Question Period Note: Pricing Carbon Pollution

Pricing Carbon Pollution

• There’s a clear cost from a changing climate, so it can’t be free to pollute. That’s why the Government of Canada introduced a price on carbon pollution across Canada in 2019.
• Putting a price on carbon pollution reduces emissions and encourages innovation. It allows Canada to meet its economic needs and its environmental goals at the same time.
• The price on carbon pollution is currently $40 per tonne. It will increase annually until it reaches $170 per tonne in 2030. The increasing price will make cleaner options more affordable and discourage pollution-intensive investments.
Provinces and Territories
• Many provinces and territories have been leaders in climate action and carbon pricing.
• The Government’s approach to pricing carbon pollution gives provinces and territories the flexibility to implement the type of system that makes sense for their circumstances as long as they align with minimum national stringency standards, or ‘benchmark’ criteria.
• The federal carbon pollution pricing system applies in provinces and territories that request it or that choose not to adequately price carbon pollution.
Costs & Proceeds from Pricing Pollution

• Canada has proven that carbon pricing can be done in a manner that keeps life affordable.
• All direct proceeds from the federal system remain in the jurisdiction where they are collected.
• Provinces and territories that chose the federal system receive those proceeds directly and can invest them as they see fit.
• In provinces that have resisted pricing, proceeds from the federal fuel charge are used to support individuals, families, and affected sectors. Most households receive more in payments than they face in costs.
• Proceeds also support climate action in schools, hospitals, small and medium-sized businesses, colleges and universities, municipalities, not-for-profits, and Indigenous communities.
• Proceeds from the industrial pricing system are used to support projects that help reduce emissions from industry.

