Canadian Carbon Pricing System Moving Forward

As the world gears up for COP24, the Canadian government reaffirmed its intention, on October 23, 2018, to implement a federal carbon pricing system across Canada in 2019.

DcDre-xU0AAUhvwAs set out in its Nationally Determined Contribution (“NDC”) submitted to the UNFCCC under the Paris Agreement, Canada committed to reduce GHG emissions by 30% below 2005 levels by 2030. To that end, Canada proposed adopting various measures to transition to a low-carbon economy, including a federal carbon pricing system. In 2016, the government published the Pan-Canadian Framework on Clean Growth and Climate Change ,(“Pan-Canadian Framework“) which outlined a benchmark for pricing carbon pollution requiring all ten (10) Canadian provinces and three (3) Canadian territories to have a carbon pricing system in place by 2018, in their respecting jurisdiction (the “Benchmark“). Provinces and territories had the option to either implement i) an explicit price-based system (i.e. a carbon tax like in British Columbia or a carbon levy and performance-based emissions system like in Alberta) or ii) a cap-and-trade system like in Quebec.

Pursuant to the Pan-Canadian Framework, the federal government was to introduce an explicit price-based carbon pricing system in order to cover jurisdictions that will not have met the Benchmark requirements within that two year period.

In that regard, earlier this year, the Greenhouse Gas Pollution Pricing Act (the “Act”) (the Federal Backstop), received Royal Assent on June 21, 2018. The Act outlines two compulsory mechanisms which will be applicable to jurisdictions that did not meet the Benchmark:

  1. a charge on fossil fuels that are consumed within a province (generally to be paid by fuel producers and distributors) which will start applying in April 2019; and
  2. an output-based pricing system, to be applicable to emission-intensive industrial facilities (i.e. facilities emitting 50,000 tonnes of carbon dioxide equivalent/year or more, etc.), to be applicable as of January 2019.

The majority of Canadian jurisdictions have either developed their own carbon pricing systems or elected to adopt the federal system:

The holdouts—Manitoba, Ontario, Saskatchewan and New Brunswick—having either failed to adopt measures that meet the federal Benchmark stringency requirements or declined to propose their own carbon-pollution pricing systems. They will be obligatorily subject to the federal carbon pricing system.

The main requirement of the federal system is to attribute a $20/tonne cost on emissions as of April 2019, which will rise by $10 each year, reaching $50/tonne in 2022. The federal government has committed to return direct proceeds collected under the federal carbon pricing backstop system to provinces.  This may happen via one of three methods: 1) providing individuals and families “Climate Action Incentive payments;” 2) providing support to schools, hospitals, small and medium-sized businesses, colleges and universities, municipalities, not-for-profit organizations, and Indigenous communities; and 3) supporting reductions in GHG emissions in such provinces.

Chart_Pricing carbon in CanadaIt remains to be seen whether or not the Canadian carbon pricing plan will help Canada meet its NDC commitments and contribute to the overall long-term goal of the Paris Agreement of holding the increase in the global average temperature to well below 2 degree Celsius above pre-industrial levels and of pursuing efforts to limit that increase to below 1.5 degrees.

 


Financial services promote a greener world

According to Michel Sapin, the French Minster of Finance, the financial sector is in the midst of a transition. Investors, insurers, and banks are at the center of the climate change activity. In a recent presentation at COP21 Sapin noted, “Climate change has immense opportunities. The future is low emissions.”

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Principles for Responsible Investment, an investor initiative in partnership with UNEP  and the UN Global Compact, corroborates Sapin and notes that investors must address the climate issue in their investment strategy.The organization promotes investor focus in sustainability as a fiduciary duty to shareholders.

In looking at investment data, it appears that many investors have embraced and take the duty seriously. From the organization’s report on trends in the private sector:

  • Private sector commitment to green investing is growing.
  • New green bond market exists and it is valued from 50 to 70 billion dollars.
  • Carbon price is a reality; presently more that 450 companies have set internal carbon prices.
  • Investor behavior is changing; portfolio decarbonization strategy is an accessible example.
  • Insurance scaling up both through both issuance and through investment portfolios. Insurers are shifting to low carbon investments

255_m20120816-17262-mmtb4u Looking ahead, to promote investor enthusiasm and enable stronger growth, regulatory authorities need to provide clear guidelines and frameworks. Prices need to be established for carbon and we need to stop subsidizing fossil fuels. Presently several carbon prices exist on global level but trading activity could be more efficient if there was an established market and a transparent carbon price. With carbon and greenhouse gas prices topics of discussion at COP 21, perhaps the UN agreement will assist in establishing a global market.