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Climate Change, Carbon Pricing, and the Constitution: The Supreme Court of Canada upholds Canada’s Greenhouse Gas Pollution Pricing Act

9 minute read

In a landmark 6-3 split decision released on March 25, 2021, the Supreme Court of Canada has held that the federal government’s Greenhouse Gas Pollution Pricing Act, S.C. 2018 c. 12, s. 186 (“GGPPA”), which establishes a national minimum price on greenhouse gas (“GHG”) emissions, is constitutional.[1] Rather than diving deeply into the intricacies and debates around federalism and constitutional law theory, this discussion focuses on the broad implications this decision has for Canadians and businesses.

The GGPPA was introduced in 2018 after cooperative attempts by the provincial and federal government to reduce GHG emissions in accordance with Canada’s commitments under the 2015 Paris Agreement were failing to achieve the required reduction targets.[2]

Alberta, Ontario and Saskatchewan independently referred questions about the constitutionality of the GGPPA to their provincial courts of appeal courts. The issue in those references and again before the Supreme Court of Canada was whether the federal government had the authority to pass such a law that puts a price on carbon. Alberta, Ontario and Saskatchewan argued that this was an overreach of federal power. Chief Justice Wagner, writing for the majority, found that Parliament had jurisdiction to enact this law as a matter of national concern and under the peace, order and good government clause of s. 91 of the Constitution Act, 1867.

While application of the national concern doctrine is rarely applied in order to maintain the autonomy of the provinces, in the GGPPA Reference decision, the majority of the Supreme Court of Canada found that “the evidence clearly shows that establishing national standards of GHG price stringency to reduce GHG emissions is of concern to Canada as a whole. This matter is critical to our response to an existential threat to human life in Canada and around the world.”[3]

 

Climate change is real

 Significantly, Canada’s highest court has now declared unequivocally: “Climate change is real. It is caused by greenhouse gas emissions resulting from human activities, and it poses a grave threat to humanity’s future.”[4] The Court also acknowledged that climate change has “a particularly serious effect on Indigenous peoples, threatening the ability of Indigenous communities in Canada to sustain themselves and maintain their traditional ways of life.”[5]

 

Overview of the GGPPA

 The purpose of GGPPA is to provide a federal floor price on carbon in the event that a province does not implement a carbon pricing regime or its carbon pricing regime fails to meet the minimum stringency standard set by Parliament. The GGPPA would only apply where provincial or territorial pricing systems are not strict enough to reduce global warming.  Provinces and territories still have the flexibility to design and implement their own policies to meet reduction targets, including carbon pricing, adapted to each province and territory’s specific circumstances, as well as to recognize carbon pricing policies already implemented or in development by provinces and territories.[6] As Chief Justice Wagner noted “if each province designed its own pricing system and all the provincial systems met the federal pricing standards, the GGPPA would achieve its purpose without operating to directly price GHG emissions in the country.”

Part 1 of the GGPPA directly prices the emissions of certain fuel producers, distributors and importers. The fuel charges apply to 22 types of carbon-based fuel that release GHG emissions when burned, including gasoline, diesel fuel and natural gas, as well as to combustible waste.

Part 2 of the GGPPA establishes a complex exemption to Part 1, which sets out an “output-based pricing system” for industrial GHG emissions by large emissions-intensive industrial facilities that are listed as a “covered facility.” A covered facility is exempt from the fuel charge, but must pay for the GHG emissions that exceed its applicable emissions limits on the basis of sector-specific output-based standards. This can be done by three ways: (1) remitting surplus compliance units earned by the facility at a time when its GHG emissions were below its annual limit, or surplus credits purchased from other facilities; (2) paying an excess emissions charge; or (3) a combination of (1) and (2).

