New Details on Application of Federal Carbon-Pricing Backstop

November 06, 2018

Written By Andrew T.R. Chachula, Sarah E. Gilbert and Thomas W. McInerney

On October 23, 2018, the federal government made further announcements regarding the federal carbon-pricing backstop (the “Backstop”), providing details on where the pricing system will apply and how the revenues for those provinces and territories will be used. The Backstop implemented pursuant to the Greenhouse Gas Pollution Pricing Act, SC 2018, C-12, s 186 (the “Act”) ensures a national carbon-pricing system is in place that applies to greenhouse gas emissions (“GHG”) from a broad set of sources.

Canada signed on to GHG reduction targets as part of the Paris Climate Accord in 2015. The federal Backstop and associated provincial carbon-pricing strategies are part of the federal government’s plan to meet those objectives.

The Federal Carbon Pricing Backstop

The Backstop was first articulated in the 2016 Pan-Canadian Framework on Clean Growth and Climate Change. In October 2016, the federal government published “The Pan-Canadian Approach to Pricing Carbon Pollution”, which set out the carbon-pricing criteria the provinces and territories had to meet. The provinces and territories were able to decide on which carbon pricing system they wanted to put in place by the end of 2018, provided it met the federal benchmark.

The provinces and territories could choose between either an explicit price-based system or a cap-and-trade system. The explicit price-based system allowed the provinces and territories to choose between either a carbon levy or a hybrid carbon levy and output-based pricing system that prices emission exceedances.

The federal Backstop will apply to any jurisdiction that does not meet the federal benchmark—and will supplement or “top-up” a deficient jurisdictional system by either expanding the emissions sources covered or increasing the effective carbon price therein.

The Backstop: Carbon Levy and Output-Based Pricing

The Backstop will consist of two components: (1) a carbon levy applied to fossil fuels (the “Carbon Levy”); and (2) an output-based pricing system (the “Output-Based Pricing System”) for industrial facilities that have reported emissions of 50,000 tonnes of carbon dioxide equivalent (“CO2e”) or more per year during any calendar year between 2014 to 2017 (with the ability for facilities that have reported emissions of at least 10,000 tonnes of CO2e per year, but less than 50,000 tonnes of CO2e per year, for any year starting with 2017, to opt-in to such Output-Based Pricing System).

The Carbon Levy will apply to prescribed liquid, gaseous, and solid fossil fuels at a rate that is equivalent to $10 per tonne of CO2e in 2018, increasing annually, until it reaches $50 per tonne of CO2e by 2022. There will be relief from the Carbon Levy in certain circumstances, including parties whose emissions are already accounted for under an Output-Based Pricing System. For example, participants captured by the Output-Based Pricing System will be able to purchase Carbon Levy free fuel, but will be responsible for paying any GHG emission exceedances, as set out below.

On October 23, 2018, the Department of Finance released a draft set of regulations under the Act that lists the jurisdictions in which the fuel charge will apply and the applicable rates. The draft regulatory proposals are open for public consultation until November 23, 2018.

The Output-Based Pricing System will be imposed on a facility’s CO2e emissions that exceed the allowable emissions limit based on the output-based standard applicable to the product produced by such facility. A participant that emits less than its annual limit will receive “surplus credits” proportional to the difference between its reported emissions and the applicable limit. Participants can either bank surplus credits for a future compliance period or trade them, similar to a cap-and-trade system. A participant that emits more than its annual limit will have options to meet its compliance obligations, including making payments to cover such excess, and/or applying any previously earned or acquired surplus credits, or a combination of the two.

Provinces and Territories Affected by the Backstop

The federal government has confirmed the Backstop will be implemented in the following jurisdictions: Ontario; New Brunswick; Manitoba; Saskatchewan; Yukon; Nunavut; and Prince Edward Island. Currently, Ontario, New Brunswick, Manitoba, and Saskatchewan have no carbon pricing system in place. The Backstop will supplement Prince Edward Island’s proposed provincial carbon tax on fossil fuels. The federal government has agreed to provide certain Backstop relief to Yukon and Nunavut, in recognition of the unique circumstances of their jurisdictions.

The Output-Based Pricing System and Carbon Levy will start applying in January and April 2019, respectively, for Ontario, New Brunswick, Manitoba, and Saskatchewan. The Output-Based Pricing System and Carbon Levy will start applying in July 2019 for Yukon and Nunavut. The Output-Based Pricing System will start applying in Prince Edward Island in January 2019.

The federal Backstop will not apply to British Columbia, Alberta (at least until 2021), Quebec, Nova Scotia, Newfoundland and Labrador, and Northwest Territories, on the basis that these jurisdictions either have in place, or will have in place, an equivalent system. British Columbia, the first Canadian jurisdiction to introduce a carbon tax, recently increased its carbon tax rate to $35 per tonne of CO2e emissions with further planned annual increases of $5 per tonne CO2e until the carbon tax reaches $50 per tonne CO2e emissions in 2021.

As far as Alberta is concerned, the Backstop (which appears very similar to Alberta’s current GHG emission regime) will have no application, at least until 2021. Alberta’s effective price on carbon is currently set at $30 per tonne of CO2e, which satisfies the Backstop pricing requirements at least until the end of 2020. However, absent any further action by the Alberta government, the Backstop will begin to apply as of January 1, 2021. The Province of Alberta has withdrawn their support for the federal Backstop (insofar as it imposes a carbon price in excess of $30 per tonne of CO2e), while impediments to proceeding with the Trans Mountain Pipeline Expansion remain outstanding. It remains to be seen whether Alberta will ultimately align with the federal government, or will resist like Ontario, Saskatchewan and Manitoba.

Backstop Revenues Will be Revenue-Neutral

The federal government has maintained the Backstop is intended to be revenue-neutral to the federal government. The federal government will return direct revenues from the Backstop system to the jurisdiction of origin. The Backstop revenues will be distributed among individuals, families, particularly affected provincial sectors, as well as support reductions in GHG emissions across the province or territory.

Provinces Challenging the Federal Backstop

Currently, Ontario and Saskatchewan have commenced legal actions to challenge the Backstop and the federal government’s jurisdiction to impose a federal carbon price on the provinces and territories.  

Manitoba has not yet joined Saskatchewan and Ontario in their legal actions.  However, it announced in October 2018 that it does not support the application of the Backstop to Manitoba and will no longer proceed with the carbon tax component of its “Made-In-Manitoba Climate and Green Plan”.  The “Made-In-Manitoba Climate and Green Plan” would have imposed a carbon tax on gas, liquid or solid fuel products intended for combustion, at $25 per tonne of CO2e, in addition to establishing an output-based pricing system for energy intensive and trade-exposed industry with emissions over 50,000 tonnes of CO2e per year.

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