Canada's Greenhouse Gas Pollution Pricing Act can move forward

The Supreme Court of Canada affirmed the constitutionality of the "Greenhouse Gas Pollution Pricing Act" on 25 March, stating that climate change had implications extending beyond provincial boundaries and constituted a national concern as defined under the clause of "peace, order and good government" outlined in sections 91 and 92 within Canada's Constitution.

The Court's ruling affirms the federal government's authority to act in cases of national interest. The ruling came in response to a court challenge brought by the provinces of Alberta, Ontario, and Saskatchewan. At issue was whether the federal government had the authority to implement its 2018 "Greenhouse Gas Pollution Pricing Act" which requires provinces to meet minimum national standards to reduce greenhouse gas (GHG) emissions through the implementation of pricing regulations on the use of hydrocarbon fuels by large industries or consumers. The Court found that GHG emissions met the criterion of having extra-provincial or cross-boundary implications justifying federal intervention. The legislation does not limit the provinces from implementing their own emissions management schemes but rather functions as a backstop to ensure all provinces implement "sufficiently stringent" regulatory measures to reduce total GHG emissions in keeping with nationally set benchmarks and international treaty commitments, such as the 2015 Paris Agreement.

Confirmed constitutionality of federally mandated minimum requirements for carbon pricing to improve regulatory stability for industries across Canadian provinces. The ruling means that the federal government can implement its planned increases in carbon pricing under the 2018 Greenhouse Gas Pollution Pricing Act (GGPPA), establishing annual increases from USD38.8 per tonne of CO2 emissions in 2022 to USD132.1 per tonne in 2030. Rather than continue the federal backstop carbon pricing mechanism which redistributes resulting revenues directly to consumers through personal income tax and benefits returns, Saskatchewan and Ontario are likely to introduce provincial carbon pricing schemes which will result in revenues being collected by those provincial governments, giving them greater discretion on how pricing schemes are managed, including how revenues are returned to consumers. Alberta Premier Jason Kenney has indicated that his government will study carbon pricing options and implement a provincial scheme if one can be designed that proves less costly than the federal backstop for consumers although they have not yet considered what that model would look like; Alberta already has a provincial output-based pricing system (OBPS) in place for industrial emitters in line with federal standards.

New government programs for investment in Canadian-based clean energy technologies and carbon capture, utilization, and storage (CCUS) innovations likely. Alberta is likely to continue pushing for CAD30 billion in federal investments for emissions-reducing technologies for resource extraction facilities, electricity generation, and other industrial sites with an emphasis on CCUS as announced in March 2021. British Colombia announced on 26 March new provincial emissions targets, seeking specified reductions by 2030 against the benchmark of 2007 pollution levels. The measure is broad-based, spanning oil and gas, transportation, industry, and communities with target cuts ranging from 33-38% for oil and gas to up to 64% for buildings and local communities through improved building efficiencies and retrofit programmes. To avoid deficit financing and limit the potential drag on national GDP growth during the transition to lower GHG emissions technologies, the federal government is likely to refocus existing funding programmes like the "Investing in Canada" USD142.95-billion, 12-year infrastructure scheme to fund low-emissions transition efforts.

Carbon pricing costs for the agricultural sector are likely to be offset by subsidies or tax benefits with moderate risks of reducing rebate capacities for consumers. IHS Markit does not assess a significant change to its GDP growth and inflation projections for Canada following the Supreme Court decision. In specific cases, like the agricultural sector, where contributions to GDP growth are likely to be affected by increasing production costs - the Agricultural Producers Association of Saskatchewan (APAS) has forecast wheat production cost increases from USD0.83 per acre in 2021 to USD3.53 per acre in 2030 as a result of carbon pricing - the government is likely to consider targeted exemptions in its April budget or through the passage of targeted legislation (Bill C-206).

With contributions from Evan Andrade

Posted 06 April 2021 by Kari Pries, Ph.D., Senior Analyst, Latin America Country Risk, IHS Markit