How carbon pricing works

Information on Canada’s carbon pollution pricing system.

The impacts and costs of climate change are being felt first-hand by communities in Canada and around the globe. Extreme weather events threaten people’s safety, their health, their homes and their livelihoods. In Canada, Canadians pay for these impacts when they are forced to repair and rebuild homes and businesses after a flood or wildfire, when they pay higher insurance premiums, or through rising costs for food, health care or emergency services.

There’s a clear cost from a changing climate, so it can’t be free to pollute. That’s why the Government of Canada introduced a price on carbon pollution across Canada in 2019.

Putting a price on carbon pollution

Carbon pricing is about recognizing the cost of pollution and accounting for those costs in daily decisions. Putting a price on carbon pollution is widely recognized as the most efficient means to reduce greenhouse gas emissions while also driving innovation.

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. The federal government sets minimum national stringency standards that all systems must meet to ensure they are comparable and contribute their fair share to reducing greenhouse gas emissions. If a province decides not to price pollution, or proposes a system that does not meet these standards, the federal system is put in place. This ensures consistency and fairness for all Canadians. The federal government published strengthened standards in August 2021 for the 2023 to 2030 period.

Under the Greenhouse Gas Pollution Pricing Act (GGPPA), adopted on June 21, 2018, the federal pricing system has two parts: a regulatory charge on fossil fuels like gasoline and natural gas, known as the fuel charge, and a performance-based system for industries, known as the Output-Based Pricing System. The fuel charge applies in Ontario, Manitoba, Yukon, Alberta, Saskatchewan and Nunavut. The Output-Based Pricing System applies in Manitoba, Prince Edward Island, the Yukon, Nunavut, and partially in Saskatchewan. All other provinces and territory are implementing their own pricing systems.

On November 22, 2022, the Government of Canada announced changes to the application of the federal carbon pollution pricing system for 2023-2030 based on the updated benchmark criteria. This page will be updated to reflect these changes once they have taken effect.

Pricing carbon pollution is working in Canada. It is encouraging industries to become more efficient and use cleaner technologies, and it is spurring new and innovative approaches for cutting pollution, using energy differently, and saving money.

Carbon pricing proceeds

Provinces and territories that have their own carbon pricing systems use the proceeds as they see fit, including by supporting families to take further action to cut pollution in a practical and affordable way. When the Government of Canada implemented its backstop carbon pricing system in 2019, it committed to returning all direct proceeds from the federal backstop system to the jurisdiction of origin. Those governments that opted for the federal pricing system receive all the proceeds back to decide how to reinvest them.

Climate Action Incentive payments

In the remaining provinces where the federal price on carbon pollution is in effect, the Government of Canada uses approximately 90 per cent of fuel charge proceeds to directly support families through Climate Action Incentive payments, delivered through annual tax returns. These payments moved to quarterly payments in 2022. Through these payments, the majority of Canadian families receive more money back than they pay, with low-income Canadians benefitting the most.

Households that choose to make changes – for example, through energy upgrades to their home, or by choosing different ways or cleaner vehicles to get around – can come out even further ahead. By making choices that reduce their emissions, Canadians can avoid paying the price on pollution while still collecting the full Climate Action Incentive payment.

The system also considers where people live, acknowledging the reality that Canadians who live in rural and smaller centres don’t necessarily have the same options, particularly when it comes to clean transportation. That’s why, for people in these communities, the Government applied an additional 10 per cent top-up to their Climate Action Incentive payment.

Supporting businesses, farmers and Indigenous communities

The remaining fuel charge proceeds are returned through other federal programming, including: initiatives to help support emission-intensive trade-exposed small and medium-sized businesses; a tax credit to return a portion of proceeds directly to farmers; and co-development and implementation of agreements to return fuel charge proceeds to Indigenous recipients.

Not all groups are affected by carbon pricing in the same way. The Government of Canada recognizes that particular groups or sectors may require targeted support or relief, in particular because of the small number of alternative options they may have in the face of carbon pricing. Under the federal system, relief is provided for farmers, fishers, residents of rural and small communities, users of aviation fuel in the territories, greenhouse operators, and power plants that generate electricity for remote communities.

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How carbon pricing works

Putting a price on carbon pollution

Carbon pricing proceeds

Climate Action Incentive payments

Supporting businesses, farmers and Indigenous communities

More information

Overview

Climate Action Incentive payments

Regulatory system for large industry: The output-based pricing system

Fuel charge

Federal GHG Offset System

Pan-Canadian Approach to Pricing Carbon Pollution

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