History Lesson - Carbon Pricing in Canada
Canada’s approach to carbon pricing has been shaped by international agreements, political developments, and the uniqueness of Canada’s federal government’s relationship with provinces and territories.
In 1992, countries from around the world met at the Earth Summit in Rio de Janeiro, Brazil, creating the United Nations Framework Convention on Climate Change (UNFCCC), an international treaty with the objective to “stabilize greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system”. The UNFCCC treaty outlines how specific international treaties may be negotiated to specify further action towards its objective.
Five years later, in 1997, the Kyoto Protocol was signed through the UNFCCC by a majority of countries from around the world, including Canada. The Kyoto Protocol, intended to limit the emissions of greenhouse gases internationally, permits emissions trading between countries in order to maintain emissions below a set level – a framework commonly known as cap-and-trade. Liberal Prime Minister Jean Chrétien signed the Kyoto Protocol that year but failed to introduce policies to achieve Canada’s committed emissions reductions. His successor, Liberal Prime Minister Paul Martin, did not make any substantial policy suggestions to address climate change in Canada.
The Conservative Party, under the leadership of Prime Minister Stephen Harper, was elected in 2006. Harper was strongly opposed to the Kyoto Protocol, which required emission reductions to be completed by industrialized countries but not by developing countries (including China).
A federal election was held in 2008, and carbon pricing became a major issue during the election campaign. Then-Liberal leader Stéphane Dion committed to a carbon price as a main component of his environmental platform, but the plan failed to gain traction with Canadians and the Liberal Party was resoundingly defeated by Harper’s Conservative Party. The Conservative Party’s platform included the promise of a cap-and-trade system, as it appeared at the time that the United States would pass a similar plan. The United States ultimately did not pass measures aimed at setting up a cap-and-trade system, and Canada’s efforts stalled in tandem.
Canada formally withdrew from the Kyoto Protocol in 2011. By 2015, the Conservative government was widely criticized for failing to implement any kind of meaningful action on climate change. The election of Justin Trudeau’s Liberal government marked a new chapter for Canada and climate change mitigation efforts.
Up to 2015, Canada’s approach to pricing carbon had been mostly handled by individual provinces.
In 2003, the Government of Alberta passed the Climate Change and Emissions Management Act (CCEMA) into law. The Specified Gas Emitters Regulation (SGER) was then passed in 2007 under the CCEMA, a regulation that required facilities emitting more than 100,000 tonnes of CO2e annually to reduce their emissions by 12% over a 6-year compliance periods relative to their baseline (generally accepted as typical performance years). Industrial emitters that failed to reach that target paid $15 per tonne of CO2e into a Climate Change and Emissions Management Fund (CCEMF). Consequently, in 2007, Alberta became the first jurisdiction in North America to put a price on carbon.
The Government of British Columbia introduced a carbon tax in 2008 through the Carbon Tax Act, setting a price on the purchase and use of fossil fuels.
British Columbia was also the first Canadian province to join the Western Climate Initiative (WCI), which was established in February 2007 by the governors of Arizona, California, New Mexico, Oregon, and Washington to develop a multi-sector, market-based program to reduce greenhouse gas emissions. The WCI became an international partnership when BC joined. In joining WCI, it appeared that BC intended to put a cap-and-trade system into place in alignment with the other members. The Greenhouse Gas Reduction (Cap and Trade) Act was passed in 2008 but was repealed in 2015 when the Greenhouse Gas Industrial Reporting and Control Act (GGIRCA) was passed.
In June 2007, Quebec implemented a carbon tax on energy distributors, producers, and refiners. The tax would affect large industry, natural gas distributors, and electricity distributor Hydro-Québec, who would pay for its thermal energy plant.
In April 2008, Quebec joined the WCI, and in 2012, the province introduced its cap-and-trade system via the Regulation respecting a cap-and-trade system for greenhouse gas emission allowances, covering fossil fuel combustion and industrial emissions in power, buildings, transportation, and industry. Quebec formally linked its cap-and-trade system with California in 2014 and subsequently with Ontario in 2018 until Ontario terminated its own program shortly after.
In 2015, Justin Trudeau and the Liberal Party were elected with a majority mandate. The Liberal Party led its election campaign with a promise to impose carbon pricing. The proposed system would resemble the Canadian healthcare model in which provinces would design systems suitable for their needs with the federal government setting national targets and enforcing principles.
