The Carbon Tax Reference: A Primer (Part 2)

29 Dec The Carbon Tax Reference: A Primer (Part 2)

The Carbon Tax Reference: A Primer (Part 2)

PART TWO: IS THE ACT CONSTITUTIONAL?

This is the second in a pair of blog posts explaining the carbon tax court cases. The first post, with an introduction to this topic and a general discussion of the constitutional law behind the court cases, can be found here.

Picking up where we left off, in the first post, we concluded that the Supreme Court will need to answer four questions in order to decide if the Greenhouse Gas Pollution Pricing Act[1] is constitutional.

1. What is the subject matter of the Act?
2. Is the subject matter singular or an aggregate?
3. Is the subject matter national or merely provincial? and
4. Does recognizing the matter respect the balance of power between the two levels of government?

This blog post will engage with each of these questions in turn, by going through the arguments raised by the main parties to the carbon tax court cases, and then, by drawing some tentative conclusions about which side has made the stronger arguments. At the end, we will also draw some general conclusions about how the Supreme Court is likely to decide the case, which is to say, whether the Act is constitutional under the national concern branch of POGG.

What is the subject matter of the Act?

The first question we need to answer to decide whether or not the Act is constitutional is: what is the subject matter of the Act?

As we explained in the first blog post, to decide the subject matter of an Act, we look to its pith and substance. This is a legal term that refers to the essential matter of the Act or, in other words, what it is really about.[2] In more colloquial terms, when we talk about the pith and substance of an act, we are trying to summarize its main contents in a single, simple phrase. The Supreme Court has said that you can think of it like the answer you would give to an acquaintance asking the question, “What is this legislation about?”[3]

Practically, to come up with the pith and substance of an act, we look at the legislation itself. Specifically, we consider the purpose or goal of the legislation, as well as its legal effect, which is to say, what it actually does.[4] To do this, we primarily look at the text of the legislation itself, although we can also consider evidence of Parliament’s intention through resources like Hansard.[5]

With that in mind, we can start by taking a brief look at the Act, with a focus on its purpose and what it does. In broad strokes, the Act sets out a carbon-pricing scheme for the purpose of reducing greenhouse gas emissions [“GHGs”]. The main body of the Act is divided into two parts. Part 1 sets a charge on fuels that produce GHGs, such as gasoline and natural gas.[6] This fuel charge applies in provinces that do not have a sufficiently stringent GHG pricing scheme for fuels, as determined by the federal government.[7] Part 2 of the Act establishes emissions limits for large industrial emitters of GHGs and requires emitters who do not meet those limits to pay a charge.[8] Part 2 also includes a trading scheme that allows emitters who surpass their targets to obtain credits for that surplus, which can be used in later years to offset excess emissions or which can be traded to other large emitters.[9] Like Part 1, Part 2 only applies to provinces that do not have a sufficiently stringent GHG pricing scheme for large industrial emitters.[10] The broad goal of the Act, as stated in its preamble, is to mitigate climate change.

Having thus considered the contents of the Act, the next step in determining the pith and substance is to articulate what it is all about. To do this, the main parties to the carbon tax court cases have proposed a number of different characterizations of the Act.

The courts have provided pretty limited guidance on how to distinguish between different possible characterizations of an act. The only clear requirement is that a characterization should be precise rather than vague and general.[11] As well, although the courts do not usually come out and say it directly, a good characterization should accurately represent what the Act is about.

On its face, the weakest characterization of the Act is probably that of Alberta and Ontario—namely, regulating GHGs. Quite simply, it is too vague and general to pass muster. If an acquaintance asked you what the Act was about, it seems clear that you would need to say something about what the Act does to regulate GHGs and, in particular, you would probably need to acknowledge that the Act is about putting a price on GHGs. To understand this, think about the fact that all of the public dialogue about the Act is about the price on carbon. Intuitively, we understand that this is a central feature of the Act and, accordingly, it should be included in a summary of what the Act is about.

From a similar perspective, it also seems clear that a precise characterization of the Act would need to mention that the Act sets minimum requirements or, put otherwise, backstop measures, for the provinces. This is one of the fundamental characteristics of how the Act is structured and how it operates. Moreover, like the pricing element, it has formed an important part of the public dialogue about the Act: we all know that the Act’s carbon pricing regime only applies in provinces without a sufficiently stringent carbon pricing regime of their own. Accordingly, a precise characterization of the Act would probably need to mention that it imposes minimum requirements or, put differently, backstop measures, on the provinces.

