Canada: The Federal Greenhouse Gas Pollution Pricing Act And Its Provincial Opposition

Last Updated: October 8 2018
Article by Rizwan Khan​ and Burgandy Dunn

The federal Greenhouse Gas Pollution Pricing Act 1 (GHG Pollution Pricing Act) received Royal Assent on June 21 2018, as Part 5 of The Budget Implementation Act, 2018.2 The GHG Pollution Pricing Act establishes the federal price on greenhouse gas (GHG) emissions applicable, as of January 2019, to any province or territory that requests it, or that has not implemented a compliant carbon pricing regime.

The rationale for the GHG Pollution Pricing Act is set out in its preamble, which describes the purpose of the pricing scheme as a means to incentivizing behavioural change that leads to "increased energy efficiency, to the use of cleaner energy, to the adoption of cleaner technologies and practices and to innovation." All of which are identified as necessary for effective action against climate change. The preamble notes Canada's obligations under international law, as party to the United Nations Framework Convention on Climate Change (1994) and the Paris Agreement (2016) and its commitment to achieve Canada's Nationally Determined Contribution (i.e., to reduce GHG emissions by 30% below 2005 levels by 2030) under the Paris Agreement. The preamble presents the federal pricing scheme as necessary to ensure that GHG emissions pricing "applies broadly in Canada", given that provincial variation, and specifically, lack of stringency, in provincial GHG emission pricing systems contribute to "significant deleterious effects on the environment, including its biological diversity, on human health and safety and on economic prosperity". The Preamble also notes that the GHG emission pricing scheme is a core element of the Pan-Canadian Framework on Clean Growth and Climate Change,3 which was developed in consultation with the provinces, territories and Indigenous peoples to meet the national emissions reduction targets, grow the green economy, and foster climate change resilience.

The federal carbon pricing 'backstop' consists of two main parts: (1) a levy on fossil fuels; and (2) an output-based pricing system (OBPS).

The application framework for the carbon levy includes four categories of persons within the fuel supply chain: Registered Fuel Distributors, Registered Fuel Importers, Registered Fuel Users, and other non-registered persons. The levy will generally be payable when a Registered Fuel Distributor uses fuel in a backstop jurisdiction or delivers fuel to a person in the backstop jurisdiction that is not a Registered Fuel Distributor. The levy will generally apply to fuel when it is imported or brought into the backstop jurisdiction by a Registered Fuel Importer. Generally, non-registered persons will acquire fuel on which the levy has already been paid. Essentially, the federal carbon levy is a charge on fossil fuels used in a backstop jurisdiction, regardless of where they were produced, and is payable by producers or distributors (as opposed to consumers).4

Carbon levy rates will initially be set for the period from 2018 to 2022. Rates for each fuel subject to the levy will be equivalent to $10 per tonne of CO2e in 2018 and increase by $10 per tonne annually to $50 per tonne in 2022. The system will return direct revenues from the carbon price to the jurisdiction of origin. This charge has been referred to as a 'federal tax' on carbon emissions from combusting fuel or waste and is currently being challenged by the Ontario and Saskatchewan government.

The second part of the GHG Pollution Pricing Act provides for a cap-and-trade pricing system, or output-based pricing system (OBPS), applicable to prescribed industrial facilities with annual emissions equal to or greater than 50 kt CO2e. Under the OBPS, industrial facilities will not be subject to the federal carbon levy described above, but to annual GHG emissions limits. Exceeding the emission limit will result in a requirement to either, pay a charge, remit compliance units, or a combination of the two.5 If a facility subject to the OBPS has emissions below the applicable standard, it may be issued surplus credits it can sell or save for use during future compliance periods. The OBPS regime also provides the Governor in Council the authority to make regulations establishing an offset credit system for projects that prevent GHG emissions or that remove GHGs from the atmosphere, and which can be similarly employed to cover excess emissions.6

After reviewing provincial carbon pricing systems for compliance with federal standards, the federal government will implement, on January 1 2019, the federal legislative scheme in any province or territory that does not have a carbon pricing system or where the existing regime fails to meet the federal standard. Jurisdictions, including Alberta, British Columbia, and Québec, which have existing carbon pricing systems that align with the Federal Carbon Pricing Standard will likely remain unaffected.7

The federal legislation builds on the Paris Agreement8, the Vancouver Declaration on Clean Growth and Climate Change,9 and the Pan-Canadian Framework on Clean Growth and Climate Change (Pan-Canadian Framework).10 The Pan-Canadian Framework established a "benchmark" outlining the elements – including provincial/territorial carbon pricing requirements and the federal 'backstop' applicable in provinces and territories that do not establish a system that meets federal requirements.11 The Pan-Canada Framework was signed by all provinces and territories in December 2016 except for Manitoba and Saskatchewan.

