Order Amending Part 2 of Schedule 1 to the Greenhouse Gas Pollution Pricing Act: SOR/2023-148

Canada Gazette, Part II, Volume 157, Number 14

Registration
SOR/2023-148 June 23, 2023

GREENHOUSE GAS POLLUTION PRICING ACT

P.C. 2023-652 June 23, 2023

Whereas the Governor in Council, in accordance with subsection 189(2) of the Greenhouse Gas Pollution Pricing Act footnote a, has taken into account, as the primary factor, the stringency of provincial pricing mechanisms for greenhouse gas emissions;

Whereas under subsection 194(1) of that Act an order made under section 189 of that Act may have effect earlier than the day on which it is made if it so provides and it gives effect to measures referred to in a notice published by the Minister of the Environment;

And whereas, the Minister of the Environment published the Notice of intent to amend Part 2 of Schedule 1 to the Greenhouse Gas Pollution Pricing Act on December 23, 2022, to announce the intent to make an order under section 189 of that Act to delete the name of a province from Part 2 of Schedule 1 to that Act;

Therefore, Her Excellency the Governor General in Council, on the recommendation of the Minister of Environment makes the annexed Order Amending Part 2 of Schedule 1 to the Greenhouse Gas Pollution Pricing Act under section 189 of the Greenhouse Gas Pollution Pricing Act footnote a.

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

Amendment

1 Item 5 of Part 2 of Schedule 1 to the Greenhouse Gas Pollution Pricing Act footnote a is repealed.

Coming into Force

2 This Order is deemed to have come into force on January 1, 2023.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Order.)

Issues

Under the Government of Canada’s approach to pricing carbon pollution, provinces and territories have the flexibility to implement the type of carbon pricing system that makes sense for their circumstances, provided they align with the minimum national stringency standards set out by the federal benchmark criteria. The updated federal benchmark criteria were published on August 5, 2021, for the period beginning on January 1, 2023, and ending on December 31, 2030.

The Government of Saskatchewan submitted a proposal regarding its carbon pricing program for industry that meets the minimum national stringency standards for 2023 to 2030, including a proposal to apply its provincial program to industrial facilities in the province’s electricity generation and natural gas transmission pipeline sectors. In 2022, the Department of the Environment (the Department) assessed provincial and territorial submissions against the updated federal benchmark criteria that apply to the 2023–2030 period. On November 22, 2022, the Government of Canada announced its findings on the application of the federal system, informed by the results of this benchmarking assessment. This included announcing its intent to transition from the federal Output-Based Pricing System (OBPS) to Saskatchewan’s carbon pricing program for industry for the electricity generation and natural gas transmission pipeline sectors. To implement this transition, the name of the province needs to be deleted from Part 2 of Schedule 1 to the Greenhouse Gas Pollution Pricing Act (the Act). If the name of Saskatchewan is not removed, there will be a duplication of carbon pricing systems on the sectors covered by both the federal and provincial regulations.

Background

Pan-Canadian Approach to Pricing Carbon Pollution

The Pan-Canadian Approach to Pricing Carbon Pollution (the Pan-Canadian Approach), published in 2016, contains the federal benchmark criteria that set minimum national stringency standards for all carbon pricing systems in Canada. The carbon pricing systems of all provincial and territorial governments in Canada were first assessed against the federal benchmark in the fall of 2018 and were assessed annually for the 2019-2022 period. Changes to provincial and territorial systems were also assessed as they occurred. The assessment process considered the stringency of provincial and territorial carbon pricing systems and evaluated how these systems aligned with the federal benchmark. The goal of the federal benchmark is to make sure that all carbon pollution pricing systems across Canada are comparable in terms of stringency and effectiveness.

In 2021, the Government of Canada updated the federal benchmark for the 2023–2030 period, including the minimum national price on carbon pollution that will increase by $15 per tonne of carbon dioxide equivalent (CO2e) each year starting in 2023 through to 2030.footnote 1 To provide certainty to households and businesses, annual assessments were replaced with an assessment for the entire 2023–2030 period. Once in place in a province or territory, the federal carbon pollution pricing backstop system (the federal backstop) will apply until at least 2027. Provincial and territorial carbon pricing systems assessed as meeting the federal benchmark will similarly apply until at least 2027, unless significant modifications are introduced, in which case the system will be reassessed against the federal benchmark. A reassessment of all provincial and territorial systems will be conducted in 2026 to ensure they continue to meet the federal benchmark. The updated benchmark also strengthened criteria on coverage, enhanced rules for offsets, included additional requirements for public reporting and disallowed measures that directly offset, reduce or negate the price signal sent by carbon pricing.

