In this article, we provide a high level summary of salient aspects Provincial carbon regimes in Canada. Our goal is to establish a baseline for readers outlining the different Canadian carbon pricing regimes for further consideration in subsequent pieces. This article is not intended to be a comprehensive piece of work on the current legislation in each Province addressing climate change, rather this short article is intended as a survey of certain carbon financing regimes now in effect across each Province.

Each Province’s journey started when the Government of Canada published the Pan-Canadian Approach to Pricing Carbon Pollution (the Federal “Benchmark”) stating that the OBPS would be used as a backstop by any Provinces or Territories that so requested or failed to put in place a system that met the Benchmark.

THE CONSTITUTIONAL LITIGATION

There was no shortage of legal appeals against the Greenhouse Gas Pollution Pricing Act (the “Act”) enacted in 2018, under which the Federal OBPS has been implemented. The Act’s constitutionality was challenged by some Provincial governments from its inception. The Act, which sets a minimum standard of carbon pricing in an effort to lower greenhouse gas (GHG) emissions, was confirmed to be constitutional by the Supreme Court of Canada (SCC) in 2021. In Reference re: Greenhouse Gas Pollution Pricing Act,^[2] the SCC explicitly recognized the existential threat of climate change and the importance of carbon pricing in combating same. By confirming that the Federal government has the legal authority to take coordinated, national action and impose a minimum carbon price, Canada can ensure that no Province is a ‘stumbling block to progress being made in other parts of the country.’

We need to understand that the Act is an environmental and economic piece of law. Fostering an economy with low GHG emissions is one of the many objectives of the Act. This goal is advanced within the legislation by providing financial incentives to both consumers and enterprises. Carbon pricing is a way to accomplish this.

The SCC’s decision should provide some certainty for business professionals and transactional lawyers that carbon pricing is here to stay (in some form or another) and that climate change and Environmental Social and Governance considerations will become increasingly more important in the context of capital raising and business transactions.

We have provided a summary of key actions each Province in Canada has taken to combat climate change and align itself with the Federal Benchmark.

Québec

Québec has adopted a cap-and-trade system, which is set out in the Regulation respecting a cap-and-trade system for greenhouse gas emission allowances (the “C&T Regulation”) under the Environmental Quality Act^[3] (the “EQA”) (the “Québec C&T System”). Québec’s C&T System is administered by the Ministry of Environment and Climate Change and it is linked to California’s cap-and-trade system through the Western Climate Initiative (the “WCI”).

The WCI is a group of U.S. States and Canadian Provinces that have decided to adopt a common approach toward addressing climate change, in particular by developing and implementing a North American system for capping and trading GHG emission allowances. Ontario joined the WCI initiative in 2017 but withdrew one year later when it repealed its cap-and-trade regulation on July 3, 2018. To date, Québec is the only Canadian Province linked to the WCI.

Participation in the Québec C&T System is open to “Emitters” and “Participants” as described in the C&T Regulation. All Emitters and Participants must register with the Québec C&T System by submitting a Compliance Instrument Tracking System Service (CITSS) application to the Minister. The reporting obligations are set out in the Québec’s Regulation respecting mandatory reporting of certain emissions of contaminants into the atmosphere. It is important to note that the C&T Regulation makes use of various impact formulas based on the global warming potential of each GHG and so Québec facilities must be careful to implement the appropriate quantification measurement technique to accurately report their emissions.

