Ottawa set to release details of hybrid carbon-tax plan

May 15, 2017 - The federal government will unveil a carbon-tax plan this week that would provide breaks for major industrial emitters, while ensuring most Canadians families get rebates to offset higher energy bills.

Environment Minister Catherine McKenna will release a “technical paper” outlining the federal proposal for a levy that would only apply in provinces that refuse to implement their own tax or cap-and-trade system. The Minister will invite feedback on the plan before introducing legislation later this year.

Ottawa’s draft plan would mimic the hybrid approach adopted by Alberta’s New Democratic Party government, federal sources say. The NDP carbon price has provoked fierce opposition from conservative political parties and some segments of the business community in the province, though several large oil companies support the Alberta policy.

The federal government plans to impose a broad carbon tax covering most emissions from fossil-fuel production and consumption, starting in 2018 at $10 per tonne of carbon dioxide emissions in 2018 and rising to $50 in 2022.

In order to protect their competitiveness, Ottawa would only tax a small portion of emissions from large industrial plants that consume a lot of fossil fuels and face global competition. As in Alberta, the amount of the levy would depend on how emissions-intensive a company compared to others in its sector, with the more efficient operators getting a bigger break.

That approach is consistent with the cap-and-trade programs in Ontario and Quebec that provide free emission rights to large, trade-exposed industries but require them to improve their performance over time.

While Prime Minister Justin Trudeau has vowed that all money raised from a federal levy would remain in the province in which it is collected, the government wants to ensure that some of that revenue is used to lessen the impact on middle– and lower-income earners. Sources say the technical paper will lay out options, including a direct federal rebate to families, or requiring a rebate as a condition under which Ottawa will hand the money over to a provincial government.

The Liberals are wary of handing over a lump sum to a hostile provincial government, which could then provide rebates and claim credit for addressing rising energy costs that were caused by federal climate-change policy or what some critics have already dubbed “Justin Trudeau’s carbon tax.”

Saskatchewan Premier Brad Wall has steadfastly refused to adopt a broad-based carbon price and is preparing to battle the Liberal government over the issue, while Manitoba Premier Brian Pallister has indicated his government would adopt some form of carbon pricing but has not released details.

Indeed, only Alberta Premier Rachel Notley has committed to having a provincial carbon tax of $50 a tonne by 2022, which is required to avoid federal intervention. Ontario, Quebec and Nova Scotia will plan to meet federal standards through a cap-and-trade system.

One provincial source said Ottawa still faces tough sledding to bring the premiers on board with a $50 price. They may be inclined to let the federal government implement its own carbon tax rather than risk their own backlash from voters, the provincial official said.

The so-called output-based approach for large emitters is designed to minimize the impact on industries that could shift production to the United States or elsewhere, which would cost jobs but provide no benefit in the global fight against climate change.

“The goal is for industries to stay in Canada, and be leaders in clean performance,” said economist Stewart Elgie, co-founder of the Smart Prosperity think tank based at the University of Ottawa. “The key is to have a steadily rising carbon price – as Canada is doing – and buffer the competitiveness effects on carbon-intensive industries.”

Ms. McKenna routinely points to major Canadian companies that support the international Carbon Pricing Leadership Coalition, which supports the use of levies to put a price on emissions. Members include oil sands companies such as Suncor Energy Inc. and Cenovus Energy Inc.; pipeline operators such as Enbridge Inc. and TransCanada Corp., miners such as Teck Resources Ltd. and Barrick Gold Corp., as well as the country’s major banks.

Conservative Party MP Ed Fast said the Alberta approach requires governments to intervene aggressively to “pick winners and losers.” He said Canadian companies cannot afford the burden of a carbon tax when U.S. President Donald Trump is promising to cut taxes for American business.

But industry executives have warned that governments must be strategic and ensure an overall competitive environment as they implement carbon pricing.

“The theory is good but it comes down to the details of how you implement it as to whether it would adequately provide those competitiveness protections,” said Terry Abel, executive vice-president at the Canadian Association of Petroleum Producers.

“Certainly we are nervous as we go through the details [in Alberta], and we want government to be very vigilant on the two objectives: economically sustainable industries and environmentally, social responsible industries as well.”