In Reference re Greenhouse Gas Pollution Pricing Act, a 6-3 majority of the Supreme Court of Canada upheld the Greenhouse Gas Pollution Pricing Act (the GGPPA) as constitutional on the basis of Parliament's authority to legislate on matters of national concern under the peace, order and good government (POGG) power under s. 91 of the Constitution Act, 1867.
This landmark ruling signals a new level of certainty on the future of carbon pricing, which affords industries an opportunity to diversify and minimize their risk by investing in clean energy initiatives.
However, while carbon pricing is likely here to stay, we can draw several key conclusions from the decision that leave open the prospect of future legal challenges in select areas.
1. The federal power over GHG emissions is limited to carbon pricing
To protect provincial autonomy, the majority defined the matter of national concern very narrowly to the legislation that was in front of it. In particular, it strictly described the power as: "establishing minimum national standards of GHG price stringency to reduce greenhouse gas emissions."
In other words, the power is not a general authority over GHG emissions, which the majority rejected as too sweeping, but a narrower authority by Parliament to require provinces to implement its chosen means - carbon pricing - to address it.
According to the majority, this narrower authority satisfied the high threshold test for recognizing matters of national concern since its impact on the provinces was limited and "carbon pricing is a critical measure for the reduction of GHG emissions."
As the Federal Government continues to roll out its climate change plan, it is unclear whether it will use the GGPPA to implement other GHG emissions policies beyond carbon pricing in the provinces. If it does, these measures could be subject to future challenge.
As stated by the majority: "Any legislation that related to non-carbon pricing forms of GHG regulation - legislation with respect to roadways, building codes, public transit and home heating, for example - would not fall under the matter of national concern."
2. The GGPPA vests a significant amount of discretion in the federal executive
Carbon pricing is often promoted as relatively simple and straightforward for governments to administer. However, the GGPPA is far from simple and places enormous decision-making powers in the hands of federal administrators.
For example, the GGPPA empowers the federal Cabinet to make decisions about the following:
- Which provinces and territories should be subject to parts 1 and 2 of the GGPPA;
- How policy differences between the federal pricing system and those in listed provinces should be resolved;
- Which emissions intensity standard should apply to which provincial industrial sector/activity; and
- Which provincial industrial sectors/activities should be included in a higher "competitive risk" category, allowing those sectors to operate under lower emissions standards thresholds.
As the stringency of emissions standards continue to rise, this decision-making authority vested in the federal Cabinet will play a large role in determining the future of energy and industrial policy in listed provinces.
The dissenting members of the Court noted a further concern relating to how the GGPPA gives the federal Cabinet the power to make unilateral changes to the legislation itself through regulation. Most notably, s. 168(4) of the GGPPA states that in the event of a conflict between the statute enacted by Parliament and the regulations made by the executive, "the regulation prevails to the extent of the conflict."
In Justice Côté's dissenting opinion, this was enough to make the GGPPA itself unconstitutional. In her view, it gave the federal Cabinet too much power to regulate beyond the narrowly recognized matter of national concern and could be used to circumvent the law-making authority of Parliament.
The majority acknowledged these concerns but was quick to point out that discretion must always be limited by the purpose of the GGPPA and may be challenged through judicial review if it goes too far. To recall, judicial review is a process to ensure that governments and decision-makers act within the boundaries of the authority that has been delegated to them.
Until the scope and range of discretion given to the federal Cabinet is clarified, the exercise of federal supervision over provincial regulations will result in growing uncertainty each time a province or a territory modifies its existing GHG emissions policy or implements a new one. As a result, provincial and territorial governments may be reluctant to adapt or modify their existing plans unless they observe that broadly equivalent programs have survived federal scrutiny in other parts of the country.
The significant discretion left to the federal Cabinet means that provinces or private industry could raise future challenges if the Cabinet makes changes to the GGPPA that exceed the strict purpose of the legislation and the constitutional power that supports it.
3. The Regulations were not before the Court
The Court did not rule on the constitutionality of the regulations under the GGPPA. However, the GGPPA, and in particular part 2, is skeletal in nature and leaves most of the content to be developed in the regulations.
Part 2 of the GGPPA functions by increasing the cost of industrial activities in listed provinces by charging large facilities for producing GHG emissions over prescribed limits based on their particular industry and production processes.
Currently, the regulations under part 2 of the GGPPA do not set a single, economy-wide carbon price. Rather, there are currently 78 separate output-based standards across 38 industrial activities. The most lenient thresholds are set for sectors which the federal cabinet has determined face higher risks to "competitiveness" and "carbon leakage."
The broad authority given to the federal Cabinet to create policy in the regulations may well be challenged in future cases. This is because the regulations must be limited to the matter of national concern in which the GGPPA is grounded. If the regulations stray too far from the strict purpose of the GGPPA or the narrow matter of national concern recognized by the majority, they could be found invalid on division of powers grounds.
For example, due to the wide discretion given to the federal Cabinet and its ability to change the legislation itself through regulations, it is possible that non-carbon pricing policies could be imposed on the provinces. If so, such measures could be subject to challenge on the basis that they go beyond the strict purpose of the GGPPA recognized by the majority.
Another example noted by the dissenting opinions of the Court is the possibility of unequal treatment of provinces and industries for reasons not strictly related to reducing GHG emissions. This was confirmed by Justice Rowe who stated that "[r]regulations that impose different treatment of facilities and industries must be justified in light of federal jurisdiction over this matter, or they will exceed the powers Parliament could validly delegate to the Governor in Council."
To the extent that differing levels of price stringency imposed on select producers and industries in listed provinces are not "critical measures for the reduction of GHG emissions," they may not fall within the scope of federal competence.
The authors were part of the team involved in the hearing and can advise on matters of compliance and other regulatory considerations created by carbon pricing for you and your industry.
MLT Aikins also offers an integrated energy practice team that services a broad array of stakeholders on all aspects of energy projects and transactions.
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.