The federal carbon pollution pricing benchmark

From: Environment and Climate Change Canada

Backgrounder

Pricing carbon pollution is widely recognized as the most efficient way to drive innovation and energy efficiency to reduce greenhouse gas emissions. It gives households and businesses the flexibility to decide when and how to make changes to reduce emissions across the economy. It creates incentives for Canadian businesses to develop and adopt new low-carbon products, processes, and services.

Under the pan-Canadian approach to pricing carbon pollution, since 2019, every jurisdiction in Canada has had a price on carbon pollution. Canada’s approach is flexible: any province or territory can design its own pricing system tailored to local needs, or can choose the federal pricing system. To ensure all carbon pollution pricing systems are fair and effective, the federal government sets minimum national stringency standards, a “federal benchmark,” that all systems must meet. This ensures that they are comparable and contribute to reducing greenhouse gas emissions. If a province decides not to put a price on carbon pollution, or proposes a system that does not meet these standards, the federal carbon pollution pricing system is put in place.

This approach also reflects the leadership of some provinces. Alberta and Quebec led the way in 2007—the former with a carbon pricing system for heavy industry and the latter with a carbon levy that became its cap-and-trade system in 2013. British Columbia implemented an economy-wide system in 2008.

The federal carbon pollution pricing system has two parts: a regulatory charge on fossil fuels such as gasoline and natural gas, known as the fuel charge, and a performance‑based system for industries, known as the Output-Based Pricing System (OBPS). The federal system can apply in whole or in part in a jurisdiction.

Canada also designed its system to be revenue neutral: where the federal system is applied, all direct proceeds from the federal fuel charge and federal OBPS are returned to the province or territory where they were collected.

Climate Action Incentive payments

Canada returns the bulk of the fuel charge proceeds via federal Climate Action Incentive payments to households, with the remainder going to Indigenous groups, small and medium-sized enterprises, and farmers.

For more details, visit the Department of Finance Canada’s website.

Fairer and more rigorous benchmark criteria for 2023 to 2030

In August 2021, drawing on extensive engagement and the findings of an independent expert assessment by the Canadian Climate Institute (formerly the Canadian Institute for Climate Choices), the Government published updated minimum national standards for carbon pollution pricing (the “federal benchmark”) for the 2023–2030 period. This will ensure that carbon pollution pricing systems are more comparable across Canada, and more effective in driving the reductions and innovation needed to tackle climate change and meet Canada’s 2030 and 2050 targets.

Key changes in the updated benchmark include:

• Common scope and coverage. All provincial and territorial carbon pricing systems will need to cover the same proportion of emissions as would be covered by the federal backstop in their jurisdiction. This proportion will vary from jurisdiction to jurisdiction depending on the distribution of emission sources. However, requiring similar coverage to what the backstop would achieve will continue to allow provinces and territories to tailor their systems to their respective needs, while setting a minimum threshold that ensures more comprehensive and consistent pricing – which is key to reducing greenhouse gas emissions.
• A clear price signal. The new benchmark includes requirements to ensure that:
  • government measures do not weaken the price signal, for example by giving instant rebates that are tied to the amount of carbon price paid or by explicitly reducing fuel taxes in order to offset the carbon price; and
  • output-based pricing systems for industry are sufficiently stringent to create strong markets that maintain a clear price signal across all covered emissions that is aligned with the minimum carbon price.
• Ensuring that protections against carbon leakage are restricted to sectors at risk. All carbon pricing systems in Canada include features to protect against carbon leakage – the risk that emissions-intensive, trade-exposed industry will lose business to competition from countries without carbon prices.
• High quality offset credits. New requirements will ensure that offset credits meet the best practices identified by the Canadian Council of Ministers of the Environment.
• Increased stability by moving to a multi-year assessment period. This will increase certainty for consumers, businesses and investors by requiring that all jurisdictions establish systems that align with Canada’s carbon price trajectory and benchmark requirements out to 2030. It also means that systems will change less frequently – once systems are in place in 2023, they will stay in place until at least 2027.

