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:

• A flexible approach that recognizes provincial and territorial carbon pricing policies.
• Carbon pricing should be applied to a broad set of emission sources across the economy.
• Carbon price increases should occur in a predictable and gradual way to limit economic impacts.
• Reporting on carbon pricing policies should be consistent, regular, transparent and verifiable.
• Carbon pricing policies should minimize competitiveness and carbon leakage risks, particularly for emissions-intensive and trade-exposed sectors.
• Carbon pricing policies should include carbon pricing proceeds recycling to avoid a disproportionate burden on vulnerable groups and Indigenous peoples.

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:

• Canada’s annual minimum national carbon pollution price from 2023 to 2030;
• Recognized carbon pollution pricing systems;
• Minimum criteria (standards) for recognized carbon pollution pricing systems, as well as an explanation of the tests used for assessments. ‘Further guidance’ sections provide additional, non-binding recommendations on system design to support governments’ efforts to establish or maintain their carbon pollution pricing programs, and are not used as part of assessments.

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 emissions^{Footnote 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:

• An explicit price-based system (i.e., (i) a carbon levy on fossil fuels, or (ii) a hybrid system comprised of a carbon levy on fossil fuels and an output-based pricing system for industry); or,
• A cap-and-trade system.

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:

• A provincial or territorial carbon levy on fossil fuels complemented by the federal Output-Based Pricing System Regulations for the jurisdiction’s emissions-intensive and trade-exposed (EITE) industrial emitters; or,
• A provincial or territorial output-based pricing-type system (OBPS) complemented by the federal fuel charge.

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.

Tests

• To ensure system stability and provide market certainty, a province or territory must establish the carbon pollution price that will apply for all years from (2023 to 2030) as part of its legislative or regulatory framework such that:
  • The carbon levy applied to fuels under the carbon levy portion of the system corresponds, at minimum, to the minimum national carbon pollution price for all years to 2030, no later than April 1, 2023, with minimum annual price increases occurring automatically on or before April 1 of every subsequent year.
  • The fixed payment per tonne of CO₂e that is a compliance price under an output-based pricing system is at least equal to the minimum national carbon pollution price for all years to 2030, no later than January 1, 2023, with minimum annual price increases occurring automatically on or before January 1 of every subsequent year.
• By December 31, 2022, the province or territory must have either:
  • Completed legislative or regulatory changes to implement the 2023-2030 price increases; or
  • Published a commitment to these price increases and details on how legislative or regulatory changes will take effect as of the relevant date (January 1, 2023 or April 1, 2023).

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.

Tests

• The assessment of the coverage of carbon pollution pricing systems will be based on an estimate determined by the federal government with input from the jurisdiction. Where there is uncertainty estimating coverage levels of the provincial or territorial system, or where a province or territory would have difficulty covering a small source of emissions for operational reasons, a discrepancy of up to 2% compared to the coverage level of the federal backstop may be considered in assessing this criterion.
• In assessing the coverage of a carbon pollution pricing system, the following will be treated as uncovered:
  • exemptions by type of fuel,
  • exemptions by fuel use,
  • exemptions by sector or activity, and
  • any sources where the province or territory negates the carbon price signal in whole or in part (see section 3.1.3).

Further Guidance

• Provisions for new facilities that are typical in emissions trading systems (e.g., initial grace period) will not be considered as exemptions when assessing OBPS coverage.
• Coverage of partial systems (e.g., federal fuel charge combined with a provincial or territorial OBPS) will assess the combined coverage of both systems against coverage levels from the full federal backstop.
• In hybrid systems, the output-based pricing system should consider also covering other non-combustion emissions besides industrial process emissions, including from venting, fugitive emissions, industrial product-use, and waste and wastewater treatment at covered industrial facilities.

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.

Tests

• Where a province or territory implements measures that directly offset, reduce or negate the price signal sent by the carbon price in whole or in part (e.g., carbon price rebates at the gas pump or on utility bills, OBPS performance standards that negate the price signal), those sources will be treated as not covered by the pricing system in the determination of the scope of the system under 3.1.2.
• Where a province or territory reduces its specific taxes on fuels as a means to offset, reduce or negate the carbon price on those fuels, those sources will be treated as not covered by the pricing system in the determination of the scope of the system under 3.1.2. This criterion does not prevent provinces and territories from making changes to their specific taxes on fuels for reasons unrelated to carbon pollution pricing.
• Any performance-based rebate program implemented as part of a carbon levy must be structured in such a way that it maintains a marginal price signal that aligns with the minimum national carbon pollution price for all emissions that it covers. Where a portion of emissions does not receive this marginal price signal, it will be treated as not covered under 3.1.2.

