The Pan-Canadian Framework on Clean Growth and Climate Change-The Ontario Controversy

clean-energy-energy-sky-7865

The federal government created an eloquent solution to the problem of carbon emissions and climate change. Their backstop GHG Act allows the provinces to create a number of homegrown solutions in order to deal with emissions within their own jurisdictions.

Ontario created perhaps the best and most integrated solution to the problem of emissions. The Ontario Climate Change Mitigation and Low-Carbon Economy Act, 2016 (the Ontario Act) established a standard cap and trade system described in the earlier article. In addition, the system integrates with the Western Climate Initiative (WCI) which provides access to an even greater market to buy and sell the most cost effective carbon credits.

The Ontario system compared a number of policy alternatives in its Five Year Climate Change Action Plan. The most cost effective alternative used the existing cap and trade system integrated with WCI. The policy concluded that the existing system would result by the year 2020 in a carbon charge of $18 in 2016 dollars.

We previously described how the federal government uses a solid constitutional ground to establish a national carbon charge. Ontario intends to argue against this ground with all available resources. This would provide great relief to Saskatchewan in its intent to also contest the GHG Act. The other provinces may follow suit, but from a risk management perspective Ontario and Saskatchewan businesses would be prudent to prepare for the federal carbon tax of $20 tonne in 2019 and establish the necessary processes and infrastructure now.

The Ontario government appears to be in the enviable position of avoiding the political cost of pricing carbon and can throw the entire responsibility on the federal government. Instead of businesses and consumers facing a potential Ontario based $18 cost per tonne of carbon by 2020, they will have the federal government’s $50 tonne instead. Interestingly, the Ontario government would be receiving greater revenues under the federal system.

The federal system would also be revenue neutral, but the Ontario government would not be as constrained in the use of the revenues. They still might model the innovations and adaptations outlined in the Ontario Climate Change Action Plan, but there is no indication that they plan to do so. Indeed, the funds could go directly back to the entities paying the tax. The carbon pricing signal would be lost, and Ontario would have lost a tremendous opportunity to invest in other innovations to shift into the low carbon economy.

However, Ontario regulated entities purchased $2.8 billion worth of credits already. Ford appears to be pleased that companies would not have to incur these costs in the future. The costs under the carbon tax would be even greater. The federal government would likely not be in a position to reimburse Ontario businesses the cost they have for purchasing credits that may extend as far as 2021. These revenues would have likely gone to the Ontario government and a portion to the WCI. The revenues generated in Ontario would have flowed mainly towards funding the various emissions reductions programs.

WCI does not provide information as to whether Ontario was a net purchaser or seller of carbon credits. An estimate by Ontario’s auditor general Bonnie Lysyk estimated that in 2016 that Ontario businesses would have to pay $466 million for WCI facilitated allowances.

Under section 33 of the Ontario Act, the Minister may retire emission allowances from circulation or may cancel Ontario emission allowances in accordance with the regulations in such circumstances as may be prescribed.  A less confrontation approach would simply be to conclude the Ontario Cap and Trade program naturally. Businesses would likely have no further need for these emission allowances since the province would no longer need to cap the level of emissions coming from the regulated industries.

Effective July 3rd, 2018 the provincial government revoked the cap and trade regulation, prohibiting all trading of emission allowances. Their Carbon website does not provide any further helpful information. The GreenON rebate program will be wound down, but the program will honor arrangement where contracts were signed before June 19th, 2018 for work to be completed by October 31st, 2018.

Ontario contemplates formation of a fund to invest in emission reduction technologies. With the dismantling of the Ontario Cap and Trade, The federal government intends to review the $420 million transfer to Ontario under the Low Carbon Economy Leadership fund.

Since the federal carbon charge is a separate type of system, we would anticipate business having to pay and collect this amount commencing January 1st, 2019. We would also anticipate the carbon tax running concurrently with the no longer required but already purchased carbon credits by Ontario regulated entities.

#pan-canadian

#emissions

photos

Tookapic

+Source: stock.tookapic.com 

 

The Pan-Canadian Framework on Clean Growth and Climate Change

arid-climate-change-clouds-60013This is the third article dealing with Canada’s legislation on climate change.

 

As previously discussed, Canada’s GHG Act contains two mechanisms for pricing carbon. The first involves straight taxation. The second mechanism uses cap and trade.

