Canada: A New Era Of Carbon Pricing In Canada And Another East-West Divide

Last Updated: March 16 2017
Article by Evan W. Dixon and Brittany Scott

Implementation of the Pan-Canadian Framework

2017 marks a new era for the Canadian oil and gas industry with the Liberal Party at the Federal level and the New Democratic Party in Alberta seeking to establish clean energy policies designed to limit greenhouse gas (GHG) emissions and facilitate a transition to a "clean energy" future. On December 9, 2016 the Federal Government, along with most of the premiers, signed a new pan-Canadian framework (Pan-Canadian Framework). The Pan-Canadian Framework is intended to address climate change nationally by implementing a 2030 target of a 30% reduction of GHG emissions below 2005 levels, as promised at the 2015 U.N.-sponsored climate change summit.

The Pan-Canadian Framework was based on a report by the Working Group on Carbon Pricing Mechanisms (Working Group). The Working Group was tasked with providing a report with options on the role of carbon pricing mechanisms in meeting Canada's emissions reduction targets, including different design options taking into consideration existing and planned provincial and territorial systems. The Pan-Canadian Framework adopted the following guiding principles from that report:

  1. carbon pricing should be a central component of the Pan-Canadian Framework;
  2. the approach should be flexible and recognize carbon pricing policies already implemented or in development by provinces and territories;
  3. carbon pricing should be applied to a broad set of emission sources across the economy;
  4. carbon pricing policies should be introduced in a timely manner to minimize investment into assets that could become stranded and maximize cumulative emission reductions;
  5. carbon price increases should occur in a predictable and gradual way to limit economic impacts;
  6. reporting on carbon pricing policies should be consistent, regular, transparent and verifiable;
  7. carbon pricing policies should minimize impacts on competition and carbon leakage, particularly for trade-exposed sectors; and
  8. carbon pricing policies should include revenue recycling to avoid a disproportionate burden on vulnerable groups and Indigenous peoples.
  9. The Pan-Canadian Framework is opposed by Saskatchewan Premier Brad Wall, who dismisses carbon pricing outright. Premier Wall has indicated he cannot commit his province to a system that imposes a tax on carbon emissions, given the important role carbon-based industries play in Saskatchewan and the current challenges facing the oil and gas industry. Manitoba Premier Brian Pallister also refused to sign on, indicating Manitoba would be taking a "wait and see" approach and withholding support until a better deal on federal health care transfers was settled. To date, neither Saskatchewan nor Manitoba has signed onto the Pan-Canadian Framework.
  10. Provincial Carbon Pricing Regimes
  11. As part of advancing the Pan-Canadian Framework, the Federal Government had previously announced on October 3, 2016 that all jurisdictions across Canada must establish a carbon pricing system by 2018. Provinces have the choice to implement either an explicit price-based system or an emissions trading system. For those provinces that choose not to implement their own system or their system does not meet the federal benchmark, the Federal Government has indicated it will impose an explicit price-based carbon pricing system in that jurisdiction. What the federal system will entail is currently unknown. At a minimum, it seems likely that the federal system will be consistent with the principles accepted from the Working Group. In part, this effort is designed to ameliorate concerns that carbon-intensive industries that compete inter-provincially would be advantaged in those jurisdictions without a carbon price, possibly leading to the leakage of certain industry (and associated emissions) to jurisdictions without a carbon price. For provinces subject to the federal system, the federal government has indicated it will return revenues to the jurisdiction of origin and has stated that the overall approach will be reviewed by early 2022 to confirm the path forward, including continued increases in stringency. The review will account for progress and for the actions of other countries in response to carbon pricing, as well as recognition of permits or credits imported from other jurisdictions.
  12. Current Status of Carbon Pricing Across Canada
  13. The Government of Canada's clear message is that it believes an economy-wide carbon pricing mechanism is the most efficient way to reduce GHG emissions. The government also believes 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. Currently, provinces that have implemented a price on carbon have chosen one of two ways largely divided between eastern and western Canada, with the west choosing a carbon tax model and the east generally implementing a cap-and-trade system. The Maritime Provinces are currently divided between carbon pricing and cap-and-trade — Nova Scotia is implementing a cap-and-trade whereas Prince Edward Island will have a carbon tax regime. The territories, generally have not committed to either regime except that the Yukon has indicated that it intends to be governed under the federal government carbon pricing regime. The Federal Government has indicated that it will work with the territories to address their specific challenges.

