This is the last issue of the ERQ for 2023. A number of the articles in this last edition update issues addressed in articles published earlier in the year. The first and possibly the most important is a recent decision of the Supreme Court of Canada.^[1] Like an earlier decision of that court^[2] this is another attempt to define the jurisdiction the federal government in energy and environmental regulation relative to the jurisdiction of the provinces.

THE CONSTITUTIONAL CHALLENGE

The first major constitutional challenge relating to the environment concerned federal government’s jurisdiction to establish a carbon tax. In that decision the court held that the federal government had jurisdiction. The result was different on October 13 however in the Impact Assessment Act (IAA) Reference.

In June 2019 the federal government announced the IAA which replaced the Canadian Environmental Assessment Act 2012. The new legislation created significant controversy in Western Canada which led the Alberta government to lodge a constitutional reference before the Alberta Court of Appeal.

The IAA created a designated project scheme under which a federal minister could designate certain projects or activities under the Regulation which would be automatically prohibited pursuant to section 7 of the Act if they could cause certain effects within federal jurisdiction known as “project prohibitions.” The project prohibition remains in place until the federal agency determines that a prohibited project does not require an impact assessment or the project proponent complies with the conditions imposed following an impact assessment decision.

In the constitutional reference before the Alberta Court of Appeal the court held that the IAA and the Regulations could not be upheld under any federal power. The court concluded that the IAA fell squarely within several heads of provincial power including natural resource management, public lands, local works and undertakings and property and civil rights.

The appeal by the government Canada was heard by the Supreme Court of Canada (SCC) in March 2023. In total, 29 parties were granted leave to intervene including 7 provinces and 22 non-governmental intervenors. A majority of the SCC found that although the federal project scheme was constitutional, Parliament had plainly overstepped his constitutional authority in enacting the designated project scheme. The court found that the federal government was free to design environmental legislation as long as it respected the division of powers and invited the federal government to revise the legislation.

The true meaning of the IAA decision is carefully analysed in the first article in this issue by professors Olszynski, Banks and Wright – they are from the University of Calgary. A second article by Professors Bankes and Leach points out that some misleading statements have been made by the Premier of Alberta in interpreting the decision. Professor Leach is from the University of Alberta.

This constitutional battle is far from over. It is expected that the federal government will revise the legislation and it will be back before the courts shortly.

INTERNATIONAL CARBON REGULATION

A previous issue of the ERQ featured an article by Neil Campbell and his colleagues at McMillan about the EU’s new carbon border adjustment mechanism and its impact on Canada.^[3] At the time European Union’s new carbon border adjustment or CBAM had just and signed into law on May 10, 2023.

The same authors have offered an update in this issue of the ERQ which deals with the implementing new regulations the EU established in August 2023. The Regulation sets out the reporting obligations for EU importers of carbon intensive goods in the six sectors covered by the CBAM. The six sectors are iron and steel, aluminum, cement, fertilizer, electricity and hydrogen.

The new reporting obligations became effective on October 2023. That means that the EU importers will now be requiring Canadian exporters of carbon intensive goods to implement monitoring and reporting methodologies that ensure the importers have the information they need to meet their regulatory obligations. The Emission Reports will be due quarterly from October 2023 through December 2025 which is now called the transitional period.

The theory and purpose of the CBAM is to ensure that imported goods have incurred the same level of carbon costs as comparable EU goods. In the EU the cost is based on the price per unit of the emissions under the EU’s emissions trading system which is currently about EUR €82 per tonne.

The CBAM recognizes that some countries have their own carbon pricing systems in place and importers must report specific information where exporting jurisdictions have domestic carbon pricing schemes. Almost 40 countries worldwide have these programs, including Canada.

The future of the Canadian carbon tax is not clear and what happens to the Canadian carbon pricing scheme will of course affect the impact of CBAM on Canada and Canadian exporters. This area of law will continue to be important. Readers, particularly exporters covered by the EU regulations, would be wise to follow the debate and regulatory framework that has been carefully set out in this series of articles.

