Backgrounder: Proposed Refinements to the Federal Carbon Pollution Pricing System

Backgrounder

On October 23, 2018, the Government of Canada announced certain details of Canada's carbon pollution pricing system, including where and when it would apply. The federal carbon pollution pricing backstop system has two components:

  • A charge on fossil fuels ("fuel charge"), which will be administered by the Canada Revenue Agency (CRA) and will apply starting in April 2019; and
  • A regulatory system for large industry, known as the output-based pricing system (OBPS), which is administered by Environment and Climate Change Canada and started in January 2019.

At the time of the announcement, the Government also released for public comment proposed partial relief of the fuel charge for natural gas and propane delivered to greenhouse operators and relief of the fuel charge for light fuel oil (e.g., diesel) delivered to power plant operators that generate electricity for remote communities.

Proposed Refinements to the Federal Carbon Pollution Pricing System

In response to feedback from Canadians, the Government is proposing further refinements to the federal carbon pollution pricing system. Today the Government is releasing draft regulations that include:

  • expanding the previously announced proposed fuel charge relief for remote power plant operators that generate electricity for remote communities to also include relief for marketable natural gas;
  • providing a rebate for registered distributors of the fuel charge for fuel that is delivered to, and subsequently exported from Canada by, non-registered, non-resident persons, subject to certain conditions;
  • facilitating the integration with the federal fuel charge of facilities that are covered by the provincial output-based performance standards system in Saskatchewan; and
  • expanding relief of the fuel charge for farmers, such that a registered distributor can deliver, without the fuel charge applying, gasoline and light fuel oil (e.g., diesel) to a farmer at a cardlock facility, subject to certain conditions.

The following sections provide further details on proposed relief measures.

Expanding Fuel Charge Relief for Electricity Generation for Remote Communities

On October 23, 2018, the Government released for public comment a proposal to provide relief of the fuel charge to light fuel oil (e.g., diesel) that is used exclusively to generate electricity for remote communities. The Government has heard that, in some cases, marketable natural gas is also used to generate electricity for remote communities. In order to ensure that these remote communities can generate electricity from cleaner fuel sources, it is proposed that relief of the fuel charge also be provided to marketable natural gas (in addition to light fuel oil) delivered to remote power plant operators.

The relief is proposed to be provided upfront through the use of exemption certificates, similar to other exemption certificates under the Greenhouse Gas Pollution Pricing Act (GGPPA), such that the fuel charge does not apply to light fuel oil or marketable natural gas that is delivered by a registered distributor in respect of those types of fuel to a person that operates a remote power plant if that fuel is for use exclusively at the location of a remote power plant in the operation of the remote power plant.

  • A remote power plant will be defined to mean a power plant that generates electricity for general distribution to the public of a remote community, that is not connected to a main electrical network and that is not connected to a distribution system.
  • A remote community will be defined to mean a geographic area that is not serviced by a main electrical network and that is not serviced by a distribution system.

It is also proposed that diversion rules be included, in line with existing provisions of the GGPPA, to ensure that the fuel charge applies if light fuel oil or marketable natural gas is used in a manner contrary to the intended relief.

This relief is proposed to generally apply as of April 2019 in all listed provinces and as of July 2019 in all listed territories, for the purpose of the fuel charge.

Fuel that is Exported from Canada by Non-Registered, Non-Resident Persons

Under the GGPPA, a registered distributor generally pays the fuel charge upon delivery to another person that is not a registered distributor. A person may generally apply to the Canada Revenue Agency to be registered as a distributor if they meet certain criteria. In one such case, a person may apply if they carry on the business of selling, delivering or distributing fuel of that type and, in the ordinary course of that business, removes fuel of that type from a listed province.

It has been brought to the Government's attention that a number of fuel producers and distributors deliver fuel, to a location in Canada, to non-residents of Canada who have no other commercial activities in Canada with respect to fuel aside from exporting fuel from Canada. Also, in the case of natural gas, a person that only removes natural gas from a listed province cannot become a registered distributor under the current rules. As such, there is a concern that it may not be possible or practical for these non-residents to register for purposes of obtaining fuel without the fuel charge applying.

To facilitate fuel charge relief on commercial exports of fuel from Canada by non-registered, non-resident persons, the Government is proposing to introduce a rebate of the fuel charge, subject to certain conditions. Specifically, it is proposed that a rebate in respect of exported fuel be provided to a registered distributor that delivered fuel in a listed province to a non-registered person that is not resident in Canada if:

  • the charge was payable by the registered distributor at the time the fuel was delivered;
  • the fuel was not further processed, transformed or altered in Canada except to the extent reasonably necessary or incidental to its transportation; and
  • the non-registered, non-resident person provides to the registered distributor, and the registered distributor retains, evidence satisfactory to the Minister of National Revenue of the exportation of the fuel by the non-registered, non-resident person.

