The Canadian federal government recently announced that the carbon tax will increase from its current $30 per tonne of greenhouse gas (GHG) emissions to $170 per tonne in 2030 – an increase of 467% over 10 years. This announcement, if made into law, is expected to have a profound effect on many consumers, businesses and industries in Canada.

The federal carbon tax in Canada is set under the federal Greenhouse Gas Pollution Pricing Act (GGPPA). The GGPPA has two main parts:

  • a federal fuel charge (based on the annual carbon price) paid by fuel producers, distributors, and certain prescribed users on 21 types of fuel and combustible waste, and
  • an output-based pricing system (OBPS) requiring large emitters in certain industries that emit 50,000 tonnes of GHG or more per year to meet GHG emissions intensity standards by reducing their emissions, remitting for retirement surplus carbon or offset credits and/or paying a carbon tax on excess emissions. 

For the 2020 compliance year, the carbon tax is set at $30 per tonne of CO2-equivalent.  The carbon tax is currently scheduled to increase by $10 annually until it hits $50 per tonne in 2023. The recent announcement, if implemented into law, will increase the carbon tax by $15 per tonne per year starting in 2023 until the tax hits $170 per tonne in 2030.

Impacts on provincial carbon schemes

The GGPPA is a "back stop," meaning it only applies if a province or territory does not have its own carbon pricing scheme or industrial emissions regulations that meet federal benchmarks. The GGPPA allows the federal government to decide if a province's carbon pricing scheme and industrial emissions regulations are equivalent to the federal carbon tax in the GGPPA.  If a provincial carbon pricing scheme for fuels is deemed equivalent, then the federal carbon tax on fuels does not apply in that province. Similarly, if provincial industrial emissions regulations are deemed equivalent, then the federal OBPS will not apply. Provinces and territories without a carbon pricing scheme for fuels or industrial emissions deemed equivalent are subject to the federal carbon tax on fuels and the OBPS.

The announced increases in the federal carbon tax will require the provinces with carbon taxes on fuels to match the federal increases in 2023 to 2030 or else their carbon taxes may no longer be deemed to be equivalent and the federal tax will apply on fuels produced and distributed in their provinces. Similarly, if a province does not match the federal tax in its emissions regulations, the OBPS may apply.

The federal government has said it will review each province's carbon scheme annually to ensure compliance with the GGPPA.

Impacts on carbon credits

Both emission and offset credits can be used under the GGPPA for compliance purposes. The market prices of emission and offset credits usually track the cost of the tax. The large increases in the federal carbon tax can therefore be expected to result in similarly large increases in the market prices of carbon and offset credits. That may increase the development of renewable energy and emission reduction projects as developers may receive greater revenues from the sale of credits and offsets from their projects. For instance, in Alberta, the value of the offset credits in 2030 to a renewable energy company may be greater than the price they currently receive for the electricity they generate from their operations.

More litigation 

Alberta, Ontario and Saskatchewan brought court cases challenging the constitutionality of the GGPPA. The appellate courts in Ontario and Saskatchewan ruled the GGPPA was constitutional under the "peace, order and good governance" power of the federal government. The Alberta Court of Appeal, on the other hand, found the GGPPA was not within the federal government's constitutional power. All three provincial court challenges have been appealed to the Supreme Court of Canada and were heard together in September 2020. The Supreme Court of Canada has not yet issued a ruling.  

The recently announced 467% increase in the carbon tax under the GGPPA may trigger further constitutional challenges by some of the provinces.

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