Both Part 1 and Part 2 of the GGPPA give the Governor in Council considerable power to make regulations and orders. The Governor in Council has declined to list Alberta under Part 2 of the GGPPA because Alberta’s self-designed Technology Innovation and Emissions Reduction system is considered to meet federal stringency requirements.[7] Part 2 only partially applies to Saskatchewan because the province has implemented its own output-based pricing system standards for large facilities.[8]

 

Modern Cooperative Federalism

In the GGPPA Reference decision, the Court viewed the issues through a modern lens of cooperative federalism, which accommodates and encourages intergovernmental cooperation.[9] Chief Justice Wagner emphasized that the courts must approach a finding that the federal government has jurisdiction on the basis of the national concern doctrine with great caution.[10] In these circumstances, though, because each province is vulnerable to other provinces’ failures to adequately price GHG emissions and the legislation is of a nature that the provinces jointly or severally would be constitutionally incapable of enacting, a federal carbon price is understandable and necessary. The purpose of the GGPPA is not about regulating GHG emissions generally, but about combatting the grave extra-provincial consequences if only some provinces implement a GHG pricing system. The majority of the Court found that a federal-imposed direct GHG pricing backstop, which does not displace provincial and territorial jurisdiction over the choice and design of pricing instruments, achieves the appropriate balance between federal oversight and provincial autonomy.

 

Anticipated impacts on Canadians and businesses

This decision will have far reaching effects across Canada. While the GGPPA does not apply to consumers directly, fuel producers, distributors and importers, and prescribed industries, will be passing on the increased costs to consumers, to achieve the express purpose of the GGPPA – to encourage decarbonization of the Canadian economy through behavioural changes signaled by market prices.

  • This decision provides certainty in the market place – it is no longer a question of whether carbon pricing is part of Canada’s economy. Consumers, businesses and industries need to determine how they are going to adjust to this new internalized climate change cost.
  • More regulation is likely to come. If a province does not already have a pricing scheme in place that meets the federal stringency requirements, the province will need to decide whether to create its own carbon pricing mechanisms or adopt the federal backstop architecture. The stringency standards are set to increase over time, which means continuous regulatory changes in the future.
  • Climate change and carbon pricing will create both risks and opportunities for business. Carbon-emitting businesses and industries will be most impacted by the GGPPA as it will inevitably increase the cost of business. Businesses and industries who choose to adopt low-carbon fuels and renewable energy sources will benefit from mandatory carbon pricing. The fuel charge increase could result in an increase in market prices for carbon offset credits and similar products.
  • The new price signals should encourage innovation. The increased fuel costs may encourage businesses to find innovative solutions to decarbonize their operations. Businesses are now incentivized to invest in low carbon technology knowing that carbon pricing will be an added cost of business going forward.
  • The GGPPA sends a signal to businesses planning to invest in Canada that Canada is committed to carbon pricing. While this may deter foreign investment in carbon-intensive industries away from Canada, this may be offset with an increase in foreign investment relating to environmental, social and governance initiatives. Instead of a climate laggard, Canada has an opportunity to position itself as a climate leader, which could attract companies and investors looking to optimize on Canada’s push towards a low-carbon economy and sustainable growth.

________

 

[1] Reference re Greenhouse Gas Pollution Pricing Act, 2021 SCC 11.

[2] Reference re Greenhouse Gas Pollution Pricing Act, 2021 SCC 11, at para 24.

[3] Reference re Greenhouse Gas Pollution Pricing Act, 2021 SCC 11, at para 171.

[4] Reference re Greenhouse Gas Pollution Pricing Act, 2021 SCC 11, at para 2.

[5] Reference re Greenhouse Gas Pollution Pricing Act, 2021 SCC 11, at para 11.

[6] Reference re Greenhouse Gas Pollution Pricing Act, 2021 SCC 11, at para 72.

[7] Government of Alberta, Technology Innovation and Emissions Reduction Regulation.

[8] Government of Canada, Saskatchewan and Pollution Pricing.

[9] Reference re Greenhouse Gas Pollution Pricing Act, 2021 SCC 11, at para 50.

[10]Reference re Greenhouse Gas Pollution Pricing Act, 2021 SCC 11, at para 142.

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