Canada’s carbon tax is going up. Do you know what this means for your organization?
Canada’s carbon tax is increasing by $10 each year until 2022, rising to $15 per annum until hitting $170 per tonne of CO2e by 2030.
Canada’s carbon tax has two parts: a fuel charge on gas and the Output Based Pricing System which regulates carbon fees for industry. Industrial facilities are charged for each tonne of CO2e produced and their overall performance relative to benchmarks and industry averages.
Individuals and industrial facilities will receive between 80 and 95% of carbon revenues back in the form of the Climate Action Initiative and other rebates.
Canada’s carbon tax is increasing to $40 per tonne of CO2e on April 1st. And no, this isn’t one of those ‘gotcha’ April Fools posts, so make sure you’re up to date on how Canada’s carbon pricing system works.
To help you out, we can take an in-depth look at the ins and outs of current carbon pricing legislation and the impacts on individual and industrial energy users.
Canada’s carbon pricing plan – officially the Greenhouse Gas Pollution Pricing Act (GGPPA) – came into force on June 21st, 2018 and consists of two parts; the pollution charge on fuel, and the Output Based Pricing System (OBPS).
The carbon tax was recently in the news due to a legal challenge by Alberta, Ontario, and Saskatchewan arguing that the legislation represents an unconstitutional overreach by the federal government into provincial matters. This challenge was quashed by the Supreme Court of Canada, which in a 6-3 decision in favour of Ottawa upheld the carbon tax as constitutional. Writing for the majority, Chief Justice Richard Wagner stated that:
“[Climate change is] a threat of the highest order to the country, and indeed the world. This context, on its own, provides some assurance that […] Canada is not seeking to invoke the national concern doctrine too lightly. The undisputed existence of a threat to the future of humanity cannot be ignored.”
This decision removes uncertainty as to the fate of Canada’s carbon tax legislation, and it is now up to those provinces that challenged the tax to come up with their own equivalent programs or be forced to adopt the federal ‘backstop’.
This backstop, in the form of the GGPPA, sets a minimum floor that provinces must meet or be obligated to use the federal regulations – provinces can also choose to adopt higher standards if they wish. The backstop currently applies to Ontario, Alberta, Manitoba, and Saskatchewan.
The federal government collected $2.81 billion (at $20 per tonne of CO2e) from the carbon tax in 2019/2020, a number that is set to increase to $8.27 billion (at $50 per tonne) for 2022/2023. 90% of the revenue from the fuel charge and around 80% of total revenue will be returned to individuals in the form of a rebate called the Climate Action Incentive.
According to the Parliamentary Budget Officer Yves Giroux, “under the federal government’s current rebate structure, most households will still receive more than what they pay in fuel charges.”
Gas will increase by 8.8 cents per litre on April 1st.
It’s important to note that not all provinces charge individuals the same way, so the costs and rebates differ province to province.
For example, the Department of Finance calculates that the annual cost for a household in Ontario is $362 with a rebate of $436 – a difference of $74. For Manitoba those numbers are $358, $486, and $128; Saskatchewan – $641, $792, $151; and Alberta – $534, $880, $346, respectively.
With this in mind, the changes slated to come into force on April 1st will increase the price per litre of gas by 8.8 cents according to the Canada Revenue Agency. The price of carbon will increase to $50 in 2022, before increasing by $15 each year until reaching $170 per tonne in 2030, in order to achieve Canada’s goal of reducing emissions by 32% compared to 2005 levels. More information about fuel charges and how they apply can be found here.
Output Based Pricing System (OBPS)
The OBPS deals with emissions from industrial facilities in sectors that have established standardized emissions reporting and data collection. Facilities operating in the following sectors are bound by the OBPS: oil and gas, pulp and paper, chemicals, ethanol, nitrogen fertilizers, lime, cement, base metal refining and smelting, potash, iron ore pelletizing, mining, iron and steel, and food processing.
Facilities in these sectors emitting 50,000 tonnes of CO2e or more per year must abide by OBPS regulations. Operations in some sectors that emit 10,000-50,000 tonnes of CO2e or more can apply to voluntarily participate as well. If you are still unsure if your operation falls under OBPS, an industry-specific overview is available from Environment and Climate Change Canada.
OBPS sets emissions performance standards (level of emissions per unit of output) for each sector across Canada. The levels are set by Environment and Climate Change Canada to assess the risk to competitiveness and of ‘carbon leakage’ – the relocation of businesses to jurisdictions lacking carbon pricing rules.
Sectors with low or medium competitiveness risks will have standards set at 80% of said sector’s average emissions intensity. Sectors at high risk, such as Emission Intensive and Trade Exposed (EITE) businesses will have standards set at 90-95%.
Every facility is charged for each tonne of CO2e produced, but 80-95% (depending on sector) of these fees are returned in the form of rebates.
What these standards mean is that the maximum allowable emission levels are 5-20% below the average emissions across the sector for that year. Every facility is charged for each tonne of CO2e produced, but 80-95% (depending on sector) of these fees are returned in the form of rebates, so that the cost of pollution is applied to 5-20% of total emissions each year.
Facilities that beat their industry’s average earn credits that can be sold or saved for later. Facilities that fail to meet the industry standard must pay a compliance obligation, which is calculated as a facility’s total annual emissions minus the annual emission limit for that sector. Each tonne of CO2e over the limit must be paid for, either by:
- paying the government for each excess tonne at the current carbon price (e.g. $40 for 2021)
- submitting surplus credits issued by the government (either purchased from more efficient facilities or saved from previous years)
- submitting eligible offset credits (see list)
According to the federal government, this approach “ensures the incentive to reduce emissions created by the carbon pollution price applies to every tonne of emissions from industrial facilities, but limits their overall cost exposure to maintain their competitiveness.”