Government of Canada announces pan-Canadian approach to pricing carbon pollution

On October 3, 2016, the Government of Canada announced its approach to pricing carbon pollution, which provides that all provinces and territories should have carbon pricing in place by 2018 otherwise, the federal government will establish the pricing system¹ in those jurisdictions that have not done so. This means that, starting in 2018, there will be a price for greenhouse gas (GHG) emissions everywhere in Canada.

Carbon pricing is aimed at helping Canada achieve its GHG reduction target, namely 30% below 2005 levels by 2030. That target reflects Canada's commitment at the twenty-first Conference of the Parties (COP21) to the 2015 United Nations Framework Convention on Climate Change. COP21 resulted in the Paris Agreement under which the international community undertook to limit global warming to less than 2°C and to pursue efforts to limit it to 1.5°C. The Parliament of Canada voted on October 5, 2016, to ratify the Paris Agreement. Ultimately, the ratification thresholds for adopting the Paris Agreement were reached, and it will come into force November 4, 2016.

At present, four provinces representing more than 80% of Canada's population have already implemented carbon pricing. Alberta has had a carbon offset system since July 1, 2007, and British Columbia implemented a carbon tax on July 1, 2008. Quebec has had a cap-and-trade system for GHG allowances (also referred to as a carbon market) since January 1, 2013, and its system has been linked to the California market since January 1, 2014. A similar system will be implemented in Ontario on January 1, 2017. In a carbon market, governments establish annual caps on GHG emissions that apply to companies in specific industry sectors. Those companies must obtain emission rights to cover their GHG emission tonnage. Emission ceilings will gradually diminish over the years as an inducement to those companies to reduce their greenhouse gas emissions.

Canada's goal is for all jurisdictions to have carbon pricing in effect by 2018, failing which a federal pricing system will apply. The provinces and territories have two choices: they can opt for a direct tax or a cap-and-trade system. Pricing will apply to a wide array of GHG sources and, at a minimum, to those currently covered by the British Columbia carbon tax.

The Government of Canada's position is that carbon price increases must be predictable and gradual. Therefore, it has established a minimum tax of $10 per tonne in 2018, to rise by $10 per year until 2022, when it will be $50 per tonne. British Columbia's carbon tax was initially $10 per tonne in 2008 and is currently $30 per tonne, whereas in Alberta, each tonne in excess of the reduction target is currently $20 per tonne and in 2017 will be $30 per tonne. In the provinces with cap-and-trade systems, it will be expected to have a 2030 emissions reduction target equal to or greater than Canada's target and declining annual caps to achieve the projected emission reductions in tax-based systems. Quebec and Ontario, which opted for a cap-and-trade system, each set an emissions reduction target that exceeds the one fixed by Canada. At the last Quebec / California joint auction held August 8, 2016, each unit of GHG emission (equal to one metric ton of CO2 equivalent) was sold for $16.45.

All jurisdictions will retain the revenues generated by the imposition of a carbon tax or by a cap-and-trade system and
will decide how they will reinvest those revenues in their respective economies. This means that British Columbia will
be able to continue lowering other taxes such as income tax and corporate tax, and Quebec, Alberta and Ontario will
be able to continue contributing to funds subsequently used for GHG emission measures and adaptation to climate
change.

The Government of Canada has stated that in 2022 it will review the efficiency of its approach and whether carbon
price increases should be maintained. The review will also consider the measures taken by other countries.

The reactions following the Government of Canada's announcement were divided. Those provinces that have
implemented carbon pricing measures greeted the announcement positively; others expressed concerns regarding the
impact the plan would have on their respective economies and the likelihood it would affect the competitiveness of
certain industries compared to those in other jurisdictions — like the U.S. — where GHG emissions are not priced. The
challenge will therefore be to minimize the impact on competitiveness of Canadian companies and prevent carbon
leakage, which occurs when a major GHG emitter relocates to a jurisdiction that has not implemented measures
related to carbon pricing.

Footnote

¹ The Environment and Climate Change Canada press release and information documents are available via the following link:
http://news.gc.ca/web/articleen.
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