The Federal Carbon Pricing Regime is Constitutional – What the Supreme Court’s Decision Means for Business

On March 25, 2021, the Supreme Court of Canada (the “SCC”) released the much-anticipated decision on the provincial challenges to the constitutionality of the federal Greenhouse Gas Pollution Pricing Act (the “GGPPA”).[1]

The verdict: the GGPPA is constitutional.

The SCC’s decision to uphold the GGPPA affirmed the federal government’s authority to regulate greenhouse gas (“GHG”) emissions through a GHG pricing system under the “national concern branch” of the “peace, order and good government” power (“POGG”) of the Constitution Act, 1867. Each of Alberta, Ontario, and Saskatchewan had previously challenged the federal GGPPA’s regulation of such matters as an intrusion into provincial powers.

In upholding the constitutionality of the GGPPA under the POGG power, the SCC has affirmed that one federal law is required to accomplish what individual provinces and territories alone cannot: the widespread reduction of Canada’s national GHG emissions. In rejecting the three provincial challenges, the SCC found that the scope of the federal government’s power under the GGPPA is reconcilable with the constitutional distribution of legislative power between the federal and provincial legislatures.

What does this mean for businesses? Depending on the jurisdiction, a provincial or federal carbon pricing system will continue to apply to fossil fuel inputs and an output-based pricing system will continue to apply to prescribed large industrial emitters. The SCC’s decision provides regulatory certainty for companies attempting to solidify their emission reduction targets and financial projections. Companies can now be reasonably confident that the regulatory rug will not be yanked out from under their feet as they navigate a carbon-regulated marketplace (subject, of course, to a future change in government).

The GGPPA in Context

The decision represents the final word in a multi-year saga playing out in both legal and political arenas. The SCC acknowledged this broader context in its judgment: “Climate change is real. It is caused by greenhouse gas emissions resulting from human activities, and it poses a grave threat to humanity’s future”.[2]

Although each court, including the SCC, rendered its decision based on the constitutional division of powers, the widespread implications of carbon pricing are significant as Canadian industry meets the opportunities associated with a lower-carbon future.

The GGPPA came into force on June 21, 2018, and sets out the regulatory framework for the federal carbon pricing backstop system, which consists of two components: (i) a levy on fossil fuels (the “Fuel Charge”); and, (ii) a cap-and-trade system for output-based GHG emissions by large industrial emitters (the “OBPS”). The purpose of the GGPPA is to establish a national minimum standard on carbon pricing as a measure to incentivize emission reductions across all sectors of the economy, and to mitigate Canada’s impact on climate change.

The federal Fuel Charge and OBPS applies in whole or in part where it has been requested by a province or territory, or within a jurisdiction which does not have a pricing system in place that is compliant with the federal benchmark stringency requirements (this is the so-called “backstop”).

Currently, the OBPS is in effect in Ontario, New Brunswick, Manitoba, Prince Edward Island, Yukon, and Nunavut. We note that in September 2020, the federal Minister of Environment informed the Ontario and New Brunswick governments that their carbon pricing systems for industrial facilities met the federal government’s minimum stringency benchmark requirements for the sources that they cover. As a result, the federal government will stand down the OBPS in both provinces at a future date. The Fuel Charge is currently in effect in Ontario, Manitoba, Saskatchewan, Alberta, Yukon, and Nunavut. The federal government has confirmed that the carbon pricing systems in Québec, Nova Scotia, the Northwest Territories, and British Columbia meet federal benchmark stringency requirements.

For detailed summaries of the challenges by the provinces at the lower courts, please see our previous blog posts here, here, here, and here.

The National Concern Branch of the POGG Power

The SCC’s decision was determinative on the issue of whether the federal government has the authority to legislate on the subject matter of the GGPPA, the mitigation of climate change through a pricing on carbon emissions, under the federal government’s national concern branch of the POGG power. As the GGPPA decision was the SCC’s first discussion on the national concern branch of the POGG power since Crown Zellerbach[3] in 1988, it carries strong implications for the balance of power between the federal and provincial legislatures.

The decision was also unequivocal in its discussion on the international consequences of climate change, and how such consequences could not be adequately remedied by provincial legislatures acting without federal oversight. The majority stated that climate change’s three unique characteristics – its cross-border effects, its disproportionate impact on provinces and territories with low emissions, and its inherent international character – requires “collective national and international action”.[4]

The national concern branch of the POGG power applies both to new matters that did not exist at Confederation, as well as matters which have risen to become those of national concern despite previously being of a local or private nature in a province (excluding national emergencies, which instead fall under the national emergency branch of the POGG power). Previous Supreme Court jurisprudence in Crown Zellerbach has required a determination that such a matter has consequences that give it a “singleness, distinctiveness and indivisibility that clearly distinguishes it from matters of provincial concern”, meaning that the provinces could not effectively regulate the issue on their own.[5]

Importantly, the majority’s decision did not substantially overhaul precedent on the national concern doctrine, although upholding a law on the basis of national concern is rare. With the SCC’s decision, the test that future laws under the national concern branch must meet first requires an assessment that the subject matter is of a concern to Canada as a whole, secondly, it requires a consideration of the national interests resultant from a provincial failure to deal with the intra-provincial aspects of the matter and, thirdly, it requires such intrusion on provincial interests to be outweighed by the benefit of addressing the matter at a national level.

