Federal Government Releases Carbon Pricing Backstop


On Thursday, May 18, 2017, the Canadian federal government released its long-awaited technical paper and various background documents for a carbon pricing backstop (the "Backstop"). The technical paper and background documents will ultimately result in new Canadian legislation, a departure from prior assumptions that the Backstop would be implemented through the Canadian Environmental Protection Act, 1999. They are open for written comment before June 30, 2017 through carbonpricing-tarificationcarbone@canada.ca.


Various provinces have already exercised their constitutional jurisdiction (which is notionally shared with the federal government)[1] to implement varying carbon pricing systems:



The Backstop is intended to set out an increasing price on carbon pollution for provinces that do not have a carbon pricing system. The Backstop allows provinces to choose whether to implement a direct carbon pricing system (as per BC's tax or Alberta's levy with output-based performance requirements) or an indirect pricing system (as per Québec, Ontario, and multiple international jurisdictions, including the European Union, China, South Korea, California and the Northeastern United States). Each provincial system must:

  • reflect increasing stringency on emissions that is codified in legislation;

  • provide regular, transparent and verifiable reports on outcomes and impacts of their system;

  • for tax-based systems, start with a price of at least $10 per tonne in 2018, increasing $10 per year to $50 per tonne in 2022;

  • for cap and trade-based systems:

  • have a greenhouse gas ("GHG") reduction target that is equal to or more ambitious than Canada's target of 30 per cent reduction from 2005 levels by 2030;

  • have caps that decline to a level estimated to be achieved by the Backstop price through 2022.

The Backstop appears to be structured in a manner that is substantially similar to Alberta's system and includes:

  • The Carbon Levy (to be in effect January 1, 2018): A tax on fossil fuels, including liquid fossil fuels [2], gaseous fuels [3], and solid fossil fuels [4] that will increase annually between 2018 and 2022 (the "Levy"). There are provisions in attempt to prevent double taxing of fuels and certain exemptions for fossil fuel exports that are not used in the jurisdiction through the creation of a registration system for various entities in the fuel supply chain (registered distributors, registered importers, registered users (which may overlap with the OBA allocations, see below), and non-registered persons). Registered entities will be required to file monthly returns in compliance with the Levy. There is limited relief from the Levy for: farming, visiting military or diplomats, small pre-packaged fuel (less than 1L), biofuel portion of blended fuels, international shipping and aviation, fuel used at a facility covered by the OBA, fuel used as a non-emitting feedstock. The mechanism for the exemption (e.g., rebate, certificate) is yet to be determined.

  • The Output-Based Pricing System (to be in effect January 1, 2019): Output-based allocations ("OBAs") to, and trading amongst, industrial facilities emitting above a 50,000 tonne CO2-equivalent ("CO2e") emissions threshold, with the potential for lower-emitting facilities to opt-in. But the OBA will not apply to municipalities, hospitals, universities, commercial buildings, or waste and wastewater regardless of the quantity of emissions. Presumably the bulk of emissions from these exempt entities will be captured through the Levy. The OBA will apply to both combustion emissions and process emissions covering all seven of the United Nations Framework Convention on Climate Change ("UNFCCC") GHGs [5]. Biomass emissions are currently not covered. The OBA emissions limit will be set for each type of a facility at a level that represents best-in-class or top quartile performance on a per unit of output basis. Facilities emitting less than the applicable OBA are eligible for surplus credits in increments of one tonne CO2e. Facilities emitting more than the applicable OBA must account for the excess emissions by paying the applicable carbon levy in that year for each tonne of excess CO2e. emissions, purchasing and submitting surplus credits from facilities that emit less than their OBA, or purchasing and submitting domestic or international units (which currently do not appear to have a quantitative limitation). Penalties (to be determined) will apply for non-compliance. The system will be administered by Environment and Climate Change Canada.

  • Domestic Offsets and International Units: Domestic activities that are not subject to carbon regulation and that can reduce GHG emissions relative to business-as-usual (certain agriculture and farming activities, and forestry initiatives) will have the ability to produce domestic offsets. The Canadian Council of Ministers of the Environment ("CCME") is currently working on an offsets framework. DeMarco Allan LLP has contributed to the related workshop documents and presentations. Similarly, Article 6 of the Paris Agreement under the UNFCCC provides for the use and transfer of internationally transferred mitigation outcomes (international units), with the details now under negotiation. DeMarco Allan LLP is presenting on the legal elements and development of Article 6 at the annual global carbon market event, Innovate4Climate, in Barcelona on May 23, 2017. Both domestic offsets and international units appear to be eligible under the proposed Backstop.

In summary, the Backstop appears to reflect considerable progress and enhanced flexibility in the Canadian approach to carbon pricing, with due regard for the leading provincial carbon pricing jurisdictions.

For further information, please contact Lisa DeMarco at lisa@demarcoallan.com or +1.647.991.1190.

Notes:

[1] See e.g., R v Hydro-Quebec, [1997] 3 SCR 213; R v Crown Zellerbach Canada Ltd., [1988] 1 SCR 401; Friends of the Oldman River Society v. Canada (Minister of Transport), [1992] 1 SCR 3; Friends of the Earth v. Canada (Governor in Council), 2008 FC 1183.

[2] Gasoline (2.33-11.63 cents/L), diesel, heavy and light fuel oil, aviation gasoline, aviation turbo fuel, jet fuel, kerosene, methanol, naphtha, petroleum coke.

[3] Marketable and non-marketable natural gas (1.96-12.93 cents/L), propane, butane, methane, gas liquids, still gas, pentane plus, coke oven gas.

[4] Low and high heat value coal ($17.72-112.58/tonne), coke (coal), waste fuel and tires.

[5] CO2, CH4, N2O, PFCs, HFCs, SF6 and NF3.


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