Redrawing the battle lines in the fight over Canada’s price on carbon

Canada’s carbon pricing system is being implemented as a way to help meet the country’s global emissions targets, but its future remains uncertain. Can industry assist in overcoming opposition?

By: , /
March 19, 2019
gas pump
A fuel pump is seen at a gas station in Toronto. A fuel charge comes into effect in April 2019 for Saskatchewan, Ontario, Manitoba and New Brunswick. REUTERS/Mark Blinch

At the historic climate talks in Paris in 2015, countries agreed that large-scale transformation is required to avoid the worst effects of global temperature rise. The Intergovernmental Panel on Climate Change (IPCC) report released last year added more urgency to this message — countries have little more than a decade to keep global warming below 1.5°C.

Carbon pricing is globally recognized as a vital tool to reduce carbon emissions. While Canada joins the ranks of countries like China, Argentina and South Africa in implementing some form of carbon pricing mechanism in 2019, Canada’s federalist system poses a unique set of challenges.

Last month the Ontario government released the details of its carbon pricing plan for big emitters, which looks quite similar to the federal emissions trading system the province adamantly opposes. This was the most recent development from a provincial coalition — made up of the governments of Alberta, Saskatchewan, Manitoba, Ontario and New Brunswick — opposed to the federal carbon pricing plan.

While provincial governments have employed a range of strategies to oppose the federal plan, influential industry players like the Canadian Chamber of Commerce have openly supported the federal carbon pricing system. Canadians are now spectators to a surprising matchup, with the federal government and a growing number of industry players facing off against defecting provinces.

It is difficult to imagine a scenario where Canada can meet its Paris Agreement target of reducing emissions to 30 percent below 2005 levels by 2030 without an ambitious and effective carbon pricing mechanism. So how can we make sense of these two seemingly contradictory developments — provincial opposition yet (conditional) industry support for carbon pricing — and how will they affect the future of Canada’s price on carbon?

The federal carbon pollution pricing system became law last summer. The plan consists of two ‘backstops’: a carbon levy and a trading system for large emitters. The carbon levy (also known as a fuel charge) will apply to fossil fuel producers or distributors, starting at $20 per tonne of carbon dioxide equivalent (C02e). This comes into effect in April 2019 for Saskatchewan, Ontario, Manitoba and New Brunswick.

The second part of the federal plan — which came into effect on January 1 — is the trading system designed for large industrial emitters (those that emit 50,000 tonnes of carbon dioxide equivalents per year), known as the Output-Based Pricing System (OBPS). In this system, the government sets an emissions threshold for each sector; companies that emit below their annual limit receive credits and those that exceed the limit must either buy credits from other companies or pay the tax (which also starts at $20 per tonne). The OBPS came into effect in January for industry in Ontario, Manitoba, New Brunswick, Prince Edward Island and partially in Saskatchewan.

A price on carbon is not a silver bullet for Canada’s emissions reductions, nor was it intended to be. Although Canada is slipping further behind on its Paris targets, the federal carbon pricing system will still significantly reduce emissions. Last fall the government estimated that — once the planned provincial and territorial systems take effect and the federal backstop is applied — the system could cut carbon pollution across Canada by 50 to 60 million tonnes in 2022. According to the latest federal projections, with the carbon pricing backstop and other proposed measures, Canada will fall short of its 2030 target by 79 millions tonnes. Without these measures the gap increases to 164 million tonnes.

Applying the federal backstop will be no easy feat. The Ontario and Saskatchewan governments have launched legal cases against the federal government. The first legal case against the federal plan is already underway in Saskatchewan, with Ontario and New Brunswick intervening in favour of Saskatchewan (and British Columbia intervening in favour of the federal government). If the newly elected premier of New Brunswick, Blaine Higgs, makes good on his promise, and if Jason Kenney’s United Conservative Party wins the Alberta spring provincial election, they could also file court cases. While Manitoba has yet to take legal action, Premier Brian Pallister unexpectedly announced last October that the government would abandon a planned carbon tax. Together these politicians are forming a new alliance against carbon pricing. Despite some variations in their positions — like Kenney’s indication that he would support the price for heavy emitters but reject the fuel charge — they are rallying together and supporting each other’s legal cases.

