Finance Committee on April 25th, 2018

[Judy Meltzer, Director General, Carbon Pricing Bureau, Department of the Environment]

Thank you very much, Chair and members of the committee. We're very pleased to be here today to participate in this review.

As you noted, I'm joined by colleagues from Finance Canada, as well as from our legislative governance team at Environment and Climate Change Canada.

I'm going to begin with a very brief, contextual overview of the pan-Canadian approach to pricing carbon pollution, and I'll turn to my Finance Canada colleague to discuss part 1 of the bill, the fuel charge component, in a bit more detail. After that, Philippe Giguère will discuss part 2 of the bill, which is the output-based pricing system for large industrial emitters.

Carbon pricing is widely recognized as an effective way to reduce emissions at the least cost to businesses and consumers while stimulating innovation and clean growth.

Carbon pricing sends an important signal to the market and encourages a reduction in the consumption of energy thanks to energy savings and energy efficiency measures.

Carbon pricing constitutes a central pillar of the national clean growth and climate plan, the Pan-Canadian Framework on Clean Growth and Climate Change, adopted by almost all premiers in December 2016.

The development of the pan-Canadian framework, including the approach to carbon pricing, was informed by input from Canadians across the country. Under the Vancouver declaration, first ministers asked for federal-provincial-territorial working groups to work with indigenous peoples and to consult the public, businesses, and civil society to present options to act on climate change and enable clean growth. The working groups heard directly from Canadians through various mechanisms: interactive websites, in-person engagement sessions, and town halls. The pan-Canadian approach to pricing carbon pollution is based on the findings of the working group on carbon pricing mechanisms in their final report.

As you aware, over 80% of Canadians already live in a jurisdiction that has a price on carbon pollution. In order to extend the carbon pricing approach throughout Canada, in October 2016, the Prime Minister announced the pan-Canadian carbon pricing standard, or the benchmark.

This recognizes the systems that are already in place and gives provinces and territories the flexibility to implement the type of system that makes sense for their particular circumstances, either in explicit price-based systems such as a carbon tax as in B.C., a carbon levy and performance-based approach such as in Alberta, or a cap-and-trade system such as is in place in Quebec and Ontario.

This benchmark, or federal standard, also sets some common criteria that all systems must meet in order to ensure they are effective. It also includes a commitment to review carbon pricing across Canada in 2022 in order to inform the path forward.

In order to ensure that there is a price on carbon across Canada, the benchmark also commits the Government of Canada to develop and implement a federal carbon-pricing backstop system that would apply in any province or territory that requests it or that does not have a carbon-pricing system in place in 2018 that meets the federal standard.

Key milestones to date in the development of the federal carbon-pricing backstop system include the release of a technical paper in May 2017 for public comment that outlined the proposed federal pricing system. In January 2018, we released draft legislative proposals relating to the proposed federal carbon-pricing system for public comment. Also at that time, Environment and Climate Change Canada released a regulatory framework describing the proposed federal approach for pricing carbon pollution for large industrial facilities.

We continue to have ongoing engagement with stakeholders, provinces, territories, and the public, in particular on the development of the output-based pricing component.

The introduction of the proposed greenhouse gas pollution pricing act is a step in the development of a federal carbon pricing backstop system. The key purpose of the act is to help reduce greenhouse gas emissions by ensuring that a carbon price applies broadly throughout Canada, with increasing stringency over time. It provides the legal framework for the federal backstop system, which consists, as you know, of two elements.

The first is a charge on fossil fuels generally payable by fuel producers and distributors. The second component is a performance-based system for industrial facilities, which is called the output-based pricing system. This is the approach that will create a price signal for large industrial emitters but also ensure that competitiveness and carbon-leakage risks are minimized. The federal carbon-pricing backstop system will only apply, as mentioned, in provinces or territories that request it or that do not have a system in place that aligns with the benchmark.

As you're likely aware, this past December, the Ministers of Finance and theEnvironment wrote to their provincial and territorial counterparts outlining the timelines for understanding and hearing about the provincial and territorial plans. There is a deadline of September 1, 2018, for provinces and territories to indicate what their plans are.

For those jurisdictions that plan to maintain or establish their own carbon-pricing systems, there will be a requirement that they indicate how their systems align with the benchmark. This assessment against the benchmark criteria will occur after that, and the backstop system would apply on January 1, 2019, starting at $20 a tonne in any jurisdiction that either requests it or that does not have a system in place that meets the benchmark. This assessment against the benchmark will occur on an annual basis.