Provinces and territories may implement carbon pricing systems that make sense for their circumstances, either explicit price-based systems or cap-and-trade systems, as long as these systems meet or exceed the stringency criteria of the federal benchmark. The federal backstop applies in provinces and territories that do not have carbon pricing systems that meet the federal benchmark (called “backstop jurisdictions”). The federal backstop contains two parts: a regulatory charge on fossil fuels (the fuel charge) under Part 1 of the Act, and a regulatory trading system, under Part 2 of the Act, for industrial facilities in sectors at significant risk of competitiveness impacts and carbon leakage resulting from carbon pricing, known as the OBPS.

Benchmarking assessment

After the initial assessment of each provincial and territorial system, the federal government implemented the federal backstop, in whole or in part, starting in 2019, in any province or territory that requested it or that did not have a carbon pricing system that aligned with the federal benchmark. The application of the federal system changed several times in the 2019–2022 period as provinces and territories made changes to their systems. In 2022, Quebec, Nova Scotia, Newfoundland and Labrador, the Northwest Territories, British Columbia and New Brunswick were implementing full carbon pollution pricing systems. Alberta and Ontario only implemented a provincial industrial pricing system. Saskatchewan implemented a provincial industrial program that covered most but not all industrial sectors. Prince Edward Island implemented its own fuel levy. As such, in 2022, the federal fuel charge applied in Ontario, Manitoba, Yukon, Alberta, Saskatchewan, and Nunavut, and the federal OBPS applied in Manitoba, Prince Edward Island, Yukon, Nunavut, and partially in Saskatchewan.

In 2022, the Department assessed provincial and territorial submissions against the updated federal benchmark criteria that apply to the 2023–2030 period. On November 22, 2022, the Government of Canada announced findings on the application of the federal system, informed by the results of this benchmarking assessment. This included announcing its intent to transition from the federal OBPS to Saskatchewan’s carbon pricing program for industry for the electricity generation and natural gas transmission pipeline sectors. This would result in Saskatchewan wholly implementing its Output-Based Performance Standard Program (OBPS Program) as of January 1, 2023. Although the fuel charge is implemented under a separate regulatory instrument, it is important to note that the findings extended the fuel chargefootnote 2 to Newfoundland and Labrador, Nova Scotia and Prince Edward Island starting as of July 1, 2023.

On December 23, 2022, the Minister of the Environment (the Minister) published a Notice of intent to amend Part 2 of Schedule 1 to the Greenhouse Gas Pollution Pricing Act. This notice of intent was made in response to the stated intention of the Government of Canada to transition from the federal OBPS to the provincial OBPS Program in Saskatchewan and was necessary to allow a retroactive effect on January 1, 2023.

On May 12, 2023, the Government of Saskatchewan published The Management and Reduction of Greenhouse Gases (Standards and Compliance) Regulations, 2023 made under Saskatchewan’s Management and Reduction of Greenhouse Gases Act. These regulations are retroactive to January 1, 2023. The regulations, its amendments made on May 17, 2023, and the revised and new standards, released on June 1, 2023, extend coverage of Saskatchewan’s OBPS Program to include facilities in the electricity generation and natural gas transmission pipeline sectors. They also increased the stringency of Saskatchewan’s existing OBPS Program for industrial facilities, which was required for the overall Program to meet the strengthened federal benchmark criteria for 2023–2030. These changes include expanding emissions coverage of the Program, introducing higher tightening rates for the Program’s performance standard allocations, and ensuring all greenhouse gas (GHG) emissions reductions by regulated facilities are expected to face a price signal equal to the minimum national price on carbon pollution in each year.

Objective

The objective of the Order Amending Part 2 of Schedule 1 to the Greenhouse Gas Pollution Pricing Act (the Order) is to avoid regulatory duplication and support the full implementation of the provincial OBPS Program in Saskatchewan, which has been assessed by the Department to meet the updated federal benchmark that applies over the 2023–2030 period.

Description

The Order deletes the name of Saskatchewan from Part 2 of Schedule 1 to the Act. As such, the federal OBPS will no longer apply to Saskatchewan’s electricity generation and natural gas transmission pipeline sectors, as of January 1, 2023.

Regulatory development

Consultation

In December 2020, the Government of Canada indicated that it would review the federal benchmark with a view towards strengthening it and further aligning carbon pricing systems across Canada for the post-2022 period.

