Regulations Amending Part 1 of Schedule 1 to the Greenhouse Gas Pollution Pricing Act and the Fuel Charge Regulations: SOR/2023-129

Canada Gazette, Part II, Volume 157, Number 14

Registration
SOR/2023-129 June 19, 2023

GREENHOUSE GAS POLLUTION PRICING ACT

P.C. 2023-576 June 16, 2023

Her Excellency the Governor General in Council, on the recommendation of the Minister of Finance, makes the annexed Regulations Amending Part 1 of Schedule 1 to the Greenhouse Gas Pollution Pricing Act and the Fuel Charge Regulations under sections 166 and 168 of the Greenhouse Gas Pollution Pricing Act ^{footnote a}.

Regulations Amending Part 1 of Schedule 1 to the Greenhouse Gas Pollution Pricing Act and the Fuel Charge Regulations

Greenhouse Gas Pollution Pricing Act

1 Table 1 of Part 1 of Schedule 1 to the Greenhouse Gas Pollution Pricing Act ^{footnote a} is amended by adding the following in numerical order:

Item	Name of Province
2	Nova Scotia

2 Table 1 of Part 1 of Schedule 1 to the Act is amended by adding the following in numerical order:

Item	Name of Province
3.1	Prince Edward Island

3 Table 1 of Part 1 of Schedule 1 to the Act is amended by adding the following in numerical order:

Item	Name of Province
4.2	Newfoundland and Labrador

Fuel Charge Regulations

4 Section 3.1 of the Fuel Charge Regulations ^{footnote 1} is amended by adding the following after paragraph (e):

• (e.1) July 1, 2023;

5 The Regulations are amended by adding the following after section 3.3:

July 1, 2023 — Nova Scotia, Prince Edward Island and Newfoundland and Labrador

3.31 Except if section 10 or 16 applies, for the purposes of the fuel charge system and applying subsection 38(1) of the Act in respect of the adjustment day that is July 1, 2023, paragraph (a) of the description of B in that subsection is adapted as follows:

(a) if the listed province is Nova Scotia, Prince Edward Island or Newfoundland and Labrador, zero, and

6 (1) Section 6 of the Regulations is amended by adding the following after paragraph (a):

• (b) Nova Scotia;

(2) Section 6 of the Regulations is amended by adding the following after paragraph (c):

• (c.1) Prince Edward Island;

(3) Section 6 of the Regulations is amended by adding the following after paragraph (d.1):

• (d.2) Newfoundland and Labrador;

7 Paragraph (a) of the description of D in section 10 of the Regulations is amended by striking out “or” at the end of subparagraph (ii), by replacing “and” with “or” at the end of subparagraph (iii) and by adding the following after subparagraph (iii):

• (iv) the adjustment day is July 1, 2023 and the listed province is Nova Scotia, Prince Edward Island or Newfoundland and Labrador, and

8 Paragraph (a) of the description of D in section 16 of the Regulations is amended by striking out “or” at the end of subparagraph (ii), by replacing “and” with “or” at the end of subparagraph (iii) and by adding the following after subparagraph (iii):

• (iv) the adjustment day is July 1, 2023 and the listed province is Nova Scotia, Prince Edward Island or Newfoundland and Labrador, and

9 (1) Paragraph 24(a) of the Regulations is amended by adding the following after subparagraph (i):

• (i.1) Nova Scotia,

(2) Paragraph 24(a) of the Regulations is amended by striking out “or” at the end of subparagraph (ii), by adding “or” at the end of subparagraph (iii) and by adding the following after subparagraph (iii):

• (iv) Newfoundland and Labrador;

Coming into Force

10 (1) Sections 1 to 8 come into force or are deemed to have come into force on July 1, 2023.

(2) Section 9 is deemed to have come into force on December 20, 2022.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Issues

The Greenhouse Gas Pollution Pricing Act (GGPPA) provides the legal framework and enabling authorities for the federal carbon pollution pricing system (the federal backstop system) for the purpose of ensuring that the pricing of greenhouse gas (GHG) emissions is applied broadly in Canada. The federal backstop system has two components: a regulatory charge on fossil fuels (the fuel charge) and an output-based pricing system for large industry (the federal OBPS).

Further, the GGPPA provides the Governor in Council with authority to determine in which provinces, territories and areas the GGPPA applies, by amending Schedule 1 to the GGPPA through regulations and, with respect to the fuel charge, by amending Schedule 2 to the GGPPA through regulations. Amendments to Schedule 1 take into account recommendations resulting from the assessment of the stringency of provincial and territorial pollution pricing systems and alignment with the federal benchmark stringency criteria (the Benchmark). The federal backstop system applies, in whole or in part, in those provinces, territories and areas listed in Schedule 1. More specifically, the fuel charge applies in those provinces, territories and areas listed in Part 1 of Schedule 1 (listed provinces). Currently, Part 1 of Schedule 1 includes Ontario, Manitoba, Saskatchewan, Alberta, Yukon and Nunavut as listed provinces for the purpose of the fuel charge.

