Canada announces provincial carbon pricing benchmarking and introduces backstop measures

On 23 October 2018, Canadian Prime Minister Justin Trudeau announced the provinces and territories that will be subject to the federal “backstop” measure as they were deemed to not be in compliance with the requirements for a carbon pricing instrument as specified by the Pan-Canadian Framework on Clean Growth and Climate Change. The federal “backstop” will be implemented in the following provinces and territories:

• Manitoba, which earlier this year withdrew its carbon tax plans;

• Saskatchewan, which opposes the federal backstop and has an output-based pricing system for large emitters that was deemed incomplete by the federal government;
• Ontario, which earlier this year revoked its cap-and-trade system and opposes the federal backstop;
• New Brunswick; and
• Prince Edward Island, which has its own fuel charge but will get the backstop measure for large Emitters.

The “backstop” measure consists of a combination of a carbon tax (“federal fuel charge“) and an output-based pricing system (OBPS, known as “federal pricing system for large industry“) for large industrial emitters based on the Greenhouse Gas Pollution Pricing Act of 2018. Direct proceeds from the federal carbon pricing measures will be returned to the province. For the carbon tax, 90% of revenues will be directly returned to citizens in that province, resulting in an expected yearly payment of CAD 718 per year by 2022 for a family of four in Ontario. The remainder of the carbon tax revenue will be spent on community-oriented projects. According to the Pan-Canadian Framework on Clean Growth and Climate Change and subsequent communications by the federal government, all provinces and territories were required to present plans for a carbon pricing instrument by September of this year.

As per government guidelines (here and here), provinces and territories had the choice of implementing a broad cap-and-trade system covering most combustion emissions (including large industry) or a combination of carbon taxes and intensity-based baseline-and-credit systems. For the second option, the carbon price of these instruments need to increase by CAD 10 per year to reach CAD 50/tCO₂e by 2022 in order to meet the benchmark stringency. For cap-and-trade systems, modeling has to demonstrate that expected emissions reductions for capped entities are comparable to a benchmark-compatible carbon tax. In addition, provincial caps need to decrease at least as much as the federal reduction target (30% below 2005 levels by 2030).

The other provinces will meet the federally set benchmark as their existing policies will result in at least a CAD20 price in their jurisdiction by the start of next year or comparable mitigation. Among the systems found in compliance were Québec, which is operating a cap-and-trade system linked with California, and Nova Scotia, which will launch its cap-and-trade program next year.

The two components of the federal backstop will be rolled out in the first half of 2019 when further details about revenue recycling will also be released.