Applying these minimum requirements to the other parties’ characterizations, we can see that, even though Alberta and Ontario are the most vague, Saskatchewan and the federal government’s characterizations are also each missing one of the essential elements of the Act.

On the basis of precision alone, British Columbia’s characterization would appear to be the best, because it is the only one that includes both of the essential elements of the Act. However, we should note that British Columbia’s characterization is still not perfect, because there is a potential issue with its accuracy. Specifically, it includes the idea of allocating Canada’s GHG targets, which does not seem to be a big enough part of the Act to be mentioned in its essential characterization.

Along a similar vein, we should also note that Saskatchewan and the federal government both include legally problematic terms in their characterizations.

• Saskatchewan’s characterization that the Act regulates provincial sources of GHGs would seem to beg the question of whether the Act is under federal or provincial jurisdiction by declaring that it regulates provincial matters.
• The federal government’s characterization that the Act sets standards that are integral to reducing GHGs would seem to introduce an inappropriately vague term into the discussion—what does it mean for a standard to be integral to reducing GHGs?

Thus, at the end of the day, we can see that none of the characterizations proposed by the parties is perfect. However, we can conclude that a sufficiently precise characterization of the Act would address its essential elements: the Act sets a carbon pricing scheme and it sets minimum standards for the provinces. As well, an accurate characterization would not include any vague or subjective terms, or any extraneous considerations, such as provincial jurisdiction or international targets.

Taken together, this means that the subject matter of the Act should be something along the lines of: minimum standards for carbon pricing.

Is the subject matter singular?

Once the subject matter of an Act has been determined, the next step in deciding its constitutionality is to ask if it meets the three requirements for a national concern that were set out by the Supreme Court in a case called Crown Zellerbach.[12] The next three sections will deal with each of these three requirements in turn.

As we discussed in the first blog post, the first requirement of the Crown Zellerbach test is that a matter must be single, distinct, and indivisible in a way that distinguishes it from provincial matters.[13] This means that the matter cannot be an aggregate of matters that have been assigned under the Constitution[14] to the provincial or federal governments.

On this point, the provinces who oppose the carbon tax—chiefly, Alberta, Saskatchewan, and Ontario—argue that the regulation of GHGs is, in reality, the regulation of a whole bunch of provincial matters, including natural resources, industry, and the use of personal property, such as vehicles. These provinces view the regulation of GHGs as the regulation of activities that produce GHGs, and the regulation of most of these activities would otherwise fall under provincial jurisdiction. Accordingly, they argue that the regulation of GHG emissions is actually the regulation of an aggregate of provincial matters.

For the other side, the federal government and British Columbia argue that the Act only regulates one aspect of the activities that produce GHGs—specifically, their production of GHGs and, even more specifically, the pricing of GHG production. So, rather than regulating a cluster of provincial activities, the Act actually regulates one specific aspect of those activities, and the provinces may continue to otherwise regulate them.

To make sense of this argument, consider that the Act only touches on GHG pricing and no other aspect of the activities that produce GHGs. Accordingly, it would be inaccurate to say that it regulates these activities in a more general sense or, indeed, in their totality. Instead, the provinces continue to regulate all of the other aspects of these activities. So, for example, with respect to personal vehicles, the provinces continue to regulate stopping at red lights and the other rules of the road—these aspects are unrelated to the pricing of GHGs. Similarly, the provinces continue to regulate natural resource development projects under provincial legislation, regardless of the price on their GHG production.

Everything taken into account, the argument of the federal government and British Columbia is probably the stronger of the two. It is true that the Act affects a great number of activities, but the question at hand is not whether it affects a great number of activities, but whether the subject matter it deals with is singular or an aggregate. In this case, the activities affected by the Act may be many, but the subject matter is singular: it regulates GHG pricing.

To put this into some context, the law has long recognized that a given activity will have different aspects to it, each of which may be regulated by the different levels of government. Recall that impaired driving is regulated by both the federal government under its criminal law power and the provincial government under its power over property and civil rights. Similarly, activities and industries that produce GHGs have a number of different aspects to them, each of which may be regulated as a separate matter by a different level of government. Taking this into account, it is inaccurate to say that the regulation of GHGs is equivalent to the complete regulation of these activities.