On November 22, 2022, the government announced its intention to implement the fuel charge in Nova Scotia, Prince Edward Island and Newfoundland and Labrador as of July 1, 2023. Therefore, the Regulations Amending Part 1 of Schedule 1 to the Greenhouse Gas Pollution Pricing Act and the Fuel Charge Regulations (the amending regulations) are needed in order to list those provinces in Part 1 of Schedule 1 to have the fuel charge component of the federal backstop system apply in those provinces, thereby ensuring that carbon pricing continues to apply broadly across Canada.

Background

The Benchmark

At the United Nations Framework Convention on Climate Change 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 pollution pricing is the most efficient way to reduce GHG emissions. Pricing 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 pollution in Canada will be based. This publication also states that a federal backstop system will apply in all Canadian jurisdictions that do not have a pollution-pricing system in place that aligns with the Benchmark. The Benchmark is intended to ensure that pollution pricing applies to a broad set of emission sources across Canada, with increasing stringency over time.

Originally, the Benchmark was published in Part II of the Canada Gazette on April 3, 2019, presented as an annex at the end of the Regulatory Impact Analysis Statement for the Regulations Amending Part 1 of Schedule 1 and Schedule 2 to the Greenhouse Gas Pollution Pricing Act and on October 31, 2018, as an annex at the end of the Regulatory Impact Analysis Statement for the Order Amending Part 2 of Schedule 1 to the Greenhouse Gas Pollution Pricing Act.

Since the original publication of the Benchmark, the Government of Canada indicated its intent to strengthen the benchmark stringency criteria for the post-2022 period in September 2020. In December 2020, the government released its strengthened climate plan, A Healthy Environment and a Healthy Economy, which proposed to implement annual carbon price increases of $15/tonne of carbon dioxide equivalent GHG emissions from 2023 to 2030 and to consider changes to strengthen the federal benchmark criteria. In 2021, Canada announced an enhanced target committing Canada to cut its GHG emissions by 40% to 45% below 2005 levels by 2030. Following engagement with provinces, territories and Indigenous organizations, and in consideration of the findings of an independent review of carbon pricing systems in Canada led by the Canadian Institute for Climate Choices, the Government of Canada confirmed, in August 2021, the updated federal benchmark, a key component of Canada’s path forward for carbon pricing post-2022. This update includes confirming the national minimum price on carbon pollution up to 2030, and strengthening the criteria that all pricing systems must meet, in order to ensure carbon pollution pricing drives low-cost emission reductions required to meet the 2030 GHG emission reduction target and pave the way for Canada’s longer-term low-carbon transformation (the Updated Benchmark). The Updated Benchmark is presented as an annex at the end of this Regulatory Impact Analysis Statement.

The Updated Benchmark indicated that the federal government would seek confirmation from provinces and territories on whether they intend to maintain or implement a carbon pollution pricing system for the 2023–2030 period and assess provincial and territorial submissions against the Updated Benchmark in 2022 for the 2023 to 2030 period. Provinces and territories had until September 2022 to put forward a plan to price carbon pollution for 2023–2030 that aligned with the Updated Benchmark or request the federal system. Based on these submissions, the Government of Canada announced that the fuel charge will newly apply in Nova Scotia, Prince Edward Island and Newfoundland and Labrador starting as of July 1, 2023, as these provinces did not propose systems that met the Updated Benchmark. Prior to the 2023–2030 period, these provinces had in place pricing systems that had been assessed to meet the previous benchmark.

The fuel charge component of the federal backstop system

Part 1 of the GGPPA provides the legal framework and enabling authorities for the fuel charge component of the federal backstop system. The fuel charge system is under the purview of the Minister of Finance and is administered by the Canada Revenue Agency (CRA) and, at the border, the Canada Border Services Agency (CBSA). It applies in those provinces, territories and areas listed in Part 1 of Schedule 1 to the GGPPA. For 2022–2023, the fuel charge applies in Ontario, Manitoba, Saskatchewan, Alberta, Yukon and Nunavut. The fuel charge is generally paid by fuel producers or distributors and generally applies to fuels produced, delivered or used in a listed province, brought into a listed province from another place in Canada, or imported into Canada at a location in a listed province. The fuel charge applies at the rates set out in Schedule 2 to the GGPPA and those rates vary by fuel type, based on global warming potential factors and emissions factors associated with the combustion of each fuel type. The first phase of the federal government’s plan set the carbon price at $20 per tonne of carbon pollution in 2019, rising $10 per tonne every year to $50 per tonne in 2022–2023. The second phase sees the carbon price increase by $15 per year starting in 2023–2024 rising to $170 per tonne in 2030–2031.

Part 1 of the GGPPA provides the Governor in Council with the authority to determine in which provinces, territories and areas the fuel charge applies, by amending Part 1 of Schedule 1 to the GGPPA through regulations. Part 1 of the GGPPA also provides that certain modifications and additions to the fuel charge system may be made by way of regulation. The Fuel Charge Regulations were previously made to provide such additional rules for the proper functioning of the fuel charge system.

Part 1 of the GGPPA includes rules that integrate the fuel charge system with the federal OBPS system under Part 2 of the GGPPA. Similarly, the existing rules of the fuel charge system, both under Part 1 of the GGPPA and the Fuel Charge Regulations, integrate the fuel charge with provincial output-based pricing systems that meet the Updated Benchmark.

