Carbon pricing is an effort by government to raise the cost – by taxes or by regulation – of carbon-based fossil fuels, in the hope of reducing their use, thereby limiting greenhouse gas emissions to combat climate change. In 2016, Prime Minister Justin Trudeau announced a national climate-change policy that included a system of carbon pricing across Canada. Under the plan, each province must adopt carbon pricing by January 2018, or Ottawa will impose its own carbon levy in that jurisdiction.
The federal government tabled a discussion paper on the so-called federal “backstop”—the default carbon pricing rules that will apply in those provinces that choose not to put in place their own system.
Under the federal plan, any province or territory that brings in its own carbon price—whether it’s a carbon tax like British Columbia and Alberta, or cap and trade like Quebec and Ontario—will be exempted from the federal backstop if it meets certain conditions. Provincial systems must cover most fossil-fuel emissions and have a price level equal to the backstop price or, under cap and trade, must result in equivalent emissions reductions as a price would have achieved. Provinces that do not bring in their own system will fall under the federal backstop rules. Under the backstop, a direct tax or levy will be applied to all fossil fuel emissions, starting at $10 in 2018 and rising to $50 by 2022. These measures assure that all provinces will have systems with a roughly similar price, emissions coverage, and roughly equivalent effort at reducing emissions.
While these parts of the federal plan have been clear since last fall, today’s discussion paper adds two more important details. Two of the biggest criticisms of carbon pricing in Canada have been that it could hurt the competitiveness of Canadian industries, and that it could impose unaffordable costs on Canadian households. The federal plan will go a long way to resolving the first problem: to deal with competitiveness, the federal plan, like Alberta’s system, will include output based allocations to ease the impact on large industrial emitters. Plants producing more than 50,000 tones of carbon dioxide will only be charged the carbon price to the extent to which their emissions are higher than the emissions of best in class facilities in their sector. This will prevent companies in internationally competitive fields like oil and gas, cement, steel, and fertilizer from being fully impacted by the carbon price, and give them a strong incentive to improve their performance to meet or beat best-in-class standards.
But the plan also opens the door to solving the second. The federal government had already said that it would not keep carbon revenues from the federal backstop, but would return all revenues to their province or territory of origin. However, this still left open the possibility that provinces could simply spend the money on whatever they wanted—which could make the federal carbon price a form of tax increase. In recent days, however, federal sources have hinted that rather than send the money to provinces, it could send revenues raised directly to citizens within those provinces. The discussion paper is silent on this point, merely saying that the government is “open to feedback,” although the accompanying press release suggests that they are “evaluating how best to return the revenues, for example, by giving it back to individuals and businesses in the province.”