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Ottawa’s Draft Carbon Pricing Plan Offers Companies Rebates for Deeper Emission Cuts

Canadian Environment Minister Catherine McKenna and Finance Minister Bill Morneau are inviting public comment on draft “backstop” legislation to ensure that all Canadians pay a price for carbon emissions, including those in provinces that don’t put their own pricing mechanisms in place by this September.

The draft does not address emissions from offshore oil and gas operations or electricity generation. Government sources said the approach to those sectors is still being developed, and will be released at a later date.

The legislation would make good on commitments the government has made repeatedly since reaching a Pan-Canadian climate policy framework agreement with most of the provinces in late 2016. If enacted and implemented, it will affect about one in five Canadians.

British Columbia, Alberta, Ontario, and Quebec have already adopted carbon pricing systems—either carbon taxes or cap-and-trade mechanisms—that together cover about 80% of the country’s population. The three Maritime provinces and Newfoundland and Labrador are also moving to implement pricing plans, although Ottawa has rejected New Brunswick’s as insufficient.

The main holdouts to which the legislation would apply have been Saskatchewan, whose nativist Saskatchewan Party government has rebuffed both climate science and pricing carbon, and Manitoba. That province has proposed a carbon tax, but plans to ignore the escalating national benchmarking that starts the price on emissions at $10 per tonne this year, rising by $10 annually to $50 per tonne by 2022.

“Canadians know pollution isn’t free, and last year we saw that extreme weather events are costing us billions of dollars—trillions if you look at what is happening around the world,” McKenna said in an interview. “We know a price on pollution is the best way to fight climate change and also get clean innovation. But of course, competitiveness is a key part of it.”

Adopting a model already running in Alberta, the federal government is proposing to impose a direct carbon tax on fossil fuels, with a modified cap-and-trade permitting system for business customized to individual industry sectors.

As CBC explains it, companies in provinces without their own compliant pricing schemes that “exceed the average energy use for their sector will have to pay a carbon levy. Those that are under the average by 30% or more will get a credit.”

The approach is meant to buffer the carbon levy’s impact on high-emitting companies exposed to global competition from jurisdictions with no carbon pricing.

“We don’t want to send Canadian companies abroad to pollute,” McKenna told the CBC. “We want a system that creates an incentive for them to innovate to reduce their emissions, but also do it in a way that recognizes that some other places don’t have a price on pollution.”  

The federal tax will apply to all industrial sectors in affected provinces, the national broadcaster reports, “including the oil and gas industry, refineries, pulp and paper, and food processing. Fuel producers and distributors will also have to pay.”

According to the Canadian Press, the 220-page draft includes a provision to return revenue raised by the federal carbon tax to the province or territory where it was paid—but only if they opt in to the system, as the Yukon Territory has. In provinces that continue to rebuff the federal system while failing to enact a compatible price of their own, Ottawa may rebate the tax directly to residents—another lift from Alberta’s policy.

Erin Flanagan, Federal Policy Director for the Pembina Institute, welcomed the draft as ” exactly the kind of signal we want to send to the economy. We want to reward consumers and businesses who are reducing their carbon footprint, so this is moving us in the right direction.”

But other climate hawks criticized the bureaucratic complexity of what the National Observer described as “an elaborate program with provisions for enforcement, payments, rebates, exemptions, and vetting of provincial systems” that will require “measuring many different facilities for their greenhouse gas intensity.”

“The costs of monitoring all of this are going to be quite significant compared to just having a carbon price,” Environmental Defence National Program Manager Dale Marshall told the Observer, adding that a federal excise tax like that on gasoline might have been simpler to administer.

Chris Ragan, Chair of Canada’s Ecofiscal Commission, endorsed the draft’s efforts to accommodate companies exposed to international competition. “What you really want to do is keep your firms in business, but also give them the incentive to reduce emissions,” Ragan said. “And that’s exactly what this system does.”

Citing the non-profit commission’s own research, Ragan said the proposed carbon levies would have limited impact nationally—affecting only about 5% of GDP. But they would strike harder in Saskatchewan, touching closer to 18% of the provincial economy.

The government plans to entertain comments on the legislation into February, the Observer notes, and to pass a final bill by Parliament’s June recess.

“Ottawa will also be assessing provincial [pricing] plans over the next eight months,” the Globe and Mail reports, “and will indicate after September 1 in which provinces it will impose the federal levy, either in whole or in part.”