Output-based pricing system regulatory framework

The federal carbon pricing system has two elements:

1. A charge on fossil fuels (e.g., gasoline, diesel, propane, natural gas), which would be paid by fuel producers or distributors.
2. An output-based pricing system for industrial facilities with high levels of emissions.

The federal government would return all direct revenues from its carbon pricing system to the jurisdiction of origin.

A technical paper describing the proposed federal system was published for comment in May 2017. The framework published today provides additional information about the output-based pricing system component.

The government would bring forward legislation and develop new regulations as a next step in the process to implement carbon pricing across Canada.

The output-based pricing system

The output-based system would create a pricing incentive to reduce greenhouse gas emissions from industrial facilities while limiting the impacts of carbon pricing on their international competitiveness, particularly on their ability to compete with similar businesses in countries that do not have carbon pricing. This approach thus minimizes the risk that businesses could move from Canada to jurisdictions that do not price carbon.

Industries in this system would not pay the charge on fuels they purchase. Instead they would pay the carbon price on the amount they emit above a specified level of pollution.

In provinces and territories where the federal carbon pricing system applies, each facility in the output-based pricing system would be assigned an annual limit on the total quantity of greenhouse gases it can emit before the carbon price applies. These limits would be set in terms of greenhouse gas emissions per unit of product for various types of industrial activities.

The more a facility pollutes above its limit, the more it would pay. The more a facility reduces its emissions below its limit, the more it could earn by selling credits to other facilities that exceed their limits.

In 2018 and 2019, this carbon pricing system for large industrial facilities would apply to those facilities that emit 50 kilotonnes or more of carbon dioxide equivalent per year. (Carbon dioxide equivalent is a measure of the quantity of carbon dioxide that would be required to produce a warming effect similar to another greenhouse gas over the same period of time. It is calculated by multiplying the quantity of a greenhouse gas by its global warming potential.)

For example, petroleum refineries, chemical- and cement-production facilities could all be large enough to qualify for this approach.

This approach would protect competitiveness for large industrial facilities by reducing carbon price exposure for those at a higher risk. At the same time, it would maintain incentives to reduce emissions, reward top performers, and support clean innovation.

The standards developed for the federal output-based pricing system are not a minimum standard or benchmark for provincial or territorial systems. Provinces and territories do not have to match Ottawa’s approach to carbon pricing in large industrial facilities. The approach outlined in today’s framework would be implemented in provinces or territories that choose the federal system or that do not implement a system that meets the federal standard.

The federal government would assess provincial and territorial carbon pricing systems as a whole against the pan-Canadian carbon pricing standard.

Purpose of the framework

The government is seeking input on the proposed regulatory design of the output-based pricing system for industrial sectors through the publication of today’s framework.

The framework, published today, follows up on the technical paper that outlined the overall federal system, released in May 2017. The framework outlines how carbon pricing for large industrial facilities would work, including a proposed approach to setting facility emission limits and a preliminary list of applicable sectors.

The government is also seeking input on the design of the output-based standards for industrial facilities. After receiving input and refining the proposal, the final standards willwould be set by legislation and regulations.

Setting of output-based standards

In most cases, the standards would be set as a percentage of the national average of a sector’s emissions per unit of production.

The standards would become more stringent over time. The government is seeking input on how best to do so.

Sectors in which the output-based pricing system would apply

The government would start by developing output-based standards for the following industrial sectors: oil and gas, pulp and paper, chemicals, nitrogen fertilizers, lime, cement, base metal smelting and refining, potash, iron ore pelletizing, mining, iron and steel, and food processing.

In the future, the government may develop output-based standards for additional sectors. The government is considering how to apply carbon pricing to offshore oil and gas and to electricity generation.

Next steps and engagement process

The federal government plans to introduce the legislation for the federal carbon pricing system after consultation on the draft legislative proposals published today. It also plans to publish a detailed regulatory proposal for the output-based pricing system later this year.

Environment and Climate Change Canada would engage provinces and territories, Indigenous Peoples, industry, environmental groups, and other stakeholders, in the design of the output-based pricing system, in the winter and spring of 2018.