Kevin Landry and William Wojcik

On December 11, 2020, the federal government announced Canada’s strengthened climate plan in a document titled A Healthy Environment and a Healthy Economy (“Plan”). The Plan proposes to increase the carbon price – the regulatory levy per tonne of CO2 equivalent emitted over the permitted amount in a compliance period under the Greenhouse Gas Pollution Pricing Act, (“GGPPA”) – by $15 per year, starting in 2023, rising to $170 per tonne of carbon pollution in 2030. This is a fifty percent yearly increase from previously contemplated carbon price increases. For reference, on inception of the GGPPA, the carbon price started at $20 per tonne in 2019, and was slated to increase by $10 per year to $50 per tonne by 2022.

These planned increases to the carbon price have not yet been put into Schedule 4 of the GGPPA, but can be made by order in Council.

Due to the ‘backstop’ nature of the GGPPA (further explained below), the increased carbon price in the Plan could result in increased carbon prices under provincial legislation analogous to the GGPPA as well.

The GGPPA as a “back stop”

The GGPPA sets a federal minimum carbon price in Canada. The GGPPA only applies to provinces who do not have their own polluting legislation that is at least equally stringent with respect to the carbon pricing set out in the GGPPA and other factors initially set out in the Pan-Canadian Framework on Clean Growth and Climate Change. Provinces whose legislation is not as stringent as the GGPPA, and are therefore subject to  its terms, are listed in Schedule 1 of the GGPPA (“Listed Provinces”).

The schedule of Listed Provinces in the GGPPA can be amended by order of Governor in Council, with the primary factor for addition or removal of a province being the stringency of provincial pricing mechanisms for greenhouse gas emissions. Failure to meet rising federal standards with respect to carbon pricing could result in provinces being added to the schedule of Listed Provinces.

Recap: Canada’s carbon pollution pricing system

The main elements of the carbon pollution pricing system are outlined in Part 1 and Part 2 of the GGPPA:

1. Regulatory charges on fuel established under Part 1 of the GGPPA (“Fuel Charge”)

The Fuel Charge applies to Green House Gas (“GHG”) producing fuels listed in Schedule 2 of the GGPPA that are produced, delivered or used in a Listed Province, brought to a Listed Province from another place in Canada, or imported from abroad into a Listed Province. The charges are largely paid by registered distributors who will typically be fuel producers or wholesale fuel distributors. The Fuel Charge also includes charges for burning combustible waste for heat or energy.

2. The output-based pricing system (“OBPS”) which functions as a carbon credit trading system for large industry

The OBPS applies to “covered facilities” either designated by the Minister or meeting criteria specified in the regulations of the GGPPA that are exempt from the Fuel Charge. If a facility emits less than the emissions limit for a particular compliance period, it will receive credits that it can bank and use for future compliance obligations or sell to other regulated facilities. A covered facility must both report emissions for each compliance period and provide compensation for emitting GHGs in excess of emission limits in a given compliance period. Compensation is payable by three methods: (a) by submitting credits earned by the covered facility or acquired from other covered facilities; (b) by paying an excess emissions charge; or (c) a combination of credits and payments for emissions charges.

Current Listed Provinces

Ontario, New Brunswick, Manitoba, Alberta, Saskatchewan, Yukon and Nunavut are all subject to the Fuel Charge.

Ontario, New Brunswick, Manitoba, Prince Edward Island, Yukon and Nunavut are all subject to the OBPS.

In some provinces, legislation is only sufficient to supersede either the Fuel Charge or the OBPS, but not both. Notable examples are Alberta, which has implemented its own cap and trade system instead of the OBPS, and Saskatchewan, which has implemented its own output-based performance standards system for large industrial facilities.

Pending litigation – stay tuned

The GGPPA took effect in April 2019 with the aim of combating climate change by putting a price on pollution to regulate national GHG emissions. The constitutionality of the legislation has come under scrutiny with some provinces questioning whether the federal government has jurisdictional authority to unilaterally impose its chosen policy to regulate sources of GHG emissions on the provinces.

Three Canadian provinces have challenged the constitutionality of the GGPPA, specifically with respect to the Fuel Charge and the OBPS: Ontario, Saskatchewan, and Alberta. The appellate courts in  Ontario and Saskatchewan decided that the OBPS and Fuel Charge were constitutional, but the Alberta Court of Appeal ruled that the Fuel Charge and OBPS were unconstitutional, which has set the stage for a Supreme Court of Canada ruling on appeals from the three cases that is, as of the date of this article, not yet issued but highly anticipated in 2021.

This update is intended for general information only. If you have questions about the above information, and how it applies to your specific situation, please contact the authors.