Federal carbon pricing is here to stay: What does it mean and what comes next?

On March 25, 2021, a 6 to 3 majority of the Supreme Court of Canada upheld the federal Greenhouse Gas Pollution Pricing Act ("GGPPA"), following the joined constitutional challenges of Ontario, Alberta and Saskatchewan. The decision will no doubt become a landmark – not only in constitutional and environmental law, but also in the history of the country's response to climate change.

The Supreme Court recognized federal jurisdiction to establish minimum national standards of greenhouse gas ("GHG") price stringency to reduce GHG emissions.

The authority recognized by the Supreme Court is narrow. The majority rejected approaches that would give the federal government complete control over greenhouse gases, climate change or even setting "national standards" in general.

Nevertheless, the Supreme Court's recognition of the federal government's limited jurisdiction is significant. It signals to the country that climate change is a serious problem requiring intervention at all levels of government. More specifically, it allows the federal government to set the pace and stringency of national carbon pricing, and to compel the Canadian economy as a whole to internalize the costs of carbon emissions.

What is the Greenhouse Gas Pollution Pricing Act?

The GGPPA came into force in 2018, following the Pan-Canadian Framework on Clean Growth and Climate Change. This policy framework was published by the federal government in December 2016 following consultations with provincial Ministers, industry, Indigenous communities and the public. It was adopted by nine provinces, including Ontario, Alberta and Manitoba, and by all three territories. Later, in 2018, Ontario, Alberta and Manitoba withdrew their support.^[1]

The GGPPA has two mechanisms, both of which are designed to put a price on carbon. The first mechanism – the Fuel Charge in Part 1 of the GGPPA – applies a levy on fossil fuel use throughout the supply chain, which varies by type of fuel. The second mechanism – the Output Based Pricing System ("OBPS") in Part 2 – assigns an annual GHG emission limit to large industrial facilities, the stringency of which varies by industry. Facilities that exceed the OBPS limit are charged for the excess, while those that fall below the limit are issued tradeable credits. Facilities in excess can purchase those credits to achieve compliance. Both mechanisms are set to increase in stringency over time.

As discussed by the majority of the Supreme Court Parts 1 and 2 of the GGPPA together create a "single GHG pricing scheme". Essentially, the OBPS in Part 2 "constitutes a complex exemption to Part 1", exempting "covered facilities from the blunt fuel charge under Part 1, creating a more tailored GHG pricing scheme that lowers the effective GHG price such facilities would otherwise have to pay under Part 1".^[2]

One of the defining features of the GGPPA is that it only applies in provinces that do not have an equivalent carbon pricing mechanism in place. This feature (also known as the "federal backstop") is designed to fill in gaps where provincial mechanisms are – according to Canada's appraisal -- insufficiently stringent. Thus, the GGPPA is meant to give the provinces flexibility to implement their own GHG pricing mechanisms, while setting a GHG pricing "floor" across the country.^[3]

The federal backstop currently applies in Saskatchewan, Manitoba, Ontario and Alberta (with only the Fuel Charge applicable in Ontario and Alberta).

For more details on the GGPPA and its function, see prior Gowling WLG articles : Climate change regulatory update and End of cap and trade program in Ontario.

Canada's newly recognized jurisdiction is narrow and specific to GHG pricing standards

While climate change is the backdrop for this case, it is important to note that the Supreme Court's affirmation of the GGPPA does not provide Canada with broad jurisdiction over all things "climate change" related, nor does it give Canada jurisdiction over all of the sources and effects of GHGs. The legislative "matter" recognized here by the Court is far narrower than that, tailored only to the Canada's jurisdiction to establish "minimum national standards of GHG price stringency to reduce GHG emissions".^[4]

Ontario, Saskatchewan and Alberta all challenged the GGPPA on division of powers grounds, arguing that it fell outside of the authority of Parliament, and encroached upon various provincial powers.

When courts consider the constitutional validity of a law within the division of powers, the analysis boils down to two stages:

1. Characterization: what is the true subject matter (or, the "pith and substance") of the challenged law, including its purposes and effects?
2. Classification: where does the "matter" of the law, as characterized, belong within the federal and provincial heads of power set out in the Constitution Act, 1867?

Or, as Justice Huscroft put more succinctly in paragraph 204 of the Ontario Court of Appeal's decision on the GGPPA: "what does it do and where in the constitutional order does it fit?"

In this case, the "matter" of carbon pricing standards did not neatly fit into any of the traditional categories of constitutional authority. Nowhere in the Canadian constitution does the word "environment" appear, let alone "climate change". The court had to decide whether the GGPPA could be characterized and classified to fit validly within federal subjects of jurisdiction.

The argument put forward by the provinces at the "characterization" stage was that the "pith and substance" of the GGPPA was "the regulation of GHG emissions". This broad characterization, they argued, could not be classified as a federal matter because the sources of GHGs fit under several spheres of exclusive provincial jurisdiction: transportation, electrical generation, natural resource extraction, land use planning and other matters of local concern.

