February 4, 2021

Canada Carbon Tax on the Rise

By Mike Parkes, Sr. Director, Energy Services, Canada

In December 2020, the Federal Government of Canada released their updated strategy to dramatically reduce greenhouse gas emissions by 2030. The plan, “A Healthy Environment and A Healthy Economy“, aims to reduce carbon emissions by 32% and includes an annual carbon tax. This slightly exceeds the 2030 Paris Agreement targets to reduce emissions by 30% of 2005 levels by 2030.

The strategy involves billions in new funding for green vehicles and infrastructure, as well as changes to the Clean Fuel Standard set to take effect in late 2021. Among the most prominent detail is exactly how much the Federal Government plans to raise the levy on greenhouse gas emissions, currently at $30/tonne, and already expected to hit $50/tonne in 2022. The below table shows specific price impact by fuel.

 

2020 2021 2022 2024 2026 2028 2030
Carbon Tax CAD $30 $40 $50 $80 $110 $140 $170
Fuel Charge Rates
Natural Gas CAD/m3 $0.06 $0.08 $0.10 $0.16 $0.22 $0.27 $0.33
CAD/GJ $1.58 $2.10 $2.63 $4.21 $5.79 $7.37 $8.94
Gasoline CAD/Litre $0.0663 $0.0884 $0.1105 $0.1768 $0.2431 $0.3094 $0.3757
Heavy Fuel Oil CAD/Litre $0.0956 $0.1275 $0.1593 $0.2547 $0.3501 $0.4455 $0.5409
Light Fuel Oil CAD/Litre $0.0805 $0.1073 $0.1341 $0.2145 $0.2949 $0.3753 $0.4557
Propane CAD/Litre $0.0464 $0.0619 $0.0774 $0.1239 $0.1704 $0.2169 $0.2635

Under this new plan, the carbon tax would increase by each year to deter consumers from fossil fuels, favoring cleaner energy sources. This announcement, if made into law, is expected to have a profound effect on many consumers, businesses, and industries in Canada. An eventual carbon tax rate of $170/tonne equates to roughly $8.94/GJ (or $0.33/m3) for natural gas.

 

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The federal carbon tax in Canada is set under the federal Greenhouse Gas Pollution Pricing Act (GGPPA). The GGPPA has two main components:

  •  A federal fuel charge (based on the annual carbon price) paid by fuel producers, distributors, and certain prescribed users on 21 types of fuel and combustible waste.
  • A regulatory trading system for the industry called the federal output-based pricing system (OBPS). This requires large emitters in certain industries to meet GHG emissions intensity standards by reducing their emissions, remitting for retirement surplus carbon, or offsetting credits and/or paying a carbon tax on excess emissions.
Overview of OBPS Program
Larger GHG emitters:

  • Mandatory Participation – An industrial facility with total annual emissions above 50,000 tCO2e and undertaking a primary activity that has an output-based standard specified will be required to register as a mandatory participant.
  • Voluntary Participation – Facilities with total annual emissions above 10,000 tCO2e may be able to opt-in voluntarily over time, depending on primarily on government-approved business sectors that are eligible to participate.

Registered facilities will have a facility-specific annual emission limit which is based on the relevant output-based standard for the product it produces and its level of production. A facility registered under the OBPS and with the Canada Revenue Agency, will be able to purchase fuel free of the carbon charge, and only be responsible for paying the carbon charge on the portion of its emissions that exceed the annual emission limit. The proceeds from the OBPS will be reinvested in the province or territory of origin to support carbon pollution reduction.

On September 20, 2020, the Federal Government informed the Governments of Ontario and New Brunswick that their carbon pollution pricing systems for industrial facilities will meet the federal government’s minimum stringency benchmark requirements for pricing carbon pollution for the sources that they cover. As a result, the Government of Canada intends to allow both provinces, subject to Governor in Council approval, to transition to their own carbon pricing systems for industry.

Other Possible Impacts

  • Market prices of emission and offset credits tend to mimic the cost of the carbon tax, and large increases in the federal carbon tax would be expected to result in comparable increases in the market prices of carbon and offset credits. That would further support the development of renewable energy and emission reduction projects as these projects could receive greater revenues from their projects.
  • Since the GGPPA is a “back stop,” meaning it is in effect only when a province or territory does not have its own carbon pricing program that meets the federal standard, the proposal could be expected to be met with aggressive push back on the provincial level. The result may be additional litigation between some provinces and the federal government.

While there is debate about whether to use carbon pricing alone or in combination along with other climate policies to reach Canada’s emissions reduction targets, it is clear that carbon costs will continue to increase.  End-use customers will need to understand the impact that these changes will have on their energy costs and should look for opportunities to better understand and navigate the choices and risks in managing energy.

Edison can help larger emitters determine if they qualify for the voluntary OBPS, or applicable provincial program, aid them through the initial application process, align customers with third-party emission verification firms, determine emission allowances, and provide advice on credit and offset purchasing. Contact us to discuss how Edison Energy’s expertise and services can help address the key challenges of cost, carbon, and the increasingly complex choices in energy today.

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