Further guidance

• This criterion does not preclude returning carbon pollution pricing proceeds to households and businesses, provided the methodology for returning proceeds does not directly negate the price signal. See Guidance for Using Carbon Pollution Pricing Proceeds for further detail on best practices and on the types of measures that risk negating the price signal.

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.

Tests

• The system is designed to maintain a marginal price signal at or above the minimum national carbon pollution price across all regulated GHG emissions, including ensuring that any emissions reductions that bring a facility’s emissions intensity below its performance standard are eligible to generate performance credits. Provinces and territories may tailor emission intensity standards to the circumstances of their sectors within this overarching requirement.
• Assessment of OBPS will be based on federal modelling, with input from the jurisdiction. Modelling will consider the expected impact of other GHG emissions mitigation measures. Results must show projected sum of all regulated facilities’ compliance obligations is greater than the projected sum of tradeable units available to the market after industries have responded to the price signal in a given compliance period, i.e., that the marginal price is holding.
• The impact of banked credits and offset credits on markets will be assessed separately considering expected supply and market participant behaviour.
• Assessments will also consider information provided by the jurisdiction, e.g., alternative modeling results and/or compliance data.

Further Guidance

• OBPS should include mechanisms to support price predictability and market stability; these could include tightening rates on industrial performance standards, limits on banking of compliance units, or limits on use of compliance units, such as expiry dates.
• OBPS should reflect best practices in emissions trading systems; these should include robust quantification methodologies; requirements for the third-party verification of compliance reports; registries for the tracking of units; and, strong reporting requirements including periodic reports on market holdings and activities.

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.

Test

• Eligibility for OBPS and performance-based rebate approaches must be limited to sectors assessed by the jurisdiction as being at risk of adverse carbon leakage and competitiveness impacts from carbon pollution pricing.
• 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 be included in OBPS systems.
• Jurisdictions must use clear and transparent tests for assessing carbon leakage and competitiveness risks, based on recognized metrics.

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.

Test

• Offset programs and protocols recognized for compliance will be assessed against best practices to ensure GHG reductions or removals generated are real, additional, quantifiable, unique, verifiable, and permanent.

Further guidance

• For further guidance on the development or operation of offset programs, consult the Pan Canadian Greenhouse Gas Offsets Framework, agreed by the Canadian Council of Ministers of the Environment in November 2018.

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.

Tests

• Provinces and territories publish regular reports and/or information on the key features, outcomes and impacts of their systems.
• Provinces and territories with an OBPS publish regular reports and/or information on compliance and emissions trading market data, including at a minimum:
  • total GHG emissions from facilities and sectors covered under the OBPS
  • total number of credits issued by category (e.g., performance credits, offset credits);
  • total compensation obligation for all facilities covered under the OBPS;
  • compliance broken out by method (e.g., payments to compliance fund, use of performance credits, use of offset credits)
  • credits status (e.g., active, suspended, revoked, voluntary cancelled), and carbon market activities (e.g., credits transfers)

Further Guidance

• Provinces and territories should report disaggregated information and data, except where confidentiality issues arise, in which case aggregation can be used.
• Information on key features, outcomes and impacts of carbon pricing systems includes:
  • list of eligible sectors at risk of carbon leakage, and the methodology(ies) used to assess the carbon leakage risk
  • list of performance/emission intensity standards, and the methodology(ies) used to set performance/emission intensity standards
  • details on how proceeds from pricing are used
  • overall carbon pricing system design and updates

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:

• establish annual caps for all years (2023 to 2030) as part of their legislative/regulatory framework; or
• publish a commitment to these caps and details on how legislative or regulatory changes will take effect as of January 1, 2023.

Tests

• Assessment of emission cap levels will be based on federal modelling, with input from the jurisdiction. Modelling will consider the expected impact of other GHG emissions mitigation measures. Results must show that the emission limits set by the caps for 2023 to 2030 are less than or equal to a modeled estimate of the emissions that would have resulted in that jurisdiction from applying the minimum national carbon pollution price (section 1) modelled as the federal backstop pricing system (fuel charge and OBPS) during that period.
• The impact of banked credits and offset credits on markets will be assessed separately considering expected supply and market participant behaviour.
• Assessments will also consider information provided by the jurisdiction, e.g., alternative modeling results and/or compliance data.
• Caps must decline annually and cannot be adjusted upwards in order to accommodate new activities.
• Emission caps are established for all years (2023-2030) in the province or territory’s legislative or regulatory framework.

