Introduction

The Minister of Finance for British Columbia introduced a consumer based carbon tax on July 1, 2008, which was one of the first substantial carbon taxes in North America. While it is expected that carbon regulations will be introduced in the near future in other jurisdictions across North America, and some jurisdictions have already implemented carbon regulations, Canada’s transportation sector is already being affected by new climate change legislation and policy. The recent introduction of various Federal and Provincial government greenhouse gas reduction legislation, regulations and policies have targeted energy intensive transport. Transportation businesses should plan now to respond to these new changes. This article provides an overview of current air emissions regulations and discusses how governments are expected to tax or regulate air emissions in the near future in Canada.

The Transportation Industry and Greenhouse Gas Emissions

Studies show that the transportation sector is a leading contributor of greenhouse gases. The six greenhouse gases listed in the Kyoto Protocol include carbon dioxide; nitrous oxide; methane; sulphur hexafluoride; hydrofluorocarbons; and perfluorocarbons, and are created by the production and combustion of fossil fuels and contribute to climate change when released into the atmosphere. In Canada, transportation represents the country’s largest source of greenhouse gases, accounting for 27% of total greenhouse gas emissions.

As a party to the Kyoto Protocol, Canada’s federal government is responsible for monitoring and reporting national greenhouse gas emissions pursuant to the United Nations Framework Convention on Climate Change (UNFCCC). The National Inventory Report reveals that domestic aviation, domestic marine, and railways each contribute between 3-4% of national transportation emissions. Another 20% of emissions come from pipelines, and off-road diesel and gasoline. Finally, road transportation contributes the remaining 67% of greenhouse gas emissions. Greenhouse gas emissions from road transport have increased substantially since the 1990s. The primary source of this trend is the increase in the number of passenger-kilometres travelled, in other words people drove further. Another major cause is the trend in personal vehicle use from automobiles to minivans, sport utility vehicles (SUVs) and small pickup trucks. These larger vehicles emit an average of 40% more greenhouse gas emissions per kilometre than automobiles. Additionally, the Canadian Environmental Sustainability Indicators 2006 indicates that emissions from heavy-duty vehicles have almost doubled as a result of just-in-time delivery production systems.

Thus, the transportation sector has been and is expected to continue to be a key target of emission control and climate change legislation. Currently, both the federal and provincial governments regulate greenhouse gas emissions.

Federal Air Emission Regulations

Under the federal Canadian Environmental Protection Act (CEPA), regulations exist to limit the sulphur content in diesel and gasoline to comply with maximum allowable emissions. In addition, Renewable Fuels Regulations require fuel producers and importers to have an average of 5% renewable content in gasoline. A further requirement for an average of 2% renewable content in diesel will be implemented through future amendments to the Regulations subject to technical feasibility, such as biodiesel being used successfully under Canadian weather conditions.

In addition, the Motor Vehicle Fuel Consumption Standards Act authorizes the federal government to regulate fuel consumption standards for any class of motor vehicle. In April 2005, car manufacturers entered into a Memorandum of Understanding with the Federal government, whereby the manufacturers committed to voluntarily cut greenhouse gas emissions by selling light duty vehicles that met U.S. fuel consumption standards. However, critics have argued that a voluntary agreement will not do enough to reduce light duty vehicle emissions. As a result, the federal government acknowledged the need to provide regulatory standards and accordingly has enacted the Passenger Automobile and Light Truck Greenhouse Gas Emission Regulations, pursuant to the CEPA. The Regulations establish mandatory greenhouse gas emission standards for new vehicles of the 2011 and later model years that are aligned with U.S. standards. The Regulations require that vehicle manufacturers and importers meet fleet average greenhouse gas emission standards for their passenger automobiles and light trucks as well as vehicle-specific standards for emissions of methane and nitrous oxide. They also include provisions that establish compliance flexibilities, to ensure the automobile industry has appropriate lead-time for technological improvements. Finally, they include reporting requirements relating to the greenhouse gas emission performance of the manufacturer’s fleets, to establish compliance with the Regulations.

The federal government has also approved other initiatives and incentives with the goal of reducing greenhouse gas emissions, such as eliminating federal excise tax on certain low carbon fuels like natural gas, propane, ethanol and methanol etc. and an ecoAUTO rebate program to encourage Canadians to purchase fuel-efficient vehicles.

Federal Regulations Respecting Aviation, Marine and Rail

The federal government shares responsibility for the environment, but it is also able to regulate transportation under other heads of power such as navigation and shipping. Under this head of power, the federal government has enacted legislation regulating the aviation, marine, and rail sectors. For example, emissions from the shipping sector are governed by the Regulations for the Prevention of Pollution from Ships and for Dangerous Chemicals made under the Canada Shipping Act, 2001. Rail transportation is governed by the Canada Transportation Act, however, there are no regulations specifically dealing with rail emissions. While the authority to regulate locomotive emissions exists under the Railway Safety Act, Environment Canada monitors locomotive emissions through information provided under a Memorandum of Understanding with the Railway Association of Canada, which sets a cap on annual emissions. However, this could be an area targeted for increased legislative and regulatory control in the future.