Objective

The objectives of the amending regulations are to ensure carbon pricing applies broadly in Canada by adding Nova Scotia, Prince Edward Island and Newfoundland and Labrador to Part 1 of Schedule 1 in order to have Part 1 of the GGPPA apply in those provinces and to provide a smooth introduction of the fuel charge system in those provinces and a consistent application of the existing fuel charge rules.

Description

The amending regulations identify Nova Scotia, Prince Edward Island and Newfoundland and Labrador as provinces in which the fuel charge under Part 1 of the GGPPA will apply by adding those provinces to Part 1 of Schedule 1 to the GGPPA. This amendment comes into force on July 1, 2023. The amending regulations also implement technical amendments that are consequential to the listing of these provinces in Schedule 1 and are described below.

The amending regulations prescribe July 1, 2023, as an “adjustment day” for the purposes of the new listed provinces and make technical refinements to certain formulas relevant to the computation of charge amount on that adjustment day. If a person holds fuel in any of the new listed provinces at the beginning of that day, that person may have obligations under Part 1 of the GGPPA, including an obligation to pay a charge in respect of the fuel held at that time. These amendments are consequential transitional rules, which are needed to ensure the fuel charge applies properly on the day on which these provinces are first listed in Part 1 of Schedule 1. The amending regulations also ensure that existing relief mechanisms for fishers and facilities subject to provincial output-based pricing systems apply in these provinces in the same manner that they apply in the existing listed provinces. These relief mechanisms and consequential transitional rules generally apply as of July 1, 2023, however, the provisions that permit registration of facilities subject to provincial output-based pricing systems come into force on December 20, 2022.

Regulatory development

Consultation

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 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 pollution pricing system that makes sense for their specific circumstances (i.e. either an explicit price-based system or a cap-and-trade system) provided that the system aligns with the Updated Benchmark.

Provinces and territories were requested to provide by September 2, 2022, final proposals for 2023–2030, describing how they intend to meet the Updated Benchmark. Following engagement with provinces and territories and review of each provincial and territorial proposal, on November 22, 2022, the Government publicly announced its intention to apply the fuel charge in Nova Scotia, Prince Edward Island and Newfoundland and Labrador on provinces on July 1, 2023.

On December 20, 2022, the Government publicly released the draft text of the amending regulations on the Department of Finance website which included the provisions listing those provinces and various consequential and transitional amendments needed to ensure a smooth introduction of the fuel charge system in those provinces and a consistent application of the existing fuel charge rules. The Department did not receive any submissions related to the draft amending regulations.

Modern treaty obligations and Indigenous engagement and consultation

For the measures contained in the amending regulations, no impacts have been identified in respect of the Government’s obligations in relation to Indigenous rights protected by section 35 of the Constitution Act, 1982, modern treaties or international human rights obligations.

Instrument choice

Under Part 1 of the GGPPA, the Governor in Council is provided with the authority to determine in which provinces, territories and areas the fuel charge applies, by amending Part 1 of Schedule 1 to the GGPPA through regulations. Therefore, the amending regulations are the appropriate instrument choice for adding Nova Scotia, Prince Edward Island and Newfoundland and Labrador to Part 1 of Schedule 1 to the GGPPA.

The Governor in Council also has the authority to determine rules relevant to the application of the fuel charge under Part 1 of the GGPPA. In order to provide certainty to stakeholders, the transitional and consequential measures contained in the amending regulations must be made into law and regulatory amendments are an appropriate mechanism by which to implement such rules.

Regulatory analysis

Benefits and costs

The amending regulations will ensure carbon pricing continues to apply broadly in Canada by adding Nova Scotia, Prince Edward Island and Newfoundland and Labrador to Part 1 of Schedule 1 in order to have Part 1 of the GGPPA apply in those provinces.

Adding these provinces to Part 1 of Schedule 1 to the GGPPA does not increase or decrease the legislative or regulatory requirements of the GGPPA, as any requirements relating to the fuel charge under Part 1 of the GGPPA are derived from the GGPPA itself. While these amending regulations expand the scope of the fuel charge portion of the federal backstop system to include Nova Scotia, Prince Edward Island and Newfoundland and Labrador, the associated costs and benefits, as set out more generally below, remain relatively unchanged as the carbon pricing instrument in each province aligns with the Updated Benchmark, whether that instrument is imposed at the provincial or federal level.

The Government of Canada has enacted a carbon pollution pricing system where, over time, it becomes increasingly expensive to pollute. Putting a price on carbon pollution is widely recognized as the most efficient means to drive innovation and energy efficiency in order to reduce GHG emissions. This carbon pollution pricing system is expected to play an important role in Canada’s objectives to achieve reductions within the range of 40% to 45% below 2005 levels in 2030.

To the extent that the federal backstop system helps reduce these emissions, it has the benefit of mitigating the long-term costs associated with climate change using the least cost means. The costs associated with a changing climate are real — Canadians feel its impacts when extreme weather threatens their safety, their health, their homes and communities, and their livelihoods. For example, according to the Canadian Institute of Climate Choices, in the last decade, the average cost of weather-related disasters and catastrophic losses each year has risen to the equivalent of 5–6% of annual GDP growth. Insured losses for catastrophic weather events totalled over $18 billion between 2010 and 2019, and the number of catastrophic events was over three times higher than in the 1980s. Environment and Climate Change Canada have recently provided updated interim estimates for the social cost of GHG that values climate change damages at $261 per tonne in 2023 rising to $294 in 2030 (CAD at 2021 price levels).

