Canadian Government Carbon and Greenhouse Gas Legislation

March 2021

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Pan-Canadian Framework on Clean Growth and Climate Change

Canada’s plan to reduce emissions and fight climate change is set out in the Pan-Canadian Framework on Clean Growth and Climate Change (the Framework). Adopted in December 2016 by Canada’s first ministers, key commitments under the Framework, several of which have been implemented in the last 4 years, include:

• establishing a carbon pollution pricing system;
• completely phasing out coal by 2030;
• developing increasingly stringent building codes starting in 2020;
• developing a clean fuel standard based on a full life-cycle analysis;
• continuing the phase down of hydrofluorocarbons;
• implementing methane regulations with the goal of reducing methane emissions by 40-45% by 2025; and
• reducing federal government GHG emissions by 40% below 2005 levels by 2030 or sooner.

In December 2020, the Government of Canada published A Healthy Environment and a Healthy Economy, which builds on the commitments contained in the Framework, including over 60 policies and programs worth over $15 billion in investments, such as:

• a $2.5 billion investment by the Canada Infrastructure Bank into clean power projects over the next three years;
• a $1.5 billion investment to increase the production and use of low-carbon fuels including hydrogren, biocrude, renewable natural gas, diesel, and cellulosic ethanol;
• a $2.6 billion investment over seven years to assist Canadians with energy efficiencies at home and $1.5 billion over three years for green and inclusive community buildings; and
• a $3.16 billion investment over 10 years to plant 2 billion trees, as well as to conserve wetlands, grasslands and restore land and habitat.

The Greenhouse Gas Pollution Pricing Act

The Greenhouse Gas Pollution Pricing Act (the Act), which implements the federal commitment in the Framework to implement a carbon pollution pricing system, received Royal Assent on June 21, 2018. The Act has two key parts:

• Part 1, administered by the Canada Revenue Agency, applies a charge to 21 types of fuel and combustible waste (Fuel Charge).
• Part 2, administered by Environment and Climate Change Canada, introduces an output-based pricing system (OBPS) for large industrial emitters.

Provinces and territories are free to choose whether to implement a carbon pollution price or a cap-and-trade system, as long as they meet the minimum federal pricing and emissions reduction targets. The federal pricing system applies in jurisdictions that do not implement a carbon tax or cap-and-trade system, or that do not meet the federal pricing and emissions reduction minimums.

Currently, the federal system applies in Manitoba, New Brunswick, Ontario, Saskatchewan, Nunavut and Yukon. The federal government adopted regulations that came into force on January 1, 2020, rendering Alberta a further jurisdiction to which the federal carbon pricing system applies.

Fuel charge

The Fuel Charge applies to 21 types of fuel delivered, transferred, used, produced, imported, or brought into the provinces and territories in which the federal system applies. It also applies to combustible waste that is burned for the purpose of producing heat or energy.

The Fuel Charge is currently $30 per tonne of CO₂ equivalent. It will increase by $10 annually on April 1, 2021 and then a further $10 on April 1, 2022. Generally, the Fuel Charge applies early in the supply chain and is payable by the registered distributor.

The Fuel Charge came into effect in April 2019 in Manitoba, New Brunswick, Ontario and Saskatchewan, in July 2019 in Nunavut and Yukon, and January 1, 2020 in Alberta. New Brunswick established its own provincial fuel charge on April 1, 2020 and as a result, the federal carbon pollution pricing backstop system no longer applies in that province.

The remainder of the Canadian provinces and territories either have their own version of the fuel charge (Newfoundland and Labrador, Prince Edward Island, Nova Scotia, British Columbia and the Northwest Territories) or have implemented a cap-and-trade program (Quebec) as an alternative.

Output-based pricing system

Under the OBPS, large industrial emitters (“covered facilities”) pay a carbon price if the emissions at their facilities exceed a set level. Covered facilities that pollute less than the set level earn credits that can be sold by the emitter.

The OBPS applies to facilities that meet the following criteria:

• Are located in a backstop jurisdiction (a province or territory in which the federal carbon pollution pricing system applies).
• Have reported 50,000 tonnes of carbon dioxide (CO₂) equivalent or more in 2014 or a subsequent year to the Greenhouse Gas Reporting Program.
• Carry out a covered activity.

Facilities that emit less than 50,000 tonnes of CO₂ equivalent may apply to be covered by the OBPS. The Voluntary participation policy for Output-Based Pricing System outlines the considerations that the federal Minister of the Environment will take into account when making such a designation.

