Update to the Pan-Canadian Approach to Carbon Pollution Pricing 2023-2030

Pricing carbon pollution is a pillar of Canada’s strengthened climate plan, A Healthy Environment and A Healthy Economy and the 2016 Pan-Canadian Framework on Clean Growth and Climate Change (PCF). Putting a price on carbon pollution is widely recognized as the most efficient means to drive innovation and energy efficiency in order to reduce greenhouse gas (GHG) emissions. The federal government is committed to ensuring that carbon pricing is in place across Canada at a similar level of stringency while ensuring provinces and territories have the flexibility to implement their own carbon pricing systems.

Background

The Government of Canada published the Pan-Canadian Approach to Pricing Carbon Pollution (the federal ‘benchmark’) on October 3, 2016, which established Canada’s approach to carbon pricing for the 2018-2022 period.Footnote 1  It set out the principles on which the pan-Canadian approach to pricing carbon pollution is based, and established minimum national stringency criteria that all systems must meet to ensure they are comparable and effective.

It also indicated that the federal carbon pollution pricing system (the ‘backstop’) would be applied in provinces and territories that request it or that do not implement a system that meets the benchmark. The federal backstop is an explicit price-based system composed of two parts, a fuel charge and an output-based pricing system for large industry. Where the federal backstop system is applied, all carbon pricing proceeds are returned to the jurisdiction of origin.Footnote 2

Canada is also creating a Greenhouse Gas Offset system to create opportunities for foresters, farmers, Indigenous communities and other project developers who implement innovative projects to reduce carbon pollution. Provinces and territories may choose to recognize credits from the federal offset system as a compliance option in their carbon pricing systems.

Update to the federal benchmark

The Government of Canada indicated its intent to strengthen the benchmark stringency criteria for the post-2022 period in September 2020. In December 2020 the government released its strengthened climate plan, A Healthy Environment and a Healthy Economy, which proposed to implement annual carbon price increases of $15/tonne of carbon dioxide equivalent (CO2e) GHG emissions from 2023-2030 and to consider changes to strengthen the federal benchmark criteria. Following engagement with provinces, territories and Indigenous organizations, and in consideration of the findings of an independent review of carbon pricing systems in Canada led by the Canadian Institute for Climate Choices, the Government of Canada has updated the federal benchmark, a key component of Canada’s path forward for carbon pricing post-2022. This update includes confirming the national minimum price on carbon pollution to 2030, and strengthening the criteria that all pricing systems must meet, in order to ensure carbon pollution pricing drives low-cost emission reductions required to meet the 2030 GHG reduction target and pave the way for Canada’s longer-term low-carbon transformation.

The updated benchmark replaces the 2018-2022 benchmark and associated guidance and will apply for the 2023-2030 period. It builds on key principles identified by the 2016 federal-provincial-territorial Working Group on Carbon Pricing Mechanisms, including:

The Federal benchmark for carbon pollution pricing systems in Canada: 2023-2030

The goal of the benchmark is to ensure that carbon pricing applies to a broad set of emission sources throughout Canada with increasing stringency over time to reduce greenhouse gas (GHG) emissions at low cost to business and consumers and to support innovation and clean growth. Taken together, benchmark criteria establish the minimum national standards of GHG price stringency to reduce GHG emissions.

This document sets out:

1. Minimum National Carbon Pollution Price Schedule (2023-2030)

Canada’s minimum national price on carbon pollution for explicit price-based systems (i.e., systems that directly set a price on emissions) is $65 per tonne of GHG emissionsFootnote 3 calculated in carbon dioxide equivalent (CO2e) in 2023, and increases by $15 per year to $170 per tonne CO2e in 2030 according to the following schedule:

Year 2023 2024 2025 2026 2027 2028 2029 2030
Minimum Carbon Pollution Price ($ CAD/tonne CO2e) $65 $80 $95 $110 $125 $140 $155 $170

Carbon prices on specific fuels or emissions sources must be calculated based on recognized global warming potential factors such as those used for reporting requirements under the United Nations Framework Convention on Climate Change.

As cap-and-trade systems set maximum emissions levels rather than minimum carbon prices, for these systems the minimum carbon pollution price is translated into an equivalent cap on emissions as detailed in section 3.2.1.

2. Recognized carbon pollution pricing systems

Provinces and territories must implement:

For industrial sources, a province or territory cannot implement a combination of a cap-and-trade system and an explicit price-based system.

Provinces and territories can also choose to implement a partial explicit price-based system designed to work with the pricing systems of the Greenhouse Gas Pollution Pricing Act (federal backstop system), either:

To avoid unintended impacts on stringency and competitiveness and to avoid overly complex and burdensome administration, any such provincial or territorial partial explicit price-based system must be designed to fully replace either the federal fuel charge or the federal OBPS. Where a province or territory implements a partial system that does not fully replace the federal fuel charge or OBPS, the corresponding federal backstop system part (i.e., fuel charge or OBPS) will apply in full in the jurisdiction.

3. Minimum criteria for recognized carbon pollution pricing systems in Canada

This section sets out the minimum criteria according to recognized carbon pollution pricing system type.

Provincial and territorial carbon pollution pricing systems must meet the following criteria beginning in 2023.

3.1 Explicit Price-Based Systems

3.1.1 Carbon Price

Carbon pollution pricing systems must have a minimum carbon pollution price of at least $65 per tonne of GHG emissions calculated in CO2e in 2023, rising by $15 per year to $170 per tonne of CO2e in 2030, in alignment with section 1.

