Canada Releases Discussion Paper on Federal Carbon Pricing

On May 18, the Government of Canada released a technical discussion paper (Discussion Paper) describing how it proposes to implement a backstop carbon price in provinces and territories that do not meet, by 2018, the national benchmark carbon price described in the December 2016 Pan-Canadian Framework on Clean Growth and Climate Change.

What You Need To Know

  • Under the Framework, provinces and territories can meet the national benchmark carbon price by implementing either a price-based system (starting at a minimum of $10 per tonne in 2018 and rising to $50 per tonne by 2022) or a cap-and-trade system (with annual cap adjustments that correspond to the emissions reductions achieved through price-based systems).
  • The Discussion Paper details how the federal government would impose the backstop price in those provinces and territories that do not meet the national benchmark. The backstop would consist of two key elements: a carbon levy applied to the consumption of certain fossil fuels; and an output-based pricing system for industrial facilities that emit above 50 kilotonnes (kt) of carbon dioxide equivalent each year.
  • Interested parties may provide comments on the Discussion Paper until June 30, 2017. Following this comment period, the federal government plans to develop new legislation and regulations to implement the federal backstop.
  • The Province of Saskatchewan, which did not sign the Framework, has objected to the implementation of the federal backstop as currently proposed. The Province says it opposes the Framework in part on the basis that the federal government lacks the constitutional authority to impose the Framework on the provinces.

Highlights of the Discussion Paper

Background on the Federal Carbon Pricing Benchmark

The December 2016 Framework outlines a federal benchmark for carbon pricing that would take effect in 2018. To meet the benchmark, jurisdictions can implement: (i) a price-based system (e.g., British Columbia’s carbon tax or Alberta’s hybrid carbon levy and output-based pricing system); or (ii) a cap-and-trade system (e.g., Ontario and Québec’s programs under the Western Climate Initiative). The benchmark would apply to substantively the same sources as British Columbia’s carbon tax, and will become more stringent over time to support Canada’s 2030 emissions reduction target of 30% below 2005 levels.

For price-based systems, the benchmark carbon price would start at a minimum of $10 per tonne in 2018, rising by $10 per year to $50 per tonne in 2022. In contrast, jurisdictions that adopt cap-and-trade systems are expected to achieve: (i) emissions reductions of at least 30% below 2005 levels by 2030; and (ii) declining annual caps to at least 2022 that correspond, at a minimum, to the projected emissions reductions resulting from the carbon price that year in price-based systems.

Federal Carbon Pricing Backstop

The Discussion Paper confirms the federal government’s plans to impose a carbon price in provinces and territories that do not have a carbon price of their own, or whose carbon price does not meet the national benchmark. The federal backstop would be composed of two key elements: (i) a carbon levy applied to the use of fossil fuels; and (ii) an output-based pricing system for industrial facilities that emit above 50 kt of carbon dioxide equivalent (CO2e), with an option for smaller emitters to opt-in to this system. Those facilities subject to the output-based system would not have their emissions covered by the carbon levy.

Carbon Levy Component

The carbon levy would apply to the use of certain fossil fuels, including liquid fuels (e.g., gasoline, diesel fuel, and aviation fuel), gaseous fuels (e.g., natural gas) and solid fuels (e.g., coal and coke). The rates for each fuel subject to the levy would be set with reference to the national benchmark price of $10 per tonne of CO2e in 2018, rising $10 annually to $50 per tonne in 2022. For example, the Discussion Paper proposes the following levies (assuming a province or territory has no carbon pricing in place):

Fuel

Unit

2018 ($10/tonne)

2019 ($20/tonne)

2020 ($30/tonne)

2021 ($40/tonne)

2022 ($50/tonne)

Gasoline

¢/L

2.33

4.65

6.98

9.30

11.63

Diesel / Light Fuel Oil

¢/L

2.74

5.48

8.21

10.95

13.69

Heavy Fuel Oil

¢/L

3.19

6.37

9.56

12.75

15.93

Marketable Natural Gas

¢/m3

31.96

3.91

5.87

7.83

9.79

Non-marketable Natural Gas

¢/m3

2.59

5.17

7.76

10.34

12.93

With some exceptions, the levy would apply to fuels that are used in provinces or territories where the federal backstop is imposed, regardless of whether those fuels were produced in or brought into the jurisdiction. In most cases, the federal government would impose the levy upstream in the fuel supply chain, typically with the levy payable by the producer or distributor, which may in turn pass on the cost to downstream users.

Output-Based Pricing System

A carbon levy on the combustion of fossil fuels would not cover all greenhouse gas emissions in a given jurisdiction. The federal government also recognizes that, in certain carbon-intensive industries, the imposition of a carbon price may raise competitiveness concerns, especially where those industries have competitors in jurisdictions that do not impose a carbon price. The output-based pricing system is intended to address these concerns..

The output-based system would apply to all industrial facilities that emit 50 kt or more of CO2e per year. Municipal buildings, hospitals, universities, schools and certain commercial and other facilities would be exempt. The system would apply to emissions not only from fuel combustion at covered facilities (which would be exempt from the carbon levy), but also emissions resulting from industrial processes and product use (e.g., solvent use) at covered facilities.

The output-based system would apply to the portion of a covered facility’s emissions that exceed a prescribed limit, which would be based on an emissions-intensity standard developed for the applicable industrial activity or product. Facilities that emit less than the limit would receive "surplus credits" from the federal government that the facility could use against future emissions or trade to another covered emitters. Similar to Alberta’s Specified Gas Emitters Regulation, facilities whose emissions exceed their limit would need to submit compliance units (credits either banked from a previous year or acquired from another facility, or offset credits) or pay the carbon price to account for the difference.

The emissions-intensity standard for a type of industrial activity or product (e.g., tonnes of CO2e per megawatt hour of electricity) would be set at a level that represents best-in-class performance (e.g., top quartile or better). The federal government intends these standards to drive reduced emissions intensity.

Facilities in industrial sectors that emit less than 50 kt of CO2e per year would have the ability to "opt in" to the output-based pricing system. By opting in, smaller emitters could choose to participate in the output-based system rather than pay the carbon levy that would otherwise be applicable to their emissions.

Other Considerations

The governments of Saskatchewan and Manitoba have not signed the Framework. The Saskatchewan government, in particular, has publicly opposed the Framework and indicated that it would be reviewing the province’s legal options to challenge it, including on constitutional grounds. According to Globe and Mail reporting, federal Environment Minister Catherine McKenna has reportedly expressed confidence that the federal government has constitutional authority to implement the carbon pricing backstop. Following the release of the Discussion Paper, however, a spokesperson for Premier Brad Wall suggested that the province would pursue legal action if the Framework were implemented.

For further details on the Discussion Paper, please see the Government of Canada's website. Comments will be accepted until June 30, 2017.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

© 2017 by Torys LLP.
All rights reserved.

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