The details of the OBPS are contained in the Output-Based Pricing System Regulations, SOR/2019-266, which set out:

• the criteria for determining which facilities are required to register in the OBPS (“covered facilities”). Covered facilities include facilities where the following industrial activities are engaged in: (i) oil and gas production; (ii) mineral processing; (iii) chemical production; (iv) pharmaceutical production; (v) iron, steel and metal production; (vi) mining and ore processing; (vii) fertilizer production; (viii) food processing; (ix) pulp and paper processing; (x) automotive assembly; and (xi) electricity generation;
• how a covered facility provides a report that sets out the information with respect to the GHG emissions limit and cause the report to be verified;
• how to quantify the GHGs from a covered facility and the production from each specified industrial activity engaged in at the covered facility;
• how to determine the covered facility’s GHG emissions limit based on the facility’s production from each specified industrial activity and the applicable output-based standard;
• how compensation is provided for excess emissions and surplus credits are issued; and
• other informational and verification requirements to be in a covered facility’s report.

With respect to compensation, a covered facility with GHG emissions below its emissions limit receives surplus credits for those emissions below the facility’s annual limit, with each surplus credit representing one tonne of CO₂ equivalent. These credits can either be used as compliance units by the covered facility or can be sold to other facilities in the OBPS. When the GHG emissions of a covered facility exceed the emissions limit, the facility is required to provide compensation for excess emissions.

Proposed Offset Credit System Regulation

On March 5^th, 2021, Environment and Climate Change Canada published the proposed Greenhouse Gas Offset Credit System Regulations, which would establish a voluntary GHG offset system as part of the federal government’s carbon pollution pricing system. Under the proposal, offset credits would be issued to project proponents for GHG reductions for projects that meet eligibility criteria and that are implemented in accordance with federal offset protocols. Protocols currently contemplated under the system relate to the following project types: (i) advanced refrigeration systems; (ii) landfill methane management; (iii) improved forest management; and (iv) enhanced soil organic carbon.

As proposed, the system consists of three main components:

• regulations to implement the operational aspects of the system;
• federal offset protocols that set out how to quantify GHG reductions for given project types; and
• a credit and tracking system to register offset projects, issue and track offset credits, and share key information through a public registry.

Publication of final regulations is targeted for the fall of 2021.

Low Carbon Economy Fund

The $2 billion Low Carbon Economy Fund (the Fund) is a key part of the Framework. The Fund provides financial support to projects that help reduce climate pollution and is divided into two parts:

• Low Carbon Economy Leadership Fund – Provides up to $1.4 billion to provinces and territories that have adopted the Framework. It is intended to help them deliver on their commitments to reduce GHG emissions.
• Low Carbon Economy Challenge – Provides $500 million for projects that reduce GHG emissions and generate clean growth.

Supreme Court Finds Greenhouse Gas Pollution Pricing Act Constitutional

The constitutionality of the Act was challenged by the governments of Saskatchewan, Ontario, and Alberta. In 2019, a majority of the Courts of Appeal of Saskatchewan and Ontario each upheld the Act as a valid exercise of the federal Parliament’s power to legislate on matters of national concern. However, a majority of the Alberta Court of Appeal held that Parts I and II of the Act are unconstitutional in their entirety.

On September 22 and 23, 2020, the Supreme Court of Canada (SCC) heard appeals in relation of all three challenges. At the SCC hearing, all the provinces, except British Columbia, brought strong positions against the Act on the basis that it is paternalistic and usurps their right to impose their own climate change policies. The provinces did not dispute the importance of regulating GHG emissions, but maintained that they are not only capable of regulating GHG emissions, but better positioned to do so than the federal government.

British Columbia argued in support of the constitutionality of the Act, emphasizing that federalism should not be a barrier to addressing climate change. The federal government emphasized that denying Parliament jurisdiction would “leave a gaping hole in the Constitution.”

On March 25, 2021, SCC released its much-anticipated decision, upholding the constitutionality of the Act. The majority of judges in the 6-3 split decision emphasized the importance of a national approach to addressing climate change, noting that the climate crisis is “an existential threat to human life in Canada and around the world.”

As Canada’s highest appeal court, the SCC majority’s decision is the final say on the Act’s validity.

Climate Accountability Legislation

In November 2020, the Minister of the Environment and Climate Change (the Minister) tabled climate accountability legislation to formally commit Canada to its target of net-zero GHG emissions by 2050. If passed by Parliament, Bill C-12, An Act Respecting Transparency and Accountability in Canada’s Efforts to Achieve Net-Zero Greenhouse Gas Emissions by the Year 2050 (Bill C-12) would require that national targets for the reduction of GHG emissions in Canada be set by the Minister t for 2030, 2035, 2040 and 2045, with the objective of attaining net-zero emissions by 2050.

To reach those targets, the Minister must establish emission reduction plans and submit progress reports to Parliament. Bill C-12 would also establish an advisory body to advise on, among other things, measures and sectoral strategies to achieve net-zero emissions by 2050. The Minister of Finance would also be required to prepare an annual report respecting key measures that the federal public administration has taken to manage its financial risks and opportunities related to climate change.