In discussing precedent on the national concern doctrine, the majority also clarified the “provincial inability” rule, stating that such federal schemes designed to implement a national operation amongst provinces must establish that such a scheme is needed because “a province’s failure to deal with the matter within its own borders would have grave extraprovincial consequences”.[6]

To qualify the analysis, in order to be constitutional, the scale of impact of the federal scheme must also be reconcilable with the fundamental distribution of legislative power under the Constitution. In discussing the GGPPA, the majority found that it was. While the GGPPA may, in establishing a national minimum standard, have interfered with a province’s preferred balance between economic and environmental considerations, such control was necessary when considering the harm that would be caused if the federal government were unable to address the matter at a national level:

“This irreversible harm would be felt across the country and would be borne disproportionately by vulnerable communities and regions, with profound effects on Indigenous peoples, on the Canadian Arctic and on Canada’s coastal regions. In my view, the impact on those interests justifies the limited constitutional impact on provincial jurisdiction.”[7]

The framing of the power at issue under the GGPPA is of particular importance for future jurisprudence on the national concern branch – by framing the purpose and intent of the GGPPA in limited and precise terms as, “establishing minimum national standards of GHG price stringency to reduce GHG emissions” (as opposed to a broader categorization, such as the “regulation of carbon emissions”),[8] the SCC emphasized that future uses of the national concern power must be limited to clearly distinct and indivisible issues that are best addressed through a defined and coordinated national strategy, as opposed to piecemeal or uncomplimentary provincial enactments.

The majority further clarified how the national concern branch of the POGG power applied with respect to provincial management of natural resources, an argument advanced by way section 92A of the 1982 Constitutional amendment. By analogizing to the dominant characteristics of uranium and atomic energy, the majority stated that the discovery of interprovincial safety and security risks from the use of uranium in generating atomic energy did not prevent it from being held to be of national concern previously in Ontario Hydro.[9] As such, the majority analogized, despite the fact that “the dominant characteristic of uranium mining would likely have been the management of natural resources within the province”, the critical factor was that “the discovery of atomic energy had led to evidence grounding a new understanding of the inherent nature of the matter as one of national concern”.[10] Such was also found to be the case with natural resources that produce GHG emissions.

By defining the purpose and intent of the GGPPA in terms of both its goal and its mechanism for achieving the goal, the SCC brings welcome clarity to an area of law untouched by the 21st century. The SCC’s decision demonstrates that the “living tree” doctrine used to interpret the Constitution can be used to evolve the powers of the federal legislature to meet modern challenges – but only when such flexibility and cooperation between federal and provincial legislatures does not “override or modify the constitutional division of powers”.[11]

The Importance of Minimum Standards

The SCC found that the purpose of the GGPPA was single, distinctive, and indivisible from matters of provincial concern by recognizing the extra-provincial nature and impacts of climate change. As such, it was a matter that cannot be dealt with by each province acting alone.

As the subject matter of the GGPPA extended past provincial borders, federal intervention was required to fill the gap. The SCC’s ruling therefore demonstrates that Canada’s constitutional distribution of legislative power includes the ability of the federal government to craft national approaches aimed at coordinating domestic responses to serious international or extra-provincial issues. In practical terms, this precedent establishes the bar which the federal government must meet if it chooses to establish provincially-binding minimum standards in other areas of national concern:

“Canada must establish not just that the matter is of concern to Canada as a whole, but also that it is specific and identifiable and is qualitatively different from matters of provincial concern, and that federal jurisdiction is necessitated by provincial inability to deal with the matter. Each of these requirements, as well as the final scale of impact analysis, represents a meaningful barrier to the acceptance of any matter of national concern that might be proposed in the future.”[12]

Further, the SCC’s decision demonstrates that other legislative regimes could be implemented in a similar manner to the GGPPA’s backstop. The GGPPA regime sets minimum standards for carbon pricing, and allows provinces to develop their own legislation that either replaces or supplements the federal baseline – it is only when a province does not reach the national standard, in whole or in part, that the backstop applies, implementing the federal regime and filling the gap. However, as stated above, the majority went to great lengths to emphasize that such a national minimum standards regime could only exist in accepted matters of national concern under the POGG power. This is a key point on which the majority and dissent split – even this constrained approach to national minimum standards went too far for three of the nine Justices, as noted below.

