Federal Carbon Tax Set to Rise in Canada’s New Climate Plan

In December 2020, Prime Minister Justin Trudeau strengthened Canada’s pledge to exceed its 2030 emissions reduction targets under the Paris Climate Agreement. Canada’s updated climate plan was announced one day before the 5th anniversary of the Paris Climate Agreement, where Ottawa had promised to reduce greenhouse gas emissions by 30% below 2005 levels by the year 2030.

According to projections by Environment and Climate Change Canada, in 2019, Canada was on track to reach reductions of only 19% below 2005 greenhouse gas emissions levels. Hence, the federal government’s call for additional measures to be implemented.

Aggressive Push to Reduce Emissions

Canada’s new $15-billion climate plan aims to reduce greenhouse gas emissions by 32% to 40% below 2005 levels if all provinces and territories are fully compliant. Central to achieving this goal will be a modest increase in the federal carbon tax. The current federally mandated carbon price of $40/tonne will increase by $10/tonne until 2022. Then, it will increase by an additional $15/tonne per year starting in 2023, rising to $170/tonne in 2030.

For context, that’s a tax increase of 425% over the next nine years, translating to an increase of 38¢/litre at the pump by 2030. While the majority of the revenue generated will be rebated back to taxpayers, the aim is clear: push Canadians and businesses off fossil fuel dependency.

The federal government will also invest billions of dollars in cleaner transportation, electric vehicles, and green infrastructure. Increasing the carbon price to unlock critical emissions reductions is essential in Canada’s strategy to achieve net-zero emissions by 2050.

Impacts on Provincial Carbon Schemes

The federal carbon tax is set under the federal Greenhouse Gas Polluting Act (GGPPA), which is a “backstop”, meaning it only applies in provinces or territories that lack or have insufficient carbon pricing schemes and industrial emissions reduction plans. The federal government reviews each province and territory’s emissions reductions schemes annually to ensure compliance with the GGPPA.

Litigation Hurdles

If passed into law, the federal carbon tax is expected to have a profound effect on consumers, businesses, and industries across Canada.

Prime Minister Justin Trudeau is counting on the Supreme Court of Canada to reject legal challenges of federal carbon pricing from conservative-led provinces like Alberta, Ontario, and Saskatchewan. To date, the Supreme Court of Canada has not yet issued a ruling.

Trudeau’s proposed carbon tax hike was met with stark criticism by Ontario’s Premier Doug Ford, who argued that higher fuel prices will make Canada uncompetitive when the world is struggling to create jobs amid the COVID-19 pandemic. Meanwhile, Trudeau’s justification for the carbon pricing measures emphasized the economic opportunities that will come with moving towards a cleaner future.

Opportunities through Offsets

The federal carbon pricing system aims to return all proceeds to individuals, families, and businesses through payments and climate action programs.

Individuals & Households

In jurisdictions where the federal backstop applies, the federal government will balance the cost-of-living increases from the carbon price hike by compensating households through rebates and direct payments. In addition, rebates will shift from annual to quarterly payments.

Businesses & Industries

The large increases in the federal carbon tax are expected to result in similarly large increases in the market prices of carbon and offset credits. This is intended to support the development of renewable energy and emissions reduction projects as developers may generate additional revenues from the sale of credits and offsets from their projects.

Through performance standards, investments, and incentives, the new climate plan will accelerate businesses that provide low-carbon products, services, and technologies.

Next Steps

Over the next few months, the federal government will consult with diverse stakeholders, ranging from industry to civil society, to ensure a workable and equitable climate plan can be delivered. An aligned approach from all levels of government will be crucial for Canada to achieve economic and environmental success while meeting the emissions reductions targets under the Paris Climate Agreement.

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