Importantly, the Supreme Court came to a similar conclusion in in Crown Zellerbach, where the Court accepted that marine pollution by dumping was a valid national concern under POGG. Marine pollution touches on a number of provincial matters listed in the Constitution, including provincial public lands and any industry involved in the production of marine pollution by dumping.[15] Even so, the Court found that marine pollution by dumping was singular enough to constitute a national concern under POGG, because it only regulates one limited aspect of these activities–namely, marine pollution by dumping.[16] Following the same logic, it makes sense that GHG pricing is singular enough to be considered a national concern, separate from the industries and activities that produce GHGs.

Thus, the parties supporting the constitutionality of the Act put forward the stronger arguments, insofar as the Act deals with a singular subject matter and not an aggregate of matters.

Is the subject matter national?

The second requirement under the Crown Zellerbach test is that the subject matter of the Act must have a national aspect to it that pulls it out of the merely provincial. This means, roughly, that there must be some reason that the subject matter needs to be regulated at the national level and could not be regulated by the individual provinces. According to the courts, to determine if something has this national aspect, one major consideration is the effect on other provinces if one province failed to effectively regulate the matter, which is referred to as the provincial inability test.[17]

In this instance, the provinces who oppose the constitutionality of the Act rely exclusively on the argument that, under the provincial inability test, a matter is only a national concern if all of the provinces working together could not regulate it. In the case of GHG pricing, they argue, the provinces could easily work together to come up with a national carbon pricing scheme and, therefore, there is no provincial inability and no national concern.

Unfortunately, this characterization of the provincial inability test is simply wrong. The actual test asks what would be the effect on other provinces if one province failed to regulate the subject matter, which is a much higher bar than whether the provinces could act together to regulate the matter.

To understand the difference between these two formulations, think of the issue the provincial inability test is meant to identify: the need for a national approach, because the inaction of one province could have negative effects on another province. If the test is whether all of the provinces could regulate a matter if they worked together, then it would not be able to identify the potential for this type of negative effects, because, quite simply, it does not address the possibility that the provinces might not actually work together to regulate the matter.

The underlying problem with this omission becomes clear when considered in the context of aeronautics, which has been recognized as a valid exercise of federal jurisdiction under the national concern branch of POGG.[18] Under the provinces’ formulation of the provincial inability test, there would be no need for a national approach to aeronautics, because all of the provinces could pass legislation identical to the current federal legislation to create, effectively, the same system. However, consider what would happen if one province failed to regulate the subject and, perhaps, failed to participate in the national air traffic control systems.[19] That is why the provincial inability test focuses on the potential consequences of provincial inaction, rather than what happens if all of the provinces work together to regulate a matter.

For their part, British Columbia and the federal government both rely on the correct version of the provincial inability test. Specifically, both argue that if one province did not introduce an adequate carbon pricing scheme, it would undermine the effectiveness of the pricing schemes introduced by the other provinces. This would occur, because of the potential for carbon producing activities to migrate from jurisdictions with pricing schemes to those without in order to avoid the costs imposed by the schemes. Overall, this would undermine the effectiveness of the carbon-pricing schemes because activities that produce GHGs would migrate rather than reduce their GHG production in response to the price pressures imposed by the carbon pricing scheme. As a consequence, the provinces with the pricing schemes would suffer the increased economic costs of those schemes, without the expected environmental benefits.

In addition to arguing the provincial inability test, British Columbia also argues more generally for the need for a national approach to carbon pricing in order to effectively reduce GHGs. In particular, British Columbia cites evidence that in circumstances where a group of individual jurisdictions are each allowed to set their own carbon prices, economic factors will incentivize each jurisdiction to set the prices too low to be effective. Simply put, each jurisdiction carries the cost of its carbon price, whereas the benefit of the pricing scheme is shared by all. This means that each jurisdiction will be motivated to set a low price to reduce its own costs, while still enjoying the benefits of the carbon-pricing efforts of other jurisdictions. Accordingly, a carbon pricing scheme requires coordinated national action to ensure that the price is set at an adequate level to reduce GHGs.