The rebate would not apply to fuel that is exported in the supply tank of a vehicle. The rebate would also not apply to fuel that is exported otherwise than in the supply tank of a vehicle if the fuel is gasoline, kerosene, light fuel oil (e.g., diesel) or propane, and the quantity of the fuel does not exceed 1,000 litres.

This rebate is proposed to apply as of April 2019 in all listed provinces and as of July 2019 in all listed territories, for the purposes of the fuel charge.

Ensuring Proper Integration of the Saskatchewan Provincial Carbon Pricing System with the Federal Fuel Charge

On October 23, 2018, the Government recognized that Saskatchewan was on track to only partially meet the benchmark stringency requirements and announced that the federal carbon pollution pricing system will generally apply to the emission sources not covered by Saskatchewan's output-based performance standards system. Specifically, the federal carbon pollution pricing system will be implemented, in part, in Saskatchewan under the federal GGPPA with the following features:

  • The federal OBPS applies to electricity generation and natural gas transmission lines, as of January 1, 2019.
  • A charge applied to fossil fuels as set out under Part 1 of the GGPPA will start applying in April 2019.

Under the GGPPA, generally, a person that is responsible for a covered facility under the federal OBPS and that has been issued a certificate in respect of the covered facility by the Minister of Environment and Climate Change may apply to the CRA to be registered as an emitter. A registered distributor can deliver fuel to a registered emitter without paying the fuel charge if the fuel is for use at a covered facility of the person, subject to certain conditions.

Without further intervention, a person that is responsible for a facility covered by Saskatchewan's output-based performance standards system would not be eligible to register with the CRA as an emitter for the purpose of Part 1 of the GGPPA. As such, the fuel charge would generally apply to fuel delivered to these provincially covered facilities. Today, the Government is proposing an approach that would ensure integration of these provincially covered facilities in Saskatchewan with the federal fuel charge. Specifically, it is proposed that, for purposes of the federal fuel charge:

  • facilities that are subject to, and have registered under, the provincial output-based performance standards system in Saskatchewan be covered facilities prescribed by regulations under the GGPPA, subject to certain conditions (including the receipt of a statement in writing from the Minister of the Environment and Climate Change confirming that the facility is subject to a provincial output-based performance standards system);
  • a person that is responsible for a prescribed covered facility in Saskatchewan may apply to the Minister of the Environment and Climate Change for a statement in writing to confirm that the facility is subject to the Saskatchewan output-based performance standards system by making an application accompanied with the relevant information; and
  • the statement in writing from the Minister of the Environment and Climate Change can be used for purposes of registering as an emitter with the CRA.

It is also proposed that other rules be included, in line with existing provisions in the GGPPA, to ensure that the relief applies in the manner intended. These include an obligation to notify the Minister of Environment and Climate Change of certain changes that would have an impact on the application of the fuel charge (e.g., ceasing to be a person responsible for a prescribed covered facility).

These provisions are proposed to be deemed to apply as of January 1, 2019.

Expanding Relief of the Fuel Charge for Farmers

The GGPPA provides farmers with relief from the fuel charge for fuels used in tractors, trucks and other farm machinery. The relief is provided upfront through the use of exemption certificates, when certain conditions are met. Specifically, the GGPPA provides that a registered distributor can deliver, without the fuel charge applying, gasoline or light fuel oil (e.g., diesel) to a farmer at a farm, if the farmer certifies that the fuel is for use exclusively in the operation of eligible farming machinery and all or substantially all of the fuel is for use in the course of eligible farming activities.

It is proposed that this relief be expanded to include delivery to a farmer at a cardlock facility, when certain conditions are met. Cardlock facilities generally consist of automated, unattended gas outlets that can be used for obtaining fuel for commercial and industrial purposes, including farming. Specifically, the relief is proposed to apply such that a registered distributor can generally deliver, without the fuel charge applying, gasoline or light fuel oil (e.g., diesel) to a farmer at a cardlock facility, if the farmer certifies that the fuel is for use exclusively in the operation of eligible farming machinery and all or substantially all of the fuel is for use in the course of eligible farming activities. This will ensure that gasoline or light fuel oil used in eligible farming activities is not subject to the fuel charge, regardless of whether a registered distributor delivers the fuel to a farmer at a farm or at a cardlock facility.

This relief is proposed to apply as of April 2019 in all listed provinces and as of July 2019 in all listed territories, for the purpose of the fuel charge.

Contacts

Have Your Say

Canadians are invited to provide comments on the draft regulatory proposals.

Please send your comments to fin.tarification-pollution-pricing.fin@canada.ca by April 19, 2019. Written correspondence related to these consultations can also be mailed to:

Carbon Pollution Pricing
Department of Finance Canada
90 Elgin Street
Ottawa, Ontario
K1A 0G5 

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