Manitoba, on June 29, 2017, responded to the federal carbon tax/levy and selective backstop proposal by requesting a legal opinion on whether the federal government has the constitutional authority to impose a carbon reduction plan on the provinces. The legal opinion, by professor Bryan Schwartz, confirmed that the federal government has the constitutional authority Supreme Court of Canada would probably hold the proposed federal carbon pricing framework – including both the carbon tax/levy and the proposed carbon trading add-on – is sustainable under the Subsection 91(3) taxing power.12 Professor Schwartz did note, however, that it may be possible Manitoba could still challenge a federal carbon tax in court if it had a climate change plan of its own and could demonstrate it was reducing emissions without the federal government's carbon pricing scheme. As a result of the opinion, Manitoba refrained from challenging the proposed GHG Pollution Pricing Act and introduced the Climate and Green Plan Implementation Act that will, if passes, allow the province to begin charging $25 per tonne of CO2e GHG emissions.13

Saskatchewan's opposition to the implementation of carbon pricing has been maintained, and on April 25, 2018 announced it had launched a constitutional reference case in the Saskatchewan Court of Appeal to challenge the federal government's ability to impose a carbon tax on the province. The constitutional question posed was whether the GHG Pollution Pricing Act, if enacted, would be unconstitutional in whole or in part.

Saskatchewan has recently been joined by Ontario in its constitutional challenge to the federal government's authority to impose a carbon tax. As briefly discussed in our post , Ontario Announces its Arguments Challenging the Federal Government's Carbon Tax, Ontario has also submitted its own reference to the Ontario Court of Appeal for determination of whether the federal GHG Pollution Pricing Act, is unconstitutional in whole or in part.

Footnotes

1 Greenhouse Gas Pollution Pricing Act, SC 2018, c 12, s 186, online: http://canlii.ca/t/53920

2 C-74, An Act to implement certain provisions of the budget tabled in Parliament on February 27,2018 and other measures, First Sess, 42nd Parl, (assented to: June 21 2018), SC 2018, c. 12.

3 Government of Canada, Environment and Climate Change Canada, "Pan-Canadian Framework on Clean Growth and Climate Change: Canada's Plan to Address Climate Change and Grow the Economy" (Gatineau, QC, 2016) online: http://publications.gc.ca/collections/collection_2017/eccc/En4-294-2016-eng.pdf

4 Registered Fuel Users that are operators of a facility covered by the output-based pricing system, discussed below, may be able to acquire fuel without the levy being payable, if the fuel is for use at that facility.

5 A compliance unit is a surplus credit issued to a covered facility that emits GHG in a quantity that is below the emissions limit that applies to it during a compliance period. The number of surplus credits issued will be equal to the difference between that limit, expressed in CO2e tonnes, and the number of CO2e tonnes emitted.

