Court of Appeal confirms validity of federal carbon price

In a narrow 3-2 ruling, the Saskatchewan Court of Appeal (SKCA) confirmed that the Greenhouse Gas Pollution Pricing Act (Act) is valid federal legislation. The majority’s non-binding ruling confirms that the charges that the Act imposes on greenhouse gas (GHG) emitting fuels and GHG emissions from designated facilities are constitutionally valid. The Government of Saskatchewan has confirmed that it will appeal the question of the Act’s constitutionality to the Supreme Court of Canada.

What you need to know

• Part 1 of the Act implements the Federal Fuel Charge on GHG-producing fuels, while Part 2 establishes output-based performance system (OBPS) for GHG emissions by large industrial facilities.
• These mechanisms, commonly referred to as a “backstop,” apply only in provinces that have not adopted prices on GHG emissions that the Government of Canada considers sufficiently stringent. Currently, those provinces are Saskatchewan, Ontario, New Brunswick and Manitoba.¹
• The majority’s ruling confirms that charges levied under Parts 1 and 2 of the Act are valid regulatory charges, and that setting a minimum price for GHG emissions is a valid exercise of Parliament’s power to make laws for the Peace, Order and Good Governance of Canada (POGG Power).
• The Ontario Court of Appeal has also heard arguments about the Act’s constitutionality but has not yet rendered its decision.

The Act: an overview

The Federal Fuel Charge is a per litre fuel charge on 22 listed GHG-producing fuels, including gasoline, natural gas, petroleum and propane. With some exceptions, the charges apply to the extent listed fuels are produced, delivered or used in a designated province, brought into a listed province from another place in Canada, or imported into Canada at a place in a listed province. The charges are equal to $20 per tonne of carbon dioxide equivalent (CO2e) emitted by each fuel type, rising to $50 per tonne in 2022. The charges do not apply to fuels delivered to industrial facilities subject to the OBPS.

In general, the OBPS applies to industrial facilities in covered sectors with emissions of greater than 50 kt of CO2e/year, and to facilities with emissions between 10 and 50 kt that voluntarily opt into the program. The output-based standards for each industry are still under development, but in general will be set as a percentage of the national average emissions intensity of the facilities in sector. Under the OBPS, a covered facility must provide compensation for the portion of its GHG emissions that exceed its annual limit by (a) submitting surplus credits earned in the past or acquired from other facilities; (b) submitting offset credits; or (c) paying an excess emissions charge.

The parties’ arguments and the SKCA’s analysis

Saskatchewan made three main submissions in support of its argument that the Act is unconstitutional.

First, Saskatchewan argued that the principle of federalism prevents Parliament from enacting a statute that applies only in some provinces because of how those provinces have chosen to exercise their legislative authority. The SKCA rejected this argument. It confirmed that there is no recognized constitutional requirement that laws enacted by Parliament must apply uniformly across the country, and that “federalism is not a free-standing constitutional imperative” that trumps division or powers. As a result, it held that there is “little legal merit in Saskatchewan’s specific concern about Parliament conditioning the application of a federal law on whether a province has chosen to exercise its own jurisdiction” because Parliament either has legislative authority, or it does not.² As the Court explained, “[t]he scope of Parliament’s constitutional authority is not dependent on how or whether a province has exercised its own exclusive jurisdiction.”³

Second, Saskatchewan argued that Federal Fuel Charge and OBPS are taxes, and that as taxes, these charges are invalid because they do not meet the requirement of section 53 of the Constitution Act, 1867, which requires taxes to be established by Parliament rather than the executive branch of government. The SKCA dismissed this argument as well. The primary purpose of a tax, explained the SKCA, is to raise revenues for general purposes. The SKCA found that the purpose of the Federal Fuel Charge and OBPS was not to raise revenues for general purposes. Instead, these charges are regulatory charges connected to a detailed regulatory scheme.⁴

Third, Saskatchewan argued that the Act is invalid because it intrudes into provincial jurisdiction over property and civil rights and matters of a local nature. Canada countered that GHG emissions are a matter of national concern, and that therefore the Act is a valid exercise of Parliament’s POGG Power. The SKCA agreed that the Act is valid exercise of Parliament’s POGG Power, but it disagreed with Canada that “the cumulative dimensions of GHG emissions” are the matter of national concern within the exclusive legislative jurisdiction of Parliament. Accepting Canada’s position, reasoned the SKCA, would permit Parliament to intrude “deeply into areas of historically exclusive provincial authority,” while “provincial legislatures would be significantly denied the authority to deal with GHG emissions.”⁵ Instead, the SKCA accepted a narrower formulation, that “the establishment of minimum national standards of price stringency for GHG emissions” constitutes a valid exercise of Parliament’s POGG Power.⁶

Based on the foregoing, a 3-2 majority of the SKCA affirmed the validity of the Act. In a lengthy dissent, two judges explained that they would have struck down the Act in its entirety. They would have done so for two reasons.

First, they found that the Act creates a tax, and “it is constitutionally repugnant for Parliament to exercise its power to tax in a way that controls constitutional measures taken by a Province to address GHG emissions, over which the Constitution Act, 1867 has declared the Provinces to be supreme.”⁷

Second, they found that the Act did not satisfy the legal test for invoking the national concern branch of the POGG Power because, among other things, the “impact of the Act on Provincial jurisdiction is not reconcilable with the fundamental distribution of legislative powers under the Constitution.”⁸

_________________________

¹ It also applies to provinces and territories that elect into its application: namely, PEI, Yukon and Nunavut.

² Para. 66

³ Para. 67

⁴ Paras. 102-111. Although this finding was sufficient to dismiss Saskatchewan’s argument, the SKCA went on to conclude that even if the Federal Fuel Charge and OBPS do impose taxes, they are valid exercises of Parliament’s taxation powers, including because Parliament gave the executive branch (particularly the Minister of the Environment) clear authority to decide where the Act applies.

⁵ Para. 133

⁶ Para. 163

⁷ Para. 388

⁸ Para. 474

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