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



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


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.