(Back)Stopping Climate Change – Overview of the Federal Carbon Tax

February 3, 2019

This guest post was contributed by Denisa Mertiri*

In December 2015, the Canadian federal government adopted the Paris Agreement’s commitment to intensify actions and investments for a sustainable low-carbon future and to limit global average temperature rise to well below 2°C above pre-industrial levels. In 2016, to honour this commitment, the Government of Canada published the Pan-Canadian Approach to Pricing Carbon Pollution outlining the principles underpinning its approach to pricing carbon emissions. This was followed by the Pan-Canadian Framework on Clean Growth and Climate Change (The Pan-Canadian Framework) – Canada’s Plan to Address Climate Change and Grow the Economy.

The Pan-Canadian Framework gave provinces and territories two years to implement a carbon pollution pricing system, failing which (or if provinces and territories requested it) the federal government would step in to introduce, in whole or in part, its own carbon pollution pricing system under the Greenhouse Gas Pollution Pricing Act, adopted on June 21, 2018. The Pan-Canadian Framework referred to this as the “federal backstop”.

The federal backstop has two components: (1) a regulatory charge on fuel, which will apply starting in April 2019; and (2) regulatory system for large industry, known as the Output-Based Pricing System (OBPS), which began to be implemented in January 2019.

On October 23, 2018 the federal government announced that it would apply the “federal backstop” in Ontario, New Brunswick, Manitoba and Saskatchewan starting in April 2019, as these provinces had each failed to implement a sufficiently stringent carbon pricing system in alignment with the benchmark elements of the Pan-Canadian Approach to Pricing Carbon Pollution. The federal backstop will also take effect in all three territories, but not until July 2019. The provinces that implemented their own carbon pricing systems that met the federal benchmark (including British Columbia, Alberta, Quebec, Nova Scotia, Newfoundland and Labrador) will not be regulated under the federal backstop.

The government predicts that the carbon pollution pricing system will cut carbon pollution by 50 to 60 million tonnes in 2022. At the same time, government models indicate that carbon pricing will result in a 0.1% GDP reduction from 2018 to 2022 (GDP growth with carbon pricing is expected to be 1.7% instead of 1.8% without carbon pricing). This does not, however, account for any economic activity that may be stimulated by pricing carbon.

The Fuel Charge (or Carbon Tax)

The federal government’s regulatory charge on fuel will directly affect individual residents in the backstop provinces. As of April 2019, consumers in Ontario, New Brunswick, Manitoba and Saskatchewan will pay the fuel charge that will be added to the cost of fossil fuels consumed and also embedded in the prices of many goods and services. However, the federal government has indicated that approximately 90% of the proceeds from this surcharge will be returned to individuals in these provinces through the Climate Action Incentive (CAI), with the remaining 10% going to small to medium-sized businesses, colleges and universities, schools, hospitals, municipalities, non-profits, and Indigenous communities. Individuals in the backstop provinces will be able to apply for the CAI rebate when they file their annual taxes.

The amount individuals can expect to receive through CAI rebates will depend on factors such as family size, province of residence, and the type of community in which individuals live. Larger families will receive bigger rebates. Small and rural communities will receive a 10% supplement. The more the government collects through the fuel charge in any given province (based on regional differences in energy and fuel consumption and electricity generation) the more it will pay the residents in that province. Charts comparing the average cost impact of the federal system to the average CAI rebate per household in the backstop provinces can be found here.

The federal government estimates that the average family will receive more through the CAI rebate than they will pay in fuel charges at gas stations or on their heating bills. The CAI rebate will also increase annually to reflect yearly increases in the federal carbon price. The federal government plans to ensure revenue neutrality and will use annual audits and reports to confirm that the proceeds are returned to the jurisdiction from which they were collected.

Note that the residents of the territories that requested the federal system, Yukon and Nunavut, will not receive a similar rebate from the federal government. In those territories, the proceeds from the backstop will be returned to the territorial governments to use as they see fit.

The Output-Based Pricing System

The second prong of the federal backstop, the OBPS, commenced on January 1st, 2019. This part of the federal backstop was designed to regulate the emissions associated with large industry using a performance-based carbon pricing system. Large industrial emitters will have to pay a carbon pollution price for emissions that exceed their facility’s limits. They will, however, be exempt from paying the regulatory charge on fuel that individual residents and small businesses will pay. Registration obligations for the large industrial emitters started on November 1, 2018.

The OBPS will operate as a blended carbon tax and emissions trading system. Emitters that achieve an emissions intensity (amount of emissions per unit of output) better than the government’s emissions standard for their sector will receive credits that they can sell. Emitters with an emissions intensity higher than the standard for their sector will have the option of paying a fee per tonne of emissions (the carbon tax) or purchasing credits from industrial facilities that beat their standard. The fee for 2019 is set at $20/tonne, and it will rise by $10 per year to $50/tonne in 2022.

The OBPS will apply in Ontario, Manitoba, New Brunswick, P.E.I., Yukon, Nunavut and partially Saskatchewan. New Brunswick and P.E.I. requested the OBPS, while Saskatchewan will use it to fill gaps in its system by covering the electricity and natural gas transmission pipeline sectors.

The federal government is expected to release regulations for how it will use the proceeds from the OBPS to support future climate actions in early 2019. Industry and stakeholders will continue to be engaged in the development of the OBPS regulatory requirements.

Looking Ahead

The federal government is facing political challenges in applying the backstop. In late November 2018, Ontario filed court materials challenging the carbon tax as an unconstitutional disguised taxation and arguing that provinces, not the federal government, have primary responsibility to regulate GHG emissions. Saskatchewan had already filed a similar lawsuit, and Alberta’s opposition party, in an extraordinary legal manoeuvre, has received intervenor status in that case. On the other hand, B.C.’s provincial government has been granted intervenor status to support the federal government in both the Ontario and Saskatchewan cases. The carbon tax’s implications appear to reach beyond reducing Canada’s GHG emissions and are significantly impacting federal-provincial relations.

*  Denisa Mertiri provides strategic legal advice to clients on environmental, corporate and commercial matters. Denisa’s clients have included corporations, directors and officers in some of Canada’s biggest corporate misrepresentation and corporate fraud cases, and she has also written articles on corporate liability and climate change litigation for various Canadian legal journals. Denisa can be reached at denisa@lawforenvironment.com.