Regulations Amending Part 1 of Schedule 1 to the Greenhouse Gas Pollution Pricing Act and the Fuel Charge Regulations, No. 2: SOR/2023-130

Canada Gazette, Part II, Volume 157, Number 14

Registration
SOR/2023-130 June 19, 2023

GREENHOUSE GAS POLLUTION PRICING ACT

P.C. 2023-577 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, No. 2 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, No. 2

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
2.1 New Brunswick

Fuel Charge Regulations

2 Section 3.31 of the Fuel Charge Regulations footnote 1 is replaced by the following:

July 1, 2023 — Nova Scotia, New Brunswick, 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:

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

4 Subparagraph (a)(iv) of the description of D in section 10 of the Regulations is replaced by the following:

5 Subparagraph (a)(iv) of the description of D in section 16 of the Regulations is replaced by the following:

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

Coming into Force

7 (1) Sections 1 to 5 come into force or are deemed to have come into force immediately after the expiration of June 30, 2023.

(2) Section 6 is deemed to have come into force on May 1, 2023.

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. At the same time, the Government of Canada confirmed that New Brunswick’s plans to update its provincial pollution pricing system met the federal benchmark stringency criteria for the 2023–2030 period. In February 2023, New Brunswick subsequently requested that the federal backstop fuel charge apply, in place of its own. On May 1, 2023, the Government of Canada announced its intention to apply the fuel charge in New Brunswick 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, No. 2 (the amending regulations) are needed in order to list New Brunswick in Part 1 of Schedule 1 to have the fuel charge component of the federal backstop system apply in that province, 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 carbon 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 2023-2030 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 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 was presented as an annex at the end of the Regulatory Impact Analysis Statement for the Regulations Amending Part 1 of Schedule 1 to the Greenhouse Gas Pollution Pricing Act and the Fuel Charge Regulations.

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 2023–2030 period. Provinces and territories had until September 2, 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 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. At the same time, the Government of Canada confirmed that New Brunswick’s plans to update and maintain its provincial carbon tax and provincial pollution pricing system for large emitters met the Updated Benchmark for the 2023–2030 period. However, in February 2023, New Brunswick subsequently announced that it would no longer implement the provincial carbon tax and would request that the federal backstop fuel charge apply in its place. On May 1, 2023, the Government of Canada announced its intention to apply the fuel charge in New Brunswick as of July 1, 2023. New Brunswick will continue to apply its own pollution pricing system for industrial emitters. Nova Scotia, Prince Edward Island and Newfoundland and Labrador were listed in Part 1 of Schedule 1 to the GGPPA, effective July 1, 2023, pursuant to separate regulations entitled Regulations Amending Part 1 of Schedule 1 to the Greenhouse Gas Pollution Pricing Act and the Fuel Charge Regulations.

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. 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 New Brunswick to Part 1 of Schedule 1 to the GGPPA in order to have Part 1 of the GGPPA apply in that province and to provide a smooth introduction of the fuel charge system in that province and a consistent application of the existing fuel charge rules.

Description

The amending regulations identify New Brunswick as a province in which the fuel charge under Part 1 of the GGPPA will apply by adding that province 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 that province in Schedule 1 and are described below.

The amending regulations make technical refinements to certain formulas relevant to the computation of charge amount on the “adjustment day” of July 1, 2023. If a person holds fuel in New Brunswick 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 New Brunswick is 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 that province 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 May 1, 2023.

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 July 1, 2023. At the same time, the Government of Canada confirmed that New Brunswick’s plan to update and maintain its provincial carbon tax and provincial pollution pricing system for large emitters met the Updated Benchmark for the 2023–2030 period. However, in February 2023, New Brunswick subsequently announced that it would no longer implement the provincial carbon tax and would request that the federal backstop fuel charge apply in its place. On May 1, 2023, the Government of Canada announced its intention to apply the fuel charge in New Brunswick as of July 1, 2023. New Brunswick will continue to apply its own pollution pricing system for industrial emitters.

On May 1, 2023, the Government also publicly released the draft text of the amending regulations on the Department of Finance website which included the provisions listing New Brunswick and various consequential and transitional amendments needed to ensure a smooth introduction of the fuel charge system in that province 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 New Brunswick 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 New Brunswick to Part 1 of Schedule 1 to the GGPPA in order to have Part 1 of the GGPPA apply in that province.

Adding New Brunswick 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 New Brunswick, 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 per tonne 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 2023–24 — 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. In New Brunswick, fuel charge proceeds will be returned in the same manner. 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 New Brunswick to Part 1 of Schedule 1 to the GGPPA in order to have Part 1 of the GGPPA apply in that province. 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 2, 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 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. At the same time, the Government of Canada confirmed that New Brunswick’s plans to update its provincial pollution pricing system met the Updated Benchmark for the 2023–2030 period. In February 2023, New Brunswick subsequently requested that the federal backstop fuel charge apply, in place of its own. On May 1, 2023, the Government of Canada announced its intention to apply the fuel charge in New Brunswick as of July 1, 2023. The amending regulations would add New Brunswick to Part 1 of Schedule 1 to the GGPPA in order to have Part 1 of the GGPPA apply in that province and implement consequential transitional rules.

Strategic environmental assessment

The amending regulations will ensure carbon pricing continues to apply broadly in Canada by adding New Brunswick to Part 1 of Schedule 1 to the GGPPA in order to have Part 1 of the GGPPA apply in that province. 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 GHG 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 New Brunswick to Part 1 of Schedule 1 to the GGPPA in order to have Part 1 of the GGPPA apply in that province. 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 GHG 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, New Brunswick, 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 system 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 New Brunswick to Part 1 of Schedule 1 to the GGPPA in order to have Part 1 of the GGPPA apply in that province 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