On the surface, the arguments proposed by British Columbia and the federal government may seem a bit weak, because the need for a national carbon pricing scheme seems like something less important than the need to take actions to fight climate change. However, it is important to keep in mind that a matter is not a national concern because of its importance; rather, it is a national concern because it needs to be dealt with at a national level. The best way to understand this is to think of all of the important things that are dealt with by the provinces, such as health care and education—if defining a national concern was about its importance, then these could all become areas of federal jurisdiction.[20] Instead, a national concern is something that needs a coordinated effort from the national government in order to work. From that perspective, carbon pricing appears to be a national concern for the reasons argued by British Columbia and the federal government: there is a need for national coordination or carbon prices will be set too low or too sporadically to be effective.

Thus, the parties supporting the constitutionality of the Act put forward the stronger arguments, insofar as the Act addresses a matter that must be dealt with nationally.

What is the effect on the constitutional balance of power?

Under the third requirement in the Crown Zellerbach test, for a matter to be a valid national concern, it must not undermine the existing balance of power between the provincial and federal governments. This means that the court must assess the extent of the legislative power the federal government would be able to exercise under the proposed POGG power—which, to be clear, would be the same thing as the subject matter of the Act—and ask whether it would concentrate too much power in the hands of the federal government at the expense of the provincial governments. The underlying concern is that the national concern branch of POGG could extend the legislative power of the federal government in a way that diminishes the legislative power of the provincial governments and, in doing so, undermine the existing balance of power between the two levels under the Constitution.

On this point, the provinces who oppose the carbon tax—namely, Alberta, Saskatchewan, and Ontario—argue that the impact of the proposed POGG power on provincial jurisdiction is enormous and that, consequently, it cannot be reconciled with the current balance of power between the provincial and federal governments. Similar to the arguments that were raised under the first requirement of the Crown Zellerbach test, the provinces argue that the proposed POGG power is the regulation of GHGs, which is, in effect, the regulation of all of the activities that produce GHGs, including the many industries that produce GHGs, as well as the everyday activities that produce GHGs, such as driving personal vehicles.

This is a problem, the provinces argue, because most of these industries and activities are normally regulated by the provinces. Accordingly, if the federal government were given the power to regulate these activities, it would take over a large swath of what would otherwise be provincial jurisdiction. Moreover, this would be a problem, because, in regulating GHGs, the federal government would have the ability to make economic policy decisions about the industries that produce GHGs, which would normally be the purview of the provinces.

For the other side, British Columbia and the federal government argue that the impact of the proposed POGG power on provincial jurisdiction is minimal, because if the subject matter of the Act is identified with the requisite degree of precision, then there is a limited potential to impact provincial jurisdiction. Specifically, if all the Act does is set minimum standards for carbon pricing, then allowing the government to legislate over that subject matter would be something much less than allowing the federal government to completely regulate the activities and industries that produce GHGs. Furthermore, as British Columbia points out, because the proposed power deals with minimum standards, it would actually leave ample space for the provincial governments to design their own carbon pricing schemes and, accordingly, make their own economic policy decisions, so long as they meet the minimum stringency requirements set by the federal government.

Putting things into context, British Columbia argues that the impact of the Act on provincial jurisdiction should be considered in relation to the federal government’s other legislative powers. In particular, if the federal government were to pass climate change legislation under one of its other powers under section 91 of the Constitution, then it would almost certainly have a greater impact on areas of provincial jurisdiction than the Act does. The reason for this is that in order to pass legislation under one of these other subject matters, the federal government would probably have to take a more direct approach to regulating GHGs. For example, to enact climate change legislation under the criminal law power, it would probably have to make some form of GHG production criminal. This would be a much more intrusive form of regulation than the current Act’s minimum carbon pricing standards.

Everything taken into account, it would appear that the federal government and British Columbia put forward the stronger arguments about the impact of the proposed POGG power on the balance of power between the federal and provincial governments. Despite the arguments of the provinces, the impact of the Act on provincial jurisdiction appears to be minimal.

