Pollution pricing: technical briefing

Implementing Canada’s plan to address climate change and grow the economy

Addressing climate change and growing the economy

Canada’s plan to fight climate change, build resilience to a changing climate, and create opportunities to grow the economy

Comprehensive set of actions across the economy

• Transportation
• Buildings
• Industry
• Agriculture
• Innovation and clean technology
• Adapting to climate change

A price on carbon pollution is a central pillar of the Pan-Canadian Framework

A price on carbon pollution creates incentives for individuals, households and businesses to build on investments they have already made to lower their emissions

Pricing carbon pollution will reduce emissions, drive innovation and help Canada compete in the emerging global low-carbon economy

The Pan-Canadian approach to pricing carbon pollution

Gave provinces and territories two years to implement their own carbon pollution pricing system that meets stringency criteria

• The benchmark

Included commitment by the federal government to implement, in whole or in part, a carbon pollution pricing system in provinces and territories that request it and in those that do not have a carbon pollution pricing system that meets the federal benchmark

• The federal backstop

The federal carbon pollution pricing system

Under the Greenhouse Gas Pollution Pricing Act, adopted on June 21, 2018, the “backstop” has two parts:

1. Regulatory charge on fuel – will apply starting in April 2019 in backstop provinces
2. Regulatory system for large industry (the Output-Based Pricing System or OBPS) – will apply starting in January 2019 in backstop provinces

Both parts will apply on starting in July 2019 in Yukon and Nunavut

The Government of Canada is ensuring a price on carbon pollution across Canada in 2019

Carbon pollution pricing proceeds

Approach to carbon pollution pricing  proceeds

Provinces and territories with their own carbon pollution pricing systems can use proceeds to support their residents, grow the economy, and protect the environment

• British Columbia
• Alberta
• Quebec
• Northwest Territories
• Nova Scotia
• Newfoundland and Labrador
• Prince Edward Island

Proceeds from the “backstop” will be returned directly to the governments of provinces and territories that requested it

• Yukon
• Nunavut

Returning proceeds in the remaining provinces

Saskatchewan, Manitoba, Ontario and New Brunswick

Fuel charge proceeds^{Footnote 1}

• Approximately 90% will be returned to residents through Climate Action Incentive payments
• The remaining portion will support SMEs, colleges and universities, schools, hospitals, municipalities, non-profits, Indigenous communities

Output-Based Pricing System proceeds

• Will not be used for Climate Action Incentive payments
• Will be used to support future climate actions in the jurisdiction in which the revenue is raised
• Details to be outlined further in early 2019

Climate Action Incentive Payments

Individuals and families will claim their Climate Action Incentive payment when they file their tax returns (starting in early 2019), and will receive it as part of their tax assessment

Amounts will vary by province (depending on annual proceeds from the fuel charge in the province) and will vary by family size

Residents of small and rural communities will receive a 10% supplement

Average middle-class family will receive more in payments than the direct costs resulting from carbon pollution pricing

All proceeds will be audited and reported annually to ensure revenue neutrality and that they are returned to the jurisdiction of origin

For more information

• Putting a price on pollution
• Climate action map

Annexes

Climate change is affecting communities across Canada

A growing number of countries are putting a price on carbon pollution

Pan-Canadian Framework – 4 Pillars

Pricing carbon pollution

Complementary mitigation actions across all sectors

Adaptation and climate resilience

Clean technology, innovation and jobs

Canada’s carbon pollution pricing system

Fuel production and distribution

• Pay fuel charge to Government of Canada
• 2019 rates (= $20/t CO₂e):
  • Gasoline: 4.42 ¢/L
  • Light fuel oil: 5.37 ¢/L
  • Natural gas: 3.91 ¢/m³
  • Propane: 3.10 ¢/L
• Some exclusions

Fuel consumption and heating fuel

• Consumers do not pay the fuel charge directly to the federal government
• Fuel price paid by consumers will likely have costs of the fuel charge embedded

OBPS Facility

• Registered OBPS facilities will not generally pay the charge on fuels that they purchase
• Instead, will be subject to the carbon pollution price on the portion of emissions above a facility emissions limit

Climate Action Incentive Payments

^{*Climate Action Incentive payments for 2020-2022 are illustrative and subject to change.}

Amounts increase annually to reflect the increases in the federal carbon pollution price

_{* For more information on these estimates, please see the Backgrounder: Fall 2018 Update – Estimated Impacts of the Federal Carbon Pollution Pricing System.
** Climate Action Incentive payments for 2020-2022 are illustrative and subject to change.}

Amounts increase annually to reflect the increases in the federal carbon pollution price

Support to universities, hospitals, schools, municipalities, non-profits, and Indigenous communities

Notes: Numbers under $5 M are rounded to the nearest M; those over $5 M are rounded to the nearest $5 M. Estimates beyond 2019-20 are illustrative and subject to adjustments as more information becomes available.

Support for small and medium-sized businesses

Note: Numbers under $5 M are rounded to the nearest million; those over $5 M are rounded to the nearest $5 M. Estimates beyond 2019-20 are illustrative and subject to adjustments as more information becomes available.

Where the federal system will apply

Federal fuel charge will apply in SK, MB, ON, NB

• Did not propose a system that meets the benchmark

The federal system for large industry (OBPS) will apply in ON, MB, NB, PEI, YK, NU and partially in SK

• NB and PEI requested it
• ON and MB do not have a system
• SK is developing a pricing system for some of its industries; federal OBPS will fill gaps by covering electricity and natural gas transmission pipeline sectors

Provincial systems will apply in BC, AB, QC, NS, NL, PEI

• BC, AB, QC have systems in place
• NS, NL on track to develop own systems
• PEI on track to develop own fuel charge (+ federal OBPS)

Territories

• NWT on track to implement a system that meets the standard
• Federal system will apply in YK and NU, with adjustments to recognize circumstances
  • Exempting aviation fuel and diesel-fired electricity in remote communities

When the federal system apply

The federal system for large industry will apply in provinces  on January 1, 2019

• Registration for regulatees will begin November 1, 2018

Federal fuel charge will apply in SK, ON, MB, and NB on April 1, 2019

• Carbon pollution pricing will take effect in all three territories on July 1, 2019
  Ensures alignment across the territories

The Output-Based Pricing System

Will apply to large industrial emitters that compete internationally

Designed to incent reductions and innovation and maintain economic competitiveness

Industry motivated to reduce carbon pollution by:

• $20/tonne (2019)
• $30/tonne (2020)
• $40/tonne (2021)
• $50/tonne (2022)

Recognized as a best practice – similar mechanisms used around the world, including here in Canada

How the OBPS works

An emissions-intensity standard is set for a whole sector

• The standard is set at 20% less than the average for the sector
• oirms with higher emissions pay, and if they do better, they will be rewarded through credits that they can sell

Compliance obligations can be met by:

• paying the carbon pollution price ($20/t in 2019 increasing to $50/t in 2022)
• Purchasing credits from industrial facilities that beat their standard

Creates a strong financial incentive for the least efficient facilities to reduce their emissions per unit of output and for strong performers to continue to improve

OBPS development next steps

Environment and Climate Change Canada will continue to engage industry and stakeholders as we develop the OBPS regulatory requirements

Next steps:

• Fall 2018: Publish regulations with registration, quantification, reporting and verification requirements, starting January 2019
• Fall 2018: Publish draft regulations with performance standards, for comment
• Spring 2019: Publish final OBPS regulations
  • Will apply retro-actively to the full calendar year 2019 as the first compliance period