The Department engaged with the Government of Saskatchewan on the implications of the strengthened benchmark criteria for Saskatchewan’s OBPS Program and design considerations for their program from fall 2021 onwards. The Government of Saskatchewan formally submitted an initial proposal to the Department, including the proposed expansion of the province’s program to the electricity generation and natural gas transmission pipeline sectors for assessment against the updated federal benchmark criteria on July 14, 2022, and additional information on changes to its submission in August and September 2022. The Government of Canada found that the proposed updates to the provincial OBPS Program were sufficiently stringent to meet the updated benchmark if implemented as proposed. The Government of Canada publicly announced the intent to transition from the federal OBPS to the provincial OBPS Program in Saskatchewan on November 22, 2022.

Currently, departmental officials are engaging with provincial officials on the transition process to facilitate a smooth transition from the federal OBPS that minimizes the risk of pricing coverage gaps, or of double pricing. The federal fuel charge will continue to apply in Saskatchewan. Persons responsible for electricity generation and natural gas transmission pipeline facilities that become subject to Saskatchewan’s OBPS Program will be able to apply for exemptions from the federal fuel charge in relation to those facilities.

The Order is exempt from prepublication in the Canada Gazette, Part I. The Government of Canada has already determined that Saskatchewan’s proposed program meets the federal benchmark if implemented as proposed and announced its intention to remove the name of Saskatchewan from Part 2 of Schedule 1 to the Act following provincial consultation. As such, there would be no benefit from additional consultation on this Order.

Modern treaty obligations and Indigenous engagement and consultation

An assessment examined the geographical scope and subject matter of the Order in relation to modern treaties in effect, and did not identify, at this time, potential modern treaty implications. The Order would respect the Government of Canada’s obligations in relation to rights protected by section 35 of the Constitution Act, 1982 and modern treaties, and international human rights obligations. The Government of Canada continues to work with Indigenous organizations on the federal approaches to the pricing of carbon pollution and the return of proceeds, so that they consider the unique circumstances and priorities of Indigenous Peoples.

Instrument choice

The Order is needed to implement the pan-Canadian approach, that applies over the 2023–2030 period. If the Order was not made, the name of Saskatchewan would remain listed in Part 2 of Schedule 1 to the Act, resulting in regulatory duplication for the province’s electricity generation and natural gas transmission pipeline sectors. There is no other instrument, outside of a regulatory approach, to remove the province from Part 2 of Schedule 1 to the Act.

Regulatory analysis

Under the Government of Canada’s approach to pricing carbon pollution, provinces and territories have the flexibility to implement the type of carbon pricing system that makes sense for their circumstances as long as they align with the minimum national stringency standards set out by the federal benchmark criteria. In keeping with this, the following analysis reports the estimated impacts of the Order but does not attempt to evaluate the decision to delist based on an assessment of net impacts. A qualitative analysis is considered sufficient for the Order, given any resulting impacts are attributable to the Government of Canada’s determination that the carbon pricing program for industry in Saskatchewan meets the federal benchmark applying to the 2023–2030 period.

Benefits and costs

Analytical framework
Analytical scenarios

This analysis assesses the incremental benefits and costs of a regulatory scenario (the Order) in which the Governor in Council makes the Order relative to a baseline scenario. In this analysis, the baseline scenario assumes that the federal OBPS continues to apply in backstop jurisdictions, including to the electricity generation and natural gas transmission pipeline sectors in Saskatchewan, and that non-backstop jurisdictions continue to operate their own carbon pricing systems for industrial facilities. The regulatory scenario assumes that, in place of the federal OBPS, the provincial OBPS Program applies to the electricity generation and natural gas transmission pipeline sectors in Saskatchewan as of January 1, 2023. Both the baseline and regulatory scenarios assume that Saskatchewan’s strengthened OBPS Program, with changes made to comply with the 2023–2030 federal benchmark criteria, applies in the other sectors.

The analysis uses the scope of application of the OBPS at the time of publication of the proposed Regulations Amending the Output-Based Pricing System Regulations and the Environmental Violations Administrative Penalties Regulations (Amendments to the OBPS Regulations), published in the Canada Gazette, Part I, in October 2022.footnote 3

Time frame of analysis

The analysis considers the estimated impacts of the Order for eight years, 2023 to 2030, given that Saskatchewan’s OBPS Program has been assessed against the federal benchmark applying to the same period. It does not consider impacts for years after 2030 because decisions concerning Canada’s approach to carbon pricing after 2030 have not yet been made. To provide stability and certainty for consumers and businesses, as of 2023, where the federal system is in place, it will remain in place until at least the end of 2026 (for the OBPS) and March 31, 2027 (for the fuel charge). The federal government will engage with provinces, territories and Indigenous communities on a review of the federal benchmark criteria and will conduct an interim review of all provincial and territorial carbon pricing systems by 2026. This will confirm that benchmark criteria are sufficient to continue ensuring that pricing stringency is aligned across all carbon pollution pricing systems in Canada and that carbon pricing systems continue to meet the benchmark criteria from 2027 to 2030. In the meantime, the Department will monitor provincial and territorial systems and only reassess against the benchmark before 2027 if provinces and territories make changes to their system.