While this may not at first appear to be the case, the arguments raised by the provinces significantly overstate the impact of the proposed POGG power on provincial jurisdiction. This happens in two ways. The first is that the provinces rely on the argument that the proposed POGG power is, effectively, the complete regulation of the industries and activities that produce GHGs. This is probably not an accurate way of characterizing the proposed POGG power, because, as British Columbia and the federal government point out, what the Act actually does is set minimum carbon pricing standards. It does not regulate any other aspects of the activities and industries that produce GHGS, except to put a minimum price on the GHGs they produce. Accordingly, allowing the federal government to regulate carbon pricing would not be the same thing as allowing the federal government to completely regulate the activities and industries that produce GHGs. Instead, under the proposed POGG power, the provinces would retain the power to regulate many aspects of these activities and industries, including governance matters, safety standards, and any other environmental standards. As well, as British Columbia points out, because the Act only sets minimum standards for carbon pricing, the provinces would still be able to choose how to meet those minimum standards, leaving them with some latent jurisdiction over carbon pricing.

The second problem with the arguments raised by the provinces is that they assume the world can be neatly divided into things that are regulated by the provinces and things that are regulated by the federal government. The truth is that all things—whether activities, industries, people, or objects—are always regulated by both levels of government. There is no such thing as an industry or activity that is exclusively provincial. Instead, all industries and activities are already regulated in some aspects by the provinces and other aspects by the federal government. Put in a more practical way, even the oil sands are subject to the federal law, including the criminal law and existing federal environmental law[21]. This means that the federal government already regulates some aspects of the activities and industries that produce GHGs, whether the proposed POGG power is recognized or not. So, correctly understood, the consequence of recognizing the proposed POGG power would not be to render provincial activities and industries federal. Instead, it would represent a shift in the existing allocation of federal and provincial jurisdiction to regulate different pieces of those activities and industries.

Once the arguments of the provinces are put into context, the actual impact of the proposed POGG power on the constitutional balance of power appears to be minimal. If the Act is found constitutional under POGG, the federal government will be able to legislate minimum carbon pricing standards. The provinces will still be able to regulate the activities and industries that produce GHGs in their other aspects, and they will even be able to design their own carbon pricing schemes. All the provinces will lose is the ability to create a carbon pricing scheme that falls below the minimum standards set out by the federal government or, perhaps, to create no carbon pricing scheme at all. In jurisdictional terms, that is a fairly small piece of the pie.

Thus, when the arguments are properly framed, the parties supporting the constitutionality of the Act put forward the stronger arguments regarding the impact of recognizing a national concern on the balance of power between the federal and provincial governments.

CONCLUSION

With that, we reach the conclusion of our discussion of the carbon tax court cases. To summarize the discussion, we can provide the following tentative answers to the Crown Zellerbach test.

1. What is the subject matter of the Act? Something like: minimum standards for carbon pricing.
2. Is the subject matter singular? Yes.
3. Is the subject matter national? Yes.
4. Is this reconcilable with the balance of power between the federal and provincial governments? Yes.

Taken together, these answers mean the Act should be constitutional under the national concern branch of POGG. All that remains to be seen is whether the Supreme Court agrees with that conclusion.

[1] Greenhouse Gas Pollution Pricing Act, SC 2018, c 12, s 186 [Act].

[2] Canadian Western Bank v Alberta, 2007 SCC 22 at para 26 [CWB].

[3] Desgagnés Transport Inc v Wärtsilä Canada Inc, 2019 SCC 58 at para 35 [Desgagnés].

[4] CWB at para 27.

[5] Ibid.

[6] See Act, Schedule 2.

[7] Ibid, s 166.

[8] Ibid, s 174.

[9] Ibid, s 174-175.

[10] Ibid, s 189.

[11] Desgagnés at para 35.

[12] R v Crown Zellerbach Canada Ltd, [1988] 1 SCR 401 [Crown Zellerbach].

[13] Ibid at 432.

[14] Constitution Act, 1867 (UK), 30 & 31 Vict, c 3, reprinted in RSC 1985, App II, No 5 [Constitution].

[15] See Crown Zellerbach at 443-44.

[16] Ibid at 437-38.

[17] Ibid.

[18] See Johannesson v Municipality of West St. Paul, [1952] 1 SCR 292.

[19] Peter W. Hogg, Constitutional Law of Canada, vol 1, 5th ed loose-leaf (Scarsborough, Ont: Carswell, 2007), ch 17 at 14.

[20] Ibid at 13.

[21] See Canadian Environmental Protection Act, 1999, SC 1999, c 33.

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