Where the federal carbon-pricing system applies, the Government of Canada will return all direct revenue from the carbon price to the jurisdiction of origin. Revenue from carbon pricing can be used in different ways, whether it's to provide rebates or assistance to households and businesses or to further invest in programs and technologies to reduce emissions.

Carbon pricing is just of the measures being taken to reduce greenhouse gas emissions towards meeting Canada's target, in combination with other complementary actions under Canada's pan-Canadian framework.

With this overview, I'm going to turn to my colleagues at Finance Canada to discuss part 1 of the act in more detail. Then we'll come back to Environment and Climate Change Canada to discuss part 2.

Thank you very much.

[The Chair, Liberal, Wayne Easter]

Okay. Who's up?

Mr. Mercille.

[Pierre Mercille]

Good afternoon.

My name is Pierre Mercille. I am the Director General, Legislation, Sales Tax Division, Finance Canada.

As we said previously, Part 5 of the bill implements the Greenhouse Gas Pollution Pricing Act. Part 1 contains provisions that implement the carbon pricing system, which is a fuel charge.

Under Part 1 of the act, the fuel charge applies to 22 kinds of fuel. Some are more common than others, like gas, light fuel-oil, often called ''diesel'', and natural gas. It also applies to less common fuels like methanol, and coke oven gas.

Schedule 2 of the bill contains the fuel charge rates. To comply with legal drafting rules, the appendices are not in Part 5, but at the end of the bill, on pages 546 and following.

The fuel charge rates in schedule 2 represent $10 to $50 levies per ton of carbon dioxide equivalent, but they are expressed in normal commercial units so as to facilitate compliance and administration of the charge. All of the rates can be found in schedule 2, but I'll give two examples.

The first example is gas. $10 a tonne means 2.21 cents per litre; $50 a tonne, in 2022, represents a charge of 11.05 cents a litre. The other example is natural gas. $10 a tonne means 1.96 cent per cubic metre; $50 a ton, in 2022, represents 9.79 cents per cubic metre of natural gas. I am referring here to marketable natural gas, which is used to heat homes.

The English title of this act is the greenhouse gas pollution pricing act. From now on, because it's very long, I will refer to it by its acronym, the GGPPA, in my remarks in English.

Part 1 of the GGPPA provides that a charge apply to fuels that are produced, delivered, or used in a listed province, brought to a listed province from another place in Canada, or imported into Canada at a place in a listed province. A listed province is a province, territory, or area that is listed in part 1 of schedule 1 to the GGPPA. Currently that schedule is empty.

Provinces will be listed in part 1 of schedule 1 if they request that the federal carbon pricing regime apply in their jurisdictions or if they do not have a carbon pricing system in place in 2018 aligned with the national benchmark to pricing carbon pollution.

Under part 1 of the GGPPA, the Governor in Council is provided with the authority to add a province, territory, or area to part 1 of schedule 1, which would result in the application of the fuel charge in that province, territory, or area.

Generally, in the most difficult case the fuel charge is paid by fuel distributors that are registered for the purpose of part 1 of the GGPPA—that is, registered with the Canada Revenue Agency. Registered distributors are, most commonly, fuel producers or persons who distribute fuels at the wholesale level. Typically these distributors will be large corporations. Registered distributors are responsible for paying the charge in respect of the fuel that they delivered to another person, and also in respect of the fuel that they may use themselves.

Part 1 provides for specific circumstances in which no charge is applicable to certain fuels that are delivered to certain persons if an exemption certificate is provided. In this case, when a registered distributor delivers fuel to certain types of persons, the registered distributor does not have to pay the fuel charge in respect of that delivery of fuel; therefore, the fuel charge is not embedded in the selling price of the distributor.

The types of persons who can use exemption certificates are, for example, other registered distributors of the same fuel, farmers in respect of certain fuels in certain circumstances, or persons subject to the output-based pricing system in part 2 of the GGPPA, where the fuel is for use at a covered facility. My colleagues will be describing part 2 of the GGPPA after my presentation.