Modelling of impacts

The baseline and regulatory scenarios have been modelled using EC-PRO, the Department’s peer-reviewed, multi-region, multi-sector, provincial-territorial computable general equilibrium (CGE) model of climate change policies. EC-PRO assesses the variables of interest, including GHG emissions, the economic welfare of households, who are assumed to be the owners of factors of production (labour and capital), gross domestic product (GDP) and gross value added (GVA). EC-PRO simulates the Canadian economy and calculates the impacts of Saskatchewan’s OBPS Program by calculating the new set of prices and variables that will return the economy to equilibrium. The incremental impacts of Saskatchewan’s OBPS Program can be estimated by comparing the CGE equilibrium results in the regulatory scenario with those in the baseline scenario.footnote 4

Administrative requirements

The effect of the Order is that the federal OBPS and its associated administrative requirements (i.e. the quantification, reporting and verification requirements) will not apply in Saskatchewan starting with the 2023 compliance period. Despite the benefit of not incurring administrative costs associated with the federal OBPS, Saskatchewan’s OBPS Program will have their own corresponding administrative obligations that apply to industrial facilities. For this reason, this analysis assumes that the net administrative impacts of the Order are minimal.

Benefits

Based upon a comparison of the estimated OBPS compensation obligations in the baseline and regulatory scenarios, the extension of Saskatchewan’s OBPS Program to the electricity generation and natural gas transmission pipeline sectors is anticipated to reduce the costs of carbon pollution pricing for these facilities in this province, as well as increase the reductions in GHG emissions.

The reduced costs under the regulatory scenario are a result of the provincial OBPS Program having less stringent standards (providing higher free allocations) to the natural gas transmission pipeline sector. However, it is also anticipated to result in greater reductions of GHG emissions than under the federal OBPS. This is due to the provincial OBPS Program pricing of methane emissions related to venting and leakage from the natural gas transmission pipeline sector, which are not included in the federal OBPS. These sources may be a cost-effective source of abatement and the EC-PRO model shows incremental reductions when these are subject to carbon pollution pricing. Although the provincial Program is more stringent from a coverage perspective, performance standards under the provincial OBPS Program are less stringent. Due to the level of stringency of the provincial OBPS Program’s standards, the cost to the natural gas transmission pipeline sector is lower under the provincial program than under the federal OBPS.

The benefits realized by the natural gas transmission pipeline sector may allow for increased investment and therefore increased domestic production. Higher levels of production could in turn increase the disposable income of households, who are assumed to be the owners of the factors of production, labour and capital, through increases in the wages earned by workers and the profits earned by facilities. Households may choose to allocate increases in disposable income to higher levels of consumption of goods and services to maximize their welfare.

Costs

Transitional costs to move from the federal OBPS to Saskatchewan’s OBPS program have already been incurred and therefore are not affected by this Order (sunk cost). No additional costs attributable to this Order have been identified.

Small business lens

The federal OBPS is designed to allow smaller facilities in backstop jurisdictions to voluntarily apply to participate in the federal OBPS. A key consideration in determining whether a facility should be permitted to voluntarily participate in the federal OBPS (“voluntary participant”) is whether the facility is carrying out an activity listed in Schedule 1 to the Output-Based Pricing System Regulations (OBPS Regulations) or is in a sector at significant risk of carbon leakage and competitiveness impacts from carbon pricing. Another key consideration in this determination is whether the facility emits or, in the case of a new, retrofitted or expanded facility, is projected to emit, a minimum of 10 kilotonnes of CO2e per year.footnote 5

No facilities in existing backstop jurisdictions that must participate in the federal OBPS (“mandatory participants”) are considered small businesses, and no voluntary participants are considered small businesses, based on information available for the 2022 compliance period. Since the federal OBPS has been in place for a number of years, and in general facilities have an incentive to voluntarily participate, most eligible facilities have likely already applied to participate in the federal OBPS.

Although none of the natural gas transmission pipeline facilities registered under the federal OBPS is considered a small business, should there be some that enter Saskatchewan’s OBPS Program, they would be subject, to some extent, to less stringent requirements in the provincial OBPS Program. While coverage of priced emissions would increase to include additional venting and leakage methane emissions, the facility would be eligible for higher free allocations under the provincial OBPS Program. Any new participation, and subsequent impacts, by small businesses in the provincial OBPS Program would be attributed to the provincial Program that facilitates their participation.