6 Beverly Gilbert, C.A., Braek Urquhart and Alan Ross, "Federal Government Announces Greenhouse Gas Pollution Pricing Legislative And Regulatory Proposals" (Jan 18, 2018) Borden Ladner Gervais LLP online: http://blg.com/en/News-And-Publications/Publication_5180; Alan Harvie, "Canada unveils backstop carbon pricing details: the Greenhouse Gas Pollution Pricing Act" (Jan 2018) Norton Rose Fulbright LLP, online: [6] Beverly Gilbert, C.A., Braek Urquhart and Alan Ross, "Federal Government Announces Greenhouse Gas Pollution Pricing Legislative And Regulatory Proposals" (Jan 18, 2018) Borden Ladner Gervais LLP online: http://blg.com/en/News-And-Publications/Publication_5180; Alan Harvie, "Canada unveils backstop carbon pricing details: the Greenhouse Gas Pollution Pricing Act" (Jan 2018) Norton Rose Fulbright LLP, online: http://www.nortonrosefulbright.com/knowledge/publications/162954/canada-unveils-backstop-carbon-pricing-details-the-greenhouse-gas-pollution-pricing-act; Tyson Dyck, Dennis E Mahoney, Michael J Fortier, Henry Ren, "Ottawa Unveils Federal Carbon Pricing Plan" (January 18, 2018) Torys LLP, online: [6] Beverly Gilbert, C.A., Braek Urquhart and Alan Ross, "Federal Government Announces Greenhouse Gas Pollution Pricing Legislative And Regulatory Proposals" (Jan 18, 2018) Borden Ladner Gervais LLP online: http://blg.com/en/News-And-Publications/Publication_5180; Alan Harvie, "Canada unveils backstop carbon pricing details: the Greenhouse Gas Pollution Pricing Act" (Jan 2018) Norton Rose Fulbright LLP, online: http://www.nortonrosefulbright.com/knowledge/publications/162954/canada-unveils-backstop-carbon-pricing-details-the-greenhouse-gas-pollution-pricing-act; Tyson Dyck, Dennis E Mahoney, Michael J Fortier, Henry Ren, "Ottawa Unveils Federal Carbon Pricing Plan" (January 18, 2018) Torys LLP, online: https://www.torys.com/insights/publications/2018/01/ottawa-unveils-federal-carbon-pricing-plan; Kirsten Mikadze, "Federal Government Releases Country-Wide Carbon Pricing Framework" (Feb 8 2018) Siskinds LLP, online: [6] Beverly Gilbert, C.A., Braek Urquhart and Alan Ross, "Federal Government Announces Greenhouse Gas Pollution Pricing Legislative And Regulatory Proposals" (Jan 18, 2018) Borden Ladner Gervais LLP online: http://blg.com/en/News-And-Publications/Publication_5180; Alan Harvie, "Canada unveils backstop carbon pricing details: the Greenhouse Gas Pollution Pricing Act" (Jan 2018) Norton Rose Fulbright LLP, online: http://www.nortonrosefulbright.com/knowledge/publications/162954/canada-unveils-backstop-carbon-pricing-details-the-greenhouse-gas-pollution-pricing-act; Tyson Dyck, Dennis E Mahoney, Michael J Fortier, Henry Ren, "Ottawa Unveils Federal Carbon Pricing Plan" (January 18, 2018) Torys LLP, online: https://www.torys.com/insights/publications/2018/01/ottawa-unveils-federal-carbon-pricing-plan; Kirsten Mikadze, "Federal Government Releases Country-Wide Carbon Pricing Framework" (Feb 8 2018) Siskinds LLP, online: https://www.siskinds.com/envirolaw/federal-government-carbon-pricing/

7 Alan Harvie, "Canada unveils backstop carbon pricing details: the Greenhouse Gas Pollution Pricing Act" (Jan 2018) Norton Rose Fulbright LLP, online: http://www.nortonrosefulbright.com/knowledge/publications/162954/canada-unveils-backstop-carbon-pricing-details-the-greenhouse-gas-pollution-pricing-act; Richard Corley, Sophie Langlois and Catherine Lyons, "Feds Announce Proposed Carbon Pricing System As Part Of Pan-Canadian Clean Growth Plan" (Jan 23, 2018) online: [7] Alan Harvie, "Canada unveils backstop carbon pricing details: the Greenhouse Gas Pollution Pricing Act" (Jan 2018) Norton Rose Fulbright LLP, online: http://www.nortonrosefulbright.com/knowledge/publications/162954/canada-unveils-backstop-carbon-pricing-details-the-greenhouse-gas-pollution-pricing-act; Richard Corley, Sophie Langlois and Catherine Lyons, "Feds Announce Proposed Carbon Pricing System As Part Of Pan-Canadian Clean Growth Plan" (Jan 23, 2018) online: http://www.goodmans.ca/Doc/Feds_Announce_Proposed_Carbon_Pricing_System_as_Part_of_Pan_Canadian_Clean_Growth_Plan

8 UN Doc. FCCC/CP/2015/L/9, Dec. 12, 2015, accessed at https://itk.ca/wp-content/uploads/2016/04/Vancouver_Declaration_clean_Growth_Climate_Change.pdf.

9 Vancouver Declaration on Clean Growth and Climate Change (March 3, 2016), online: http://www.itk.ca/wpcontent/uploads/2016/04/Vancouver_Declaration_clean_Growth_Climate_Change.pdf.

10 Pan-Canadian Framework on Clean Growth and Climate Change (2016), online: http://publications.gc.ca/collections/collection_2017/eccc/En4-294-2016-eng.pdf

11 Ibid. at pg. 50.

12 Bryan P. Schwartz, "Legal Opinion on the Constitutionality of the Federal Carbon Pricing Benchmark & Backstop Proposals" (October 6, 2017), at pg. 7 online: http://manitoba.ca/asset_library/en/climatechange/federal_carbon_pricing_benchmark_backstop_proposals.pdf.

13 https://web2.gov.mb.ca/bills/41-3/b016e.php

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