In Canada, carbon pricing works a bit differently in each province and territory—but every jurisdiction has to meet the minimum standards set out in the 2016 Pan-Canadian Framework on Clean Growth and Climate Change, and the 2018 Greenhouse Gas Pollution Pricing Act (GGPPA).
The GGPPA places a minimum price on carbon emissions, starting at $20 per tonne in 2019 and rising to $50 per tonne in 2022. These legal minimums are referred to as the federal carbon pricing backstop. In December 2020, the federal government announced a plan to increase the carbon price by $15 per tonne per year from 2023 to 2030.
As long as a province or territory meets these minimum standards, it is entitled to run its own carbon pricing system. If it doesn’t meet the standards, the federal backstop kicks in.
There are two overarching systems for pricing carbon in Canada: the fuel charge, which is the carbon tax that Canadians pay on gasoline, diesel, natural gas, and other hydrocarbon fuels; and the output-based pricing system (OBPS), which applies a charge to large industrial emitters.
How carbon pricing works in each province and territory
Independent: British Columbia and Quebec have been leaders in establishing carbon pricing in Canada, and have had their own systems in place since 2008 and 2012, respectively. Newfoundland and Labrador, the Northwest Territories, and Nova Scotia all administer their own carbon pricing systems as well.
Completely under the federal system: The federal government manages both the fuel charge and the OBPS for Nunavut and the Yukon Territories—as well as for Manitoba, which has proposed a system of its own that hasn’t been accepted by the federal government.
Provincial fuel charge, federal OBPS: New Brunswick and Prince Edward Island have their own fuel charges, but the federal government administers the OBPS in both provinces. New Brunswick is preparing to launch its own industrial emissions pricing system.
Federal fuel charge, provincial pricing system for large emitters: The federal fuel charge applies in Alberta, Ontario, and Saskatchewan, but these provinces all have their own versions of the OBPS for large emitters. The federal government applies some OBPS charges in Saskatchewan.
Fuel charge and OBPS in practice
The fuel charge varies depending on the carbon content of the fuel in question. Under the federal system in 2021-22, for example, gasoline is charged at 8.8 cents per litre, and natural gas at 7.8 cents per cubic metre.
In provinces where the fuel charge is administered by the federal government, all the revenues are returned to households and businesses in the province where they were collected—90% to households, and 10% to businesses and nonprofits. For example, the average family of four in Ontario will receive a rebate of $600 in 2021, through a refundable income tax credit.
The fuel charge doesn’t apply to fuel used as part of farm operations. Farmers are exempted in order to protect their international competitiveness.
The output-based pricing system (OBPS) applies to emitters who produce more than 50 Mt per year. It’s also calibrated to protect the international competitiveness of Canadian industries, and to prevent carbon leakage—companies moving abroad to avoid carbon charges, with the unwanted effect of damaging the Canadian economy without reducing emissions.
The OBPS applies the same price per tonne of emissions as the fuel charge, but the rebate system works differently. Producers receive rebates based on the average carbon intensity of their industry. For example, steel producers receive a rebate equal to 80% of the industry’s average emissions per tonne of steel produced. This system incentivizes producers to reduce their carbon intensity without discouraging them from producing more steel.
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