Pan-Canadian Framework and Carbon Pricing
• Pricing carbon pollution is widely recognized as the most efficient way to reduce GHG emissions while driving innovation to provide consumers and businesses with low-carbon options. Putting a price on carbon that applies to a broad set of emission sources across Canada with increasing stringency over time is a central pillar of the 2016 Pan-Canadian Framework on Clean Growth and Climate Change (PCF).
• The Pan-Canadian approach to pricing carbon pollution provides flexibility for provinces and territories to implement a carbon pricing system that makes sense for their circumstances, provided that the system meets minimum stringency criteria to ensure that it is stringent, fair and efficient, as defined in the federal benchmark. The benchmark stipulates a common minimum price level per tonne of carbon dioxide equivalent (CO2e). The initial carbon price and its trajectory up to 2022 was set in 2016.
• In December 2020, the Government of Canada released its strengthened climate plan (SCP), A Healthy Environment and a Healthy Economy, outlining federal policies, proposals, programs and $15 billion in investments to build a stronger, cleaner, more resilient and inclusive economy. The SCP confirmed that the Government of Canada will continue to put a price on carbon pollution, rising until 2030. The strengthened price trajectory is critical to delivering on Canada’s heightened climate ambition, including the target of reducing GHG emissions to 40-45% below 2005 levels by 2030 and reaching net-zero emissions by 2050.
• The federal benchmark has been updated in 2021 to ensure that carbon pricing systems are at a similar level of stringency across Canada and that they continue to drive low cost emissions reductions required for Canada to build a cleaner, more prosperous economy.
• The SCP also confirmed that the federal carbon price will remain revenue neutral going forward. It reaffirmed the Government of Canada’s commitment to keep the federal price on carbon pollution affordable, and to support households with investments to increase energy efficiency and further reduce emissions.
Federal Carbon Pollution Pricing System (Backstop)
• The federal carbon pollution pricing system, the backstop, has two elements: a regulatory charge on fossil fuels and an output-based pricing system (OBPS) for industrial facilities. The federal OBPS is designed to minimize competitiveness and carbon leakage risks in emissions-intensive and trade-exposed industries.
• The federal backstop applies in jurisdictions that request it or that do not have a carbon pricing system that aligns with the federal benchmark.
• The fuel charge currently applies in Ontario, Manitoba, Yukon, Alberta, Saskatchewan, and Nunavut.
• The system for industry currently applies in Ontario, Manitoba, Prince Edward Island, Yukon, Nunavut, and partially in Saskatchewan. Ontario will be implementing its own system to replace the federal system as of January 1, 2022.
• For 2021, the fuel charge rate for gasoline is 8.84 cents per litre, for diesel it is 10.73 cents per litre and the rate for marketable natural gas is 7.83 cents per cubic metre. These rates reflect a carbon pollution price of $40 per tonne of carbon emissions in 2021.
• All direct proceeds from the backstop are returned to the jurisdiction of origin.
• The Greenhouse Gas Pollution Pricing Act (GGPPA), which authorizes the federal government to apply a federal carbon pricing system, received Royal Assent on June 21, 2018.
• The governments of Saskatchewan, Ontario and Alberta separately took legal action to challenge the GGPPA arguing that natural resources regulation falls under provincial jurisdiction under the Constitution. The Courts of Appeal for Saskatchewan and Ontario ruled that the GGPPA was constitutional. The Court of Appeal for Alberta ruled that it was unconstitutional. All three decisions were appealed to the Supreme Court of Canada.
• In a decision released March 25, 2021, the Supreme Court of Canada ruled that the GGPPA is constitutional. The Court found that climate change is an existential threat to human life and must therefore be approached in Canada as a matter of national concern through coordinated national and international efforts under the peace, order and good government (“POGG”) power in the Constitution.
Industry Competitiveness
• Under the federal approach, the OBPS is designed to put a price on the carbon pollution of large industrial facilities, while limiting the impacts of carbon pricing on their ability to compete in the Canadian market and abroad. Carbon costs can affect businesses that conduct activities that are emissions-intensive and highly internationally traded if they compete with similar businesses in countries that do not have carbon pricing in place. This approach minimizes the risk that businesses will move from Canada to jurisdictions that do not price carbon.
• Instead of paying the fuel charge, an industrial facility in the federal output-based system faces a compliance obligation on the portion of emissions that exceed an annual limit. Covered facilities are required to provide compensation for GHG emissions that exceed an emissions limit and are issued surplus credits if their emissions are lower than the applicable emissions limit. Facilities can sell surplus credits or bank them for use in future years.
• The Government engaged with industries and other stakeholders on the design of this system for more than two years.
• The Government is exploring border carbon adjustments as possible measures to ensure that Canada's transition to a low-carbon economy is achieved in a way that is fair and predictable for our businesses, and supports Canada's international competitiveness. The Government has not decided whether or when to implement border carbon adjustment measures.
Proceeds from Pricing Pollution
• The federal carbon pollution pricing system is not about raising revenues. It is about recognizing that pollution has a cost, empowering Canadians, and encouraging cleaner growth and a more sustainable future.
• The Government of Canada does not keep any direct proceeds from pollution pricing. All direct proceeds from the federal system are returned to the province or territory of origin in the following ways:
• For jurisdictions that have voluntarily adopted the federal system, direct proceeds from the federal fuel charge and OBPS are returned to the governments of those jurisdictions.
• In other jurisdictions where the federal system applies, the Government returns the vast majority of direct fuel charge proceeds to households through Climate Action Incentive payments.
• The remaining fuel charge proceeds are used to support key sectors and populations including trade-exposed small businesses, farmers and indigenous groups.
• Proceeds from the federal OBPS for large industrial emitters are returned through programs to reduce emissions from industrial facilities and support green electricity sector projects.
• Returning proceeds from carbon pollution pricing helps with affordability, in particular for low income and vulnerable households. It does not change the incentive to pollute less. Every time a consumer or business makes a purchasing decision they have a financial incentive to choose greener options regardless of how the proceeds are returned.
• The current approach used for the federal pricing system results in the majority of households in these jurisdictions being better off, receiving more money back through the Climate Action Incentive than they pay in increased direct costs like gas and heating.
• Recognizing that people who live in small, rural, and remote communities have reduced access to cleaner transportation options, the Climate Action Incentive provides a 10% top-up for eligible individuals and families who live outside urban areas.

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