The federal price on pollution is revenue neutral for the federal government; the direct proceeds from the federal carbon pricing system remain in the province or territory where they are collected. For those provinces that do not meet the federal stringency requirements in 2023–2024 — Alberta, Saskatchewan, Manitoba, Ontario, Nova Scotia, Prince Edward Island and Newfoundland and Labrador — 90% of direct proceeds from the federal fuel charge will be returned to households, which are the ultimate bearers of the carbon price, through Climate Action Incentive payments. Under this approach, 8 out of 10 households get more money back than the costs they face from the federal carbon pollution pricing system (i.e. generally all of those but the highest energy consumers and those with higher incomes). Please refer to the gender-based analysis plus section below for more details on how fuel charge proceeds are being recycled to individuals.

Small business lens

The fuel charge requirements under Part 1 of the GGPPA and the Fuel Charge Regulations generally apply to fuel producers and fuel distributors upstream in the distribution chain, which are generally medium or large-sized businesses. However, to the extent that small businesses may incur compliance costs, those costs are derived from the GGPPA itself. As a result, the small business lens does not apply to the amending regulations.

One-for-one rule

The amending regulations will ensure carbon pricing continues to apply broadly in Canada by adding Nova Scotia, Prince Edward Island and Newfoundland and Labrador to Part 1 of Schedule 1 in order to have Part 1 of the GGPPA apply in those provinces. Any requirements relating to the fuel charge under Part 1 of the GGPPA are derived from the GGPPA itself. Accordingly, the amending regulations do not increase or decrease the level of administrative burden imposed on business; therefore, the one-for-one rule does not apply.

Regulatory cooperation and alignment

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 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 pollution pricing system that makes sense for their specific circumstances (i.e. either an explicit price-based system or a cap-and-trade system) provided that the system aligns with the Updated Benchmark.

Provinces and territories had until September 2022 to put forward a plan to price carbon pollution for 2023–2030 aligned with the Updated Benchmark, or request the federal system. Based on these submissions, the Government of Canada announced that the fuel charge will newly apply in Nova Scotia, Prince Edward Island and Newfoundland and Labrador starting as of July 1, 2023, as these provinces did not propose systems that met the Updated Benchmark. The amending regulations would add Nova Scotia, Prince Edward Island and Newfoundland and Labrador to Part 1 of Schedule 1 to the GGPPA in order to have Part 1 of the GGPPA apply in those provinces and implement consequential transitional rules.

Strategic environmental assessment

The amending regulations will ensure carbon pricing continues to apply broadly in Canada by adding Nova Scotia, Prince Edward Island and Newfoundland and Labrador to Part 1 of Schedule 1 in order to have Part 1 of the GGPPA apply in those provinces. Part 1 of the GGPPA is an essential component of the Pan-Canadian Approach to Pricing Carbon Pollution. A strategic environmental assessment was undertaken to assess the impacts in listed provinces as summarized below.

In combination with other measures outlined in the Pan-Canadian Framework on Clean Growth and Climate Change and the Government of Canada’s 2030 Emissions Reduction Plan, the federal carbon pollution pricing system (including the fuel charge) provides incentives to reduce energy use through conservation and efficiency measures, while also serving to drive fuel switching and technology advances, and thus ultimately leads to reductions in greenhouse gas emissions and air pollution. These outcomes will directly and indirectly contribute to all the 2022–2026 Federal Sustainable Development Strategy goals, but specifically the goals of effective action on climate change, clean growth, and clean energy.

Gender-based analysis plus

The amending regulations will ensure carbon pricing continues to apply broadly in Canada by adding Nova Scotia, Prince Edward Island and Newfoundland and Labrador to Part 1 of Schedule 1 in order to have Part 1 of the GGPPA apply in those provinces. Part 1 of the GGPPA is an essential component of the Pan-Canadian Approach to Pricing Carbon Pollution. A gender-based analysis plus (GBA+) was undertaken to assess the impacts of carbon pricing on diverse groups in listed provinces, as summarized below.

The GBA+ concluded that the application of the carbon pollution price can have disproportionate impacts on low-income and vulnerable populations. These impacts are neutralized or mitigated in the Pan-Canadian Approach to Pricing Carbon Pollution through the recycling of the direct proceeds to individuals. Carbon pollution pricing, with well-designed proceeds return as a core element, minimizes the impacts of climate change on Canadians and the Canadian economy. It contributes to the overall resilience of the country and benefits all, including potentially vulnerable groups, while maintaining the overall incentives of the price signal to incent behavioural change to reduce greenhouse gas emissions and help contribute to the Government’s climate change objectives. Proceeds recycling can also be directed to further mitigate climate change impacts, which can particularly benefit groups that are more vulnerable to the impacts of changing weather patterns. In Ontario, Manitoba, Saskatchewan, and Alberta, the federal government returns the bulk of the direct proceeds from the fuel charge directly to individuals and families, through Climate Action Incentive payments, with a top-up of 10% for those living in small and rural communities. Direct proceeds will be returned in the same manner in Nova Scotia, Prince Edward Island and Newfoundland and Labrador. In Yukon and Nunavut, the federal government returns all direct proceeds from the fuel charge to the territorial governments. All potential impacts would also have been covered by the previous GBA+ on the broader federal carbon pollution pricing system.

Implementation, compliance and enforcement, and service standards

The amending regulations will be administered and enforced by the CRA and, at the border, by the CBSA as part of the fuel charge regime under Part 1 of the GGPPA. The provisions contained in the amending regulations come into force as outlined above in the description section. The amending regulations add Nova Scotia, Prince Edward Island and Newfoundland and Labrador to Part 1 of Schedule 1 in order to have Part 1 of the GGPPA apply in those provinces as of July 1, 2023. In preparing for this implementation, the CRA and CBSA are updating certain systems, forms and public notices.

Contact

Nina Gormanns
Sales Tax Division
Tax Policy Branch
Department of Finance Canada
90 Elgin Street
Ottawa, Ontario
K1A 0G5

Annex: The Updated Benchmark

1. Minimum national carbon pollution price Schedule (2023–2030)

Canada’s minimum national price on carbon pollution for explicit price-based systems (i.e. systems that directly set a price on emissions) is $65 per tonne of GHG emissions calculated in carbon dioxide equivalent (CO₂e) in 2023, and increases by $15 per year to $170 per tonne CO₂e in 2030, according to the following schedule:

Year	2023	2024	2025	2026	2027	2028	2029	2030
Minimum Carbon Pollution Price ($CAD/tonne CO2e)	65	80	95	110	125	140	155	170

Carbon prices on specific fuels or emissions sources must be calculated based on recognized global warming potential factors such as those used for reporting requirements under the United Nations Framework Convention on Climate Change.

As cap-and-trade systems set maximum emissions levels rather than minimum carbon prices, for these systems the minimum carbon pollution price is translated into an equivalent cap on emissions as detailed in section 3.2.1.

2. Recognized carbon pollution pricing systems

Provinces and territories must implement

• An explicit price-based system (i.e. (i) a carbon levy on fossil fuels, or (ii) a hybrid system comprised of a carbon levy on fossil fuels and an output-based pricing system for industry); or
• A cap-and-trade system.

For industrial sources, a province or territory cannot implement a combination of a cap-and-trade system and an explicit price-based system.

Provinces and territories can also choose to implement a partial explicit price-based system designed to work with the pricing systems of the Greenhouse Gas Pollution Pricing Act (federal backstop system), either

• A provincial or territorial carbon levy on fossil fuels complemented by the federal Output-Based Pricing System Regulations for the jurisdiction’s emissions-intensive and trade-exposed (EITE) industrial emitters; or
• A provincial or territorial output-based pricing-type system (OBPS) complemented by the federal fuel charge.

To avoid unintended impacts on stringency and competitiveness and to avoid overly complex and burdensome administration, any such provincial or territorial partial explicit price-based system must be designed to fully replace either the federal fuel charge or the federal OBPS. Where a province or territory implements a partial system that does not fully replace the federal fuel charge or OBPS, the corresponding federal backstop system part (i.e. fuel charge or OBPS) will apply in full in the jurisdiction.

3. Minimum criteria for recognized carbon pollution pricing systems in Canada

This section sets out the minimum criteria according to recognized carbon pollution pricing system type.

Provincial and territorial carbon pollution pricing systems must meet the following criteria beginning in 2023.

3.1 Explicit Price-Based Systems

3.1.1 Carbon Price

Carbon pollution pricing systems must have a minimum carbon pollution price of at least $65 per tonne of GHG emissions calculated in CO₂e in 2023, rising by $15 per year to $170 per tonne of CO₂e in 2030, in alignment with section 1.

Tests

• To ensure system stability and provide market certainty, a province or territory must establish the carbon pollution price that will apply for all years from 2023 to 2030 as part of its legislative or regulatory framework such that:
  • The carbon levy applied to fuels under the carbon levy portion of the system corresponds, at minimum, to the minimum national carbon pollution price for all years up to 2030, no later than April 1, 2023, with minimum annual price increases occurring automatically on or before April 1 of every subsequent year.
  • The fixed payment per tonne of CO₂e that is a compliance price under an output-based pricing system is at least equal to the minimum national carbon pollution price for all years up to 2030, no later than January 1, 2023, with minimum annual price increases occurring automatically on or before January 1 of every subsequent year.
• By December 31, 2022, the province or territory must have either
  • Completed legislative or regulatory changes to implement the 2023–2030 price increases; or
  • Published a commitment to these price increases and details on how legislative or regulatory changes will take effect as of the relevant date (January 1, 2023, or April 1, 2023).

3.1.2. Common Scope

At a minimum, the carbon pollution price must apply to an equivalent percentage of GHG emissions from combustion sources as would be covered by the federal backstop system in the jurisdiction. Provinces and territories have the flexibility to tailor source coverage, provided the percentage of covered emissions from combustion sources meets this minimum requirement.

In addition to this requirement, in hybrid systems, the output-based pricing system must also cover industrial process emissions.

Tests

• The assessment of the coverage of carbon pollution pricing systems will be based on an estimate determined by the federal government with input from the jurisdiction. Where there is uncertainty estimating coverage levels of the provincial or territorial system, or where a province or territory would have difficulty covering a small source of emissions for operational reasons, a discrepancy of up to 2% compared to the coverage level of the federal backstop may be considered in assessing this criterion.
• In assessing the coverage of a carbon pollution pricing system, the following will be treated as uncovered:
  • exemptions by type of fuel,
  • exemptions by fuel use,
  • exemptions by sector or activity, and
  • any sources where the province or territory negates the carbon price signal in whole or in part (see section 3.1.3).

Further guidance

• Provisions for new facilities that are typical in emissions trading systems (e.g. initial grace period) will not be considered as exemptions when assessing OBPS coverage.
• Coverage of partial systems (e.g. federal fuel charge combined with a provincial or territorial OBPS) will assess the combined coverage of both systems against coverage levels from the full federal backstop.
• In hybrid systems, the output-based pricing system should also consider covering other non-combustion emissions besides industrial process emissions, including from venting, fugitive emissions, industrial product use, and waste and wastewater treatment at covered industrial facilities.

3.1.3 Maintaining the Carbon Pollution Price Signal

Provinces and territories must not implement measures that directly offset, reduce or negate the price signal sent by the carbon price.

Tests

• Where a province or territory implements measures that directly offset, reduce or negate the price signal sent by the carbon price in whole or in part (e.g. carbon price rebates at the gas pump or on utility bills, OBPS performance standards that negate the price signal), those sources will be treated as not covered by the pricing system in the determination of the scope of the system under 3.1.2.
• Where a province or territory reduces its specific taxes on fuels as a means to offset, reduce or negate the carbon price on those fuels, those sources will be treated as not covered by the pricing system in the determination of the scope of the system under 3.1.2. This criterion does not prevent provinces and territories from making changes to their specific taxes on fuels for reasons unrelated to carbon pollution pricing.
• Any performance-based rebate program implemented as part of a carbon levy must be structured in such a way that it maintains a marginal price signal that aligns with the minimum national carbon pollution price for all emissions that it covers. Where a portion of emissions does not receive this marginal price signal, it will be treated as not covered under 3.1.2.

Further guidance

• This criterion does not preclude returning carbon pollution pricing proceeds to households and businesses, provided the methodology for returning proceeds does not directly negate the price signal. See Guidance for Using Carbon Pollution Pricing Proceeds for further detail on best practices and on the types of measures that risk negating the price signal.

3.1.4. Stringency of Output-based Pricing Systems for Industry

Output-based pricing systems (OBPS) for industry must be designed to maintain a marginal price signal equivalent to the minimum national carbon pollution price (section 1) across all covered emissions.

Tests

• The system is designed to maintain a marginal price signal at or above the minimum national carbon pollution price across all regulated GHG emissions, including ensuring that any emissions reductions that bring a facility’s emissions intensity below its performance standard are eligible to generate performance credits. Provinces and territories may tailor emission intensity standards to the circumstances of their sectors within this overarching requirement.
• Assessment of OBPS will be based on federal modelling, with input from the jurisdiction. Modelling will consider the expected impact of other GHG emissions mitigation measures. Results must show projected sum of all regulated facilities’ compliance obligations is greater than the projected sum of tradeable units available to the market after industries have responded to the price signal in a given compliance period, i.e. that the marginal price is holding.
• The impact of banked credits and offset credits on markets will be assessed separately considering expected supply and market participant behaviour.
• Assessments will also consider information provided by the jurisdiction, e.g. alternative modelling results and/or compliance data.

Further guidance

• OBPS should include mechanisms to support price predictability and market stability; these could include tightening rates on industrial performance standards, limits on banking of compliance units, or limits on use of compliance units, such as expiry dates.
• OBPS should reflect best practices in emissions trading systems; these should include robust quantification methodologies; requirements for the third-party verification of compliance reports; registries for the tracking of units; and, strong reporting requirements including periodic reports on market holdings and activities.

3.1.5 Application of OBPS and performance-based rebates

Output-based pricing systems (OBPS) and performance-based rebate approaches under a carbon levy must only apply to sectors that are assessed by the jurisdiction as being at risk of carbon leakage and competitiveness impacts from carbon pollution pricing, and must not apply to sectors that are clearly not at risk, such as fuel distributors.

Test

• Eligibility for OBPS and performance-based rebate approaches must be limited to sectors assessed by the jurisdiction as being at risk of adverse carbon leakage and competitiveness impacts from carbon pollution pricing.
• Sectors that clearly do not face such a risk, such as fuel distributors (not including emissions from the operation of natural gas transmission pipelines), must not be included in OBPS systems.
• Jurisdictions must use clear and transparent tests for assessing carbon leakage and competitiveness risks, based on recognized metrics.

3.1.6 Offset credits

Offset credits allowed for facility compliance under an OBPS must represent GHG emissions reductions and/or removal that are real, additional, quantified, unique, verified, and permanent.

Test

• Offset programs and protocols recognized for compliance will be assessed against best practices to ensure GHG reductions or removal generated are real, additional, quantifiable, unique, verifiable, and permanent.

Further guidance

• For further guidance on the development or operation of offset programs, consult the Pan-Canadian Greenhouse Gas Offsets Framework, agreed by the Canadian Council of Ministers of the Environment in November 2018.