In a cap and trade system, the government sets carbon emission caps on the regulated sectors. The government then issues certain emission allowances by an auction process. Those businesses purchase the allowances to allow for a certain amount of carbon emissions. If the business exceeds those levels of allowances, then it has to pay a charge on the excess. However, if it is able to reduce its level of emissions to below the level of allowances, it can trade those allowances to other businesses requiring them. The government in charge of the cap and trade system then simply reduces the amount of allowances issued for each time period. The economy then reduces its overall carbon emissions.

The difficulty with a national cap and trade system would be the federal government’s potential lack of jurisdiction to issue such a system. The government’s solution involved creating the first mechanism, the carbon charge, which clearly falls into its ability to legislate. The cap and trade system becomes merely an add-on. This flexibility for the carbon charge then would justify this second mechanism.

The GHG Act allows the provinces to implement their own tax system or cap and trade system. The provincial systems must plan to achieve a certain level of emission reductions in order to be comparable to the same results that would have been achieved by the federal system. If the planning objectives are comparable, then the federal system does not apply. This achieves the ‘backstop’ type of legislation where the provinces retain sufficient authority to develop their own homegrown process for emission reductions.

A cap and trade system possesses numerous pros and cons. For example, this system shows historical success. The sulphur dioxide trading system reduced emissions to alleviate acid rain impacts. The system produced actual and substantial reductions in sulphur dioxide over a short period of time.

The European Union Emissions Trading System for carbon initially appeared to be substantially less successful. The government issued far too many emission allowances which substantially reduced their value. Businesses did not have to modify their operations in order to meet their emission caps. Presently, the EU’s $38 billion annual carbon market now seems to be operating the way intended and carbon prices have more than doubled in the past year.

A cap and trade system can result in real reductions of carbon emissions. Meanwhile, a carbon tax can simply be paid by a business as a cost of doing business instead of it trying to reduce its emissions. However, the B.C. carbon tax systems does appear to have resulted in an overall reduction of emissions from 2008 to today’s date. Ontario’s recently introduced cap and trade system required time to prove itself.

Ontario’s first 2017-2020 compliance period allowed some eligible capped emitters to receive emission allowances free of charge. This was to make the transition easier and make the system manageable for companies with competitors in jurisdictions without a carbon price. Allowances were not to be given free of charge to fuel suppliers/distributors, electricity importers and electricity generators. The rate of allowances was to be decreased over time at a rate of 4.75% per year for combustion emissions starting in 2018.

Partnering with other cap and trade systems can result in even greater savings. Ontario signed on with the Western Climate Initiative. This Initiative includes California and Quebec. Other governments had joined in, but dropped out of the Initiative. Nova Scotia recently indicted its intent to join.

The theory of comparative advantage shows that where a country has a lower opportunity cost, it can produce less expensive emission credits and this can result in a greater economic return for all countries involved. This allows countries to specialize in emission credits where they have comparative advantage.

Being involved with international trading provides organizations with the ability to source the least expensive emission credits. This somewhat resembles a free trade agreement where funds leave one jurisdiction and emission credits come back. Some politicians criticize such an arrangement which drives investment out of the country. However, business have the ability to source the least expensive emission credit to reduce its expenses and meet its overall emission cap.

Ontario recently indicated its intent to withdraw from the Initiative. Its agreement states that it has to provide one year’s notice. The Initiative then blocked Ontario businesses from any future auctions of emission credits. This prevented these business from dumping all of their credits and negatively impacting the value of credits.

 

In the next article, we shall examine the Ontario situation.

 

photo by

Pixabay

+Source: pixabay.com

 

 

 

The pan-Canadian framework: Setting a price on carbon

air-air-pollution-climate-change-221012This is the second in a series of articles dealing with carbon tax and trading. The first article dealt with the history surrounding the UN treaty on climate change and the various attempts to implement the treaty which eventually culminated in the Paris Agreement. The pan-Canadian framework became Canada’s answer to reduce its overall greenhouse gas (GHG) emissions.

Carbon pricing forms the central component behind any market attempt to reduce GHG emissions other than using strict command and control regulations. Pricing sends a signal to the marketplace that products or operations relying on extensive carbon use can be less economically efficient than other products or operations that use less carbon.

The ability to emit any form of pollution into the environment without restrictions allows polluting entities to externalize those costs. This means that these entities do not have to incur the cost of cleanup while some other neighbour next door, or city or country incurs the eventual cost of that pollution. Sending a price signal essentially adds the cost of the pollution right into the cost of the product or operation itself. Anyone using that product or operation can now compare the cost with another product or operation that does not have such a carbon extensive expense attached to it. The market eventually switches to the low-carbon alternative.

