The government of Canada recently released a technical discussion paper seeking to inform Canadians about a proposed federal carbon pricing backstop and to obtain feedback on its design.

Interested parties have until June 30, 2017, to provide written comments, following which the federal government plans to develop new implementing legislation.

The Technical Paper on the Federal Carbon Pricing Backstop outlines a prepared federal carbon pricing option for provinces that do not have a provincial carbon pricing system in place by 2018. In December 2016, the federal government released the "Pan-Canadian Framework to Pricing Carbon Pollution" which included criteria that provincial carbon pricing systems must meet.

The federal carbon backstop is comprised of two key elements:

  1. a carbon levy applied to fossil fuels; and
  2. an output-based pricing system for industrial facilities that emit above 50 kilotonnes of CO2 equivalent/year.

The Carbon Levy

The proposed carbon levy would apply to liquid fuels, gaseous fuels and solid fuels. Assuming a particular province or territory has no carbon pricing mechanism in place by 2018, the following carbon rates of levy would apply:

Fuel

Unit

2018

($10/tonne)

2019

($20/tonne)

2020

($30/tonne)

2021

($40/tonne)

2022

($50/tonne)

Gasoline

¢/L

2.33

4.65

6.98

9.30

11.63

Diesel/Light Fuel Oil

¢/L

2.74

5.48

8.21

10.95

13.69

Heavy Fuel Oil

¢/L

3.19

6.37

9.56

12.75

15.93

Marketable Natural Gas

¢/m3

1.96

3.91

5.87

7.83

9.79

Propane

¢/L

1.55

3.10

4.64

6.19

7.74

Coke (Coal)

$/tonne

31.80

63.59

95.39

127.19

158.99

In general, the levy will apply to fuels combusted in a jurisdiction, irrespective of whether the fuels were produced in, or brought into, the applicable jurisdiction. The levy will also generally be applied upstream in the fossil fuels supply system to producers or distributors who will likely, in turn, pass on the levy cost to downstream users.

The carbon levy will categorize the following entities in the fuel supply chain: Registered Fuel Distributors, Registered Fuel Importers, Registered Fuel Users and other non-registered persons.

If the fossil fuel is brought into a backstop jurisdiction and subsequently delivered outside the backstop jurisdiction in a timely manner (e.g., tracking or rail fuel movement) the levy will not apply in the backstop jurisdiction. Fuels used in international aviation and marine use are also exempted.

Output-Based Pricing

The purpose of the output-based pricing system is to address competitors concerns for Canadian industrial entities that have competitors in jurisdictions that do not impose a carbon price.

As stated earlier, the output-based pricing system would apply to all industrial facilities that emit above 50 kilotonnes of CO2 equivalent/year, other than municipal buildings, hospitals, universities, schools and certain commercial facilities which will be exempt.

A facility that exceeds its prescribed limit (which will be based on an emissions-intensity standard developed for the applicable industrial activity) will have several options to comply:

  1. payment of the federal carbon price (i.e., $10/tonne in 2018 rising to $50/tonne by 2022);
  2. use of eligible offset credits; and
  3. use of surplus credits used by facilities that emitted less than their regulated limit.

Other Thoughts

Neither Saskatchewan nor Manitoba have signed on to the Pan-Canadian Framework. Saskatchewan has indicated it may challenge the federal government's constitutional authority to regulate greenhouse gas emissions.

For those provinces that have already implemented their own equivalent carbon pricing regimes, the federal carbon pricing backstop will have little effect. However, with respect to Alberta and British Columbia in particular, whose provincial regimes currently are capped at a price of $30/tonne of CO2e emissions, it remains to be seen what further steps they may take on or before 2021, when the federal carbon backstop moves past the $30/tonne price. Similarly, with respect to the output based pricing system of industrial facilities emitting more than 50 kilotonnes of CO2equivalent/year, while the Alberta government has indicated that it would be moving to a similar mechanism in the form of a Carbon Competitiveness Regulation (that would replace the existing Specified Gas Emitters Regulation or SGER) the existing SGER framework applies to facilities that emit 100 kilotonnes or CO2 equivalent/year. Accordingly, the federal carbon backstop may foreshadow a more stringent threshold to be adopted by Alberta when such Carbon Competitiveness Regulation is released.