The aviation sector is also governed, in part, by a voluntary compliance program. Airline travel is expected to expand over the next 20 years, which will result in an increase in emissions. In anticipation of this expansion, in 2005, the federal Minister of Transport entered into a Memorandum of Understanding with the Air Transport Association (ATA) of Canada to reduce greenhouse gas emissions. This voluntary agreement requires ATA members to improve their fuel efficiency by an average of 1.1% per year. In addition, the government is working through the International Civil Aviation Organization (ICAO) to reduce aviation emissions by developing a carbon dioxide emissions standard for new carrier types which is anticipated by 2013. There is also ongoing discussion regarding a global approach to greenhouse gas emissions management for the aviation industry, including emissions targets, however, it is too early to ascertain the effect this global approach will have on domestic policy. It is expected that the federal government will impose aviation emissions regulations pursuant to the federal Aeronautics Act or the Canada Transportation Act.

Provincial Air Emission Regulations

Although the federal government regulates fuel content, the provinces have played a much more predominant role in the emission regulation field. In British Columbia, provincial air emissions regulations have been in place for years and new provincial legislation includes renewable and low carbon fuel requirements; legislation addressing climate change targets; legislation introducing a carbon tax; and finally legislation providing a framework for a cap and trade system.

British Columbia has established various emissions regulations under its Environmental Management Act (EMA). These include the Cleaner Gasoline Regulation and the Gasoline Vapour Control Regulation; which respectively establish gasoline standards to reduce emissions of volatile organics, nitrogen oxides and sulphur oxides; and prevent the escape of gasoline vapours. However, the EMA has not served as the only legislation driving climate change in the province. British Columbia has enacted new legislation, the Greenhouse Gas Reduction (Renewable and Low Carbon Fuel Requirements) Act, which, similar to the Federal Renewable Fuels Regulations, enables the government to set requirements for the amount of renewable fuel and fuel blends for transportation in British Columbia. The Act and Regulation require fuel suppliers of gasoline or diesel to ensure that the renewable fuel comprises at least a prescribed percentage of that fuel, which is currently set at 5% renewable fuel content by volume in gasoline and 3% renewable content in diesel, in addition to a low carbon fuel requirement aimed at a 10% reduction in carbon intensity by 2020. The Act and Regulations also contain reporting requirements to ensure the objectives of the Act, to reduce the environmental impact of transportation fuels and contribute to a new low carbon economy, are met. With respect to future emissions legislation, the government plans to reduce tailpipe emissions by implementing vehicle greenhouse gas emission standards equivalent to those laid out in California’s 2004 Low-Emission Vehicle II regulations, which are expected to cut greenhouse gas emissions standards by 30% relative to current vehicle models.

Provincial legislation specifically addressing climate change has also been created. In 2007, British Columbia enacted the Greenhouse Gas Reduction Targets Act, which commits the province to reducing emissions by 33% below 2007 levels by 2020 and 80% by 2050, along with interim reduction targets of 6% by 2012 and 18% by 2016 to guide and measure progress. Pursuant to the Reduction Targets Act the government of British Columbia has committed to ensuring all provincial public sector operations are carbon neutral and has enacted accompanying regulations which address the quality of greenhouse gas offsets, for the purposes of fulfilling the provincial government's commitment to a carbon neutral public sector.

In addition, as noted, the Minister of Finance for British Columbia introduced a revenue neutral carbon tax scheme in its 2008 Budget. The tax is described as “revenue neutral” because the revenue raised by the carbon tax will be returned to taxpayers through reductions in other taxes with the goal of reducing British Columbia’s income tax to strengthen British Columbia’s competitiveness. In addition, to offset the burden on lower income residents, the province provides a refundable Low Income Climate Action Tax Credit.

The tax applies to the retail purchase or use of fuels in British Columbia, such as gasoline, diesel, natural gas, heating fuel, propane and coal; and includes aviation fuel, and is payable at the time of purchase or at the time of use. Businesses operating in the transportation industry, especially aviation, should note the exemptions from the tax that are provided for under section 14 of the Carbon Tax Act, and those listed under Part 4 of the Carbon Tax Regulation.

Initially the tax was introduced in 2008 at $10 per tonne of carbon emissions, rising $5 per tonne a year until 2012, when it will reach $30 per tonne. This translates to a tax of 2.14 cents per litre of gasoline, as of July 1, 2008, increasing to 7.24 cents per litre by 2012. The purpose of a phased approach was to give individuals and businesses time to reduce their use of fossil fuels. Whether there will be future rate changes will depend in part on whether the province is meeting its emission reductions targets, the impact of a cap and trade system, the actions of other governments and the advice of the Climate Action Team.

Carbon taxes serve the dual-purpose of reducing carbon fuel consumption and generating funds to finance “green” initiatives. The theory is that, by putting a price on the amount of greenhouse gas emitted, the economy will respond by reducing fuel consumption, improving fuel efficiency, switching to cleaner fuels or implementing new technologies, with the result being an overall reduction in emissions. Whether this theory proves valid is questionable given that the staggering increase in the price of gas over the past few years has not been accompanied by a radical decrease in emissions. Furthermore, critics of carbon taxes argue that it is an unfair burden on consumers who have to pay the tax for daily living, for example those who live in rural areas, rather than taxing the industries which are the big polluters. However, the government has recognized that the carbon tax will not, on its own, meet British Columbia’s emission-reduction targets, but rather it will be integrated with other complementary measures such as a cap and trade system.