What's an exemption certificate? An exemption certificate is a certification that the purchaser provides to the vendor—for example the registered distributor—that relieves the distributor of the obligation to pay the charge in respect of that fuel. For example, the operators of a covered facility under the output-based pricing system would be required to certify, first, that they are registered with the Canada Revenue Agency as an emitter under the output-based pricing system, and that the fuel is for use at a covered facility under the output-based pricing system. This means that the emissions from the burning of that fuel will be priced under part 2 of the legislation and not under part 1 of the legislation.

Part 1 also provides specific rules for determining the fuel charge applicable to certain interjurisdictional air, marine, rail, and road carriers. Some of these carriers will be entitled to receive fuel from a registered distributor, with no charge applying up front, when they present a valid exemption certificate. In this case they will be, instead, required to self-assess and pay the charge directly based on their fuel use. For example, air and marine carriers are generally required to pay the charge only on fuel used in intrajurisdictional journeys, which means a journey that begins and ends in the same listed province.

Part 1 also provides for limited and very specific circumstances in which a person may be eligible for a rebate of the fuel charge paid by the person. To give you an example, if a person is not a registered distributor and imports the fuel in Canada at a place in a listed province, they will be required to pay the charge in respect of that fuel. However, if the person subsequently removes the fuel from that listed province, they may be entitled to a rebate if they become registered with the Canada Revenue Agency.

[The Chair, Liberal, Wayne Easter]

Pierre, I'll have to stop you there. We have to go and vote. After the vote, we do have a hard stop at 5:30 today, because another committee has this room booked. We'll come back and see if we can at least finish the presentation, but I think you can figure on coming back before the committee. This is complicated.

We will suspend until the vote is over.

[The Chair, Liberal, Wayne Easter]

We're going to start, because it will be on the record. I do think we're probably going to have to go back to some of the wording for some of this complicated stuff to figure it out.

Go ahead, the floor is yours.

[Pierre Mercille]

Thank you very much. I will continue my presentation.

Part 1 also contains obligations regarding the registration of persons who perform certain activities related to the fuels to be charged. A person who produces fuel in a listed province must register as a distributor. Someone who operates a marketable natural gas distribution network in a listed province must also register as a distributor.

Under Part 1 of the act, fuel charges will be administered by the Canada Revenue Agency. In Part 1 there are administrative rules, such as rules on filing periods, the obligation to file a form, and the obligation to pay the fuel charge to the Receiver General. Part 1 also includes enforcement regulations meant to ensure compliance with the rules in Part 1 by those who must pay the charges. This includes provisions containing penalties, offences and means of recovery. Those provisions are similar to enforcement measures to be found in other acts administered by the Canada Revenue Agency.

Part 1 also gives the minister the right to distribute the net amount of the charges under Part 1 regarding a province, territory or zone. The net amount must be determined for a given period. It basically represents the amount of the charges levied for the period, net of any charge-related amount reimbursed or remitted during the period.

Part 1 contains all of the necessary regulations to ensure the proper operation of the fuel charge. However, in order to ensure that the government may rapidly adjust fuel charge regulations following potential issues that may be raised by stakeholders or the Canada Revenue Agency, the governor in council is authorized to make regulations concerning the application of the fuel charge in particular cases.

In conclusion, I would add that Part 1 also authorizes the governor in council to set the fuel charge rates, as set out on schedule 2 of the act, which includes the power to set those rates for the years following 2022.

I will now yield the floor to my colleague Mr. Giguère, who will describe Part 2.

[Philippe Giguère, Manager, Legislative Policy, Department of the Environment]

Thank you, Mr. Chair.

Like my colleague Mr. Mercille, I am going to give a summary overview of Part 2 of the act, which sets out the output-based pricing mechanism for greenhouse gas pollution caused by large industrial installations. For your information, Part 2 is in sections 169 to 261 of the act.

The objective of Part 2 is to reduce to a minimum the risk of carbon leaks from industries that engage in trade, while imposing a price signal that encourages those industries to reduce the level of greenhouse gases their facilities emit.

Part 2 is mostly enabling legislation, since it establishes some of the main powers and obligations of the output-based pricing mechanism, but most of the details of the system will be provided in the regulations. May I direct your attention to section 192, which sets out those regulatory powers in detail? In other words, regulations detailing the mechanism will have to be made in order for them to be operational in one of the administrations listed in schedule 1 of the act.

The government has already begun consultations on the proposed regulatory framework for the implementation of the output-based system, which may be the subject of regulations, if this bill is given royal assent.

