Overview
On October 23, 2018, The Right Honourable Justin Trudeau announced the Government of Canada’s intention to ensure that that there is a price on carbon pollution across Canada in 2019 and implement a fuel charge in jurisdictions that do not have systems meeting a federal standard, or in those that voluntarily adopt it. In Toronto, Prime Minister Trudeau announced that Ontario, New Brunswick, Manitoba, and Saskatchewan will be subject to the federal pollution pricing system in 2019.
Prime Minister Trudeau stated:
"The effects of climate change are everywhere, and they are a constant reminder of the need to act now. While climate change is the biggest challenge of this generation, it also provides the opportunity to do better while growing the economy. We are investing in Canadian companies that are on the forefront of clean technologies, and are working with provinces, territories, and municipalities to provide Canadians with more clean energy options. Protecting the environment is a responsibility we all share. That is why we are taking action to promote clean energy and growth in Canada. Together, and only together, we can make a real difference for our planet’s future."
Federal Backstop and Application in Ontario
The Pan-Canadian Framework on Clean Growth and Climate Change requires all Canadian provinces and territories to have carbon pricing in place. Jurisdictions that do not will become subject to the federal government’s Greenhouse Gas Pollution Pricing Act (the Federal Backstop). The Federal Backstop received Royal Assent on June 21, 2018.
On July 3, 2018, the Ontario government revoked the Cap and Trade Regulation (Ontario Regulation 144/16). On July 25, 2018, the province proposed legislation to repeal the Climate Change Mitigation and Low-carbon Economy Act, 2016 and wind down the Ontario cap and trade program through Bill 4: Cap and Trade Cancellation Act, 2018.
The Federal Backstop outlines two mechanisms for pricing carbon and will apply in Ontario as follows:
Part 1: A charge on fossil fuels (e.g., gasoline, diesel, propane, natural gas) paid by registered distributors (fuel producers and distributors) will start applying in April 2019.
Part 2: For larger industrial facilities, an output-based pricing system (OBPS) for emissions-intensive trade-exposed industries will start applying in January 2019. This system will cover facilities emitting 50,000 tonnes of carbon dioxide equivalent per year or more, with the ability for smaller emissions-intensive trade-exposed facilities that emit 10,000 tonnes of carbon dioxide equivalent per year or more to voluntarily opt in to the system over time.
OBPS facilities that exceed the above-noted emissions limit for their industrial sector may cover additional emissions by:
- Paying an emissions charge to the federal government (in an amount set by the federal carbon price: $20 per tonne starting in 2019 and rising by $10 each year to $50 per tonne in 2022);
- Using OBPS surplus credits issued by the federal government;
- Using eligible offset credits; or
- Using a combination of the above compliance options.
A facility can earn OBPS surplus credits if the federal government confirms that its reported emissions for previous year(s) were below the applicable limit. OBPS surplus credits can either be banked for future use or traded to other participants in the OBPS program. OBPS facilities also have the option to use eligible offset credits to cover emissions above the applicable limit. Credits can be generated through voluntary activities and will have to be verified by an accredited third-party verification body.
Use of Proceeds
The federal government has released details about how direct proceeds from the Federal Backstop would be returned to the province or territory of origin. In Ontario, the proceeds will be returned as follows:
Climate Action Incentive payments: Under the proposed approach, most of the proceeds the federal government collects from Ontario through the fuel charge will be returned directly to Ontario’s individuals and families through Climate Action Incentive Payments.
Support for particularly affected sectors: The remainder of fuel-charge proceeds will be used to provide support to the province’s schools, hospitals, small and medium-sized businesses, colleges and universities, municipalities, not-for-profit organizations and Indigenous communities. In Ontario, this is estimated at about $1.45 billion over the next five fiscal years.
Under the proposal, individuals will claim the Climate Action Incentive payment on their tax return. Direct proceeds from industrial facilities under the federal OBPS will support reductions in greenhouse gas emissions in Ontario.
The Department of Finance released a set of draft regulatory proposals under the Federal Backstop, listing jurisdictions in which the fuel charge applies and the rates at which it will apply.
The Department of Finance has also proposed additional fuel charge relief for greenhouse operators and power plant operators that generate electricity for off-grid communities. Canadians are invited to provide comments on this and several additional proposals by November 23, 2018.
Next Steps
The Province of Ontario recently filed a reference with the Ontario Court of Appeal to challenge the constitutionality of the Federal Backstop, joining the Province of Saskatchewan in challenging the federal government's right to impose the Federal Backstop on provinces.
In response to Prime Minister Trudeau’s announcement yesterday, Ontario Premier Doug Ford stated: “Let me be clear, Prime Minister Trudeau does not have the right to ram a carbon tax down the throats of Ontario families and job-creators.”
We will continue monitoring developments in connection with the Federal Backstop and the status of the province’s challenge.
Please feel free to contact the author for more information.