Ottawa Unveils Federal Carbon Pricing Plan

On January 15, as part of the Government of Canada's commitment to implement a federal backstop carbon price, the Minister of Environment and Climate Change and the Minister of Finance initiated consultation on (i) a draft legislative proposal for a levy on fossil fuels; and (ii) a regulatory framework for an output-based pricing system for industrial facilities.

What You Need To Know

• As a key element of the Pan-Canadian Framework on Clean Growth and Climate Change,¹ the proposed backstop carbon price is intended to apply in any province or territory that requests it or that does not have a carbon pricing system in place by 2019 that meets the federal benchmark.
• The proposed federal backstop includes two elements:
  • Levy on fossil fuels. The draft legislative proposal sets out the rates of fuel levies for 2018 to 2022, covering a range of liquid fuels (e.g., gasoline, diesel), gaseous fuels (e.g., natural gas, propane) and solid fuels (e.g., coal, coke). Rates are equivalent to $10/tCO₂e in 2018, increasing by $10 annually to $50/tCO₂e by 2022. Generally, the levy will apply to fuels used in a backstop jurisdiction (whether produced in or brought into the jurisdiction), and will be payable by the producer or distributor upstream in the supply chain.
  • Output-based pricing system (OBPS) for industrial facilities. The OBPS is intended to apply to facilities that emit 50 ktCO₂e or more per year and that carry out an activity for which an output-based standard (OBS) is prescribed. From the time the fuel levy starts to apply in a jurisdiction, OBPS facilities in that jurisdiction will be able to purchase fuel levy-free, and will instead have to pay a carbon price ($10/tCO₂e starting in 2018, increasing to $50 by 2022) or procure emission credits for the portion of their emissions that exceed an annual emissions limit.
• Interested parties may provide comments on the draft legislative proposal until February 12, and on the regulatory framework for OBPS until April 9.

Highlights of the Federal Proposal

Levy on Fossil Fuels

The proposed Greenhouse Gas Pollution Pricing Act sets out a tariff of fuel levies for the period from 2018 to 2022 which covers a range of liquid fuels (e.g. gasoline, diesel, aviation fuel, methanol, petroleum coke), gaseous fuels (e.g. natural gas, propane, butane, ethane, gas liquids) and solid fuels (e.g. coal, coke, combustible waste). Rates are set based on global warming potential factors and emission factors, such that they are equivalent to $10/tCO₂e in 2018, increasing by $10 annually to $50/tCO₂e by 2022. The following table provides examples of levy rates:

In most cases, the levy will be imposed on (i) a fuel distributor in respect of fuel it delivers or uses in a jurisdiction, (ii) a person that imports or brings covered fuel into a jurisdiction; and (iii) a producer in respect of fuel it produces in a jurisdiction. In other words, the levy is generally payable by the producer or distributor upstream in the supply chain, who may in turn pass the cost onto end users.

OBPS for Industrial Facilities

The OBPS is intended to apply to facilities that emit 50 ktCO₂e or more per year and that carry out an activity for which an OBS is prescribed. Covered emission sources will include fuel combustion, industrial process, flaring, and some venting and fugitive sources.² According to the framework document, OBS will initially be developed for the following sectors: oil and gas, pulp and paper, chemicals, nitrogen-fertilizers, lime, cement, base metal smelting and refining, potash, iron ore pelletizing, mining, iron and steel, and food processing. Additional sectors will be included over time.

From the time the fuel levy starts to apply, OBPS facilities will be able to purchase fuel levy-free, and will instead have to pay a carbon price (i.e., $10/tCO₂e starting in 2018, increasing to $50 by 2022) in respect of any excess emissions above their annual output-based emissions limit, which will be determined based on the applicable OBS and the facility's annual total production. Alternatively, to cover excess emissions, a facility could also submit surplus credits—issued by the federal government to facilities whose emissions are below their annual limit—or submit eligible offset credits.

Generally, OBS will be established as a percentage (proposed to start at 70%) of the production-weighted national average of emission intensity, and will become more stringent over time. Compliance periods will run on a calendar year basis. Starting with the 2020 compliance year, facilities in a backstop jurisdiction with annual emissions between 10 to 50 ktCO₂e, which carry out an activity for which an OBS has been prescribed, will be able to opt-in to the OBPS.

Many important aspects relating to the OBPS framework remain under consideration, including the treatment of indirect emissions, the design of market and compliance mechanisms, the years to be included when assessing a facility's emissions against the 50 ktCO₂e threshold, the approaches for making OBS more stringent more time (e.g., fixed annual reduction), and the potential application of carbon pricing to offshore oil and gas production and to electricity generation.

Notably, the draft legislative proposal provides that the federal government may distribute the amounts collected (from either OBPS or fuel levies) to a province and/or "prescribed persons." It does not necessarily require the federal government to return carbon pricing revenues to the province of origin, although the federal government has indicated its intention to do so.

Public Consultation and Next Steps

Interested parties may provide comments on the draft legislative proposal until February 12, and on the regulatory framework for OBPS until April 9. The Government of Canada intends to implement the federal backstop in any province or territory that requests it in fall 2018, and starting in January 2019 in any province and territory that does not have a carbon pricing system that meets the federal benchmark.

For further details, please consult the Government of Canada's website.³

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¹ See "Update on Pan-Canadian Climate Change Framework."

² Methane venting and methane fugitive emissions from oil and gas facilities will not be subject to the OBPS.

³ See https://www.canada.ca/en/environment-climate-change/news/2018/01/government_of_canadareleasesfurtherdetailsonfederalcarbon-pollut.html.

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