THE TAX CREDIT DEBATE

The next article is also a follow-on article. In the last issue we featured a detailed article by Colena Der, Jake Sadikman and Edward Rowe from the Osler law firm regarding the draft Canadian legislation for tax credits for clean energy.^[4] In this issue we have a more detailed analysis by Charles DeLand, the Associate Director of the CD Howe Institute.

The DeLand article looks more carefully at tax credits for carbon capture, a technology that is now getting a great deal of attention in Alberta particularly from operators in the oil sands.

DeLand is very specific in his concerns about the inefficient aspects of the new legislation. In particular he says that the credits are too time-limited because they provide an unwarranted reduction in the credits. The credits are 60 per cent from 2022 to 2030 but after 2030 they drop by half and stop completely by 2041. That, DeLand says, is much too short given the length of time it takes to bring carbon capture projects to operational status. In addition, DeLand complains that regulations impose unwarranted high-cost labour charges. DeLand suggests that if Canadians can not offer tax credits that are equal or better than the ones the Biden Administration is offering in the US there will be few Canadian projects.

LOW INCOME RATES

The next article is another follow-up to an earlier article. In fact, it is a direct response. Ahmad Faruqui, a former partner at the Brattle group in San Francisco and his two associates Jim Lazar and Richard McCann have responded to an earlier article in the ERQ by Meredith Fowlie, a Professor at the Haas Institute at the University of California at Berkeley.^[5]

The question at issue is a new rate design proposal being considered by the California Commission for solar customers. The Commission is promoting an income graduated fixed charge for some 1 million households that have installed solar panels in the State. These low-income rates have created a very lively debate.

Faruqui and his associates concede that it is nice to help low-income consumers but higher income solar customers will unfairly see their bills increase. Some will see increases by as much as 150 per cent. They also argue that energy efficient customers will pay a penalty.

This article sets out a policy issue which is as relevant in Canada as it is in the United States. Readers will remember that the electric utility serving most of Nova Scotia recently faced a major conflict with both the government and the consumers of that province on this issue.

We should also note that it is becoming a widely held belief that an increase solar generation may be one of the lowest cost solutions to reducing Canadas carbon footprint. Prices have fallen dramatically, there is virtually no technology risk and there is less new transmission cost than many other solutions face.

The policy debate on solar energy generation is not going away. This article provides an important analysis of the problem facing California and a number of other jurisdictions. The same can be said about the earlier article in this publication by Meredith Fowlie, one of the leading energy economists in the United States.

FEDERAL ENERGY REGULATION

The last article in this issue of the ERQ is a frank challenge against the massive spending by the federal government on different renewable energy projects as part of what is now called The Energy Transition. The article comes in the form of the criticism on the most recent Report^[6] by Canada’s federal energy regulator known as the Canadian Energy Regulator or CER. The author, Ron Wallace, is a former member of the National Energy Board, the federal agency that the CER replaced in 2019.

Ron Wallace does not think the CER is doing its job and Canadians are going to pay a high price. The reason the CER is not doing its job, Wallace argues, is that federal government making all the decisions and the Commission no longer has a serious role.

The article starts with a criticism of the CER structure, which was unique at the time. The new agency, unlike the previous one, has a Board of Directors in addition to an adjudicative panel. The argue then, which is repeated now, is that regulatory agencies lose their independence when this dual structure is imposed.

Some will argue that in the provinces of BC, Saskatchewan, Manitoba, Quebec, and New Brunswick, where one government owned utility calls all the shots, there is little regulatory independence. The one exception is Nova Scotia, where the Chair has a life appointment identical to a judge. Wallace correctly argues, however, that this structure has larger consequences when applied to the sole federal regulator that has recently become responsible for massive national carbon reduction programs under the Energy Transition.

This structural argument is not new. This author made the point along with the former Chair of the Alberta Utility Commission and another former member of the NEB in an earlier article in this publication.^[7]

The author points out that primary concern for any independent regulator is to avoid regulatory capture by those within its regulate community. But what happens, he states, when regulatory capture comes from the government itself?

Investors, analysts and policy makers had come to rely upon the NEB for fact-based, independent analyses of the national interest untainted by either governmental policy direction or the direct economic interests of industry. The 2023 CER report on Canada’s energy future stands all those principles on their head by uncritically assuming that Federal policies to achieve net zero greenhouse gas emissions by 2050 are not only desirable but technically and economically feasible.

