In a speech to Parliament on Oct. 3, 2016, Prime Minister Trudeau announced that, starting in 2018, the federal government will impose a national price on carbon. He prefaced his comments by referencing Canada’s obligations under the Paris Agreement (COP21) and later stated that “there is no hiding from climate change.” COP21 was ratified by the federal government on Oct. 5, 2016.

The “tax,” as it is referred to in the media, proposes a carbon price of $10 per tonne in 2018. The price will increase each year by $10 per tonne until 2022, when it will reach a level of $50 per tonne.1 Substantively, it will apply to the same sources as British Columbia’s carbon tax — specifically fossil fuels, which include: gasoline; diesel (light fuel oil); jet fuel; natural gas; propane; coal - high heat value; and coal - low heat value.2

Implications for Canada's provinces and territories

Details were not provided on how the national carbon price will be implemented. However, the provinces and territories will have the option to put a direct price on carbon or adopt a cap-and-trade system. A federal price will be introduced in provinces and territories that have not implemented cap-and-trade or imposed a carbon price by 2018.

Provinces and territories will be required to apply the national carbon price as a benchmark. Jurisdictions that choose a cap-and-trade system will need to implement a 2030 emissions reduction target equal to or greater than Canada’s reduction target set at 30 percent below 2005 levels, as well as declining annual caps (to at least 2022) that correspond for each year, at a minimum, to the projected emissions reductions resulting from the carbon price of that year in price-based systems.

From a regulatory point of view, Québec and Ontario appear to be relatively well-positioned to meet the national carbon price. In Québec, the 2030 emissions reduction target has been proposed at 37.5%3 when compared with 1990 levels and the December 2012 Order in Council, which established declining annual caps until the year 2020. In Ontario, Bill 172, Climate Change Mitigation and Low-carbon Economy Act, 2016, codifies Ontario’s GHG emissions reduction targets at 37% below 1990 levels by 2030.4

All revenues generated by the national price on carbon will stay in the province or territory in which they are generated. Further, Prime Minister Trudeau mentioned that the goals of the plan are to build a clean growth economy, encourage innovation and reduce pollution:

Setting a price for carbon pollution will give us a significant advantage while we build a clean growth economy. A reasonable and predictable price for carbon pollution will encourage innovation because businesses will have to find new ways to reduce their emissions and pollute less.5

Praise and criticism

Canada has earned praised for its approach to imposing carbon pricing in an effort to meet its GHG reduction commitment. On the other hand, critics been very vocal against the imposition of a national carbon price, stating that it will squelch any benefit the Canadian economy would experience from any increase in energy prices in the future. Saskatchewan is considering challenging the constitutionality of such a carbon tax, with Premier Wall questioning the timing of the plan given the job losses in the energy sector.

Others argue that the carbon prices are too low. Certain economists estimate that to achieve Canada's emissions reduction goal, carbon pricing would need to start at $30 a tonne today, rising to $200 by 2030. This would translate to an estimated additional 47.3 cents of carbon tax per litre of gasoline and 60.1 cents per litre of diesel fuel in 2030.6 Such high premiums on the price of fuel may indeed be enough to encourage a reduction in consumption of fossil fuels by Canadians.

Next steps

Following this announcement, Canada and the other 196 signatories of the Paris Agreement agreed to phase down hydro fluorocarbons (HFCs), which are gases related to processes such as air conditioning and refrigeration and are more damaging to the environment than carbon dioxide. The Canadian government has stated that it will propose regulations to significantly reduce HFC consumption and prohibit the manufacture and import of certain products containing HFCs into Canada.

These achievements in the fight against climate change set the tone for the COP22 meeting taking place Nov. 7 to 18 in Marrakesh, Morocco. It will be interesting to see the global reaction to the national price for carbon in Canada.