Ontario

In Reference re: Greenhouse Gas Pollution Pricing Act, the Supreme Court of Canada explicitly recognized the existential threat of climate change and the importance of carbon pricing in combating same. Following this decision, Ontario, once a backstop jurisdiction, began transitioning from the Federal OBPS to Ontario’s Emissions Performance Standards (“EPS”) program. The EPS program’s concept is comparable to the Federal OBPS in that a facility required to register with the program will need to calculate, document, and verify its annual GHG emissions and pay the carbon price per tonne of CO₂ above its applicable limit. Such compensation can also come in the form of “emissions performance units,” which are credits a facility earns for generating GHG emissions below the EPS program’s annual cap. Depending on the nature of its industrial operations and the volume of its annual GHG emissions, a facility may or may not be obliged to register with the EPS program. All establishments (including Ontario EPS facilities) that engage in a specified GHG activity within the program, as set out in Column 1 of Schedule 2 of the Ontario Regulation 390/18 (Greenhouse Gas Emissions: Quantification, Reporting and Verification), are required to give a report to the director, if the reporting amount in respect of the facility for each calendar year is 10,000 tonnes of CO₂e (carbon dioxide equivalent) or more. Ontario EPS facilities have an additional obligation to get their reports verified by a third party.

Surplus credits issued to an Ontario facility under the Federal OBPS must be remitted or transferred by February 15, 2023 and failure to do so will make the credits subject to suspension and ineligible for remittance or transfer as compensation for the 2022 or subsequent compliance periods.

Alberta

In Alberta, the regulatory regime governing the pricing of greenhouse gas emissions is created by the Emissions Management and Climate Resilience Act (“EMRCA”) and the related Technology Innovation and Emissions Reduction Regulation (TIER). In connection with a mandatory review of TIER conducted in late 2022, several amendments to TIER were promulgated that became effective January 1, 2023. Included among these amendments was the introduction of a sequestration credit.

As a result, there are now four kinds of credits and offsets in Alberta:

There are nuanced differences between the different forms of credits and offsets.

Emission offsets are generated by projects that have voluntarily reduced their GHG emissions. Emission offsets are quantified using Alberta-approved methodologies called quantification protocols, and are verified by a qualified third party assurance provider. Emission offset projects must meet the requirements in the TIER Regulation, the Standard for Greenhouse Gas Emission Offset Project Developers, and a relevant Alberta-approved quantification protocol (the “Quantification Protocols”). Alberta emission offset projects are registered and publicly listed. Alberta OBPS facilities are required to submit annual compliance reports. Those that emit more than 100,000 tonnes of CO₂e per year are also required to submit an annual forecasting report.

An emission performance credit is generated when the facility’s total regulated emissions are less than its allowable regulated emissions by 1 CO₂e tonne. As with emission offsets, emission performance credits can be registered in the Alberta Emission Performance Credit Registry.

A fund credit is a credit that is created by paying money into the Fund at the rate specified by Ministerial Order. On December 1, 2021, the Alberta Minister of Environment and Parks issued Ministerial Order 87/2021,^[4] confirming the increase of the cost to obtain Technology, Innovation and Emissions Reduction Fund (Fund) credits under the TIER from C$40 per credit in 2021 to C$50 per credit in 2022 (1 tonne of CO₂e reduced = 1 Carbon Offset = $50/tonne in 2022).

By Ministerial Order 62/2022, the cost of fund credits was further established for 2023 through 2030. The current Order aligns with the carbon pricing requirements under the Federal OBPS. Based on the 2022 result of the assessment of Provincial and Territorial systems against the updated Federal Benchmark as of November 22, 2022, the Federal fuel charge will continue to apply in Alberta.

A sequestration credit is created through the conversion of an emission offset, if the emission offset was created through the net geological sequestration of carbon dioxide, during or after 2022.

Government-approved Quantification Protocols have been developed to support the Alberta offset system. These protocols provide standardized quantification methodologies for specific greenhouse gas emission reduction opportunities in Alberta. The protocols have been developed using the best available science tailored to Alberta conditions, good practice guidance from other jurisdictions, Provincial/national expertise, and experience gained through similar international projects. While quantification protocols serve as a guide for setting up a project and quantifying associated emission reductions/removals, it remains the responsibility of the project developer to demonstrate how the project meets the requirements outlined in the protocol, and that the activity continues to comply with all applicable regulatory requirements.