The output-based pricing system will only apply to facilities that meet the following criteria.

First, the facilities must be located in a province or territory to which the federal system applies; secondly, their emissions must be over a given threshold, that will be set in the regulations. Finally, they must perform certain activities, which will also be listed in the regulations. The regulated facilities are referred to in the act as ''covered facilities''. The term is defined in section 169 of the act.

As mentioned previously, the output-based pricing system will complement the fuel charge. In other words, the fuels used in facilities covered by the output-based pricing system will not be subject to the fuel charge contained in Part 1.

Regulated facilities will have to register with the system, submit reports on their GHG emissions, and assess their emissions output against a GHG limit. The annual limit for covered facilities will be based on an emissions intensity standard for the industrial activity of the facility. The standards will be defined by regulations.

For the purpose of publishing emissions intensity standards in the fall of 2018, the department has begun to engage with stakeholders. For instance, a standard could be set to allow the emission of the equivalent of a tonne of CO² per unit of production for a given regulated activity. In that example, facilities that practice the regulated activity would have an annual limit equal to a tonne of CO² equivalent, multiplied by the number of units produced by the facilities in the course of that year. That design feature will encourage the facilities to be as efficient as possible in their production, in other words, to reduce their emissions per production unit. The goal is to encourage energy efficiency and the use of cleaner fuels.

Section 174 requires that regulated facilities provide compensation for the part of their emissions that exceeds the annual limit. However, if facilities emit less than their annual limit, under section 175 they will receive surplus credits, which they may apply in future or sell to other regulated facilities. In this way the system creates an incentive for continuous improvement.

The facilities that must remit compensation for excess emissions may do so in one of the following three ways.

First, the facilities may submit the surplus credits they have earned or acquired from other facilities. Second, the facilities may submit compliance units from approved projects that prevent or eliminate GHG emissions. Third, the facilities may also pay an excess emissions charge, which is set out in schedule 3 of the bill.

As previously mentioned, the charge is set at $10 per tonne of carbon dioxide equivalent in 2018, and will increase by $10 a year until it reaches $50 a tonne in 2022.

In addition to credits referred to as compliance units, which will be delivered under Part 2 of the act, it is possible that credits from other jurisdictions, such as compliance units issued under a provincial system, may be accepted as compensation.

The facilities will have to open accounts in a tracking system to allow for the purchase, sale and use of credits. The Part 2 tracking system will also register the payment of charges for excess emissions.

As for the distribution of revenue collected under Part 2, essentially, as my colleague Mr. Mercille described it, all of the revenue collected from the output-based pricing system will be returned to the province or territory it came from. Under the law the revenue may be distributed to the government of a province or territory, or to persons designated by regulation.

A large part of this bill, which has 200 pages, refers to provisions related to the enforcement or application of the law. Those provisions are designed to ensure the integrity and proper operation of the pricing system. They are largely inspired by the application and enforcement provisions that are found in other federal environmental acts such as the Canadian Environmental Protection Act.

Part 3 of the act allows the federal government to apply, if need be, a provincial pricing mechanism in keeping with the federal standard to federal Crown lands, as well as to federal works and enterprises, what is known as the ''federal house''. These powers mean that the federal house is subject to the same provincial pricing system as the other federally regulated entities on that territory.

Finally, Part 4 of the act requires that the Minister of the Environment and Climate Change table a report every year on the application of the act before both houses of Parliament.

Thank you.

We are ready to answer your questions.

[The Chair, Liberal, Wayne Easter]

Okay, that completes the presentations. That is great.

We are going to have to adjourn because there's another committee that starts immediately. I'm just looking at the schedule here to see what we can do because I do think that there's going to be a substantive amount of questions on this section.

We have a subcommittee meeting on Monday, April 30. Would we be agreeable to having an additional committee meeting put in on the morning of Tuesday, May 1, to deal with this issue? We already have a meeting slated in the afternoon, and that's with witnesses.

Are you okay with that?

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Yes.

[The Chair, Liberal, Wayne Easter]

We'll try to slate an additional meeting on Tuesday morning. I'll talk to you personally to see if we can find a time that doesn't complicate your schedules. On the morning of Tuesday, May 1, we'll come back to this issue that the presentations have been made on. We'll send out a time.

The meeting is adjourned.