Under the Greenhouse Gas Pollution Pricing Act (Act), the federal government is empowered to administer and enforce a two-pronged carbon pricing system in provinces and territories that either fail to meet the federal benchmark specified in the Act or choose to adopt it voluntarily (Listed Provinces).
For a discussion regarding the political and legal challenges surrounding the Act and its uncertain future, see our October 2018 Blakes Bulletin: Canada Details Federal Carbon Pricing System in Face of Increasing Opposition.
Under Part 1 of the Act, the Canada Revenue Agency (CRA) will administer a fuel “charge” in the following Listed Provinces: Saskatchewan, Manitoba, New Brunswick and Ontario from April 2019 and in the Yukon and Nunavut from July 2019.
Under Part 2 of the Act, Environment and Climate Change Canada (ECCC) will administer an output-based pricing system for large industrial emitters in Ontario, New Brunswick, Manitoba, Prince Edward Island and Saskatchewan from January 2019 and in the Yukon and Nunavut from July 2019.
The fuel charge applies to certain fossil fuels and “combustible waste” (tires, asphalt shingles and other items to be prescribed by regulation) that emit greenhouse gases (GHG) through combustion. The charge for 2019 is set at C$20/Mt CO2e (i.e., metric tonne of carbon dioxide equivalent). Between 2020 and 2022, the charge is set to increase by C$10 per year to C$50/Mt CO2e. The actual rate will vary for each fuel type based on its “global warming potential”; for example, the fuel charge for 1Mt of coke is set at C$31.80.
On October 23, 2018, the federal government announced that fuel charge proceeds will first be distributed back to individuals and families in the Listed Province as Climate Action Incentive payments. The Climate Action Incentive payments program allows each family unit to make a claim for a rebate in their personal income tax returns. Individuals and families will be deemed to have paid tax in a specified amount each year and will receive a refund of that amount the following year. The planned amount of refunds for the years 2019 to 2022 in each of the Listed Provinces is described in the federal government’s Pricing Pollution: How It Will Work website.
The remainder of fuel charge proceeds will be used to provide support to schools, hospitals, small and medium-sized businesses, colleges and universities, municipalities, not-for-profit organizations and indigenous communities in the Listed Provinces.
Fuel Charge Registration
Specified persons who produce, distribute, import or use certain fossil fuels or combustible waste in a Listed Province must register with the CRA to file returns and pay fuel charge. There are 12 types of fuel charge registrations. Depending on the circumstances, the registration may be mandatory or optional. Some, but not all, of the categories are mutually exclusive, and a person may have to be registered in multiple categories depending on the circumstances. The penalty for failing register is C$2,000. The CRA can also require an applicant to provide security to guarantee the payment of fuel charge.
In addition, persons with business activities in a Listed Province involving the production, distribution, emission, import or certain uses of fuel and combustible waste, as well as persons that are air, marine, rail or road carriers, may be required to register with the CRA for the purposes of the fuel charge.
The CRA recommends that applications for registration be submitted prior to the implementation of the fuel charge on April 1, 2019 for Manitoba, New Brunswick, Ontario and Saskatchewan and July 1, 2019 for Nunavut and the Yukon. Application forms are not available online at this time. In its Excise and GST/HST Notice 105 dated December 10, 2018, the CRA noted that information notices regarding the fuel charge will be published shortly.
Fuel Charge Reporting
All registrants must file a return with the CRA reporting the “net” fuel charge payable, taking into account all applicable charges and refunds, and remit any positive amount to the Receiver General of Canada. The reporting period is monthly for all registrants and quarterly for the registered road carriers. Non-registered persons must file a return and remit the charge payable for each month that a fuel charge becomes payable by the end of the following month. If the net charge for the reporting period is a negative amount, the person may claim a rebate of the amount in the return.
The penalty for failing to file is one per cent of the total fuel charge payable in the reporting period plus one-quarter of the penalty amount for each month that the return is not filed, up to a maximum of 12 months. Further, the penalty for failing to report or misstating the amount of fuel charge payable is five per cent of the amount of the unreported fuel charge. In addition to penalties, a person may be prosecuted for failing to file or make a return and is subject, on summary conviction, to a fine between C$2,000 and C$40,000 and/or imprisonment up to 12 months.
OUTPUT-BASED PRICING SYSTEM FOR LARGE INDUSTRIAL EMITTERS
Part 2 of the Act provides for a distinct carbon pricing system applicable to large industrial emitters operating in trade-exposed industries. This framework establishes an output-based pricing system (OBPS) whereby large emitters located in a Listed Province are exempt from the fuel charge described above for the specific fuels that are used at the Covered Facility (defined below). Instead, emissions from Covered Facilities will be priced based on the portion of their emissions that exceed an annual output-based emissions limit.
The OBPS will come into effect on January 1, 2019 in Ontario, New Brunswick, Manitoba, Prince Edward Island and Saskatchewan, and on July 1, 2019 in the Yukon and Nunavut. Draft regulations are expected to be published shortly and finalized in early 2019, following the coming into force of the OBPS.