In December 2015, international negotiations were held in Paris through the UNFCCC to develop a new protocol, another legal instrument, or an agreed outcome with legal force. The resulting Paris Agreement was adopted by consensus on December 12, 2015. The goal of the agreement is to limit the global average temperature increase to well below 2°C above pre-industrial levels and to pursue efforts to limit the increase to 1.5°C. Under this new agreement, each country must determine, plan, and regularly report on the contribution that it undertakes to mitigate climate change. In Paris, Canada promised to reduce its greenhouse gases by 30 percent from 2005 levels by 2030.
Three months later, Prime Minister Trudeau and premiers from every province and territory convened in Vancouver, issuing the Vancouver Declaration on Clean Growth and Climate Change. This Declaration is an agreement that a collaborative approach between provincial, territorial, and federal governments is important to reduce GHG emissions and to enable sustainable economic growth. The Vancouver Declaration resulted in the creation of the Pan-Canadian Framework for Clean Growth and Climate Change, a collective plan to grow Canada’s economy while reducing emissions and building resilience to adapt to a changing climate. Carbon pricing was made central to the Framework.
Canada’s Greenhouse Gas Pollution Pricing Act
In October 2016, Prime Minister Justin Trudeau stood in the House of Commons in Ottawa and announced the federal government’s carbon pricing plan. All provinces and territories would be required to have a carbon price in place by January 2018 — either a carbon tax or a cap-and-trade system. The 2018 target date was later revised to 2019. All provinces and territories have the flexibility to create their own solutions to deal with GHG emissions in their own jurisdictions. The Greenhouse Gas Pollution Pricing Act (GGPPA) was formally passed into law by the Parliament of Canada in the fall of 2018, setting a baseline carbon price at $20 per tonne of CO2e in 2019, rising $10 per year to $50 per tonne of CO2e in 2022. The Trudeau-led government was re-elected in fall 2019, reinforcing the idea that carbon pricing may be here to stay.
Canada’s Implementation Approach
There are two general ways in which a carbon price has been applied in Canada:
a pollution price on fuel (also known as a carbon levy);
a pollution price for industry
The industrial price is in some circumstances applied separately from the carbon levy due to the risk of carbon leakage, which is where large industrial emitters seek to potentially move their operations and activities to jurisdictions outside of Canada with no carbon price in order to minimize costs and maintain industry competitiveness. Canada’s industrial carbon price is implemented through an output-based pricing system or OBPS, incentivizing higher industrial output and lower emissions. Any facility in Canada emitting more than 50,000 tonnes of greenhouse gases each year is subject to the system if its provincial system does not meet federal standards.
All direct proceeds from pricing carbon pollution under the federal system are returned to the jurisdiction in which they were collected. For jurisdictions that choose to adopt the federal system, the federal government returns all proceeds directly to the provincial or territorial government.
In provinces that have not committed to pricing carbon pollution, the federal government returns approximately 90% of direct revenues from the federal fuel charge to individuals and families through the federal Climate Action Incentive payment. The remaining proceeds support municipalities, small and medium-sized businesses, schools, hospitals, universities and colleges, not‑for‑profit organizations, and Indigenous communities.
Each province and territory has taken its own unique approach to carbon pricing under the federal framework.
British Columbia charges a province-wide carbon tax aligned with the federal price on fossil fuels through the Carbon Tax Act. The provinces uses tax revenues to invest in clean technology, environmental policies, and direct rebates to households with an income-based tax credit.
Industry pays the provincial carbon tax directly and a portion of the industrial carbon tax revenue is put into incentives for cleaner operations via the CleanBC Program for Industry, enabled through GGIRCA.
Alberta voted in an NDP government in 2015, which unveiled its Climate Leadership Plan, including an economy-wide carbon tax, later that year. The revenue would be used for direct rebates to Albertans, lowering taxes, investment in public transit, and clean energy research. The Climate Leadership Implementation Act was introduced in the Alberta Legislature in May 2016, and a carbon tax was imposed January 1, 2017.
In April 2019, a provincial election was held, and was won by Jason Kenney’s United Conservative Party (UCP). A central plank to Kenney’s campaign had been to rescind the carbon tax. Just a few weeks after his election, Kenney introduced An Act to Repeal the Carbon Tax in the Alberta Legislature. The removal of the provincial carbon tax prompted the federal government to introduce the federal carbon levy on January 1, 2020. The Alberta government challenged the tax in its provincial court, and Alberta’s Appeals Court sided with the province, finding the legislation unconstitutional.