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3.1.2. Common Scope

At a minimum, the carbon pollution price must apply to an equivalent percentage of GHG emissions from combustion sources as would be covered by the federal backstop system in the jurisdiction. Provinces and territories have the flexibility to tailor source coverage, provided the percentage of covered emissions from combustion sources meets this minimum requirement.

In addition to this requirement, in hybrid systems, the output-based pricing system must also cover industrial process emissions.

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Further Guidance
3.1.3 Maintaining the Carbon Pollution Price Signal

Provinces and territories must not implement measures that directly offset, reduce or negate the price signal sent by the carbon price.

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Further guidance
3.1.4. Stringency of Output-based Pricing Systems for Industry

Output-based pricing systems (OBPS) for industry must be designed to maintain a marginal price signal equivalent to the minimum national carbon pollution price (section 1) across all covered emissions.

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Further Guidance
3.1.5 Application of OBPS and performance-based rebates

Output-based pricing systems (OBPS) and performance-based rebate approaches under a carbon levy must only apply to sectors that are assessed by the jurisdiction as being at risk of carbon leakage and competitiveness impacts from carbon pollution pricing, and must not apply to sectors that are clearly not at risk, such as fuel distributors.

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3.1.6 Offset credits

Offset credits allowed for facility compliance under an OBPS must represent GHG emissions reductions and/or removals that are real, additional, quantified, unique, verified, and permanent.

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Further guidance
3.1.7 Public Reporting

Provinces and territories must publish regular, transparent reports and/or information on the key features, outcomes, and impacts of their carbon pricing systems, as well as on compliance information and carbon market data where publication could enhance accountability, and carbon market function and oversight.

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Further Guidance

3.2 Cap-and-Trade Systems

3.2.1 Maximum Emissions Caps

Cap-and-trade systems must have declining (more stringent) annual GHG emissions caps from 2023 to at least 2030 that correspond, at a minimum, to the projected emissions levels that would result from the application of the minimum national carbon pollution price (section 1) that year in explicit price-based systems.

To ensure system stability and provide market certainty, by December 31, 2022, the province or territory must either:

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3.2.2. Common Scope

At a minimum, the GHG emissions caps must cover an equivalent percentage of GHG emissions from combustion sources as would be covered by the federal backstop system in the jurisdiction. Provinces and territories have the flexibility to tailor source coverage, provided the percentage of covered emissions from combustion sources meets this minimum requirement.

In addition to this requirement, the system must also cover industrial process emissions for any sector that receives a free allocation of allowances.

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Further Guidance
3.2.3 Maintaining the Carbon Pollution Price Signal

Provinces and territories must not implement measures which directly offset, reduce or negate the price signal sent by the level at which the caps are set.

Free allocation methodologies must be designed to maintain a price signal to emitters that is equivalent to the market price of allowances.

Free allocation of allowances must be limited to sectors assessed by the jurisdiction as being at risk of carbon leakage and competitiveness impacts. Sectors that clearly do not face such a risk, such as fuel distributors (not including emissions from the operation of natural gas transmission pipelines), must not receive free allowances.

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Further Guidance
3.2.4 Offset Credits

Offset credits allowed for facility compliance must represent GHG reductions and/or removals that are real, additional, quantified, unique, verified, and permanent.

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Further Guidance
3.2.5 Public reporting

Provinces and territories must publish regular, transparent reports and/or information on the key features, outcomes, and impacts of their carbon pollution pricing systems, as well as on compliance information and carbon market data where publication could enhance accountability, and carbon market function and oversight.

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Further Guidance

Implementation and Assessment

The 2016 benchmark continues to apply for assessments of carbon pollution pricing system stringency for the 2018-2022 period.

The federal government will seek confirmation from provinces and territories on whether they intend to maintain or implement a carbon pollution pricing system for the 2023-2030 period and assess provincial and territorial submissions against the updated federal benchmark criteria in 2022 for the 2023 to 2030 period. This will inform the application of the federal backstop carbon pollution pricing system as of 2023, pursuant to the Greenhouse Gas Pollution Pricing Act. This multi-year assessment will replace the current annual assessment of systems. To provide certainty to residents and businesses and to allow carbon pricing systems to function effectively, where the federal backstop applies in 2023 it will remain in place until at least the end of 2026.

The federal government will conduct an interim assessment in 2026 of provincial and territorial systems to confirm that systems continue to meet the benchmark criteria for the 2027-2030 period, taking stringency into account as the primary factor.

The federal government will also monitor major changes to provincial and territorial systems on an ongoing basis and re-assess against benchmark criteria where necessary.

Interim review

The federal government will engage provinces, territories and Indigenous organizations in an interim review of the benchmark by 2026, to confirm that benchmark criteria are sufficient to continue ensuring that pricing stringency is aligned across all carbon pricing systems in Canada. The review will also consider impacts on inter-jurisdictional and international competitiveness from carbon pricing, and whether additional criteria are needed to address differences between jurisdictions (i.e., differences in average cost) and/or the use of compliance units imported from other countries, including where these units are not internationally transferred mitigation outcomes under the Paris Agreement. In preparation for this review, Canada will work with provinces and territories to collect additional data, including on average costs for industry.

As part of the interim review, the federal government will commission an independent expert assessment of the effectiveness of all carbon pricing systems in Canada and of their distributional impacts, including on vulnerable populations and Indigenous communities. The federal government will seek input from provinces, territories, and Indigenous organizations on the scope of this assessment.

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