up" to B.C.'s carbon pricing.
  • In addition to matters of policy, the new proposal raises legal issues. The Federal Government indicates that for those provinces that do not have a carbon regime, it will essentially impose one. There will likely be vigorous jurisdictional arguments emerging from the federal carbon policy. Potentially, arguments may be made on indirect taxation of provincially owned resources by the Federal Government and constitutional immunity, such as was argued in Reference re Proposed Federal Tax on exported Natural Gas [1982] 1 S.C.R. 1004. In that case, the question was whether a levy which the Crown in right of Canada sought to impose upon certain natural gas owned, produced, and to be exported by the Crown in right of Alberta, was ultra vires the Parliament of Canada by virtue of section 125 of the Constitution Act, 1867 which states that no lands or property belonging to Canada or any Province shall be liable to Taxation. The Supreme Court of Canada held that if the primary purpose is the raising of revenue for general federal purposes then the legislation falls under s. 91(3) and the immunity in s. 125 is engaged. If, on the other hand, the Federal Government imposes a levy primarily for regulatory purposes, or as necessarily incidental to a broader regulatory scheme, then the levy is not in pith and substance "taxation" and s. 125 does not apply.

The bridge between a Pan-Canadian Framework on Clean Growth and Climate Change and a Canadian Energy Strategy is a fundamental one that must be tackled sooner rather than later to avoid these jurisdictional tussles. The First Ministers will be reviewing progress on the Canadian Energy Strategy which remains at this stage high level statements of areas of potential cooperation. There are a number of critical issues still to be addressed to ensure the effectiveness of the alignment and equivalency of provincial and federal policies, especially as it affects provincial competiveness within and outside Canada.

Borden Ladner Gervais LLP will be monitoring these developments, including the introduction of further legislation, as they occur.

About BLG

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions