Order Amending Part 2 of Schedule 1 to the Greenhouse Gas Pollution Pricing Act: SOR/2018-212

Canada Gazette, Part II, Volume 152, Number 22

Registration

October 19, 2018

GREENHOUSE GAS POLLUTION PRICING ACT

P.C. 2018-1292 October 19, 2018

Her Excellency the Governor General in Council, on the recommendation of the Minister of Environment, pursuant to section 189 of the Greenhouse Gas Pollution Pricing Act ^{footnote a}, taking into account, as the primary factor, the stringency of the provincial pricing mechanisms for greenhouse gas emissions, makes the annexed Order Amending Part 2 of Schedule 1 to the Greenhouse Gas Pollution Pricing Act.

Order Amending Part 2 of Schedule 1 to the Greenhouse Gas Pollution Pricing Act

Amendment

1 Part 2 of Schedule 1 to the Greenhouse Gas Pollution Pricing Act ^{footnote 1} is amended by adding the following after the heading “Provinces and Areas for the Purposes of Part 2 of the Act”:

List of Provinces

Item	Province
1	Ontario
2	New Brunswick
3	Manitoba
4	Prince Edward Island
5	Saskatchewan
6	Yukon
7	Nunavut

Coming into Force

2 This Order comes into force on the day on which it is registered.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Order.)

Issues

The Greenhouse Gas Pollution Pricing Act (GGPPA or the Act) received royal assent on June 21, 2018. ^{footnote 2} The GGPPA provides the legal framework and enabling authorities for the federal carbon pollution pricing backstop system (the federal backstop system) for the purpose of ensuring that the pricing of greenhouse gas (GHG) emissions (i.e. carbon pollution pricing) is applied broadly in Canada. Further, the GGPPA provides the Governor in Council with authority to determine in which provinces, territories and areas the Act applies, by amending Schedule 1 to that Act through an order in council. Amendments to Schedule 1 take into account recommendations resulting from the assessment of the stringency of provincial and territorial carbon pollution pricing systems and alignment with the benchmark elements of the Pan-Canadian Approach to Pricing Carbon Pollution (the Benchmark), including the additional published guidance on the Benchmark. ^{footnote 3}, ^{footnote 4} The federal backstop system will apply, in whole or in part, in those provinces, territories and areas listed in Schedule 1 (referred to herein as “backstop jurisdictions”). Currently, Schedule 1 does not list any backstop jurisdictions. It is necessary to list specific provinces, territories and areas in Schedule 1 to have the federal backstop system apply, in whole or in part, to these jurisdictions.

In addition, the Department of the Environment (the Department) is developing ministerial regulations under the GGPPA that will enable certain elements of the output-based pricing system (OBPS) for emissionsintensive and trade-exposed facilities to come into effect in backstop jurisdictions. The ministerial regulations will establish criteria permitting early registration and specify the information that must be quantified, reported and verified beginning on January 1, 2019, in advance of regulations to be made by the Governor in Council that set out the OBPS (i.e. OBPS regulations). The listing of provinces, territories and areas in Part 2 of Schedule 1 to the Act must be completed before the ministerial regulations or the OBPS Regulations can come into effect.

Background

At the United Nations Framework Convention on Climate Change (UNFCCC) conference in December 2015, the international community, including Canada, concluded the Paris Agreement, which is intended to reduce GHG emissions to limit the rise in global average temperature to less than two degrees Celsius (2 °C) and to pursue efforts to limit it to 1.5 °C above pre-industrial levels. It is widely recognized that economy-wide carbon pollution pricing is the most efficient way to reduce GHG emissions. Pricing carbon pollution drives innovative solutions to provide low-carbon choices for consumers and businesses. As part of its commitments made under the Paris Agreement, Canada pledged to reduce national GHG emissions by 30% below 2005 levels by 2030.

In October 2016, the Government of Canada published the Pan-Canadian Approach to Pricing Carbon Pollution, which outlines the principles on which the pricing of carbon pollution in Canada will be based. ^{footnote 5} This publication also states that a federal backstop system will apply in all Canadian jurisdictions that do not have a carbon pollution pricing system in place that aligns with the Benchmark by 2018. The Benchmark is intended to ensure that carbon pollution pricing applies to a broad set of emission sources across Canada, with increasing stringency over time. The complete Benchmark is presented in Annex 1 at the end of this Regulatory Impact Analysis Statement (RIAS).

Greenhouse Gas Pollution Pricing Act

Part 1 of the GGPPA, administered by the Canada Revenue Agency, establishes a charge on fossil fuels — known as the fuel charge — that will generally be paid by fuel producers or distributors and generally applies to fossil fuels produced, delivered or used in a backstop jurisdiction, brought into a backstop jurisdiction from another place in Canada, or imported into Canada at a location in a backstop jurisdiction. The fuel charge applies at the rates set out in Schedule 2 of the Act and those rates vary by fuel type. The rates increase annually from 2018 to 2022.

Part 2 of the GGPPA, administered by the Department, provides authority to establish an OBPS. The aim of the OBPS is to minimize competitiveness risks for emissions-intensive and trade-exposed facilities in backstop jurisdictions, while retaining a price signal on carbon pollution and thus an incentive to reduce GHG emissions. Facilities participating in the OBPS will be able to purchase charge-free fuel and will instead face a compliance obligation on the portion of their GHG emissions that exceed prescribed limits. Participants will have the option to comply with the OBPS regulations by either remitting eligible compliance units or paying the excess emissions charge, or through a combination of these options.

Schedule 1 to the GGPPA is divided into two parts. Part 1 of the Act (the fuel charge), administered by the Canada Revenue Agency, will apply in the backstop jurisdictions listed in Part 1 of Schedule 1 to the GGPPA. Similarly, facilities that meet specified criteria and are located in any of the backstop jurisdictions listed in Part 2 of Schedule 1 to the GGPPA will be subject to Part 2 of the Act (the OBPS), administered by the Department. These lists take into account recommendations resulting from the assessment of the stringency of provincial and territorial carbon pollution pricing systems and alignment with the Benchmark. A summary of the results of this assessment is presented in Annex 2 at the end of this RIAS.

Objectives

The objective of the Order amending Part 2 of Schedule 1 to the GGPPA (the Order) is to add a list of provinces, territories and areas to Part 2 of Schedule 1 in order to have Part 2 of the Act apply in these backstop jurisdictions.

Description

In accordance with section 189 of the GGPPA, this Order identifies the jurisdictions in which Part 2 of the Act will apply by adding the following provinces, territories and areas to Part 2 of Schedule 1 to the Act: ^{footnote 6}

• Ontario
• New Brunswick
• Manitoba
• Prince Edward Island
• Saskatchewan
• Yukon
• Nunavut

“One-for-One” Rule

By itself, the listing of backstop jurisdictions in Part 2 of Schedule 1 to the GGPPA is not anticipated to lead to any administrative cost impacts on businesses, thus the “One-for-One” Rule does not apply to the Order. As mentioned above, the Department is developing ministerial regulations under the Act that will enable certain elements of the OBPS to come into effect in backstop jurisdictions. The ministerial regulations will establish criteria permitting early registration and specify the information that must be quantified, reported and verified beginning on January 1, 2019, in advance of OBPS regulations to be made by the Governor in Council. The administrative cost impacts associated with the ministerial regulations and the OBPS regulations will be assessed and reported in the respective RIAS accompanying these regulations.

Small business lens

Small businesses are not expected to incur any costs due to the listing of backstop jurisdictions in Part 2 of Schedule 1 to the GGPPA. As a result, the small business lens does not apply to this Order.

Consultation

In March 2016, Canada’s First Ministers committed to putting Canada on a credible path to meet or exceed its commitments made under the Paris Agreement. The First Ministers agreed that such a commitment would require transitioning to a low-carbon economy by adopting a broad range of domestic measures, including carbon pollution pricing, adapted to the specific circumstances of each province and territory.

On December 9, 2016, the Pan-Canadian Framework on Clean Growth and Climate Change (the Pan-Canadian Framework) was finalized at a climate-focused First Ministers meeting in Ottawa. A central component of the Pan-Canadian Framework is the pricing of carbon pollution, which is expected to lead to substantial GHG emission reductions, contributing to meeting Canada’s international commitments and the transition to a low-carbon economy.

The federal government is committed to ensuring that the provinces and territories have the flexibility to design their own policies and programs, while ensuring that carbon pollution pricing applies to a broad set of GHG emission sources across Canada with increasing stringency over time. Provinces and territories can implement the type of carbon pollution pricing system that makes sense for their specific circumstances (either an explicit price-based system or a cap-and-trade system).

In May 2017, the Government of Canada released a technical paper on the federal backstop system describing the two main components of the system:

• (i) a charge on fossil fuels that is generally payable by fuel producers or distributors, with rates that will be set for each fuel such that they are equivalent to $10 per tonne of carbon dioxide equivalent (CO₂e) in 2018, rising by $10 per year to $50 per tonne of CO₂e in 2022; and
• (ii) an OBPS for large facilities in emissionsintensive and trade-exposed sectors, with an opportunity for smaller facilities in these sectors to voluntarily participate in the system. ^{footnote 7}

In December 2017, the Government of Canada requested that provinces and territories provide information by September 1, 2018, describing how they intend to meet the Benchmark. After the review of each provincial and territorial system, the federal government will implement the federal backstop system, in whole or in part, starting on January 1, 2019, for the OBPS, in any province or territory that has requested it or that does not have a carbon pollution pricing system in place in 2018 that aligns with the Benchmark. The assessment process will consider the stringency of provincial and territorial carbon pollution pricing systems and evaluate how these systems align with the Benchmark.

In January 2018, the federal government released draft legislative proposals relating to the proposed federal backstop system for public comment. On March 27, 2018, the Government of Canada tabled the GGPPA in the House of Commons, as part of the Budget Implementation Act, 2018, No. 1 (Bill C-74). On June 21, 2018, Bill C-74, including the GGPPA, received royal assent. ^{footnote 8}

Also in January 2018, the Government of Canada released a regulatory framework for the OBPS outlining the design of the system. ^{footnote 9} Further, in May 2018, the Department published a document related to the regulatory framework providing additional details on compliance units and their use in the OBPS. ^{footnote 10} In setting output-based standards, the Department is taking into account the emissions intensity and trade exposure of each sector, as well as other factors that may lead a sector to be at competitiveness risk due to the pricing of carbon pollution.

Rationale

This Order lists backstop jurisdictions in Part 2 of Schedule 1 to the GGPPA, enabling the development of regulatory instruments to establish the OBPS component of the federal backstop system in these jurisdictions. In particular, the listing of backstop jurisdictions will enable the Minister of the Environment to make ministerial regulations under the Act, allowing or facilitating certain aspects of the OBPS to come into effect. The Ministerial regulations will set out criteria about which facilities should register, and specify the information that regulated facilities must quantify, report and verify beginning on January 1, 2019, in advance of finalizing OBPS regulations under the GGPPA. The Order will also enable the Department to develop these OBPS regulations that the Minister of the Environment will recommend be made by the Governor in Council. By itself, the Order is not expected to lead to any incremental impacts (benefits or costs) on the public or other stakeholders. The impacts associated with the ministerial regulations and the OBPS regulations will be assessed and reported in the respective RIAS accompanying these regulations.

Detailed strategic environmental assessments, completed in 2017 and 2018, concluded that the Pan-Canadian Approach to Pricing Carbon Pollution contributes to the overall objectives of the Pan-Canadian Framework. This approach to pricing carbon pollution will also support a number of goals and targets established under the Federal Sustainable Development Strategy, specifically those concerning clean growth and effective action on climate change. ^{footnote 11}

Implementation, enforcement and service standards

This Order comes into force on the day on which it is registered. By itself, the listing of backstop jurisdictions in Part 2 of Schedule 1 to the GGPPA is not anticipated to impose any incremental impacts on Canadians, government or businesses. Therefore, there are no related service standards, and no implementation strategy specific to the Order is considered necessary.

The Government of Canada is committed to continuing to work with provinces and territories to implement carbon pollution pricing as a central component of the PanCanadian Framework. From 2019 onwards, there will be an annual assessment process of provincial and territorial carbon pollution pricing systems to consider their stringency and to ensure that these systems continue to meet the Benchmark. The federal government will monitor major changes to provincial and territorial systems on an ongoing basis, work with the territories to address their specific challenges, and continue to engage with Indigenous peoples with respect to pricing carbon pollution. The Pan-Canadian Approach to Pricing Carbon Pollution will be reviewed by early 2022 to confirm the overall path forward.

Contacts

Katherine Teeple
Director
Federal Carbon Pricing System Division
Carbon Pricing Bureau
Environmental Protection Branch
Department of the Environment
351 Saint Joseph Boulevard
Gatineau, Quebec
K1A 0H3
Email: ec.tarificationducarbonecarbonpricing.ec@canada.ca

Matthew Watkinson
Director
Regulatory Analysis and Valuation Division
Economic Analysis Directorate
Strategic Policy Branch
Department of the Environment
200 Sacré-Cœur Boulevard
Gatineau, Quebec
K1A 0H3
Email: ec.darv-ravd.ec@canada.ca

Annex 1: The Benchmark

The Government of Canada published the Pan-Canadian Approach to Pricing Carbon Pollution on October 3, 2016, and followed up with the publication of guidance on the Benchmark in August 2017 and supplemental guidance on the Benchmark in December 2017. The Benchmark is comprised of the elements below; the guidance published in 2017 is shown in italics.

1. Timely introduction

• All jurisdictions will have carbon pricing by 2018.
• The federal government will provide technical assistance to provinces and territories to support the design of their carbon pollution pricing systems, as requested, such as modelling GHG emission projections and economic analysis.

2. Common scope

• Pricing will be based on GHG emissions and applied to a common and broad set of sources to ensure effectiveness and minimize interprovincial competitiveness impacts. At a minimum, carbon pricing should apply to substantively the same sources as British Columbia’s carbon tax.
• At the time of the publication of the Benchmark in October 2016, British Columbia’s carbon tax applied broadly across the economy, including but not limited to fuels that produce GHG emissions when combusted in transportation, heating, electricity, light manufacturing and industry. There are specific exemptions from British Columbia’s carbon tax for the use of fuels where combustion does not occur (e.g., fuel used as a raw material in industrial processes, fuel used to remove natural gas liquid or impurities in the processing of natural gas). Other specific exemptions from British Columbia’s carbon tax, as in effect in 2016, included marked gasoline and diesel used for certain agricultural purposes, and fuels sold for export.
• The goal of the Benchmark is to ensure that each carbon pollution pricing system applies to a broad base of emissions. Each jurisdiction should apply its carbon pollution pricing system to essentially the same sources and fuels as those to which British Columbia’s carbon tax applies, to the extent to which the same sources exist in the jurisdiction.

3. Two systems

• Jurisdictions can implement: (i) an explicit price-based system (a carbon tax like British Columbia’s or a carbon levy and performance-based emissions system like in Alberta); or (ii) a cap-and-trade system (e.g. in Quebec).

4. Legislated increases in stringency, based on modelling, to contribute to our national target and provide market certainty

• For jurisdictions with an explicit price-based system, the carbon price should start at a minimum of $10 per tonne in 2018, and rise by $10 per year to $50 per tonne in 2022.
• Carbon pricing systems should be designed to achieve incremental GHG emissions reductions in the 2018 to 2022 period through a clear price signal flowing from the level at which caps are set or an explicit carbon price, meaning fewer emissions than would have occurred without the pricing system in place.
• The following guidance applies to jurisdictions with cap-and-trade systems:
  • (i) Each cap-and-trade system must incorporate a 2030 emissions reduction target equal to or greater than Canada’s 30% reduction target.
  • (ii) Cap-and-trade systems must decline (more stringent) annual caps to at least 2022 that correspond, at a minimum, to the projected emissions reductions resulting from the carbon price that year in price-based systems.
  • (iii) Caps must cover a broad base of emissions comparable to British Columbia’s carbon tax, decline in time and result in incremental reductions, and cannot be adjusted upwards in order to accommodate large new activities.
  • (iv) Jurisdictions can set an annual or a multi-year compliance period.
  • (v) The emission limits set by the caps for 2018 to 2022 should be less than or equal to a modelled estimate of the emissions that would have resulted in that jurisdiction from applying the Benchmark carbon price during that period to the sources covered by the cap. The baseline for modelling will be an accurate and recent projection, informed by Canada and the jurisdiction.
  • (vi) Cap-and-trade systems should include best practices in use in cap-and-trade systems internationally and in Canada (e.g., robust quantification methodologies; requirements for the third-party verification of compliance reports; transparent registries for the tracking of units; and strong reporting requirements).
  • (vii) A reserve should be established from which emission allowances can be released to moderate sudden pressures in the market that could significantly and rapidly change prices to capped participants, including new entrants. ^{footnote 12}
  • (viii) The system should include other measures to support price predictability and market stability, including auction floor prices that increase consistently. ^{footnote 13}
  • (ix) Allowances should be distributed and reported in a transparent manner while protecting confidential business information, including methodologies for allowance allocation and quantities of free allowance provided.
  • (x) Clear rules should define the treatment of allowances and credits held by any capped facilities that cease operation.
  • (xi) There should be clear rules and limits to prevent market manipulation.
• The following guidance applies to jurisdictions with explicit price-based systems similar to Alberta’s hybrid system:
  • (i) A hybrid system should include two components: a carbon levy (or tax) that applies to fossil fuels and an output-based pricing system that applies to designated facilities or sectors (which do not pay the levy on the fuel they use). The carbon pollution price in both components of a hybrid system – the fuel levy and the fixed payment per tonne of CO₂ e that is a compliance option under the output-based pricing component – should be at least equal to the Benchmark carbon pollution price.
  • (ii) The output-based pricing system component should not apply to fuel distributed to consumers.
  • (iii) Jurisdictions should tailor the emission intensity standards in the output-based pricing component of their hybrid system to the circumstances of their sectors. These standards should be at levels that drive improved performance in carbon intensity over the 2018 to 2022 period, and should account for best-in-class performance. The reviews of carbon pricing committed to in the Pan-Canadian Framework will consider the adequacy of these emission intensity standards, accounting for their impacts on emissions, innovation, competitiveness and carbon leakage.
  • (iv) The output-based pricing component should include best practices in emission trading systems internationally and in Canada (e.g., robust quantification methodologies; requirements for the third-party verification of compliance reports; transparent registries for the tracking of units; and strong reporting requirements).

5. Revenues remain in the jurisdiction of origin

• The Government of Canada has committed to return the revenues from carbon pricing to the jurisdiction of origin, where they may be used for various measures, including to address impacts on vulnerable populations and sectors and to support climate change and clean growth goals.

6. Federal backstop system

• The federal government will introduce an explicit price-based carbon pricing system that will apply in jurisdictions that do not meet the Benchmark. The federal backstop system will be consistent with the principles set out in the Pan-Canadian Approach to Pricing Carbon Pollution and will return revenues to the jurisdiction of origin.
• As committed to in the Pan-Canadian Framework, the federal government will:
  • (i) work with the territories to find solutions that address their unique circumstances, including high costs of living and of energy, challenges with food security, and emerging economies; and
  • (ii) engage Indigenous peoples to find solutions that address their unique circumstances, including high costs of living and of energy, challenges with food security, and emerging economies.

7. Five-year review

• The overall approach will be reviewed by early 2022 to confirm the path forward, including continued increases in stringency. The review will account for progress and for the actions of other countries in response to carbon pricing, as well as recognition of permits or credits imported from other countries.
• Federal, provincial and territorial governments will work together to establish the approach to the review of carbon pollution pricing, including expert assessment of stringency and effectiveness that compares carbon pollution pricing systems across Canada, which will be completed by early 2022 to provide certainty on the path forward.
• An interim report will be completed in 2020, and reviewed and assessed by Canada’s First Ministers.
• The federal, provincial and territorial governments will work together to assess approaches and best practices to address the competitiveness of emissions-intensive and trade-exposed sectors. This work started in 2017.

