April 01, 2021

Canada Given Green Light to Carbon Pricing: Why the Supreme Court of Canada’s Decision Should Matter to Those South of Our Northern Border

Posted on April 1, 2021 by Kevin Poloncarz

On March 25, 2021, the Supreme Court of Canada upheld the Greenhouse Gas Pollution Pricing Act (“GGPPA”), which establishes a national pricing benchmark for greenhouse gas (“GHG”) emissions. Reference re Greenhouse Gas Pollution Pricing Act, case numbers 38663, 38781, and 39116. Several provinces challenged the law, arguing that it was unconstitutional and that it imposed unlawful taxes. In upholding the constitutionality of Canada’s federal pricing program, the decision is a strong affirmation of the need to impose a uniform price on carbon emissions across jurisdictions and has some significant upshot implications for businesses and policymakers in the United States. 

The Challenged Law: Under the GGPPA, Canada’s provinces must each elect to implement an explicit carbon price that rises to at least C$50 by 2022, or participate in a cap-and-trade program. If a province fails to do so, the federal government will implement a “backstop,” consisting of a levy on fossil fuels and an output-based pricing system on industrial facilities. If a province’s program does not meet the carbon price benchmark, the federal backstop will supplement or “top-up” the provincial system.

Notably, the GGPPA allows those provinces that have already established their own pricing systems, such as British Columbia’s carbon tax, to continue implementing them, so long as they meet the federal benchmark. It also accommodates Québec’s decision to continue participating in a linked carbon market with California. A map published by the federal government shows how a patchwork of provincial programs has been knit together, along with the federal backstop, to achieve equivalency in pricing across Canada.

Saskatchewan, Ontario and Alberta challenged the constitutionality of the GGPA. In split decisions, the courts of appeal for Saskatchewan and Ontario held that it was constitutional; the court in Alberta held that it was not.

The Opinion: In a 6-3 decision, the Supreme Court held that the GGPPA was constitutional, ruling that the establishment of a national GHG pricing floor was a necessary exercise of federal authority to address climate change.

In reaching this conclusion, the Court held that reducing GHG emissions was a matter of national concern. It also noted that GHG emissions, by their nature, pose specific coordination challenges among provinces. The Court observed that, absent a federal pricing floor, any province’s failure to implement a sufficiently stringent pricing mechanism could undermine the efficacy of GHG pricing everywhere due to the risk of carbon “leakage,” i.e., that emissions reductions occurring in any given province would be offset, as emissions and business activity migrate to provinces implementing weaker programs.      

Responding to arguments that the GGPPA amounted to federal infringement upon traditional provincial arenas, including a province’s control over its natural resources, the Court emphasized the law’s design as a “backstop” that provided provinces “the flexibility to design their own policies to meet emissions reductions targets.” The majority viewed any impact on provincial sovereignty as “justified” in light of the irreversible harms posed by climate change, which will be “borne disproportionality by vulnerable communities and regions.”

Finally, the Court held that the GGPPA’s fuel and excess emission charges are “constitutionally valid regulatory charges,” not taxes. It explained that while these levies had the characteristics of taxes, they were clearly connected to a regulatory scheme and served a well-documented regulatory purpose: altering behavior to reduce emissions.

The Upshot: There are several reasons why this decision is noteworthy for businesses and policymakers in the United States:

  • First, in justifying the federal benchmark and any intrusion on provincial authority in part upon the disproportionate burdens that would be borne by vulnerable communities, including Indigenous peoples, the Court’s ruling situates environmental justice at the center of efforts to address climate change. In this respect, it affirms the stature that the Biden-Harris Administration has accorded environmental justice as a critical component of its climate strategy, including in its Day One executive order and initial efforts to re-establish the social cost of carbon pollution.
  • Second, in holding that the risk of carbon leakage warrants a minimum national price, the Court recognizes the fundamental dilemma for any jurisdiction embarking on carbon pricing in the absence of assurances that its neighbors won’t undercut its competitiveness. The Canadian backstop resolves carbon leakage concerns, while respecting provincial authority to experiment with different carbon pricing mechanisms, and, in that regard, may provide a useful model for a federal policy framework that both accommodates and supports the efforts of states that have already moved forward with some form of carbon pricing.
  • Third, in holding that the federal benchmark was not a tax, but a lawful regulatory charge aimed at reducing emissions, the majority’s ruling accords with an important decision of the California Court of Appeal, which upheld California’s cap-and-trade program in 2017 against a similar challenge. There, the California Court held that the test for distinguishing between a tax and a lawful regulatory fee simply didn’t apply to the obligation to purchase allowances for every ton of GHG emitted because allowances are a valuable commodity issued by the state for the purpose of reducing emissions, and no one has a vested right to emit. Now, in both California and Canada, carbon pricing has withstood challenges that it amounted to an unlawful tax and, as a consequence, a significant portion of the North American population will be subject to equivalently stringent price signals.
  • Finally, the ruling may put renewed focus on the possible application of carbon border adjustments to exports from the United States. John Kerry, the Special Presidential Envoy for Climate, recently urged the European Union (EU) to hold off on its proposed carbon border adjustment mechanism, saying it should only be imposed as a “last resort.” While the EU is certainly a major trade partner, consider the complications if Canada were to impose such a border adjustment, given its status as the largest U.S. goods export market and the cross-border nature of many supply chains and production lines. Further, if the United States eschews carbon pricing, in favor of a menu of regulatory programs, infrastructure investments and incentives designed to reduce emissions, how might the cost of those regulations and investments stack up against Canada’s minimum price? Could Canada give a free pass to goods from California, given the linkage between its cap-and-trade program and Québec’s program, which Canada explicitly found to satisfy the federal benchmark? Should such cross-border trade concerns inform the debate concerning a proposed cap-and-trade bill currently advancing within the Washington State Legislature to establish a program linked with California and Québec?

As states continue their efforts to address the climate crisis and an array of businesses increasingly call for carbon pricing at the federal level, the decision of the Supreme Court of Canada – the United States’ largest export market – deserves both attention and praise for grappling with the transboundary nature of carbon pollution and affirming why national leadership is essential to tackle the problem of climate change.