3.1.7 Public Reporting

Provinces and territories must publish regular, transparent reports and/or information on the key features, outcomes, and impacts of their carbon pricing systems, as well as on compliance information and carbon market data where publication could enhance accountability, and carbon market function and oversight.

Tests

• Provinces and territories publish regular reports and/or information on the key features, outcomes and impacts of their systems.
• Provinces and territories with an OBPS publish regular reports and/or information on compliance and emissions trading market data, including at a minimum:
  • total GHG emissions from facilities and sectors covered under the OBPS
  • total number of credits issued by category (e.g. performance credits, offset credits);
  • total compensation obligation for all facilities covered under the OBPS;
  • compliance broken out by method (e.g. payments to compliance fund, use of performance credits, use of offset credits)
  • credits status (e.g. active, suspended, revoked, voluntary cancelled), and carbon market activities (e.g. credits transfers)

Further guidance

• Provinces and territories should report disaggregated information and data, except where confidentiality issues arise, in which case aggregation can be used.
• Information on key features, outcomes and impacts of carbon pricing systems includes:
  • list of eligible sectors at risk of carbon leakage, and the methodology(ies) used to assess the carbon leakage risk;
  • list of performance/emission intensity standards, and the methodology(ies) used to set performance/emission intensity standards;
  • details on how proceeds from pricing are used; and
  • overall carbon pricing system design and updates.

3.2 Cap-and-Trade Systems

3.2.1 Maximum Emissions Caps

Cap-and-trade systems must have declining (more stringent) annual GHG emissions caps from 2023 to at least 2030 that correspond, at a minimum, to the projected emissions levels that would result from the application of the minimum national carbon pollution price (section 1) that year in explicit price-based systems.

To ensure system stability and provide market certainty, by December 31, 2022, the province or territory must either

• establish annual caps for all years (2023 to 2030) as part of their legislative/regulatory framework; or
• publish a commitment to these caps and details on how legislative or regulatory changes will take effect as of January 1, 2023.

Tests

• Assessment of emission cap levels will be based on federal modelling, with input from the jurisdiction. Modelling will consider the expected impact of other GHG emissions mitigation measures. Results must show that the emission limits set by the caps for 2023 to 2030 are less than or equal to a modelled estimate of the emissions that would have resulted in that jurisdiction from applying the minimum national carbon pollution price (section 1) modelled as the federal backstop pricing system (fuel charge and OBPS) during that period.
• The impact of banked credits and offset credits on markets will be assessed separately considering expected supply and market participant behaviour.
• Assessments will also consider information provided by the jurisdiction, e.g. alternative modelling results and/or compliance data.
• Caps must decline annually and cannot be adjusted upwards in order to accommodate new activities.
• Emission caps are established for all years (2023–2030) in the province or territory’s legislative or regulatory framework.

3.2.2 Common Scope

At a minimum, the GHG emissions caps must cover an equivalent percentage of GHG emissions from combustion sources as would be covered by the federal backstop system in the jurisdiction. Provinces and territories have the flexibility to tailor source coverage, provided the percentage of covered emissions from combustion sources meets this minimum requirement.

In addition to this requirement, the system must also cover industrial process emissions for any sector that receives a free allocation of allowances.

Tests

• The assessment of the coverage of cap and trade systems will be based on an estimate determined by Canada with input from the jurisdiction. Where there is uncertainty estimating coverage levels of the provincial or territorial system due to data limitations, or where a province or territory would have difficulty covering a small source of emissions for operational reasons, a discrepancy of up to 2% compared to the coverage level of the federal backstop may be considered in assessing this criterion.
• In assessing the coverage of a carbon pricing system, the following sources will be treated as uncovered:
  • exemptions by type of fuel;
  • exemptions by fuel use;
  • exemptions by sector or activity; and
  • any sources where the province or territory negates the carbon price signal in whole or in part (see section 3.2.3).

Further guidance

• Where feasible, the system should also consider covering other non-combustion emissions at industrial facilities besides industrial process emissions, including from venting, fugitive emissions, industrial product use, and waste and wastewater treatment.
• Provisions for new facilities that are typical in emissions trading systems (e.g. initial grace period) will not be considered as exemptions when assessing coverage.
• Coverage of partial systems (e.g. federal fuel charge combined with a provincial or territorial industrial cap) will assess the combined coverage of both systems against coverage levels from the full federal backstop.

3.2.3 Maintaining the Carbon Pollution Price Signal

Provinces and territories must not implement measures which directly offset, reduce or negate the price signal sent by the level at which the caps are set.

Free allocation methodologies must be designed to maintain a price signal to emitters that is equivalent to the market price of allowances.

Free allocation of allowances must be limited to sectors assessed by the jurisdiction as being at risk of carbon leakage and competitiveness impacts. Sectors that clearly do not face such a risk, such as fuel distributors (not including emissions from the operation of natural gas transmission pipelines), must not receive free allowances.

