The federal carbon pricing plan will be much more than an annually escalating charge on fuel. At a briefing in Ottawa on May 18, 2017, Environment Canada officials released a technical discussion paper on carbon pricing that includes a baseline-and-credit system and a market for offsets.
The plan is intended to apply only to jurisdictions that do not have a carbon pricing plan in place at least equivalent to the federal backstop. At present, that means the federal plan would not apply in British Columbia, Alberta, Ontario and Quebec. Nova Scotia has proposed a cap-and-trade plan that should be sufficient to exclude it as well.
The proposed federal carbon price on fossil fuels is largely as expected. Gasoline, diesel fuel, aviation fuel, natural gas, coal, coke will all be subject to a $10-charge per tonne of CO2. The charge will be levied against the fuel’s producer or distributor, will be implemented in 2018 and will grow by $10 annually through 2022, by which time it will have hit $50.
Per litre of gasoline, the cost will begin at 2.33 cents in 2018, rising to 11.63 cents in 2022. Per m3 of marketable natural gas, the cost will begin at 1.96 cents in 2018, rising to 9.79 cents in 2022.
The baseline-and-credit system will apply to all industrial facilities that emit 50 kilotonnes or more of CO2 equivalent per year. Certain facilities and sectors will be exempted, such as buildings, waste and wastewater plants, and the system will not kick in before January 1, 2019.
Industries within the baseline-and-credit system will be relieved (likely through a rebate) of the carbon cost of the fuel they consume. Instead, they will be subject to a carbon intensity baseline. Baselines will be set sector by sector and, according to the technical discussion paper, will represent best-in-class performance (top quartile or better). The baseline will cover emissions from fuel consumption and all process emissions.
Facilities that perform better than their baseline will receive tradable credits from the federal government representing the difference between their actual emissions and those expected under their baseline intensity. If a widget plant’s baseline says it should emit two tonnes of carbon per widget, and instead it emits 1.5 tonnes per widget, it will earn credits equivalent to 0.5 tonnes per widget produced.
On the other side of that coin will be industries that perform more poorly than their baseline. They will be required to pay the equivalent carbon levy for their excess, purchase available credits from the better performers or purchase offsets. The federal government intends to set rules on acceptable offsets, and they may include foreign credits, which are now known as “internationally transferred mitigation outcomes”.
Industries that fall below the 50-kilotonne threshold of the baseline-and-credit system may apply to join, thereby earning a rebate on the carbon levy they pay on consumed fossil fuel. Allowing them to opt in removes a perverse incentive that might encourage plants to boost their emissions in order to qualify for baseline and credit.
The baseline-and-credit mechanism will allow the government to set baselines that do not disadvantage so-called emissions-intensive, trade-exposed industries. These are highly-competitive sectors whose processes consume a great deal of energy (cement is often held out as an example). Plants in those sectors might consider relocation when faced with the shock of a rising carbon cost.
Comments on the “Technical Paper on the Federal Carbon Pricing Backstop” are invited through June 30, 2017 to firstname.lastname@example.org.