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Federal Carbon Tax Backstop

Reading Time 3 minute read

Environmental Bulletin

On October 23, 2018, Prime Minister Trudeau announced details of the Canadian government's plan to impose a price on carbon in Provinces and Territories that have not yet imposed their own.

The first phase of the federal plan (referred to by the federal government as "a regulatory charge on fuel") will impose a carbon tax on gasoline, natural gas and other fuels in provinces and territories without an equivalent. The tax will begin in 2019 at $20 for every tonne of CO2 equivalent greenhouse gas emissions expected from the fuel, rising by $10 a year, to $50/tonne by 2022.

To date none of Saskatchewan, Manitoba, Ontario and New Brunswick have passed equivalent legislation. The federal plan is expected to take effect in those Provinces in April 2019. The same is true of the Yukon and Nunavut, where the federal backstop is expected to take effect in July 2019.

The federal carbon tax will apply to fuel distributors in these Provinces and Territories, who are expected to pass on the additional costs to consumers. Consumers will be compensated by the federal government through new "Climate Action Incentive" payments in an attempt to offset the resulting costs. The government estimates that 30% of affected consumers will pay more carbon taxes than they receive in payments, while the opposite will be true of the other 70%. Those paying more are expected to be wealthier Canadians with higher fuel use requirements.

The government also announced targeted relief for certain sectors, including farmers, residents of rural and small communities, greenhouse operators and Indigenous Peoples. For example, the government announced plans to increase Climate Action Incentive payments to residents of small and rural communities by 10% in recognition of their higher energy needs and reduced access to alternative transportation options. For greenhouse operators, the relief is proposed to come by way of certain exemption certificates so that only 20% of fuel delivered to eligible greenhouses is subject to the carbon tax. In other cases, details of how that targeted relief will be made available remain in development.

The second phase of the federal plan will see a regulatory trading system put in place for large industry, known as the federal output-based pricing system (OBPS). Owners and operators of facilities subject to the OBPS will be required to register. Details are to be made available on Environment and Climate Change Canada's website on October 31, 2018, and registration will be available starting November 1, 2018.

The OBPS is structured so that facilities subject to the system will not be required to pay the federal carbon tax on fuels, but instead will be subject to a carbon price imposed on a portion of their greenhouse gas emissions that exceed a prescribed limit. That limit will be based on relevant sector benchmarks and comparables. Facilities that emit less than their annual limit will receive surplus credits which they can then trade. Facilities that emit more than their annual limit may comply by paying an emission charge equivalent to the carbon tax on fuels (i.e. $20 per tonne CO2 equivalent in 2019, increasing to $50/tonne by 2022), by submitting credits purchased from another facility with surplus credits, or submitting offsets. Offsets represent reductions or removals of greenhouse gases achieved from specific project-based sources, where the reductions or removals are beyond those required by applicable law. Details of the OBPS, including further details on compliance options and specific relief that may be available to certainly highly competitive industries, have yet to be released.

Saskatchewan and Ontario have voiced opposition to a federal carbon price, and are expected to proceed with a legal challenge against the plan, arguing it is beyond the jurisdiction of the federal government.


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