British Columbia has been the first province to introduce hard caps on greenhouse gas emissions pursuant to the Greenhouse Gas Reduction (Cap and Trade) Act. The Cap and Trade Act provides a basis for setting up a market-based cap and trade framework to reduce greenhouse gas emissions from large emitters operating in the province. A cap and trade system involves setting an overall cap or limit on allowable emissions. Emitters who reduce emissions below the cap are able to sell their excess quota. Emitters whose emissions exceed the cap must purchase emission credits to bring them within their allowable limit. Under the British Columbia Cap and Trade Act, the province will establish caps for designated large greenhouse gas emitters by issuing tradable compliance units that correspond with specific periods of time. Emitters will be required to surrender to the government the number of compliance units that are equivalent to the amount of greenhouse gas emissions from its operations. Failure to do so could result in penalties under the Cap and Trade Act. In addition, the Reporting Regulation sets out the requirements for the reporting of greenhouse gas emissions from British Columbia facilities emitting 10,000 tonnes or more of carbon dioxide equivalent emissions per year, beginning on January 1, 2010.

At this time it is still unclear how this system could be applied to the transportation sector generally, and more specifically whether aviation and shipping will be part of the cap-and-trade system in British Columbia. However, it has been recommended by British Columbia’s Climate Action Team that aviation and shipping should be included in any cap and trade system as it is anticipated that air travel is only increasing and, as a result of the lack of alternative fuels available for aircrafts, as there are for motor vehicles, air travel will begin to represent an increasing proportion of emissions.

From an international perspective, the Cap and Trade Act provides the framework for British Columbia to participate in a market-based cooperative approach to reduce greenhouse gas emissions with other members of the Western Climate Initiative: Arizona; California; Manitoba; Montana; New Mexico; Ontario; Oregon; Quebec; Utah; and Washington. This regional climate partnership is designing a cap and trade program, which could be used as the model for a continental cap and trade program in the United States, Canada, and Mexico. Despite the foregoing, on January 25, 2011, the National Round Table on the Environment and the Economy released a report which explores the economic and environmental implications of harmonization with the United States on climate policy. The report concluded that given the uncertainty about U.S. commitment and direction on climate change and the difference between Canadian and U.S. economies and emissions profiles, and the need to stay competitive, the report recommended that Canada should begin to implement emissions rules now and harmonize with the U.S. in the future. Therefore, businesses in the transportation sector should expect that Canada may go forward with its own economy-wide cap and trade system and leave harmonization for the future.

Other Measures

The ultimate success of a carbon tax depends heavily on the existence of fuel efficient alternatives. In the transportation sector, taxing gas at the pump will not reduce the number of drivers on the road unless safe, efficient and convenient public transportation is available. In this regard, British Columbia has announced plans to make substantial investments in alternative transport. British Columbia recently pledged $14 billion to fund a Provincial Transit Plan, which is intended to double transit ridership by improving and expanding the public transit system. The Union of British Columbia Municipalities has also allocated $50 million to help communities build a safe network of bicycle paths. British Columbia is also investing in alternative fuel sources and fuel cells to advance the development of a hydrogen highway. In addition, the province has introduced an expanded Scrap-it program to get older and less efficient vehicles off the road and is providing provincial sales tax exemptions on the purchase of hybrid and fuel efficient vehicles.

Finally, British Columbia’s Climate Action Team is recommending greater use of marine and rail transport and more efficient operation of major ports. British Columbia has recently completed Canada’s first electric shore power project at Port Metro Vancouver to reduce marine diesel engine emissions from cruise ships. As well, British Columbia is working with its four Pacific Coast neighbours: Alaska; Washington; Oregon; and California, collectively the Pacific Coast Collaborative, to standardize environmental practices and standards for the pacific ports.

Conclusion

This article has provided a brief outline respecting current air emissions regulations and plans for future regulations in Canada. As can be seen, the governments have introduced and are developing a number of policy and legislative initiatives aimed at reducing greenhouse gases. The main thrust of these initiatives have been in the area of personal transportation. However, this does not mean that the new and emerging legislation will not have an impact on the larger transportation industry. British Columbia’s revenue neutral carbon tax may be a model for other jurisdictions to follow in North America. In addition, mandatory carbon credit payments at points of travel to offset emissions associated with air travel have been recommended, as well as the potential for the inclusion of emissions from air travel into the new cap and trade system; all of which can be expected to make fuel dependent transportation related activities more expensive in the near future. In addition, the ability of the federal government to manage air, marine and rail transport, may be an area that it will target in its efforts to reduce emissions in the transportation industry and lead to increased regulation. Businesses in the transportation sector should monitor the situation and plan to deal with the expected costs associated with climate change legislation.