8. Reporting

• Jurisdictions should provide regular, transparent and verifiable reports on the outcomes and impacts of carbon pricing policies.
• The federal government will:
  • (i) continue to collaborate with provinces and territories on efforts to track and report GHG emissions in a consistent way across the country;
  • (ii) take regular stock of progress under carbon pollution pricing in order to report to Canadians and to inform Canada’s future commitments in accordance with the Paris Agreement;
  • (iii) engage with external experts to provide informed advice to First Ministers and decision makers, assess the effectiveness of measures, including through the use of modelling, and identify best practices; and
  • (iv) collaborate with provincial and territorial governments, through the Canadian Council of Ministers of Environment to examine:
    • (a) options for a pan-Canadian GHG offset framework; and
    • (b) international mitigation opportunities including the scope for ongoing recognition by Canadian jurisdictions of credits associated with reductions occurring in other countries.
• Jurisdictions should require, at minimum, annual reporting of emissions by regulated entities.
• Jurisdictions with emissions trading should establish registries for tracking tradable units (allowances and credits), and should report periodically on market holdings and activities.

Annex 2: Provincial and territorial carbon pollution pricing systems — summary of assessment of stringency against the Benchmark

Table 1: Provinces and territories with existing or planned carbon pollution pricing systems

Province or Territory	System in place by January 1, 2019	Covers common and broad set of sources of GHG emissions	Explicit price-based or cap-and-trade system	Carbon price or emission caps meet the minimum Benchmark stringency	Annual reporting on carbon pricing impacts	Provincial system meets or on track to meet Benchmark
Alberta	✓	✓	✓	✓	✓	✓
British Columbia	✓	✓	✓	✓	✓	✓
Newfoundland and Labrador	✓	✓	✓	✓	✓	✓
Northwest Territories table 1 note *	---	✓	✓	✓	✓	✓
Nova Scotia	✓	✓	✓	✓	✓	✓
Prince Edward Island table 1 note **	✓	---	✓	✓	✓	Partially
Quebec	✓	✓	✓	✓	✓	✓
Saskatchewan table 1 note ***	✓	---	✓	✓	✓	Partially
Table 1 Notes Table 1 Note * The planned Northwest Territories’ system is proposed to start applying in July 2019 due to the requirements of the consensus-style government of the territory, which is considered in the Benchmark assessment as per the Pan-Canadian Framework on Clean Growth and Climate Change commitment to find solutions that address the unique circumstances of the territory. Return to table 1 note * referrer Table 1 Note ** The planned Prince Edward Island carbon levy is expected to cover fossil fuel used for electricity generation or in residential, commercial and industrial sectors. Prince Edward Island has requested the federal output-based pricing system for industrial emitters in the province. The combination of the provincial carbon levy and federal output-based pricing system is expected to jointly meet the requirements for coverage of common and broad set of sources of GHG emissions, as required by the Benchmark. Return to table 1 note ** referrer Table 1 Note *** The planned Saskatchewan output-based performance system is only expected to cover emissions from large industrial emitters in the province (those that emit 25 000 tonnes of CO2 e or more annually), with the exception of electricity generation and natural gas transmission pipelines. The combination of the provincial output-based performance system and federal fuel charge and federal output-based pricing system is expected to jointly meet the requirements for coverage of a common and broad set of sources of GHG emissions, as required by the Benchmark. Return to table 1 note *** referrer

Table 2: Provinces and territories without existing or planned carbon pollution pricing systems

Province or Territory	Assessment summary
Manitoba	Manitoba has expressed its intent to not implement a carbon pollution pricing system by January 1, 2019. It is not on track to implement a price on carbon pollution aligned with the Benchmark.
New Brunswick	New Brunswick has not indicated plans to implement a price on carbon pollution aligned with the Benchmark.
Nunavut	Nunavut has indicated that it does not intend to implement its own carbon pollution pricing system and that it intends to accept implementation of the federal backstop system.
Ontario	Ontario has revoked its cap-and-trade system and has not indicated any plans to implement a carbon pollution pricing system by January 1, 2019. It is not on track to implement a price on carbon pollution aligned with the Benchmark.
Yukon	Yukon has requested the application of the federal backstop system.