The Supreme Court disagreed, characterizing the GGPPA far more narrowly, even more so than any of the majorities in provincial Courts of Appeal that upheld the law. The Supreme Court's decision placed an increased emphasis on "GHG pricing stringency":

[80] For the foregoing reasons, I conclude that the true subject matter of the GGPPA is establishing minimum national standards of GHG price stringency to reduce GHG emissions. With respect, I cannot accept the broader characterizations of the GGPPA advanced by the majorities of the Court of Appeal for Ontario and the Court of Appeal of Alberta. Not only is GHG pricing central to the GGPPA, but Parts 1 and 2 of the statute operate as a backstop by creating a national GHG pricing floor…^[5]

A narrower characterization of the GGPPA favoured a more restrained recognition of federal authority. This was especially important with the GGPPA, since Canada sought to classify it under a less defined head of federal power: to legislate for the "peace, order and good government of Canada" ("POGG").

POGG is a general and residual power, available to the federal government to legislate for matters of "national concern", or in response to a national "emergency". The Supreme Court found that the GGPPA was valid according to the "national concern" doctrine, clarifying their test from the 1988 case of R v Crown Zellerbach Canada Ltd, [1988] 1 S.C.R. 401. The Court did not invoke Canada's emergency power, though some intervenors submitted that they could. In their conclusion on the "national concern" doctrine, the Supreme Court held:

[206] The result of the GGPPA is therefore not to limit the provinces' freedom to legislate, but to partially limit their ability to refrain from legislating pricing mechanisms or to legislate mechanisms that are less stringent than would be needed in order to meet the national targets. Although this restriction may interfere with a province's preferred balance between economic and environmental considerations, it is necessary to consider the interests that would be harmed — owing to irreversible consequences for the environment, for human health and safety and for the economy — if Parliament were unable to constitutionally address the matter at a national level. This irreversible harm would be felt across the country and would be borne disproportionately by vulnerable communities and regions, with profound effects on Indigenous peoples, on the Canadian Arctic and on Canada's coastal regions. In my view, the impact on those interests justifies the limited constitutional impact on provincial jurisdiction.

Multi-level climate governance in Canada

The Supreme Court's decision affirms that climate change is a problem. As the majority stated at the outset of their decision:

"The essential factual backdrop to these appeals is uncontested. Climate change is real. It is caused by greenhouse gas emissions resulting from human activities, and it poses a grave threat to humanity's future. The only way to address the threat of climate change is to reduce greenhouse gas emissions."^[6]

While those facts alone did not make the GGPPA constitutional, the Supreme Court came to the conclusion that, with respect to carbon pricing, Canada is authorized to set the national pace and stringency.

Over the past few years, even while awaiting the fate of the GGPPA in appellate courts, neither federal nor provincial authorities have stood still on climate policy.

The federal government bet heavily on the success of the GGPPA, not only implementing it, but expanding its scope and trajectory. In December 2020, in response to criticism that it was falling short of its Paris Agreement targets, Canada released a policy plan entitled A Healthy Environment and Healthy Economy. As part of the plan, Canada committed to increasing the stringency of the GGPPA carbon price standard from its current rate of $40/tonne up $15/tonne per year to $170/tonne in 2030. The plan also committed to multi-billion dollar investments in decarbonisation technology and infrastructure.

Only a few weeks ago, Canada also posted for public comment its proposed Greenhouse Gas Offset Credit System Regulations, under the authority of the GGPPA. The proposed regulation would supplement the OBPS by allowing regulated entities to acquire tradeable credits by investing in "carbon off-sets" – initiatives that have the effect of reducing GHG emissions such as energy-efficient refrigeration, landfill methane capture, forest management and carbon sequestration in agricultural lands. The proposed regulations are posted online for public comment until May 5, 2021.

Meanwhile, all 10 provinces now have their own climate plan in play, covering subjects of provincial authority like local emissions standards, transportation, electricity generation, building standards and agriculture. Even some of the provinces that argued against the constitutionality of the GGPPA – Alberta, Ontario, and New Brunswick– have had their GHG emissions standards assessed by Canada as being equivalent to the current federal OBPS, resulting in a federal announcements to withdraw Part 1 of the GGPPA from those provinces.

Climate action has also progressed in Indigenous and municipal governments. Around the country, several municipalities and Indigenous governments have declared states of emergency, or made major investments in climate mitigation or adaptation measures.

While there is action at all levels, the now-upheld GGPPA will set the national standard for GHG pricing going forward. As the federal carbon price rises in stringency each year towards $170/per tonne, it remains to be seen whether the provinces will be able to keep pace within their own plans. If they don't, the GGPPA "backstop" will kick in again, even for those provinces that are currently compliant.

Please reach out to any member of our team if you have questions on how to navigate the changing landscape of GHG regulations in Canada.