Question Period Note: Canada Strengthens Carbon Pricing Across the Country

Canada Strengthens Carbon Pricing Across the Country

• Putting a price on pollution is the most effective way to fight climate change and drive innovation.
• Canada has a flexible approach that sets minimum standards for all carbon pricing systems and lets provinces and territories choose what type of system they prefer.
• In November 2022, the Government of Canada announced the results of Canada’s strengthened approach to carbon pricing: where the federal system will apply from 2023 onwards and where provinces and territories have strengthened their own carbon pricing systems to make sure all systems are continue to drive additional reductions and innovation.
Provinces and Territories
• All jurisdictions have a role to play in reducing emissions, and many provinces and territories have been leaders in climate action and carbon pricing.
• It is essential that carbon pricing systems across Canada have similar levels of stringency and effectiveness.
• The Government’s approach to pricing carbon pollution gives provinces and territories the flexibility to design and implement systems that best meet their circumstances, as long as they meet minimum standards – the federal benchmark – to ensure they are stringent, fair, and effective.
The federal pricing system
· The federal carbon pricing system has two parts: a charge on fossil fuels and a pricing system for industrial facilities.
· The federal system applies in provinces and territories that requested it or that choose not to adequately price carbon pollution.
· The federal fuel charge currently applies in Alberta, Saskatchewan, Manitoba, Nunavut, Ontario, and Yukon.
· Starting in July, the federal fuel charge will also apply in Newfoundland and Labrador, Nova Scotia, and Prince Edward Island. On July 1, residents in these provinces will receive their first quarterly Climate Action Incentive payment.
· The federal system for industry applies in Manitoba, Prince Edward Island, Yukon and Nunavut.
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 other provinces and territories where the federal system applies, 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 farmers, small businesses 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.
• The strengthened, updated benchmark was published in August 2021 and sets a price trajectory and more stringent criteria for the 2023-2030 period. The price per tonne of CO2e will be $65/tonne in 2023, rising by $15/tonne per year to $170/tonne in 2030.
• As an early deliverable under the Canadian Net-Zero Emissions Accountability Act, Canada published the first Emissions Reduction Plan (ERP) in 2022. The 2030 Emissions Reduction Plan lays out the next steps to reach Canada’s 2030 emissions reduction target, providing greater certainty and improving transparency and accountability on the way to net-zero. 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.
Federal Carbon Pricing 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.
• On November 22, 2023, the federal government announced the results of its 2023-2030 benchmark assessment of provincial carbon pricing systems.
• Going forward:
o The federal fuel charge will continue to apply in Alberta, Saskatchewan, Manitoba, Nunavut, Ontario, and Yukon.
o The federal fuel charge will expand to Newfoundland and Labrador, Nova Scotia, and Prince Edward Island beginning July 1, 2023, when Canadians in these provinces will receive their first quarterly Climate Action Incentive payment.
o British Columbia, New Brunswick, Northwest Territories, and Quebec will continue to implement their own pollution pricing systems.
• For pollution pricing of large industries:
o The federal Output-Based Pricing System will continue to apply in Manitoba, Prince Edward Island, Yukon, and Nunavut.
o The federal Output-Based Pricing System will no longer apply in Saskatchewan, as the province transitions to apply its own system to cover all required sectors. Canada will work closely with Saskatchewan to ensure a smooth transition for affected facilities and will retroactively transition in Saskatchewan as of January 1, 2023.
o Alberta, British Columbia, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Ontario, Quebec, and Saskatchewan will continue to implement their own pollution pricing systems for industrial emissions.
Industry Competitiveness Under the federal approach, the Output-Based Pricing System 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.
o Instead of paying the fuel charge, an industrial facility in the federal Output-Based Pricing 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.
o The Government engaged with industries and other stakeholders on the design of this system for more than two years.
o 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
o 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.
o 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 Output-Based Pricing System 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 Output-Based Pricing System for large industrial emitters are returned through programs to reduce emissions from industrial facilities and support green electricity sector projects.
o 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.
o 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.
o 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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