As a signatory to the Paris Agreement, Canada has set itself ambitious climate targets to reduce greenhouse gas (GHG) emissions by 40-45% below 2005 levels by 2030 and achieve net-zero emissions by 2050. In part one, we explained Canada’s CO2 emissions reduction programs for large industrial emitters, including cap-and-trade and performance based programs.
In this article, we explore another mechanism by which Canada supports its broader climate change strategies of reducing greenhouse gas emissions and transitioning to a low-carbon economy. The carbon pricing framework in Canada is designed to incentivize businesses and individuals to reduce their carbon footprint by putting a price on carbon emissions. Here’s a detailed overview of how these schemes work:
Federal Carbon Pricing Framework
- Pan-Canadian Framework on Clean Growth and Climate Change: In 2016, the federal government introduced the Pan-Canadian Framework, which requires all provinces and territories to implement carbon pricing. The framework ensures that carbon pricing is applied across Canada, either through a carbon tax, a cap-and-trade system, or a combination of both.
- Federal Carbon Pricing Backstop: The federal government introduced a backstop mechanism to ensure a minimum carbon price across the country. This system applies in provinces and territories that do not have their own compliant carbon pricing systems. The backstop consists of two main components:
- Fuel Charge: A tax applied to fossil fuels like gasoline, diesel, and natural gas. The rate increases annually to encourage reductions in fossil fuel use.
- Output-Based Pricing System (OBPS): This system targets large industrial emitters, setting emissions intensity standards for various sectors. Companies that exceed their limits must pay for excess emissions, while those below can earn credits.
- Carbon Pricing Rates: The carbon price started at CAD $20 per tonne of CO2 equivalent in 2019 and has been increasing annually. As of 2023, the carbon price is set to rise to CAD $65 per tonne, with plans to reach CAD $170 per tonne by 2030.
Provincial and Territorial Systems
Provinces and territories have the flexibility to design their carbon pricing systems, provided they meet or exceed the federal benchmark. Some of the notable provincial systems include:
- British Columbia: Introduced a carbon tax in 2008, which is one of the oldest in North America. The tax applies broadly to fossil fuels and is revenue-neutral, with proceeds used to reduce other taxes and fund climate initiatives.
- Quebec: Operates a cap-and-trade system linked with California’s under the Western Climate Initiative. This system sets a cap on total emissions and allows companies to buy and trade emission allowances.
- Alberta: Initially implemented a carbon tax, which was later replaced by the Technology Innovation and Emissions Reduction (TIER) system focusing on large emitters. Alberta also has a consumer carbon levy.
- Ontario: Previously had a cap-and-trade system but transitioned to the federal backstop after the provincial government repealed it in 2018.
Revenue Recycling and Rebates
The revenue generated from carbon pricing is often recycled back into the economy. The federal government, for instance, returns the majority of the revenue collected through the fuel charge to households through Climate Action Incentive payments, which are designed to offset the cost of the carbon tax for most families.
Summary
Canada’s carbon pricing strategy is considered a key tool in meeting its international climate commitments, including the Paris Agreement targets. Canada’s carbon tax schemes represent an evolving policy landscape, balancing environmental goals with economic considerations and regional differences. In part 3, we will explain the primary methods by which businesses operating in Canada report the emissions of their facilities: the federal Canada GHG Reporting Program, and various provincial GHG Reporting Programs.
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