This problem of externalizing costs can be seen in other areas. The globalization of the economy demonstrates this. Lower tariffs allow products that are produced more cheaply elsewhere into the country. The entire economy essentially benefits except for those that used to make the same item but at a higher cost. One group incurs the benefits while a different group incurs the cost such as job loss.

A more concrete example would the Alliance of Small Island States (AOSIS). This 44-member intergovernmental organization comprises low-lying coastal and small island countries formed to address global warming. The existence of many of these states are at risk owing to global warming and rising sea level. The group continues to threaten litigation with climate change related losses at potentially over $570 trillion.

The federal government places carbon pricing as the primary pillar to its pan-Canadian framework. The question then becomes can it legally achieve this goal.

The framework uses two basic mechanisms for this pricing under Bill C-74 which includes the Greenhouse Gas Pollution Pricing Act (GHG Act) and recently passed by the Senate. The first mechanism uses carbon taxation. The Act actually uses the term “charge” instead of tax, but tax seems to capture the concept fairly well also. The charge begins at $20 per CO2 equivalent for 2019 and increases at $10 per year until it reaches $50 in the year 2022.

The federal government’s jurisdiction over the environment can conflict with the provinces’ jurisdiction quite easily. The federal government’s jurisdiction over tax pursuant to s. 91(3) of the Constitution Act however appears quite clear. This section allows the federal government to raise money by any mode or system of taxation. However, the intent behind the GHG Act would be for it to be revenue neutral. The revenues raised would be returned to the provinces to facilitate climate adaptation and innovation in low carbon technology. The GHG Act does appear clear in that it raises revenue. The Constitution Act does not place a condition on raising money through taxes depending upon how the revenues can be spent.

The federal government can pass legislation in order to implement a treaty, but this does not override the provinces’ jurisdiction. The government also has authority under peace, order and good government. Carbon being emitted in one jurisdiction can have negative effects in another jurisdiction, but this would not seem to justify dealing with carbon on a national basis under this type of power.

A number of provinces intend to challenge the federal jurisdiction to place a charge on carbon emissions. Scholars have opined on this situation and came to the conclusion that the feds would likely succeed in any court challenge. Although this delays the inevitable, court challenges also allow a bad situation to continue. In addition, jurisdictions not modifying their economy to align themselves with a lower carbon future, shall soon become less competitive and be left behind by the global economy.

In the next article, we shall be examining how the second mechanism of carbon pricing, carbon trading, integrates with the tax proposal. Read the previous article here.

Gary Goodwin is the chief legal officer for a national conservation organization. He has been working in the environmental field for over 30 years.

Lawyers Daily July 6, 2018

 

Source: pixabay.com

The pan-Canadian framework on clean growth and climate change Thursday, June 28, 2018 @ 8:52 AM | By Gary Goodwin

 climate-cold-glacier-2969.jpg

The Canadian government now enters the final stages of implementing its Greenhouse Gas Pollution Pricing Act. The Act sets the regime for a charge on fossil fuels and for pricing industrial greenhouse gas (GHG) emissions. This provides a backstop action for other parts of the country that have not taken steps to pass their own legislation to deal GHG emissions. Concurrently, the incoming Ontario government intends to terminate its existing cap and trade legislation.

As Canadians enter interesting times with respect to federal and provincial jurisdictions and potential litigation for Ontario companies that have already started down the emissions trading path, we require some context establishing the existing socioeconomic environment. This begins a series of articles looking at how we got to this point, where we are now, and potentially what the future might look like legislatively. As others and Yogi Berra point out, it’s tough to make predictions, especially about the future.

The UN Framework Convention on Climate Change (UNFCCC) created the overall structure for 192 countries that signed and ratified this treaty dealing with GHGs. An important preamble of the treaty recognizes that the parties are concerned that human activities have been substantially increasing the atmospheric concentrations of GHGs. The importance of this should be restated in that although some commentators and politicians question the science behind climate change, we do not hear of any country wanting to withdraw from this global treaty.

We do not intend to debate the reality behind climate change, and we would only recommend self-directed research on this point. We would also recommend relying upon peer-reviewed research which is the “court of appeal” standard when it comes to climate change science. The Intergovernmental Panel on Climate Change is the international body for assessing the science related to climate change.

Historically, the 1997 Kyoto Protocol failed to fully implement the UNFCCC as it did not include the two largest emitters, China and the U.S. The Canadian government itself did not take serious steps to attempt to implement the protocol. With the legally binding obligations, the government needed to withdraw from the protocol to avoid some $14 billion in penalties.