British Columbia

British Columbia’s carbon pricing system has two key parts: (1) a carbon tax for fuel emissions, which is set out in the Carbon Tax Act and the Carbon Tax Regulation (Collectively the “BC Carbon Tax”); and (2) an OBPS for industrial emissions, which is set out in the Greenhouse Gas Industrial Reporting and Control Act,^[5] and its regulations (the “BC Framework”).

The BC Carbon Tax is collected at the point of retail consumption (for example, at the pump for gasoline and diesel). All individuals and businesses must pay the BC Carbon Tax on all uses of fuel, even if the fuel isn’t combusted, unless a specific exemption applies. Exemptions are available for, among other things, fuel that is purchased by a Registered Consumer, Registered Air Service or Registered Marine Service (as defined by the Carbon Tax Act).

The BC Framework applies to facilities that operate in the Liquefied Natural Gas (LNG) sector only and have an annual emissions output that is equal to or greater than 10,000 tonnes of CO₂e. The Director (as defined under the BC Framework) must receive a report from every establishment (including facilities falling within the ambit of the BC Framework) that emits 10,000 tonnes of CO₂e or more for each compliance period (calendar year). This report must include information about the facility’s annual GHG emissions and, if applicable, the amount of GHG emissions that were captured and stored from the facility. Reporting facilities that emit over 25,000 tonnes of CO₂e per year have an additional obligation to get their emissions report independently verified by a recognized verification body.

THE ATLANTIC PROVINCES

Similar to Ontario, New Brunswick begun its transition to its own Provincial OBPS as an accepted alternative to the Federal system in 2021. It applies to the same gases as the Federal system and applies the same pricing scale of $50 per tonne in 2022. As a result of this transition, the surplus federal credits issued to a facility in New Brunswick were not eligible compensation for the 2021 or subsequent compliance period if they have not been transferred or remitted by February 15, 2022.

As of July 1, 2023, the Federal OBPS and fuel charge will apply to Nova Scotia, and Prince Edward Island. The pricing plan put forward by these two provinces did not meet the higher standard of carbon pricing coming into effect on January 1, 2023.

Similarly, as of July 1, 2023, the Federal OBPS will be imposed in Newfoundland and Labrador, repealing its Provincial carbon tax system in place since January 2019. The Made-in-Newfoundland-and-Labrador strategy had prevented the imposition of a carbon price on fuel used for home heating as well as a number of other fuel-related purposes. The Government of Newfoundland and Labrador has been outspoken in its opposition to the withdrawal of carbon price exemptions by the Federal government of Canada.

The Governments of all the Atlantic provinces have argued that lower-income households, who spend a larger percentage of their income on heating and electricity prices, are disproportionately affected by the rising energy costs brought on by the new Federal Benchmark. They have also argued thatthe Federal government’s stringency in implementing the carbon tax backstop will inevitably limit the Provincial government’s financial capacity to provide relief related programs to its residents. Finally they have argued that, in addition to raising the cost of fuel, the new Federal Benchmark also indirectly raises the cost of many other items, including groceries.

CARBON TAXES IN US AND EUROPE

South of the border, the US States have taken matters in their own hands. California runs its own cap-and-trade program. A first of its kind in the U.S. when launched in 2013, this program sets a goal of slashing GHG emissions by 40 per cent by 2030. The system provides companies the opportunity to buy or trade credits as well as creating a cap on how much pollution they can produce under the program. A corporation must purchase allowance credits from the State during an auction if it wishes to emit more greenhouse gases than it is permitted to. The money raised from these auctions, which brought in over $2 billion last year, is used to fund other climate projects. Regrettably, a review of the effectiveness of the program, found that companies have purchased and saved approximately 321 million of these pollution-permitting allowances for future use, which may make it challenging for the State to require such businesses to reduce their emissions in order to fulfil the state’s 2030 goals.

Correspondingly, nine states on the eastern seaboard have formed their own cap-and-trade conglomerate called the Regional Greenhouse Gas Initiative. The program sets an annual cap for the region’s aggregate CO2 emissions from electric power sector. The cap declines over time in a planned and predictable way (2.5 per cent per year from 2015–2020). Pollution permits (called ‘allowances’) are regularly auctioned to covered entities (power plants). One allowance is equivalent to one ton of CO2.