Cap-and-Trade System

A cap-and-trade system is a market-based approach where an annual limit or cap is set on the amount of GHG emissions allowed to be released into the atmosphere. Cap-and-trade system participants are allocated a declining amount of GHG emissions each year (the "cap"), meaning they must either cut their emissions, purchase allowances or buy offset credits (to a maximum of 8% of exceeding emissions) to make up for the difference. By creating demand and supply for emissions allowances, a cap-and-trade system establishes a market price for GHG emissions. In order to achieve absolute reductions in GHG emissions, the limit or cap is gradually lowered over time. According to the Federal Government, provincial cap-and-trade systems must have a:

  1. 2030 emissions reduction target equal to or greater than Canada's 30% reduction target;
  2. declining and more stringent annual caps to at least 2022 that correspond, at a minimum, to the projected emissions reductions resulting from the carbon price that year in price-based systems.

The eastern provinces, Ontario and Québec, chose linked cap-and-trade systems. Québec's system has been operational since 2012 and Ontario's came into force as of January 1, 2017. Both jurisdictions have imposed GHG emissions reductions targets.1 Ontario's and Québec's cap-and-trade systems are linked to California, under the Western Climate Initiative, which allows them to purchase offset credits outside of their respective jurisdictions. The initial floor price on carbon in Ontario is expected to be set for auctions at between $17.50 and $18 per tonne, though demand could push the price higher. The current floor in Québec is set at $13.56 for the February 22, 2017 auction. Nova Scotia has also stated it will be implementing a cap-and-trade system but will not link it to Ontario or Québec. The full details of Nova Scotia's system are unknown as of February 6, 2017.

Explicit Pricing System

A carbon tax or levy puts a price on each tonne of GHG emissions generated from a broad set of sources. The idea is that over time, the carbon price will elicit a market response from all sectors of the economy, thus resulting in reduced emissions. The design and implementation of carbon taxes varies widely and will depend on the jurisdiction's energy mix, composition of its economy, existing tax burdens, existence of complementary environmental policies and political considerations. For jurisdictions with a price-based system, the carbon price floor is a minimum of $10/tonne in 2018 and must rise by $10/year to $50/tonne in 2022.

The largest western energy producing provinces, Alberta in 2017 and British Columbia in 2008, implemented a carbon price to manage GHG emissions. For 2017, the British Columbia carbon tax is $30/tonne of GHG emissions whereas in Alberta the carbon levy is $20/tonne, increasing to $30 in 2018. Both Alberta and British Columbia's carbon price are revenue-neutral whereby revenues generated are returned to taxpayers by various means. Saskatchewan remains the sole Canadian province with a relevant oil and gas sector that may be subject to the federal policy unless it chooses to implement its own "made in Saskatchewan approach." Prince Edward Island announced its commitment to a carbon tax regime effective January 1, 2018 that will be "fiscally neutral" — the full details of its carbon tax are unknown at the moment.

More Clarification Required

Each nation, including Canada, arguably has a responsibility to address climate change. The Government of Canada's policies are based on the premise that by acting now and acting together, it can assist the Provinces in transitioning to a lower carbon future and assist all Canadians in making this transition. The full impact of these measures will not be known for some time. While perhaps a laudable effort on the part of the Federal Government to take on leadership on climate change issues, the regime still lacks clarity in several key areas. There are a number of critical issues still to be addressed to ensure the alignment and equivalency of provincial and federal policies, especially as it affects provincial competiveness within and outside Canada. Perhaps the greatest question remains is how these policies will fare given the interconnected nature of the North American economy and what appears to be an a divergence on carbon policy under President Trump. Only time will tell and we will all understandably watch for future developments in Canada as these policies are put into place and might be affected given the new political landscape south of the border.


1 In Ontario, the GHG emissions reductions target in 2020 is 154.7 Mt, 15% below 1990 levels, and for 2030 is 114.7 Mt, 37% below 1990 levels. In Québec, the GHG emissions reductions target in 2020 is 71.8 Mt, 20% below 1990 levels, and for 2030 is 56.1 Mt, 37.5% below 1990 levels.

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.

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