A series of Conference of the Parties (COPs) under the UNFCCC umbrella attempted to re-establish some sort of unanimity on how to proceed further. These COPs finally culminated in the Paris Agreement in 2015. The nature of this agreement as a treaty can be somewhat questionable. President Barack Obama entered into the agreement by executive order and therefore did not require Senate approval required for treaties. This allowed President Donald Trump to provide notice by executive order of his administration’s intent to withdraw from the agreement. The U.S. can only provide notice to withdraw three years after the agreement comes into force for the country. The U.S. can then provide a one-year formal notice to withdraw. The total of all these periods finally culminates in November 2020, shortly before the end of his existing term.

As of June 2018, 195 UNFCCC members signed the agreement, and 178 became parties to it. The agreement aims to limit the increase of global average temperatures to 2 degrees C above preindustrial levels and hopefully to limit the increase to 1.5 degrees C to significantly reduce the risks and impact of climate change.

In the agreement, each country plans and reports on its own targets. The agreement does not contain any enforcement mechanism to compel countries to reach a certain level by any particular date and instead provides a method to globally drive fossil fuel divestment.

Each country determines its own “Nationally Determined Contributions” (NDCs) and that these NDCs should be ambitious.

An important aspect of the agreement includes the International Transfer of Mitigation Outcomes (ITMOS). This allows countries to use emission reductions outside their own jurisdictions. The various heterogeneous carbon trading systems require linkage in order to avoid double counting and other verification issues. The UNFCC can act as a type of global securities regulator, something that Canada was unable to do when examining a national securities regulator.

Under the agreement, Canada committed to reducing GHG emissions by 30 per cent below 2005 levels by 2030. The major strategy to reach this commitment can be found within the pan-Canadian framework. In future articles we will examine its four main pillars which include pricing carbon pollution, complementary climate actions, adaptation and innovation.

As expected, pricing carbon creates the greatest controversy. Exploring the reasoning behind pricing carbon will illuminate the further changes we can anticipate in Canada’s short-term economic future.

This is the first of a four-article series.

The pan-Canadian framework (developed with the provinces and territories and in consultation with Indigenous peoples) will ultimately impact almost all sectors of the Canadian economy. This future impact illustrates areas in which in-house counsel should be strategically reactive, and more importantly, proactive.

The facts, they are a changin

pexels-photo-204366.jpeg
It was a dark and stormy night. Or rather, the night darkness concealed the source of the intense storms. That seems much better. My wife and I waited for the storm to pass that evening before setting off to walk the dogs. The reflection of the street lights glistened off the wet streets.

All down the street, I could see small ridges. Upon closer examination, I could see that there were literally hundreds of night crawlers stretched out perpendicular to the road. The road friction made them stretch out to a tortured length of about a foot and a half. Normally plump, this condition thinned them out considerably. Night crawlers are earth worms on steroids.

Feeling some form of compassion for this Lumbricus terrestris, I started to scoop them up and toss them back on to the grass. Some worms can survive being cut in half but being half squashed flat by a truck did not seem very survivable to me.

Now, under normal conditions worms produce a fair bit of mucus. Adding torrential rains to that seems to add to mucus production as the worm exodus continued. I started to regret my misplaced compassion and tried to distance myself from my emotions. My wife just simply distanced herself.

I assumed the common knowledge that during intense rain storms worms attempt to escape drowning in their burrows. However, they breathe through their skin which needs moisture. So there may be a number of other reasons why they engage in such risky behavior of stretching themselves out on a busy road.

One good reason would be migration. Lots of rain would allow them to move great distances. However, half of them moved from the south to the north, while the other half moved from north to south. But, hey, they’re worms. The grass always seem more organic filled on the other side of the street it is said.

An interesting phenomena occurs when you experience a situation and learn some new facts about it later. I learned that another good reason worms travel is that they want sex. My recollection of the event now includes an added ‘ewww’ quality to it. And what better time to find a mate than when everyone else is stretched out in the same area. We have a beach here that seems to serve the same purpose for humans.

Although worms are hermaphrodite, male and females together, they cannot reproduce solely by themselves. They need a mate. I must have cast aside, and severely disappointed, several dozen night crawlers. Destined now to remain virgins they’re probably bitter. Unless that was going to be their choice anyway, and so that is perfectly ok.

This sex migration behavior can bring down planes. After a rain, worms like to stretch out wherever they can, including airport runways. Worms do not get sucked into turbines, but the birds coming to eat the worms can be. Particularly the flocking birds like gulls which tend to ignore whatever happens around them when they fight over food. So airport authorities tend to use fungicides to reduce worm populations.

