On October 23, 2018, the Government of Canada announced the next steps in its climate action plan and reaffirmed its commitment to apply a federal carbon pricing system (the "Federal Backstop") in Ontario, New Brunswick, Manitoba and Saskatchewan in 2019.  In so doing, the federal government has doubled down on imposing carbon pricing across Canada.
What is the Federal Backstop?
The Federal Backstop is the federal carbon pricing system for provinces without a cap and trade program or a tax that meets the minimum mandated federal requirements. The Greenhouse Gas Pollution Pricing Act sets out two mechanisms for pricing carbon under this federal system:
- a charge on fossil fuels for fuel producers, distributors and importers; and
- an output-based pricing system for industrial facilities.
For more detail on these carbon pricing mechanisms, see our October 9, 2018 article: "Ontario's Cap and Trade Program Ends and Federal Backstop Looms: Implications for Ontario Businesses".
Application of the Federal Backstop: A fuel charge is coming to a province near you
Alberta, British Columbia, Newfoundland and Labrador, the Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Quebec and the Yukon have all agreed to either develop their own carbon pricing system or to voluntarily adopt the Federal Backstop. Ontario, New Brunswick, Manitoba and Saskatchewan have not.
In particular, the Ontario government is challenging the constitutional authority of the federal government to impose the Federal Backstop on Ontario by joining Saskatchewan's court challenge  and by bringing its own referenceto the Ontario Court of Appeal. On October 3, 2018, Manitoba also announced it would no longer impose a carbon tax and would focus on other efforts to reduce GHG emissions as set out in the Made-in-Manitoba Climate and Green Plan. New Brunswick had proposed redirecting some its gasoline fuel tax and diesel fuel tax into a fund for climate change projects.  However, the proposal did not meet the federal requirements.
In the latest round of draft regulations amending the Greenhouse Gas Pollution Pricing Act, Ontario, New Brunswick, Manitoba and Saskatchewan are specifically listed and are required to comply with the federal charge on fuel by April 2019.
The draft regulations set out the charges specific to each type of fuel, including gasoline, aviation gasoline, natural gas, coal, and combustible waste, among others. The fuel charge is meant to reflect a carbon pollution price of $20 per tonne of carbon dioxide equivalent in 2019, rising by $10 per tonne every year to reach a total of $50 per tonne in 2022. For example, a carbon price of 4.42 cents per litre will apply to gasoline as of April 2019, and will rise to 11.05 cents per litre by April 2022.
Exceptions to the federal fuel charges for farmers, fishers and residents of rural and remote communities
Despite the application of the federal fuel charge, it is proposed that exemptions apply to certain groups that may be particularly hard hit by increased fuel costs. Farmers will see exemptions for the use of gasoline and light fuel (e.g. diesel) in tractors, trucks and other farming machinery. Fishers will also benefit from exemptions for fuel used exclusively for eligible fishing vessels.
It is also proposed that partial relief from the fuel charge apply to greenhouse operators and power plant operators in remote communities. Remote communities will likely be classified as those that are off-grid in that they are not serviced by an electrical distribution network or natural gas distribution system.
Furthermore, although a fuel charge will generally apply to aviation fuel, it is proposed that no aviation fuel charges apply within the Yukon and Nunavut in recognition of the need for air transportation in the territories. This is in line with the $0 fuel charge on aviation fuel in the Northwest Territories.
Returning the proceeds of the Federal Backstop to the province of origin
The federal government's announcement also clarified what would be done with the funds collected through the Federal Backstop. Direct proceeds collected from the federal fuel charge will go back to the provinces from which the charges were collected in the form of:
- A Climate Action Incentive to be paid to individual households;
- Support for small and medium sized enterprises ("SMEs"); and
- Investments in sectors such as universities and colleges, hospitals, schools, municipalities, non-profit organizations, and Indigenous communities.
The Department of Finance projects that, in 2019-2020, Ontario will receive an estimated $1.585 billion in Climate Action Incentive payments, $105 million in support for SMEs and $50 million to support municipalities, universities, schools, colleges, hospitals, non-profit organizations and indigenous communities; for a total of $1.74 billion in returned proceeds. Annual proceeds are expected to increase each year of the program to rise to $4.19 billion in total estimated returns to Ontario by 2023-2024. Further details on how this program will return funds to their province of origin will be released in early 2019.
Furthermore, the estimates above do not take into account any payments made in respect of the proceeds of the output based pricing system. Since the federal government will only begin receive proceeds from this program in 2020, the federal government has not yet decided how to return these proceeds to the provinces that are subject to the Federal Backstop.
The output-based pricing system: More details to come
The latest round of updates on the Federal Backstop focused on the federal fuel charge, and did not deal as heavily with the output-based pricing system. However, registration for facilities subject to the output-based pricing system are set to open on November 1, 2018. The federal government advises that more details about registration requirements will be available on October 31, 2018.
The federal government shows no signs of backing off on its federal carbon pricing scheme, the Federal Backstop. However, its proposals demonstrate an increasing concern about ensuring that the proceeds from the program do not get buried in general federal revenue and, instead, go back to the province of origin.
Canadians are invited to comment on these latest developments and proposals until November 23, 2018 by contacting email@example.com.
*This article is the latest update in a series of articles on the federal carbon pricing regime. For more details, please see the October 9, 2018 article, "Ontario's Cap and Trade Program Ends and Federal Backstop Looms: Implications for Ontario Businesses".
 Climate Change Act, S.N.B. 2018, c.11, online: http://laws.gnb.ca/en/BrowseTitle?letter=C. Under New Brunswick's Act, in 2018, 2.33 cents of the 15.5 cent gasoline tax would be allocated to the climate change fund, rising to 11.64 cents of the 15.5 cent gasoline tax by 2022. However, no new tax would be levied.