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.

Tests

• The assessment of the coverage of cap and trade systems will be based on an estimate determined by Canada with input from the jurisdiction. Where there is uncertainty estimating coverage levels of the provincial or territorial system due to data limitations, or where a province or territory would have difficulty covering a small source of emissions for operational reasons, a discrepancy of up to 2% compared to the coverage level of the federal backstop may be considered in assessing this criterion.
• In assessing the coverage of a carbon pricing system, the following sources will be treated as uncovered:
  • exemptions by type of fuel,
  • exemptions by fuel use,
  • exemptions by sector or activity, and
  • any sources where the province or territory negates the carbon price signal in whole or in part (see section 3.2.3).

Further Guidance

• Where feasible, the system should also consider covering other non-combustion emissions at industrial facilities besides industrial process emissions, including from venting, fugitive emissions, industrial product-use, and waste and wastewater treatment.
• Provisions for new facilities that are typical in emissions trading systems (e.g., initial grace period) will not be considered as exemptions when assessing coverage.
• Coverage of partial systems (e.g., federal fuel charge combined with a provincial or territorial industrial cap) will assess the combined coverage of both systems against coverage levels from the full federal backstop.

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.

Tests

• Eligibility for free 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 allocations.
• Jurisdictions must use clear and transparent tests for assessing carbon leakage and competitiveness risks, based on recognized metrics.
• Where a province or territory implements measures which directly offset, reduce or negate the price signal in whole or in part, those sources will be treated as not covered by the pricing system in the determination of the scope of the system under 3.2.2. This includes free allocation methodologies that negate the carbon pollution price signal.
• Where a province or territory reduces its specific taxes on fuels as a means to offset, reduce or negate the carbon pollution price on those fuels, those sources will be treated as not covered by the pricing system in the determination of the scope of the system under 3.2.2. This criterion does not prevent provinces and territories from making changes to their specific taxes on fuels for reasons unrelated to carbon pollution pricing.

Further Guidance

• Clear rules should define the treatment of allowances and credits held by any facilities regulated under the cap-and-trade system, particularly those that cease operation.
• The system should include mechanisms to support price predictability and market stability; these should include auction floor prices that increase consistently, a credit reserve to relieve sudden pressures in the market (e.g., new market entrants), limits on banking allowances, limits on allowance purchases, and allowance expiry.
• Allowances should be distributed and reported in a transparent manner while protecting confidential business information, including methodologies for allowance allocation and quantities of free allowances provided.
• Cap-and-trade systems should include best practices in use in cap-and-trade systems; for example, these should include robust quantification methodologies; requirements for the third-party verification of compliance reports; and transparent registries for the tracking of units.
• This criterion does not preclude returning carbon pollution pricing proceeds to households and businesses, provided the methodology for returning proceeds does not directly negate the price signal. Consult Guidance for Using Carbon Pollution Pricing Proceeds for further detail on best practices and on the types of measures that risk negating the price signal.

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.

Tests

• Offset programs and protocols recognized for compliance will be assessed against best practices to ensure GHG reductions or removals generated are real, additional, quantifiable, unique, verifiable, and permanent.

Further Guidance

• For further guidance on the development or operation of offset programs, consult the Pan Canadian Greenhouse Gas Offsets Framework, agreed to by the Canadian Council of Ministers of the Environment in November 2018.

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.

Tests

• Provinces and territories publish regular reports and/or information on the key features, outcomes and impacts of their systems.
• Provinces and territories publish regular reports and/or information on compliance and emissions trading market data, including at a minimum:
  • total GHG emissions from entities and sectors covered under the cap-and-trade system;
  • total number of free emission allowances issued;
  • total number of offset credits generated and used;
  • total number of emission allowances auctioned and auction prices;
  • emission allowances and offset status (e.g., active, suspended, revoked, voluntary cancelled), and carbon market activities including auction and reserve sales results, and emission allowance transfers.

Further Guidance

• Provinces and territories should report disaggregated information and data, except where confidentiality issues arise, in which case aggregation can be used.
• Information on key features, outcomes and impacts of the cap-and-trade system includes:
  • list of eligible sectors at risk of carbon leakage, and the methodology(ies) used to asses the carbon leakage risk
  • list of performance/emission intensity standards, and the methodology(ies) used to set performance/emission intensity standards
  • details on the use of proceeds
  • overall carbon pricing system design and updates

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.