Tests

• Eligibility for free allowances must be limited to sectors assessed by the jurisdiction as being at risk of carbon leakage and competitiveness impacts.
• Sectors that clearly do not face such a risk, such as fuel distributors (not including emissions from the operation of natural gas transmission pipelines), must not receive free allocations.
• Jurisdictions must use clear and transparent tests for assessing carbon leakage and competitiveness risks, based on recognized metrics.
• Where a province or territory implements measures which directly offset, reduce or negate the price signal in whole or in part, those sources will be treated as not covered by the pricing system in the determination of the scope of the system under 3.2.2. This includes free allocation methodologies that negate the carbon pollution price signal.
• Where a province or territory reduces its specific taxes on fuels as a means to offset, reduce or negate the carbon pollution price on those fuels, those sources will be treated as not covered by the pricing system in the determination of the scope of the system under 3.2.2. This criterion does not prevent provinces and territories from making changes to their specific taxes on fuels for reasons unrelated to carbon pollution pricing.

Further guidance

• Clear rules should define the treatment of allowances and credits held by any facilities regulated under the cap-and-trade system, particularly those that cease operation.
• The system should include mechanisms to support price predictability and market stability; these should include auction floor prices that increase consistently, a credit reserve to relieve sudden pressures in the market (e.g. new market entrants), limits on banking allowances, limits on allowance purchases, and allowance expiry.
• Allowances should be distributed and reported in a transparent manner while protecting confidential business information, including methodologies for allowance allocation and quantities of free allowances provided.
• Cap-and-trade systems should include best practices in use in cap-and-trade systems; for example, these should include robust quantification methodologies; requirements for the third-party verification of compliance reports; and transparent registries for the tracking of units.
• This criterion does not preclude returning carbon pollution pricing proceeds to households and businesses, provided the methodology for returning proceeds does not directly negate the price signal. Consult the Guidance for Using Carbon Pollution Pricing Proceeds for further detail on best practices and on the types of measures that risk negating the price signal.

3.2.4 Offset Credits

Offset credits allowed for facility compliance must represent GHG reductions and/or removal that are real, additional, quantified, unique, verified, and permanent.

Tests

• Offset programs and protocols recognized for compliance will be assessed against best practices to ensure GHG reductions or removal generated are real, additional, quantifiable, unique, verifiable, and permanent.

Further guidance

• For further guidance on the development or operation of offset programs, consult the Pan-Canadian Greenhouse Gas Offsets Framework, agreed to by the Canadian Council of Ministers of the Environment in November 2018.

3.2.5 Public reporting

Provinces and territories must publish regular, transparent reports and/or information on the key features, outcomes, and impacts of their carbon pollution pricing systems, as well as on compliance information and carbon market data where publication could enhance accountability, and carbon market function and oversight.

Tests

• Provinces and territories publish regular reports and/or information on the key features, outcomes and impacts of their systems.
• Provinces and territories publish regular reports and/or information on compliance and emissions trading market data, including at a minimum:
  • total GHG emissions from entities and sectors covered under the cap-and-trade system;
  • total number of free emission allowances issued;
  • total number of offset credits generated and used;
  • total number of emission allowances auctioned and auction prices; and
  • emission allowances and offset status (e.g. active, suspended, revoked, voluntary cancelled), and carbon market activities including auction and reserve sales results, and emission allowance transfers.

Further guidance

• Provinces and territories should report disaggregated information and data, except where confidentiality issues arise, in which case aggregation can be used.
• Information on key features, outcomes and impacts of the cap-and-trade system includes:
  • list of eligible sectors at risk of carbon leakage, and the methodology(ies) used to assess the carbon leakage risk;
  • list of performance/emission intensity standards, and the methodology(ies) used to set performance/emission intensity standards;
  • details on the use of proceeds; and
  • overall carbon pricing system design and updates.

Implementation and assessment

The 2016 benchmark continues to apply for assessments of carbon pollution pricing system stringency for the 2018–2022 period.

The federal government will seek confirmation from provinces and territories on whether they intend to maintain or implement a carbon pollution pricing system for the 2023–2030 period and assess provincial and territorial submissions against the updated federal benchmark criteria in 2022 for the 2023 to 2030 period. This will inform the application of the federal backstop carbon pollution pricing system as of 2023, pursuant to the Greenhouse Gas Pollution Pricing Act. This multi-year assessment will replace the current annual assessment of systems. To provide certainty to residents and businesses and to allow carbon pricing systems to function effectively, where the federal backstop applies in 2023 it will remain in place until at least the end of 2026.

The federal government will conduct an interim assessment in 2026 of provincial and territorial systems to confirm that systems continue to meet the benchmark criteria for the 2027–2030 period, taking stringency into account as the primary factor.

The federal government will also monitor major changes to provincial and territorial systems on an ongoing basis and reassess against benchmark criteria where necessary.

Interim review

The federal government will engage provinces, territories and Indigenous organizations in an interim review of the benchmark by 2026, to confirm that benchmark criteria are sufficient to continue ensuring that pricing stringency is aligned across all carbon pricing systems in Canada. The review will also consider impacts on inter-jurisdictional and international competitiveness from carbon pricing, and whether additional criteria are needed to address differences between jurisdictions (i.e. differences in average cost) and/or the use of compliance units imported from other countries, including where these units are not internationally transferred mitigation outcomes under the Paris Agreement. In preparation for this review, Canada will work with provinces and territories to collect additional data, including on average costs for industry.

As part of the interim review, the federal government will commission an independent expert assessment of the effectiveness of all carbon pricing systems in Canada and of their distributional impacts, including on vulnerable populations and Indigenous communities. The federal government will seek input from provinces, territories, and Indigenous organizations on the scope of this assessment.