Supreme Court of Canada Rules that Federal Carbon Pricing Law is Constitutional

This morning, the Supreme Court of Canada ruled that the federal carbon pricing law is constitutional, in a 6-3 landmark decision.

The ruling stated that because climate change causes harm beyond provincial boundaries, it is a matter of national concern under the “peace, order and good government” clause in section 91 of the Constitution.

The ruling also stated that the fuel and excess emission charges imposed by the Greenhouse Gas Pollution Pricing Act were constitutionally valid regulatory charges, and not taxes. The majority noted the Act would only apply where provincial or territorial pricing systems are not strict enough to reduce global warming.

This decision has been long awaited, with the process having been delayed by the pandemic. The Supreme Court appeal hearing took place in September 2020.

Background:

The origins of this process go back to the 2018 federal legislation - the Greenhouse Gas Pollution Pricing Act - which is a significant part of the federal government’s broader approach to addressing climate change that was outlined under the Pan-Canadian Framework on Clean Growth and Climate Change.  

The Act established a national framework for carbon pricing that applied to large industrial emitters through an output-based pricing system (OBPS), as well as to the rest of the economy through a carbon levy, commonly referred to as the ‘fuel charge’ component.

The federal approach was developed to be a ‘backstop’, in case a provincial program fell short, or did not have its own system in place.

After the Act was passed, Ontario, Saskatchewan, and Alberta filed challenges regarding the national application of the carbon price in their respective provincial courts, arguing that the law infringed on provincial jurisdiction, thus making it unconstitutional.

In its legal argument, the federal government relied on the Peace, Order and Good Government (POGG) clause in the Constitution, which says that for matters of national concern that are not explicitly named in the Constitution, it has the power to makes laws to manage issues that are of inherent concern to the entire country.

The lower courts in Saskatchewan and Ontario ruled against the challenges, stating the federal government was within its constitutional rights to enact the legislation, and carbon tax. In Alberta, the provincial government won the court challenge, with the majority opinion calling the Greenhouse Gas Pollution Pricing Act ‘a constitutional trojan house’, in that it does not contain a limit to the scope of the federal government’s power.

What Happens Now:

With today’s ruling, it is expected that the federal government will proceed with its intention to escalate the carbon price, as indicated in its 2020 climate plan, A Healthy Environment and an Health Economy. The fuel charge paid by consumers would go from $40 per tonne (as of this April) to $50 per tonne next year. Following that, it would rise $15 annually, until it has reached $170 per tonne in 2030.

As it currently stands, taxpayers who pay the federal fuel charge would continue to receive rebates on their income tax;  however, beginning in 2022 the federal government announced that then rebates would be paid quarterly by cheque or direct deposit rather than annually through tax returns.

The price for excess emissions paid by large industrial emitters through the separate OBPS would continue to rise in the same manner as the fuel charge. For provinces that have their own industrial pricing systems in place (as most do), they would need to continue to be reviewed annually to make sure they remain equivalent to the federal model. This pathway remains unclear for Ontario and New Brunswick as the transition from the OBPS to the respective industrial pricing system in both provinces is still in progress and with no date yet set for the changeover.

With the legal fight now over, it remains unclear what the next steps will be for the provincial governments that have been in adamant opposition to the federal carbon pricing system; in a number of provinces, including Alberta and Ontario, the opposition to the fuel charge has been a key tenet to the current governments’ platforms.

Today’s decision should give Canadian businesses some clarity on the topic of the carbon pricing system’s legal footing, which has only heightened in importance since the election of US President Biden and stronger climate policies coming forward from Canada’s closest trade ally.

Politically the issue of a carbon tax remains a differing factor between the governing federal Liberals and the Conservatives. The ruling today will no doubt be seen as a win by the Liberals, but could escalate pressure on the Conservatives to decide how it will tackle this topic leading up to the next federal election. Erin O’Toole, leader of the federal Conservative Party, has stated that he will end the fuel charge if the Conservatives form government following the next election.

Concurrent to this, it should be noted that the federal government is undertaking a number of complementary and significant legislative/regulatory initiatives, including:

• Environment and Climate Change Canada (ECCC) recently released its draft regulation for a Federal Carbon Offsets System – currently open for comment until May 5 2021 - which once final will apply differently in the provincial jurisdictions, depending on existing provincial offset programs and protocols, and whether provincial industrial carbon pricing systems allow for the use of offset credits to fulfill compliance requirements. At this time, Ontario’s Emissions Performance Standard (EPS) program does not include the use offsets.
  ‍
• The comment period regarding the draft regulations for the Clean Fuel Standard (covering liquid fuels such as gasoline, diesel, home heating oil)  recently closed, with the final regulation due to be released late this year.
  ‍
• If passed the proposed Canadian Net-Zero Emissions Accountability Act, which was introduced for first reading in November 2020, will formalize Canada’s 2050 target, and establish a series of interim emissions reduction targets at 5-year milestones toward that goal.

‍

Happy to help.

The Sussex team will continue to track the progress and intersection of all of these initiatives closely. Please let us know if you have any questions.