During the tenure of the NDP government, the previous industrial pricing system under SGER was refreshed through the Carbon Competitiveness Incentive Regulation (CCIR). Upon the election of the UCP, CCIR was replaced with the Technology Innovation and Emissions Reduction Regulation (TIER). In December 2019, the federal government approved Alberta’s industrial carbon pricing system. Industrial emitters are thus exempt from the requirements of the federal GGPPA for fuels whose emissions are included in their site reporting.
The federal carbon levy applies in Saskatchewan. In May 2019, the Saskatchewan government lost a court challenge of the tax when the Saskatchewan Court of Appeal sided with the federal government.
The Management and Reduction of Greenhouse Gases Act was partially passed in January 2018 to provide authority for electricity and reporting regulations. An amended Act was passed in full in December 2018, which provides the authorities for an output-based emissions management framework for large industry, including compliance options such as a technology fund. This industrial carbon pricing system partially meets Ottawa’s requirements; the federal industrial system is imposed on electricity generators and pipelines that are not subject to the provincial system.
The federal carbon levy is currently imposed in Manitoba. The province indicated in early 2020 that it is in the process of figuring out a made-in-Manitoba approach. The Manitoba government is currently proceeding with a court challenge to the federal levy.
Manitoba is subject to the federal output-based pricing system for industrial emitters.
The Climate Change Mitigation and Low-Carbon Economy Act was passed by Kathleen Wynne’s Liberal Government in 2016, setting up a cap-and-trade system in Ontario. In 2017, Ontario joined the WCI and shortly after linked its cap-and-trade system with Quebec’s and California’s, creating the second largest harmonized carbon market at the time, trailing behind the European Union’s Emissions Trading System.
In June 2018, Ontario held a general election and the Progressive Conservative government was elected, led by Doug Ford. Ford’s campaign included a focus on removing the existing cap-and-trade system. The Cap and Trade Cancellation Act was passed by the Ontario Legislature in November 2018. Later that month, the Ontario government presented a climate plan which did not include any aspect of carbon pricing.
Consequently, the federal carbon levy was imposed in Ontario in 2019. The Ontario government challenged the tax in its provincial court, and the Ontario Court of Appeal sided with the federal government.
Ontario is subject to the federal output-based pricing system for industrial emitters.
Quebec’s cap-and-trade system meets the requirement of federal carbon pricing. The system applies to large emitters in the province and individuals pay the carbon price embedded in the price of goods.
Ottawa imposed the federal carbon levy on to New Brunswick in April 2019, as the province had refused to impose one of their own. After the re-election of Trudeau’s Liberals in fall 2019, Premier Blaine Higgs reversed course and a provincial carbon tax was introduced in April 2020 through the Climate Change Act, meeting the federal pricing requirement. The provincial carbon tax is used to reduce the province’s gas tax, rendering the carbon tax mostly revenue neutral.
New Brunswick is currently subject to the federal output-based pricing system and has proposed its own industrial system in Transitioning to a Low-Carbon Economy – New Brunswick’s Climate Change Action Plan. The proposed provincial system is under review by federal officials.
Nova Scotia introduced a regulation to create a provincial cap-and-trade system via the Cap-and-Trade Program Regulations in late 2018, meeting the requirement of federal carbon pricing. The system applies to large emitters in the province and individuals pay the carbon price embedded in the price of goods.
Prince Edward Island
Prince Edward Island introduced a provincial carbon levy, meeting federal carbon pricing requirements, through the Climate Leadership Act in November 2019.
The province has chosen to use Ottawa’s output-based pricing system for industrial emitters.
Newfoundland and Labrador
Newfoundland and Labrador introduced a carbon price in January 2019 through the Revenue Administration Act, reducing provincial gas tax by approximately the same amount and meeting federal requirements.
The Management of Greenhouse Gas Act was passed in June 2016, which sets up the provincial framework for an output-based pricing system for large industry. The system has been approved by the federal government.
Yukon has opted to use both the federal carbon levy and the federal output-based pricing system for industrial emitters. It is exempt from paying the levy on aviation gasoline and aviation turbo fuel.
In late 2019, An Act to Amend the Petroleum Products Tax Act was passed into law in the Northwest Territories. This law implements an economy-wide carbon tax, with various rebates and offsets for residents and businesses, including large industry.
Similar to Yukon, Nunavut has opted to use both the federal carbon levy and the federal output-based pricing system for industrial emitters. It is exempt from paying the levy on aviation gasoline and aviation turbo fuel.
While the provincial courts in Ontario and Saskatchewan ruled in favour of the federal government’s arguments supporting a federal framework for carbon pricing, Alberta’s provincial court deemed the federal government’s approach unconstitutional. The fight is set to continue with the Supreme Court of Canada.