Night crawlers contribute to the US current account deficit! Some politician should complain about this. If nothing more than the neat optics it provides. “Congress needs night crawler NAFTA negotiations!” Apparently $20 million of night crawlers are exported to the US each year with little or no USA content. A few years ago, the price leapt from $35 per thousand worms to $80 per thousand. Economics 101. Supply was tight, and owing to inelasticity of demand, prices skyrocketed. Worm futures may not have the panache of Tesla stock, but you would have made a fortune otherwise.

Fact

 

Federal tax reform debates suffer from the Rashomon effect

pexels-photo-1059114

The film Rashomon won an Academy Honorary Award in 1952 and is considered now one of the greatest films ever made. The film uses a plot device that involves various characters providing subjective, alternative, self-serving and contradictory versions of the same incident.

One can see the theoretical application of this plot device to the multi-varied perception of the liberal government’s changes to the taxation of Canadian controlled private corporations. Let’s just deal with the one plot device — the sprinkling of income.

The government takes the position that these tax advantages are in place to help Canadian businesses reinvest and grow, find new customers, buy new equipment and hire more people. Not surprisingly, people evidently use these corporate structures to reduce taxes by paying dividends to those family members at a lower tax bracket and not involved in the business. Mea culpa. The government perceives that these people are avoiding paying their fair share of taxes as opposed to investing in their business and maintaining their competitive advantage.

Of course, sprinkling income provides dividends to family members who may not have much to do with the corporation in the first place. The tax policy intended to spread income more among those involved with the corporation.

The government states that when the rules are used for personal benefit, they are not contributing to growing the economy. Rather, such practices undermine confidence in the economy by selectively giving away tax advantages and producing an unfair result.

The Canadian Bar Association takes umbrage to the government’s use of the term “loophole.” Loopholes are inherently legal, but they circumvent the policy intent of the legislation when corporations legally use tax advantages to make professionals more whole as compared to salaried employees. So let’s just call these advantages “loopwholes” instead.

We can use the Rashomon approach to examine taxes paid in Finance Minister Bill Morneau’s CCPC comparison discussion paper. Susan, an employee, earns employment income of $220,000 and pays her fair share of taxes totalling $79,000. We compare this to our business owner Bob earning a professional income of $220,000 and, through the sprinkling of tax loopwhole-ness, pays only $44,000 in taxes. Susan pays about 36 per cent of her income in taxes while Bob only pays 20 per cent, a $35,000 difference. One could easily think that there is only a 16-per-cent difference, but through the magic of Rashomon, we can see that Susan pays about 44 per cent more in taxes (35/79). If the loopwhole is lost, Bob becomes even more upset as his tax bill would increase 80 per cent (35/44).

The CBA, to the consternation of some members and now some former members, takes a political position against the removal of the tax loopwhole. The main argument appears to be that the loopwhole allows the corporate professional to earn the same amount as an employed individual since a corporate professional does not have paid vacation or an employer pension. The pension argument has an iceberg quality to it since fewer companies are providing pensions in any event, down to around 37 per cent of employees.

In comparing total compensation, HR professionals use a rough guideline that benefits can total 20 per cent of income once you include vacation, health and pensions. If we get back to fun with ratios, we can see that Bob’s tax savings of $35,000 comes close to this 20-per-cent premium ($44,000 normally).

A major argument for allowing professional corporations a tax break is the risk premium. A business owner has no guaranteed income, job security, paid vacation, sick days or retirement program. In addition, the owner must personally guarantee debt obligations and pay the entire cost of the Canada Pension Plan. Therefore, an owner should be entitled to a risk premium. As an example, the risk premium for stocks is arguably about five per cent, but this does not appear high enough for Bob considering the risk.

So, in a straight comparison, Bob should pay less tax in order to have close to the same total compensation as Susan, a salaried employee. Unfortunately, we drifted away from the actual question, dreamed about a logical fallacy and refuted an argument that was never made. The question is not how the tax system should make Susan and Bob have the same total compensation but rather how to limit the tax exemption for what it was intended, mainly using dividends to compensate those involved in the business and to help businesses reinvest and grow.

If we use sprinkling dividends as a loopwhole in order to make Bob’s total compensation the same as salaried employee Susan, we have passed the risk premium over to be paid by Susan by way of tax revenue foregone by exempting Bob. The risk premium should belong to Bob to be mitigated by higher revenue paid by Bob’s clientele or by reduced expenses, not lower taxes at the expense of Susan.

If a tax break is truly yours, then let it go. If it returns, then it belongs to you. If it doesn’t, then it never was.

 

Photo by rawpixel.com from Pexels

From a previous Canadian Lawyer Article.