In constructing a report “with the end-goal in mind”, the CER appears to have by-passed an essential requirement as an expert agency first to assess the validity of the fundamental assumptions that underpin the modeling. One could question if many of the report’s assumptions and findings were critically reviewed before those assumptions about net-zero scenarios were accepted: “…to help Canadians and policymakers see what a net-zero world could look like.”

Arguably, assessments of the national interest should be based on more factors than the attainment of reduced emissions. It requires consideration of viable, economic and feasible methodologies for a “transitional” energy economy to maintain, or enhance, our standard of living. This is especially so when a significant proportion of the global energy economy appears headed in directions that make achievement of a global net-zero economy highly problematic.

In the concluding section of his article Wallace asks two pointed questions

1. Should a national regulator be laser-focussed “on the challenge of achieving net-zero greenhouse gas emissions by 2050” and issues associated with “integrating Canada’s energy, economic and climate goals” and “end goals of achieving net-zero greenhouse gas (GHG) emissions in 2050” or should it seek to provide Canadians with a clear vision of the true costs and consequences of these policies?
2. Is it appropriate for a national energy regulator to accept direction from government to consider an energy economy that is greatly reduced, or even perhaps devoid, of hydrocarbon production while appearing to ignore international and economic realities for energy security? This approach appears to ignore, or at least diminish, the reality that G-20 countries are increasingly confronted with concerns about the basic science and feasibility of attaining Net Zero. Arguably, any considerations of the Canadian national interest should embrace parallel considerations of feasible policy alternatives.

Ron Wallace concludes his article by saying

Determinations of the Canadian national interest in matters of energy will require sustained, intellectual efforts from experts freed from the constraints of policy aspirations of governments. The fundamental challenge facing not just the CER, but all Canadians, is to have access to expert, balanced and comprehensive advice about the costs and consequences of proposed net-zero policies – with parallel, balanced assessments of possible alternatives. These questions, concerning relevance, credibility and independence, are the real challenges facing our “modernized” CER.

This article is worth a careful read. Ron Wallace is right to state that the Energy Transition as is now called has become a huge central planning exercise with many questioning how much planning is actually taking place. In many countries including Canada the Energy Transition has become a huge Money Tree. In this kind of environment an independent energy regulator is an essential institution.

1. Reference re Impact Assessment Act, 2023 SCC 23.
2. Reference re Greenhouse Gas Pollution Pricing Act, 2021 SCC 11.
3. Neil Campbell, Talia Gordner, Lisa Page and Adelaide Egan , “The EU’s Carbon Border Adjustment Mechanism in Action: Impacts on Canada and Beyond” (October 2023) 11:3 Energy Regulation Q, online: ERQ <energyregulationquarterly.ca/articles/the-eus-new-carbon-border-adjustment-mechanism-in-action-impacts-on-canada-and-beyond>.
4. Colena Der, Jake Sadikman and Edward Rowe, “Canada Issues Draft Legislation on Tax Credits for Clean Energy” (October 2023) 11:3 Energy Regulation Q, online: ERQ <energyregulationquarterly.ca/articles/canada-issues-draft-legislation-on-tax-credits-for-clean-energy>.
5. Meredith Fowlie, “New Electricity Rate Reform in California” (August 2023) 11:2 Energy Regulation Q, online: ERQ <energyregulationquarterly.ca/articles/new-electricity-rate-reform-in-california>.
6. “Canada’s Energy Future 2023” (2023), online (pdf): CER <www.cer-rec.gc.ca/en/data-analysis/canada-energy-future/2023/canada-energy-futures-2023.pdf>.
7. Rowland Harrison, Neil McCrank, and Ron Wallace, “The Structure of the Canadian Energy Regulator: A Questionable New Model for Governance of Energy Regulation Tribunals?” (April 2020) 8:1 Energy Regulation Q, online: ERQ <energyregulationquarterly.ca/articles/the-structure-of-the-canadian-energy-regulator-a-questionable-new-model-for-governance-of-energy-regulation-tribunals>.