Climate Change Blog Series: Federal Government releases its Technical Paper on the Carbon Pricing Backstop

Climate Change Blog Series: Federal Government releases its Technical Paper on the Carbon Pricing Backstop

This blog is part of the Environmental Law Centre’s blog series exploring climate change law in Canada. This blog series provides updates on climate change law developments and includes insights from our related law reform research. This blog series is generously funded by the Alberta Law Foundation.

 

 

On May 18, the Federal Government issued its Technical Paper on the Federal Carbon Pricing Backstop (the “Technical Paper”).  The Technical Paper is meant to inform the public about the federal carbon pricing backstop and to obtain feedback on its design (written comments can be submitted at <carbonpricing-tarificationcarbone@canada.ca> on or before June 30, 2017).

The need for a federal carbon pricing backstop arises from the Pan-Canadian Framework on Clean Growth and Climate Change (the “Pan-Canadian Framework”, see here). Among other things, the Pan-Canadian Framework sets a benchmark for pricing carbon emissions throughout Canada by 2018.   The carbon pricing benchmark stipulates:

  1. The introduction of a carbon pricing regime must occur by 2018.
  2. Broad sources of greenhouse gas (GHG) emissions must be priced in all jurisdictions in order to enhance the tool’s effectiveness and to minimize impacts on interprovincial competiveness. This requires that each jurisdiction substantively price the same GHG emission sources as those covered by B.C.’s carbon tax.
  3. Each jurisdiction can choose which carbon pricing tool to implement: (a) an explicit price-based system (i.e. carbon tax, carbon levy or performance-based emissions system) or (b) a cap-and-trade system.
  4. The carbon pricing regime must increase in stringency over time. An explicit price-based system should start pricing GHG emissions at minimum of $10 per tonne in 2018 and rise by $10 per year to $50 per tonne in 2022. For a cap-and-trade regime, the stringency goal is:
  • a 2030 emissions reduction target that is equal to or greater than Canada’s 30% reduction target , and
  • at a minimum, declining annual caps (until at least 2022) that correspond to the projected emissions reductions resulting from the carbon price that year in price-based systems.
  1. The revenue from the carbon pricing tool will remain in the respective jurisdiction.
  2. Jurisdictions that do not meet the benchmark have to comply with an explicit price-based carbon pricing system introduced by the Federal Government.
  3. There will be a 5 year review of the overall Pan-Canadian Framework.
  4. Each jurisdiction should report regularly on the outcomes of its carbon pricing system.

 

The Technical Paper outlines the proposed carbon pricing backstop that will apply to those jurisdictions that either do not introduce carbon pricing or do not meet the benchmark set in the Pan-Canadian Framework.

The carbon pricing backstop consists of two components:

  1. a carbon levy applicable to fossil fuels, and
  2. an output-based pricing system for industrial facilities that emit above certain levels.

 

The carbon levy is take effect in 2018 and the output-based system will not come into effect before January 1, 2019.  In the interim period between when the levy and the output-based pricing system come into effect, the carbon levy will apply fully to fuels used by all industrial facilities.  Once the output-based pricing system comes into effect, industrial facilities that emit 50 kilotonnes or more of CO2e per year will be subject to that system and not the carbon levy.

The Carbon Levy

The carbon levy will apply to fossil fuels including liquid fuels (gasoline, diesel fuel, and aviation fuel), gaseous fuels (natural gas) and solid fuels (coal and coke).  Generally speaking, the carbon levy will apply to fuels that are used in a backstop jurisdiction regardless of whether those fuels were produced or brought into the backstop jurisdiction.  In most cases, the carbon levy will be applied early in the supply chain and will be payable by the producer or distributor.

The carbon levy will be applied to fuels that are combusted, vented or flared.  It will not be applicable to fuels used as a raw material, diluent or solvent in a manufacturing or petrochemical process in a manner that does not produce heat or energy.  In addition, there are situations in which relief from the carbon levy will be provided:

  • fuels used at a facility whose emissions are subject to the output-based pricing system (once it is in effect);
  • gasoline and diesel used by registered farmers;
  • fuels exported or removed from a backstop jurisdiction;
  • fuel used as an international ships’ store (aviation or marine);
  • fuel purchased by visiting military forces or diplomatic representatives;
  • fuel in sealed, pre-packaged containers of 1 litre or less; and
  • the biofuel portion of blended fuels.

 

Initially, the carbon levy rates will be set from 2018 to 2022. For each fuel subject to the carbon levy, the rate will be equivalent to $10 per tonne of CO2e in 2018, increasing annually by $10 per tonne to $50 per tonne in 2022.

Certain persons will be required to register with the Canada Revenue Agency (“CRA”) as a Registered Fuel Distributor, a Registered Fuel Importer or a Registered Fuel User.  Because registrations will be based on a fuel-by-fuel basis, the registration status of a person may differ per type of fossil fuel. Persons that are required to register with the CRA will be able to do so on a provisional basis prior to the carbon levy coming into effect.  Registered persons will be required to file returns with the CRA and remit the total amount of carbon levy payable on a monthly basis.

Output-Based Pricing System

The output-based pricing system will apply to industrial facilities that emit 50 kilotonnes or more of CO2e emissions per year.  Facilities in specifically listed sectors such as buildings (including municipal, hospitals, universities, schools, commercial), and waste and wastewater will not be subject to this pricing system regardless of the quantity of their emissions.   The output-based pricing system applies to emissions from fuel combustion, as well as, emissions of synthetically-produced GHG from industrial processes and product use.

The output-based pricing system used an emissions-intensity standard for various types of activities or products.    The standard will be set at a level that represents best-in-class performance (i.e. the top quartile or better) for that particular activity or product.

Under the output-based pricing system, the carbon pollution price is applied to the portion of an industrial facility’s emissions that exceed those allowed by the emissions-intensity standard for the type of activity.  Facilities that emit less than the limit corresponding to the relevant emissions-intensity standard will receive surplus credits that can be banked for future use or traded to another participant in the system (1 surplus credit = 1 tonne CO2e).  If a facility exceeds its limit, then it will be required to submit compliance units (i.e. surplus credits banked from a previous year or acquired from another facility) or to pay the carbon price specified in the backstop legislation to make up the difference.

The output-based pricing system requires annual compliance reporting.

Next Steps

As previously mentioned, written comments on the design of the federal carbon pricing backstop can be submitted at <carbonpricing-tarificationcarbone@canada.ca> on or before June 30, 2017.

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