Focus turns to federal carbon price stringency requirements following Supreme Court decision

The Supreme Court of Canada’s recent majority decision upheld the constitutionality of the federal Greenhouse Gas Pollution Pricing Act (GGPPA). This means that the federal backstop carbon price will continue to apply in jurisdictions without an equivalent regime. Going forward, the practical focus will be on how (rather than “whether”) to ensure ongoing compliance with the GGPPA. A key question will be whether provincial or territorial carbon pricing systems will be considered equivalent to the GGPPA, especially as that equivalency test is revisited over time.

What you need to know

• By a six to three majority, the Supreme Court of Canada upheld the GGPPA as a valid exercise of Parliament’s power to make laws for the “Peace, Order and Good Government” (POGG) of Canada” (read our full analysis on the ruling)¹.
• Part I of the GGPPA imposes a regulatory charge on the distribution of various fossil fuels, and Part II establishes an output-based pricing system (OBPS) for certain industrial GHG emissions that are not subject to the fuel charge. The federal government may stand down the fuel charge and/or OBPS where a jurisdiction has implemented its own carbon pricing regime that meets or exceeds the requirements in Part I and/or II of the Act.
• Currently, Part I of the GGPPA applies in Alberta, Manitoba, Nunavut, Ontario, Saskatchewan and Yukon, and Part II applies in the aforesaid jurisdictions (except Alberta) as well as New Brunswick and Prince Edward Island. Ontario and New Brunswick are expected to transition to their respective industrial emission programs (as alternatives to the OBPS) after the federal government determined last year that both proposed programs meet the GGPPA’s stringency requirements.
• Through ongoing reviews, the federal government will assess all alternative carbon pricing systems to ensure continued compliance with the GGPPA.

Discussion

Highlights of Supreme Court decision

The Supreme Court’s majority decision characterized the GGPPA’s true subject matter as the establishment of minimum national standards for GHG price stringency to reduce GHG emission. In the Court’s view, the statute provides a backstop without requiring the reduction of GHG emissions in any particular way.

With respect to the “national concern” branch of the Parliament’s POGG power, the Court held that climate change caused by GHG emissions is of significant concern to Canada as a whole, poses serious extra-provincial effects that distinguish it from provincial concern, and is an issue that the provinces cannot effectively address jointly or severally due to the risk of carbon leakage. Finally, the Court concluded that since the GGPPA would only apply to the extent necessary to fix a deficiency in provincial regulation, its impact on the provinces would be appropriately qualified and limited.

The majority and minority decisions are further discussed in our recent bulletin².

Equivalency of provincial carbon pricing systems

From a practical perspective, the Supreme Court’s landmark decision has brought some long-awaited clarity for businesses, which have been faced with a whirlwind of climate policy enactments (and in some cases, reversals) across Canadian jurisdictions in recent years. Moreover, for provinces that have developed alternative carbon pricing regimes pending finality in the courts, there is now certainty for the foreseeable future that they must continue to comply with the GGPPA’s minimum standards. In particular, Ontario and New Brunswick will transition to their respective industrial emission programs in lieu of the OBPS.

Ontario’s alternative to the OBPS is its Emissions Performance Standards (EPS) for large emitters. As discussed in our prior bulletin, the EPS program was released in July 2019 but was largely put on hold while Ontario sought to be excluded from the application of the OBPS. In the fall of 2020, the federal Minister of Environment and Climate Change (MECC) determined that the EPS program meets the minimum stringency requirements under the GGPPA. A few days after the Supreme Court upheld the GGPPA, the MECC informed Ontario that January 1, 2022 will be the planned effective date for transition to the EPS. Once that transition is completed, the EPS will apply to the sectors in Ontario that are covered by the federal OBPS based on a mandatory emissions threshold of 50,000 tonnes of carbon dioxide equivalent per year, require each regulated entity to reduce emissions or purchase/use compliance units to cover emissions in excess of its annual limit, and set the price of compliance units in lockstep with the federal backstop price (i.e., $20 for 2020, increasing $10 a year to $50 in 2023).

Similarly, New Brunswick’s carbon pollution pricing system—which is intended to cover the same GHGs as the OBPS and apply the same pricing scale—received the MECC’s acceptance in the fall of 2020. No announcements have been made regarding the planned transition date for New Brunswick. Until the transition occurs, the federal OBPS will continue to apply to industrial emitters in Ontario and New Brunswick (as well as the other jurisdictions that have no equivalent systems in place) including the requirement to file annual reports and associated verification reports for the 2019, 2020 and 2021 compliance periods.

Ongoing stringency reviews and potential future changes

With respect to the list of jurisdictions that are subject to the federal fuel charge or OBPS (see GGPPA, Schedule 1, Part I and Part II, respectively), the Governor in Council may amend such list pursuant to sections 166 or 189 of the GGPPA. Those sections also require the Governor in Council to “take into account, as the primary factor, the stringency of provincial pricing mechanisms”. In this regard, the MECC looks to the minimum requirements for fuel charge and OBPS under the GGPPA and has published benchmark guidance and supplemental guidance to inform the development of equivalent systems.

With respect to pricing systems already accepted by the MECC, they are subject to annual reviews to ensure continued compliance with the GGPPA’s minimum standards. The federal government also monitors major changes made by provinces and territories on an ongoing basis. The fact that a pricing system has received federal acceptance does not guarantee that it will remain compliant in future years. It is worth noting that Ontario and New Brunswick’s alternative proposals have been criticized, including on the basis that they would lead to less emission reductions compared to the federal OBPS and that New Brunswick’s fuel charge (which replaced the federal charge in April 2020) was largely offset by reductions to the province’s existing fuel tax.

Similar criticisms were echoed by the MECC in the letters that granted federal permission to Ontario and New Brunswick’s plans to move away from the OBPS. Minister Wilkinson stated: “we have recognized that technically Ontario and New Brunswick’s systems have met the benchmark, but they produce significantly less in the way of emissions reductions than the federal backstop that is currently in place”. He also noted that the upcoming five-year review of the GGPPA in 2022 will provide an opportunity to close certain perceived gaps in federal stringency rules. As such, and in light of the Supreme Court’s decision, it would not be surprising if in the future the federal government updated the stringency requirements that must be met by equivalent provincial and territorial pricing systems.

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¹ Reference Re: Greenhouse Gas Pollution Pricing Act, 2021 SCC 11, as discussed in a prior Torys bulletin.

² Supra note 1.