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CANADA: BACKSTOP ENSURES PRICING GOES NATIONAL
Canada’s carbon pollution pricing system, also known as the Federal Backstop, is made up of two components: the fuel charge, which is a charge placed on fossil fuels used in a ‘backstop’ jurisdiction, and the Output-Based Pricing System (OBPS) for industrial facilities. The programme is currently imposed wholly or in part in provinces and territories that did not implement an equivalent carbon pricing programme, as determined by the Federal government; Manitoba, Ontario, New Brunswick, Yukon and Nunavut are backstop jurisdictions. British Columbia, Quebec, Nova Scotia, Northwest Territories, and Newfoundland and Labrador have their own, federally approved, provincially administered carbon pricing systems. Saskatchewan and Prince Edward Island have province-specific hybrid programmes. Alberta has its own mechanism for large emitters and will have the fuel charge imposed as of 1 January 2020.
The fuel charge started at C$20/tonne of CO2e on 1 April 2019 and will increase by C$10/tonne of CO2e on 1 April of each year until 2022, when it reaches C$50/tonne of CO2e. Under the OBPS stream, industrial facilities with annual emissions of 50,000 tonnes of CO2e or higher will face a carbon price on the portion of their emissions that are emitted in excess of a specified limit. These emissions limits are based on Output Based Standards, calculated as a percentage of the national average of a sector’s emissions per unit of production. The standards vary between sectors and are also based on emissions-intensive, trade-exposed measurements. Facilities which emit below their limit will generate surplus credits that can be sold or used for future compliance obligations. Compliance for mandatory facilities began on 1 January 2019. Industrial facilities with annual emissions of 10,000 tonnes CO2e or higher and meet certain criteria can voluntarily participate by opting in to the OBPS.
Compliance options for covered OBPS facilities include any combination of surplus credits, offsets or paying the excess emissions charge, which mirrors the fuel charge price. Compliance units, such as offsets and surplus credits, represent a lower cost compliance option for covered facilities. Offsets from approved existing provincial offset programmes, known as Recognized Units, can be used for compliance in the OBPS.
It is expected that credits from agriculture, waste, land use and forestry project types in the BC, Alberta and Quebec’s offset programmes will be prioritised. A federal offset programme is currently being developed to increase the supply of offsets available to OBPS participants. Regulated facilities can use compliance units such as offsets and surplus credits to cover 100% of their compliance obligation in the first three compliance years. The usage limit for compliance units drops to 75% in 2022, meaning facilities would have to cover at least 25% of their compliance obligation by paying the C$50/tonne CO2e excess emissions charge.
The Federal Backstop is revenue neutral, meaning the proceeds will be returned to households, industry, institutions, and small- and medium-sized businesses in the jurisdiction from which they were collected to support climate action.
The constitutional justification for the implementation of the Greenhouse Gas Pollution Pricing Act, which underpins the fuel charge and OBPS, is currently being challenged in court. Ontario and Saskatchewan have launched different constitutional challenges, both of which were rejected in their respective Provincial Courts of Appeal. These decisions have been appealed to the Supreme Court of Canada, with the hearings tentatively scheduled for March 2020. Alberta has also launched its own challenge and Manitoba has filed for judicial review of the programme. Quebec is an intervener in Saskatchewan’s constitutional challenge to protect its cap-and-trade system.
As the Liberal Party won a minority in the October election, it is expected that the Federal government will continue with the implementation of the Pan-Canadian Framework on Clean Growth and Climate Change, which includes the Federal Backstop. A programme review in 2022 will assess what areas of the backstop need to be adjusted to ensure Canada is on track to meeting its targets and determine if the price of carbon will increase above $50/ tCO2e beyond 2022.
Adi Dunkelman & Kody McCann - ClearBlue Markets