Canada: Federal Carbon Tax Ruled Constitutional... For Now

On May 3, 2019, the Saskatchewan Court of Appeal (SKCA) released its lengthy decision in Reference re Greenhouse Gas Pollution Pricing Act, 2019 SKCA 40. This much-anticipated decision represents the first judicial consideration of whether Canada's federal carbon tax regime is constitutionally compliant. The outcome was a 3-2 split decision, with a majority holding for the SKCA that the Greenhouse Gas Pollution Pricing Act, SC 2018, c 12 (the Act) is wholly constitutional.


The Lieutenant Governor in Council for Saskatchewan (Saskatchewan) initiated a reference to the SKCA to determine whether the Act is unconstitutional in whole or in part. Saskatchewan's challenge focused specifically on monetary charges imposed on fossil fuels and emissions under Parts 1 and 2 of the Act.

Part 1 of the Act applies a levy to fuels that are produced, delivered, used, or imported in specified provinces. The charge for 2019 is $20 per tonne of CO2 equivalent emitted by each type of fuel, which will rise to $50 per tonne of CO2 equivalent in 2022. Part 2 of the Act sets output-based performance standards for greenhouse gas emissions by large industrial facilities. Industry-specific standards are established based on average emissions by facilities in the industrial sector for a given product. The provisions of Part 2 require facilities to pay compensation for exceeding their annual greenhouse gas emission limit. Notably, section 165(2) of the Act requires any money raised under Part 1 or Part 2 to be redistributed in the province it was collected in.

The Act as a whole is designed to operate as a stopgap measure. Parts 1 and 2 apply only in those provinces selected by the Governor in Council. The key criteria in the selection of provinces is whether a province has adopted its own sufficiently stringent pricing mechanisms for reducing greenhouse gas emissions. Currently, Part 1 of the Act applies in Ontario, New Brunswick, Manitoba, and Saskatchewan, and to a limited extent in the Yukon and Nunavut. Part 2 applies in Ontario, New Brunswick, Manitoba, Prince Edward Island, the Yukon, and Nunavut, and to a limited extent in Saskatchewan. The Act does not apply to Alberta, given that the federal government has deemed its existing carbon pricing measures to be sufficient.

All participants in the proceedings before the SKCA accepted the importance of limiting greenhouse gas emissions. The only issue to be determined was whether the provisions of the Act could be upheld as a proper exercise of the federal government's law-making power. Saskatchewan advanced two primary arguments that the Act is unconstitutional, both taking issue with the Act's selective application. First, Saskatchewan argued that it would offend the principle of federalism to allow Parliament to apply legislation based on whether existing provincial measures were in place. Second, Saskatchewan argued that the Governor in Council's role in selecting which provinces are subject to the Act enables the executive branch of government to create its own tax.

Majority Decision

The three-member majority decision rejected Saskatchewan's arguments in favour of invalidating the Act. The majority also concluded that the Act was a valid exercise of Parliament's constitutional power to legislate for the peace, order and good government of Canada (POGG).

Addressing whether the Act levied unconstitutional taxes, the majority held that the amounts charged under both Parts 1 and 2 are regulatory charges rather than taxes. The charges are not designed to raise revenue for general purposes, but rather are part of a detailed regulatory scheme with the purpose of changing individual behaviour. On that basis, the majority rejected Saskatchewan's argument that the Act empowered the Governor in Council to impose a tax. Even if the amounts were taxes, the majority held that Parliament's delegation of power to the Governor in Council was sufficiently explicit and therefore constitutional.

Having rejected Saskatchewan's arguments for invalidating the Act, the majority addressed whether Parliament's legislative jurisdiction encompassed the subject matter of the Act. While the Government of Canada and several intervenors offered numerous heads of power under the Constitution to support the Act, the majority concluded that it could only be supported under Parliament's POGG power. The majority held that ensuring minimum national price standards for greenhouse gas emissions is a matter of national concern, falling within the exclusive competence of the federal government.

Dissenting Reasons

In a dissenting judgment, two judges departed from the majority on several key points. While the dissenting judges agreed that the charge imposed under Part 2 of the Act was a regulatory charge, they found that Part 1 of the Act imposes a true tax. The dissenting judges would have struck down Part 1 of the Act as unconstitutional, concluding that the Act's delegation of taxation power to the Governor in Council is overly broad, not sufficiently express, and offensive to the principle that taxation legislation should apply uniformly.

In addition, the dissenting judges would have struck down the whole of the Act as not being justified by any of Parliament's legislative powers. Addressing the POGG power, the dissenting judges concluded that regulation of greenhouse gas emissions is not distinct enough from provincial matters to be considered a national concern. By working together, provinces could enact substantively the same legislation. In the dissenters' view, the extra-provincial impacts of greenhouse gas emissions are not determinative, because the legislation itself does not place a cap on emissions. Furthermore, giving Parliament exclusive power over greenhouse gas emissions would take too much away from provincial legislative jurisdiction. As greenhouse gas emissions arise from a number of activities and are linked to nearly all aspects of a provincial economy, giving Parliament exclusive jurisdiction would prevent provinces from developing local and nuanced responses to greenhouse gas emissions.

Further Challenges Await the Carbon Tax Regime

While the federal carbon tax regime has survived its first legal challenge, there are more to come. The Ontario Court of Appeal heard argument for a similar reference case in April, reserving its decision, and Manitoba's government has indicated that it will bring its own challenge to the Act. There is also a good chance that the Supreme Court of Canada ultimately considers the issue, particularly in light of the SKCA's split decision. Alberta's newest Premier, Jason Kenney, has indicated that Alberta would seek to intervene and support Saskatchewan if the government chooses to appeal. One thing is clear: the SKCA's decision on the federal carbon tax regime will not be the final word.

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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