The Liberals hold on - but is carbon pricing out of the woods?

Canada has spoken. A minority Liberal government will return to Parliament following a federal election that put, perhaps more than ever, the spotlight on climate change. The federal Greenhouse Gas Pollution Pricing Act ("GGPPA"), or, as it is more colloquially known, the "carbon tax", will live another term.

But, despite the apparent endorsement from voters and the continued application of the law, its future remains uncertain. Half of Canada's provinces are opposed to federal jurisdiction over greenhouse gases ("GHGs"), and have asserted their own jurisdiction over GHG emissions in two ways. First, many provinces have issued their own climate change plans, some of which bear a striking resemblance to the GGPPA itself, and some of which, if passed into legislation, allow these provinces to exert their own jurisdiction on carbon pricing. Second, four provinces have launched court challenges of the GGPPA, none of which have yet been successful but two of which have been appealed to the Supreme Court of Canada. In March 2020, the Supreme Court will hear arguments about whether the federal government has valid jurisdiction to price carbon.

The head-butting between federal and provincial governments promises a regulatory landscape for GHGs that is, at best, complicated and, at worst, perplexing. Whether or not the Supreme Court upholds federal jurisdiction over carbon pricing, GHG emitters will likely face a patchwork of federal and provincial regulation and policy for years to come.

What's in the federal carbon pricing law?

The GGPPA is divided into two parts. Part 1 levies a Fuel Charge, which applies a tax to producers, distributors and importers of fuels, including gasoline, aviation fuel, natural gas, coal, and combustible waste, among others. The charge (which starts at $10 per ton of carbon dioxide equivalent in 2018) is effectively passed down the chain of supply of the fuel and is ultimately borne by the end-use supplier (and then likely makes its way into consumer prices).[1]

Part 2 is an Output-Based Pricing System ("OBPS"), which applies to large industrial emitting facilities. The OBPS is similar to a cap-and-trade scheme, in that it sets an overall limit on GHG emissions in a given jurisdiction, and sets individual limits for facilities. Those that exceed their limit are charged, and those that remain below are granted tradeable credits. The main difference between the OBPS and cap-and-trade is that under a cap-and-trade system facilities pay for all of their GHG emissions, and not just for the emissions that exceed the prescribed limit, as is the case with the OBPS.

Under the GGPPA, there is also a backstop mechanism – the federal carbon price does not apply in provinces where an adequate carbon pricing regime is in place. When a province proposes a GHG regulation, Environment and Climate Change Canada ("ECCC") assesses the price imposed on carbon emissions. If the provincial plan does not meet minimum standards, the GGPPA applies concurrently, filling in any gaps left behind.

For more detail on the structure and function of the GGPPA, see previous articles by Gowling WLG.

What's in the provincial climate change plans?

Many provinces have published their own plans to regulate GHG, most of which have already been assessed by the federal government. Some have been determined by ECCC to be sufficiently stringent to avoid the implementation of the GGPPA, while others have been deemed not stringent enough. In provinces where the GGPPA applies despite an existing provincial plan, a regime of concurrent federal and provincial regulations and policies appears to be unfolding.

Both BC's carbon tax, and Quebec's cap-and-trade program, were determined by ECCC to have met federal standards, meaning the GGPPA will not apply in either province. Ontario's prior cap and trade program would have met ECCC's standards, but was cancelled by the current Ontario government resulting in application of the GGPPA to Ontario, and giving rise to the Ontario government's challenge of the GGPPA in court.

In all other provinces, the GGPPA has applied since April 2019, even where provinces have proposed their own plans to impose a cost on GHG emissions. Saskatchewan's Made-in-Saskatchewan Climate Change Strategy, for example, includes "Output-Based Performance Standards" which set GHG emission reduction targets. Ontario's recent Emissions Performance Standards Regulations set overall industry-specific limits on GHG emissions and reward compliance with tradeable credits.

At first glance, both the Ontario and Saskatchewan plans bear striking resemblances to the GGPPA. However, both plans may be applied less stringently than the GGPPA, and do not necessarily amount to the same total "price" on carbon as the federal pricing scheme. Though the ECCC continues to review these provinces' plans, it is entirely possible that GHG emitters will be subject to both federal and provincial regulations concurrently.

Constitutional challenges reach the Supreme Court

Four of Canada's provinces -- Ontario, Alberta, Saskatchewan and Manitoba -- have or are challenging the GGPPA in their respective Courts of Appeal. New Brunswick also pushed back on the federal GGPPA, intervening in the cases brought by other provinces (although following the election, the Premier of New Brunswick said he would look into creating a federally-compliant carbon pricing plan).[2] The provinces challenging the constitutionality of the GGPPA argue that the GGPPA asserts overly broad jurisdiction over GHG regulation, encroaching on provincial powers to regulate electricity generation, transportation, land use and property rights.

Canada contends that it has the jurisdiction to set minimum GHG emission standards and control cumulative GHG impacts, which is a limited power that can coexist with provincial GHG regulation. Canada argues that such control over GHGs is necessary to confront the 'national concern' of climate change.

This past spring, the majorities of both the Saskatchewan and Ontario Courts of Appeal ruled in favour of the federal government. Dissenting judgments in both courts have found that the GGPPA was construed too broadly to be "reconcilable with the fundamental distribution of legislative powers" between federal and provincial governments.[3]

Both Ontario and Saskatchewan have appealed to the Supreme Court of Canada. The hearing, currently set for March 2020, will make a final determination on the validity of the GGPPA and issue the final statement on federal jurisdiction over carbon pricing.[4]

Who ultimately has authority over GHGs?

GHG regulation, in some form or another, is here to stay across Canada.

If federal carbon pricing is upheld in 2020, the GGPPA will layer concurrently over an already complex patchwork of emergent provincial regulation and policy. But, even if the GGPPA is struck down, the federal government is likely to retain some role in GHG regulation. For instance, GHGs are designated as a 'toxic substance' under the Canadian Environmental Protection Act[5] , an Act which gives rise to the Renewable Fuels Regulations[6] -- another lesser-known GHG-related law.[7] The Federal government is also developing a Clean Fuel Standard.[8]

It seems safe to say that both federal and provincial governments will have some degree of say in GHG regulations going forward. But critical questions about how authority is allocated, and what form further regulations will take, have yet to be answered.

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