One-for-one rule

The one-for-one rule applies since there is an incremental decrease in the administrative burden on business, and the proposal is considered burden out under the rule. While the Saskatchewan OBPS Program has its own administrative requirements, administrative obligations imposed by the federal OBPS Regulations would no longer apply to the electricity generation and natural gas transmission pipeline sectors in Saskatchewan following the implementation of the Order. The Order makes no change in terms of federal regulatory titles.

The administrative burden removed by the Order for a participant under the federal OBPS is estimated to be around $63,000footnote 6 in annualized average costs when allocated over the 10-year period used to assess the administrative cost impacts of the OBPS Regulations (2023–2032).footnote 7 This corresponds to the removal of about $4,500 in annualized average costs per facility for 14 mandatory participants.footnote 8

These costs are related to information gathering, quantification, reporting, verification, and compensation provision. It was assumed that information gathering necessitates an estimated 70 hours per year, while quantification, reporting, verification, and compensation provision require 20 hours, 30 hours, 56 hours, and 7.5 hours per year, respectively. These estimates assume a wage of $53/hour and apply to all 14 mandatory participants.

Regulatory cooperation and alignment

The federal government is committed to ensuring that the provinces and territories have the flexibility to design their own carbon pricing policies and programs, while ensuring that pricing applies to a broad set of GHG emission sources across Canada with increasing stringency over time. The Order, which is the result of federal-provincial cooperation under the Pan-Canadian Approach to Pricing Carbon Pollution, will avoid regulatory duplication and support the implementation of Saskatchewan’s OBPS Program.

The federal government’s approach to pricing carbon pollution from large industrial emitters is comparable to other systems in Canada and in other countries. Most systems in Canada and around the world are designed to put a price signal on carbon pollution while minimizing competitiveness impacts for industries vulnerable to carbon leakage, either within the design of the system itself, or in how revenue generated by the system is redistributed.

Strategic environmental assessment

In accordance with the Cabinet Directive on the Environmental Assessment of Policy, Plan and Program Proposals, a preliminary scan concluded that a strategic environmental assessment is not required.

Gender-based analysis plus

No significant gender-based analysis plus (GBA+) impacts have been identified for this Order. Saskatchewan’s OBPS Program has been designed to provide additional economic relief to industrial facilities operating in the province. Relative to the federal OBPS, the implementation of the provincial OBPS Program in the province’s natural gas transmission pipeline sector could potentially have positive impacts on employment due to a likely increase in investment in the sector. This may indirectly benefit more men than women, as men are typically a higher proportion of the labour force in industrial sectors considered to be at significant risk of carbon leakage or adverse competitiveness impact.

Implementation, compliance and enforcement, and service standards

Implementation

The Order deletes the name of Saskatchewan from Part 2 of Schedule 1 to the Act retroactively as of January 1, 2023. The federal fuel charge will continue to apply in Saskatchewan. A process is in place to prevent these facilities from being priced under both federal the backstop and the provincial program. The Department is collaborating with Saskatchewan’s Ministry of Environment on communications material for facilities transitioning to Saskatchewan’s OBPS Program regarding the steps they need to take, and the time frames in which they need to take these steps, to continue to be eligible for exemptions from the federal fuel charge.

Persons responsible for facilities located in Saskatchewan that were subject to the federal OBPS need to comply with the requirements of the federal OBPS that apply up to December 31, 2022, including reporting on GHG emissions for the 2022 compliance period, and providing compensation for excess emissions from that compliance period. These persons are also required to notify the Minister if they become aware of any error or omission in their annual reports submitted for the 2019 to 2022 compliance periods within five years of the submission of the annual report; maintain an account in the federal OBPS credit and tracking system; and update specific registration information if it changes. The Department’s Enforcement Branch may conduct enforcement activities regarding these obligations, as needed.

To support persons responsible for facilities that transition from the federal OBPS to Saskatchewan’s OBPS Program in meeting the federal OBPS regulatory requirements referenced above, the Department will communicate directly with the facilities located in Saskatchewan via targeted compliance promotion emails. The Department will also update the Government of Canada’s OBPS web page on a regular basis to provide helpful information on regulatory requirements.

Contacts

Katherine Teeple
Executive Director
Industrial Greenhouse Gas Emissions Management Division
Carbon Markets Bureau
Environmental Protection Branch
Department of the Environment
351 Saint-Joseph Boulevard
Gatineau, Quebec
K1A 0H3
Email: tarificationducarbone-carbonpricing@ec.gc.ca

Maria Klimas
Acting 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: RAVD.DARV@ec.gc.ca