In the interim, two regulatory instruments, which were published in the Canada Gazette – Part II on October 31, 2018, will apply:
- The Notice Establishing Criteria Respecting Facilities and Persons and Publishing Measures, which details the facilities covered under the OBPS (Notice)
- The Greenhouse Gas Emissions Information Production Order, which sets out GHG quantification requirements, notably with respect to sampling, analysis and measurement methods, record keeping and reporting obligations (Information Production Order).
As a result of the publication of the Notice and the Information Production Order, the OBPS will effectively come into force on January 1, 2019, although certain elements of the regime will require regulations before they can be fully implemented.
Who is Subject to the OBPS?
The OBPS will apply to “Covered Facilities”, which are defined in the Notice as a facility that:
- Is located in a backdrop jurisdiction
- Has reported 50 kilotonnes (kt) or more of CO2e under the Greenhouse Gas Reporting Program established under the Canadian Environmental Protection Act, in any of the 2014 to 2017 calendar years, and
- Carries out a designated industrial activity.
There are over 35 designated industrial activities, including for:
- A natural gas pipeline transmission system: the transmission of natural gas
- A petroleum refinery: the processing of crude oil
- Any other facility: the production or generation of cement, ethanol, electricity using fossil fuels, metal or diamonds, glass, potash, pulp, refined sugar, vaccines, citric acid, etc.
Also, facilities emitting between 10kt CO2e and 50kt CO2e, which do not qualify as Covered Facilities and that are not required to register under the Notice, may apply to ECCC to voluntarily participate in the OBPS. Once approved as voluntary participants, these facilities will be required to meet the same requirements as Covered Facilities. Further information on the eligibility criteria and process for opting in as a voluntary participant will be provided through regulations.
Registration, Quantification, Reporting and Third-Party Verification Requirements
The owner or operator of a Covered Facility is required to register the facility in the OBPS with ECCC and obtain a Covered Facility Certificate.
Covered Facilities are invited to register via the online registration portal, which has been open since November 1, 2018. Additional information as to how to create an account and register is made available by ECCC in the Registration Application – Steps to submitting your Output-based Pricing System Guide.
Quantification, Reporting and Verification Requirements
The owner or operator of a Covered Facility must quantify the following types of emissions:
- Stationary fuel combustion emissions
- Industrial process emissions
- Industrial product use emissions
- Venting emissions
- Flaring emissions
- Leakage emissions (i.e., uncontrolled emissions)
- On-site transportation emissions
- Waste emissions (i.e., emissions resulting from waste disposal activities)
- Wastewater emissions (i.e., emissions resulting from industrial wastewater and industrial wastewater treatment).
This must be done in accordance with the methods and the sampling, analysis and measurement requirements set out in the Information Production Order. The Information Production Order sets out the quantification requirements specific to each type of Covered Facility. It requires each specific GHG listed under the Act to be individually quantified and recorded.
In addition to quantifying the GHGs resulting from the operation of a Covered Facility, the Information Production Order imposes the following detailed requirements on owners and operators of Covered Facilities:
- Keeping and retaining all records required to verify compliance with the Act for a period of seven years
- Producing an annual report that includes information listed under Schedule 1 of the Information Production Order (starting on June 1, 2020)
- Providing third-party verification reports in relation to the annual report and any related records.
The emission limit applicable to each Covered Facility that is subject to the OBPS (in tonnes of CO2e) will be based on the prescribed output-based standards applicable to the specific production activities multiplied by the annual production at the facility.
A Covered Facility that emits GHGs in a quantity that exceeds the emission limits will be required to provide compensation for any excess emissions. Compensation can be provided by the remittance of compliance units, the payment of an excess emission charge payment (that is set at C$20/Mt CO2e in 2019, C$30 in 2020, C$40 in 2021 and C$50 in 2020), or a combination of the two. Conversely, if a Covered Facility emits GHGs in a quantity that is below the emission limit, a number of surplus credits equal to that difference will be issued to the Covered Facility. A trading platform is expected to be implemented.
The Act provides that the revenues received from excess emissions charge payments by the Minister of National Revenue must be distributed to the province or to any person that is specified in the regulations (which have not yet been published).
While the coming into force of the Act and the recent publication of both the Notice and the Information Production Order provides insight on the OBPS, significant portions of this regime are still unclear.
Public and industry consultations are ongoing and the federal government is expected to release the OBPS regulations shortly, with the expectation that they will be finalized after the coming into force of the regime in 2019. These regulations are expected to clarify different elements of the OBPS, including the output-based standards applicable to each industry and the option to participate voluntarily, and will provide additional information on the compensation scheme (i.e., the possibility to bank credits or obtain offset credits). Once the regulations come into force, the Information Production Order and Notice will likely no longer be necessary.
Come what may, the stage is now set for the OBPS to come into force on January 1, 2019. As such, Covered Facilities should be aware of their obligations under this regime and follow legal developments in this area.
For further information as to whether your business is subject to the requirements of the federal fuel charge or output-based pricing system, please contact one of the following members of our Environmental Law or Sales & Commodity Taxes groups:
Zvi Halpern-Shavim 416-863-2355
Amy Lee 416-863-4241
Charles Kazaz 514-982-4002
Mathieu Nolin 514-982-4291