Provinces and territories had until September 2022 to put forward a plan to price carbon pollution for 2023–2030 aligned with the strengthened benchmark requirements, or request the federal system.

Based on this, the Government of Canada has announced that, starting in 2023:

• The federal fuel charge will continue to apply in four provinces that did not propose systems—Alberta, Saskatchewan, Manitoba, and Ontario—as well as in Yukon and Nunavut.
• The federal fuel charge will also newly apply in Nova Scotia, Newfoundland and Labrador, and Prince Edward Island starting as of July 1, 2023, as these provinces did not propose systems that met the benchmark criteria.
• The federal fuel charge will start to apply again in New Brunswick at the provincial government’s request starting as of July 1, 2023.
• British Columbia, Quebec, and the Northwest Territories have proposed full systems that meet the updated federal benchmark.
• The federal OBPS for industry will continue to apply in Manitoba, which did not propose a carbon pricing system for industry, as well as in Prince Edward Island, Yukon, and Nunavut at their request.
• In Saskatchewan, where the federal OBPS currently applies to electricity generation and natural gas pipelines, the federal OBPS will no longer apply once Saskatchewan’s expanded OBPS takes effect in 2023. The federal government will work closely with Saskatchewan to ensure a smooth transition for affected facilities.
• British Columbia, Alberta, Saskatchewan, Ontario, Quebec, New Brunswick, Nova Scotia, Newfoundland and Labrador, and the Northwest Territories have all proposed carbon pollution pricing systems for industry that meet the federal benchmark requirements.

Proceeds from the federal system in Yukon and Nunavut will continue to be returned directly to territorial governments at their request, as will federal OBPS proceeds in Prince Edward Island.

Note that, with the exception of Quebec, which has finalized its carbon pricing system for 2023–2030, these provinces and territories are still in the process of finalizing their proposed systems.

The federal government will continue to monitor all provincial and territorial systems as they are finalized and implemented to ensure they meet the benchmark criteria. For more details on their proposed plans, please contact provincial or territorial governments directly.

To provide stability and certainty for consumers and businesses, as of 2023, where the federal system is in place, it will remain in place until at least the end of 2026 (for the OBPS) and March 31, 2027 (for the fuel charge).

The federal government will conduct an interim review by 2026 to confirm that benchmark criteria are sufficient to continue ensuring that pricing stringency is aligned across all carbon pollution pricing systems in Canada and that carbon pricing systems continue to meet the benchmark criteria from 2027 to 2030.

Supporting Canadians with affordability and home heating

The Government of Canada has programs to support Canadians who want to become less dependent on fuel to reduce their energy costs and lower their greenhouse gas emissions. The Canada Greener Homes Initiative provides grants and loans to help homeowners buy things such as solar panels, heat pumps, and energy-efficient windows. Beginning in 2022–2023, the Low Carbon Economy Fund (LCEF) will invest up to $250 million over four years to help make home heating more affordable for families across the country. With a focus on lower-income households, this funding will specifically help homeowners who currently use oil to heat their homes move to greener home heating sources, such as electric heat pumps.

The Government of Canada also announced a new $250 million investment for the Oil to Heat Pump Affordability (OHPA) Grant, a new stream to top-up the existing Canada Greener Homes Initiative (CGHI) provided through Natural Resources Canada. This funding will help tens of thousands of households move to affordable, reliable, and clean electric heat pumps instead of expensive, carbon-intensive home heating oil that is vulnerable to global price shocks.

Associated links

• The Government of Canada strengthens pollution pricing across the country (November 2022)
• Federal benchmark 2023–2030: Update to the pan-Canadian approach to carbon pollution pricing 2023-2030 (August 2021)
• Supplemental benchmark guidance
• Guidance on the pan-Canadian carbon pollution pricing benchmark

• Federal benchmark 2016–2022: Pan-Canadian approach to pricing carbon pollution (October 2016)

• Guidance for using carbon pollution pricing proceeds

• Making home heating more affordable for Atlantic Canada and other regions (September 2022)