Fragile coalitions

Political coalitions are notoriously fragile and the coalition that emerged in the wake of the last federal election in support of carbon pricing is no exception. The 2018 election of Doug Ford in Ontario was followed, in quick succession, by the repeal of Ontario’s fledgling cap and trade program, the removal of the carbon tax for natural gas rates, and a court challenge of the federal backstop.

In Alberta, Premier Rachel Notley’s support of the national climate plan was contingent upon the construction of the Trans Mountain Expansion project (TMX). When the August Federal Court of Appeal decision caused the project’s certification to be revoked, Notley pulled out of the national plan. This decision won’t jeopardize the government’s carbon levy — currently priced at $30 per tonne — until 2021, when the federal backstop increases to $40 per tonne. Meanwhile, the United Conservative Party is leading in the polls for the province’s upcoming election, creating even greater uncertainty around the future of the federal backstop.

"Industry acceptance reflects a growing global consensus around carbon pricing."

While the political battle wages on, businesses continue working with the federal government to iron out the details of the output-based pricing system. The government initially set the threshold for most sectors at 70 percent of average emissions, meaning these large emitters would pay for 30 percent of their emissions. However, the government later loosened the threshold to 80 percent — meaning most companies would pay for 10 percent fewer emissions — with proposed exemptions for several industries at 90 and 95 percent. These changes resulted from lobbying and consultations with affected industries. Further changes could be made in response to the latest round of comments on the OBPS, which ended on February 15. However, given that the government has actively responded to concerns about competitiveness, most industries appear to be on board with the trading system.

Many companies have been reticent in the past about publicly supporting a price on carbon. Perhaps this should be unsurprising, since some industries like oil and gas have actively lobbied against carbon pricing mechanisms. For example, in correspondence released under an access-to-information request, the Canadian Association of Petroleum Producers (CAPP) opposed Alberta’s carbon levy in 2013. But the last five years have seen a gradual shift. In 2015, several large oil and gas producers publicly endorsed Alberta’s carbon tax in its climate plan (however, industry reception of the plan was divided over the emissions cap, which was the product of secret negotiations between oilsands producers and environmental organizations).

Industry — cautious but (mostly) unified

The federal carbon pollution pricing system is less controversial from the perspective of most industries. Industry acceptance reflects a growing global consensus around carbon pricing; in countries around the world, multinationals have voiced their support for carbon pricing policies.

The Canadian Chamber of Commerce — Canada’s largest business association — recently endorsed both the OBPS and the fuel charge. While not every member supports the details of the carbon pricing system, the report names several industry associations that support carbon pricing. Such widespread industry support is significant, though it is not unconditional.

Shortly after the chamber’s report, the organization made it clear its support for the federal plan is contingent on returning revenues to businesses, reducing the “regulatory burden” on businesses, and gaining access to tidewater (i.e., building pipelines for oil and gas exports). Similarly, another large business association, Canadian Manufacturers and Exporters, calls for revenue-neutral distribution of carbon pricing funds. The chamber also frames pricing as an alternative to regulation. However, the federal government considers complementary regulation such as the clean fuel standard, the coal phase-out and methane regulations (all criticized in the Chamber’s report) necessary to reach Canada’s climate targets.

The growing (albeit conditional) support of industry makes provincial opposition to the federal backstop look contradictory (with a caveat that at least one regional business association has sided against the federal government, and an association representing small- and medium-sized businesses, the Canadian Federal of Independent Businesses, may more vocally oppose the plan). When it comes to carbon pricing, most industries see the writing on the wall. According to the Canadian Chamber of Commerce report, “larger Canadian enterprises and multinationals have been preparing for a carbon tax for years.” Data collected by the CDP, a nonprofit organization that has helped normalize global corporate carbon disclosure, supports this finding. On paper, companies are supportive of Canada’s national emissions targets, but are more “inclined to wait and see” when it comes to explicitly supporting a carbon pricing system ambitious enough to achieve those targets.

Meanwhile, the opposing provinces seem to be intent on dragging the federal carbon pricing system through the courts — even if the cases will only serve to delay the inevitable. However, the dynamics between the federal government and the provinces could look very different depending on the outcome of the federal election this fall. Carbon pricing will be a core election issue and federal Conservative Party leader Andrew Scheer is calling 2019 the “year of the carbon tax.” While such punchy messaging has certainly tested well in focus groups and is likely to resonate with certain voters, we have yet to see if the complexities and nuances of the carbon pricing issue will be reflected in the lead up to October’s election.