Canada’s Hydrogen Strategy

On December 16, 2020, Canada’s federal government released its Hydrogen Strategy for Canada (the Strategy). The Strategy sets an ambitious framework to cement hydrogen as a key part of Canada’s climate plan and intends to achieve emission reductions while at the same time creating domestic and international economic opportunities.

The Strategy’s short-term goal (between now and 2025) is to lay the foundation for the hydrogen economy. This will involve extensive planning for the development of new hydrogen supply and the distribution of infrastructure, which will support the development and growth of early deployment “HUBs” (areas/clusters with extensive expertise in a certain sector) in mature hydrogen applications, and will also focus on supporting emerging hydrogen applications.

Between 2025 and 2030, the Strategy’s focus shifts to stimulating growth and diversification of the hydrogen sector. Industrial clusters will be able to support the expansion of hydrogen technologies into other sectors and regions. This could include extending production facilities and infrastructure already built for industrial applications to things such as residential heating, hydrogen refuelling stations or dispatchable power generation.

The long-term goal of the Strategy (between 2030 and 2050) is market expansion. By then new transportation applications should be ready for commercial use and the sector should expand rapidly during this period. The Strategy suggests that at this time, Canada should start to realize the full benefits of the hydrogen economy and can focus on increasing its supply and distribution infrastructure.

Regulations Respecting Reduction in the Release of Methane and Certain Volatile Organic Compounds

The Regulations Respecting Reduction in the Release of Methane and Certain Volatile Organic Compounds (the Regulations) came into force on January 1, 2020, except for certain sections which will not come into force before 2023. The provisions in the Regulations that are currently in force:

• Impose certain requirements on the oil and gas sector in order to reduce emissions of methane and certain volatile organic compounds.
• Designate the contravention of certain of its provisions as “serious offences by adding them to the schedule to the Regulations Designating Regulatory Provisions for Purposes of Enforcement (Canadian Environmental Protection Act, 1999).

Greenhouse gas emissions reporting requirements

There are multiple federal GHG reporting requirements:

• Under the Canadian Environmental Protection Act, 1999, Environment and Climate Change Canada requires certain emitters to report GHG emissions annually. In addition, all facilities engaged in carbon capture, transport and storage (CCTS) must submit a report covering their CCTS activities, regardless of their annual GHG emissions.

• Under the federal Greenhouse Gas Reporting Program, all facilities that emit 10,000 tonnes or more per year of GHG, in CO₂ equivalent units, are required to report.

Coal

Effective July 1, 2015, the Reduction of Carbon Dioxide Emissions from Coal-Fired Generation of Electricity Regulations came into force under the Canadian Environmental Protection Act, 1999. The regulations place a limit of 420 tonnes of CO₂ for each gigawatt-hour of electricity produced from coal per year. Compliance with the regulations by all new and most existing coal-fired electricity-generating plants will be required immediately, with some existing units being required to comply with the regulations before 2030.

Effective November 30, 2018, the Regulations Amending the Reduction of Carbon Dioxide Emissions from Coal-fired Generation of Electricity Regulations also introduced a performance standard designed to phase out conventional coal by 2030.

Natural gas

The Regulations Limiting Carbon Dioxide Emissions from Natural Gas-fired Generation of Electricity, which came into force on January 1, 2019, impose performance standards (CO₂ emission intensity-based limits) on new and significantly modified natural gas-fired electricity generating units, including combustion engines and boiler units.

Fuel

On December 19, 2020, the federal government published the Clean Fuel Regulations (CFR), which, as proposed, would require liquid fossil fuel suppliers to reduce the carbon intensity of the fuels used in Canada from 2016 levels by 12 grams of carbon dioxide equivalent per megajoule (gCO₂e/MJ) by 2030, which represents a decrease of approximately 13% in CI below 2016 levels. The CFR will also establish a credit market to give suppliers flexibility in meeting their annual reduction requirements, and it will retain the volumetric requirements for low-carbon intensity fuel content currently found in the Renewable Fuels Regulations.

A final version of the proposed CFR is expected to be published in late 2021.

The federal government has also implemented the Regulations Amending the Passenger Automobile and Light Truck Greenhouse Gas Regulations and the Heavy-Duty Vehicle and Engine Greenhouse Gas Emission Regulations (regulating the emissions standards of typical consumer and industrial vehicles).

International co-operation

In November 2017, Canada ratified the Kigali Amendment to the Montréal Protocol, which will phase down hydrofluorocarbons—or HFCs which, in addition to their role in atmospheric ozone layer deterioration (being the focus of the Montréal Protocol), are very powerful GHGs. Canada has also been working to harmonize its climate change efforts with those of other countries. In this regard, Canada has announced partnerships with France and the World Bank Group and on November 20, 2017, Canada signed a Memorandum of Understanding with Rwanda to this effect.