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

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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.

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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.

 

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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

 

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