Similar to the Federal OBSP, the European Union has an Emissions Trading System (ETS) that enables companies to buy carbon credits from other companies. Based on the principle of cap-and-trade, the system sets an absolute limit or ‘cap’ on the total amount of certain GHGs that can be emitted each year by the entities covered by the system. This cap is reduced over time so that total emissions fall. All member states of the European Union (plus Iceland, Liechtenstein, and Norway) are part of the ETS. Except for Switzerland, Ukraine, and the United Kingdom, all European countries that levy a carbon tax are also part of the ETS. Switzerland has its own emissions trading system, but it has been tied to the ETS since January 2020. As of January 2021, the United Kingdom adopted its own UK ETS as a result of Brexit.

Unfortunately, the ETS has been criticised, amongst other things, for over-allocating permits, price volatility and failing to meet its goals. To combat its pitfalls, the European Union announced the broad outlines of its Carbon Border Adjustment Mechanism (CBAM) on December 13, 2022. CBAM will allow for the taxation of imports from nations with laxer environmental regulations in the most polluting industries (steel, cement, fertilisers, etc.). The goal is to prevent “carbon leakage” and “environmental dumping,” which would force industries to move their manufacturing outside of Europe, and to motivate the rest of the world to step up its efforts to decrease GHG emissions.

CONCLUSION

Carbon pricing is gaining momentum globally. We have seen carbon pricing proposals in progress in 47 national jurisdictions worldwide as of October, 2022.^[6]

There are certain key elements that are necessary to ensure that a carbon pricing system will be successful. Looking at the different jurisdictions across Canada, it is evident that to advance the domestic carbon-pricing agenda, “readiness” for carbon pricing must be developed first. This involves both political leadership and technical/ institutional preparation. One can argue whether carbon pricing readiness existed in Canada when the Federal Pan-Canadian approach was first adopted in 2018.

We have seen a patch-work of Provincial responses develop since 2018 when the SCC decision was issued. There is still not much uniformity in Canada although there is certainly an emerging carbon pricing signal for business and industry. In Canada, the Federal government has tried to implement a nation-wide carbon price, beginning at $20 per tonne of carbon dioxide equivalent emissions (tCO₂e) in 2019 and raised it to $50 per tonne as of April 1, 2022. This price will increase to $65 per tCO₂e in 2023, and continue to increase by $15 dollars annually, until it reaches $170 per tCO₂e in 2030. Whether there is carbon leakage throughout Canada because of the disparate treatment of GHG emissions is an open question.

1. This article is a revised version of P. Jason Kroft and Ghazal Hamedani, “Provincial carbon regimes: mixed bag to fight climate change” (9 December 2022), online: Miller Thomson <www.millerthomson.com/en/publications/articles/provincial-carbon-regimes-mixed-bag-to-fight-climate-change/>.

* Jason Kroft is a partner at Miller Thompson in Toronto. Ghazal Hamedani is an associate at that firm.

2. Reference re: Greenhouse Gas Pollution Pricing Act, 2021 SCC 11 [Reference re GGPPA (SCC)].
3. CQLR c Q-2, (last visited 15 January 2023), online: <www.canlii.ca/t/55ln6>.
4. “Ministerial Order 87/2021 [Environment and Parks]: Technology Innovation and Emissions Reduction Fund Credit Amount Order” (last visited 15 January 2023), online: Government of Alberta <www.open.alberta.ca/publications/aep-ministerial-order-87-2021#detailed>(Minister of Environment and Parks).
5. Greenhouse Gas Industrial Reporting and Control Act [SBC 2014] c. 29.
6. “Carbon Pricing Dashboard” (last viewed 1 April 2022), online: The World Bank <carbonpricingdashboard.worldbank.org/map_data>.