As a result of the decision, federally-established minimum standards on other matters of national concern could be imposed on provinces, who are free to either replace or supplement the federal baseline by imposing standards greater than or equal to the national model, or allow the federal government to act in relation to the national concern. The future use of such legislative backstop methods could entail a harmonization of certain standards across provinces for other matters of national concern – when and if they arise.

The Dissent and “supervisory federalism”

Justices Brown and Rowe dissented from the majority, with Justice Côté dissenting in part. While none of the dissenting Justices denied the importance of climate change and its effects, however, there was discomfort among the dissenting Justices that the reasoning adopted by the majority would have significant impacts on federalism, in which Parliament would be able to intrude into areas of provincial jurisdiction through the imposition of national minimum standards. It was put forward that the framework adopted by the majority results in a hierarchical and supervisory model of Canadian federalism in which provincial legislative authority will be subject to Parliament’s oversight and authority to create national standards.

The primary concern raised by the three dissenting Justices was the broad level of discretion that the GGPPA left in the hands of the executive branch, and whether this decision would open the door for the executive to create federal minimum standards in other areas of provincial jurisdiction.

Justices Brown and Rowe found the GGPPA to be ultra vires, with the subject matter of the GGPPA falling within the jurisdiction of the provinces. To reinforce this point, both of the dissenting Justices took issue with the GGPPA operating as a backstop. As a backstop model, the Justices were of the view the GGPPA could not be constitutional as it reinforces that Parliament has legislated in a matter in which the provinces have the authority to legislate. In the opinion of Justice Rowe, the use of minimum national standards may be a means of by-passing the analysis which artificially expands the federal capacity to legislate those matters which now fall within provincial jurisdiction. It was argued this rationale undermines cooperative federalism, and places federal supervision over provincial autonomy. We are likely to see similar arguments taken up in future cases where minimum standards are at issue.

The Bottom Line

The SCC’s decision leaves the federal government’s carbon pricing regime intact. While the ruling does not alter the federal or provincial carbon pricing regimes, it does have significant implications in that it will allow businesses to plan with greater certainty, particularly those in backstop jurisdictions (including Alberta, Manitoba, Nunavut, Ontario, and Saskatchewan – those whose regimes do not fully meet the federal minimum standard).

Given the constitutionality of the GGPPA, the OBPS will continue to apply, in whole or in part, in each backstop province and all provinces will be required to ensure they continue to meet the federally established minimum stringency standards. Regulated fuels, listed in Schedule 2 of the GGPPA, will continue to be subject to the Fuel Charge in each of the backstop provinces. Over the coming months, the federal government will continue to develop the regulatory system under the GGPPA.

The Road Ahead

Under the Paris Agreement, Canada has committed to reducing its GHG emissions by 30% below 2005 levels by 2030. The first policy steps taken to meet our Paris Agreement commitments were guided by the Pan-Canadian Framework on Clean Growth and Climate Change (the “Pan-Canadian Framework”), which was adopted in December 2016. On December 11, 2020, the federal government released its Healthy Environment and a Healthy Economy Plan (the “Plan”), which builds on the Pan-Canadian Framework and provides a road map forward to meet our 2030 emissions reduction target. The Plan outlines actions in five main areas, including: (i) energy efficiency in homes and buildings; (ii) lower emission transportation options; (iii) increasing the price on carbon pollution; (iv) supporting the decarbonization of Canadian industry; and, (v) building more resilient communities.

In December 2020, the Plan released by the federal government indicated that the price on carbon was designed to start low and increase slowly over time, so as to ensure that business and consumers had opportunity to understand the regime and change their consumption and emission habits accordingly. As stated in the Plan, the first phase of the carbon pricing mechanism would set the price at $20 per tonne of pollution in 2019, rising $10 per year to $50 in 2022, ultimately reaching $170 per tonne in 2030. This means that the provinces, in turn, will need to increase in lockstep with the federal government – otherwise they will not meet the national minimum standard and the backstop will apply.

On March 6, 2021, the Minister of Environment and Climate Change announced draft regulations to establish the Federal Greenhouse Gas Offset System, implemented under the OBPS. More information on the draft regulations can be found here.

The decision will also have significant ramifications for the scope of Parliament’s power within the Canadian federal system and specifically those matters that fall within Parliament’s jurisdiction as being of national concern. This goes beyond carbon pricing and extends into any number of other areas that are difficult to regulate by provinces and territories in isolation.

We’re here to help

Should you have any questions about how the SCC’s decision may impact your business, or if you have any questions about the regulatory scheme, the lawyers at McCarthy Tétrault have extensive industry and regulatory experience, and can help you navigate the complexities of the carbon pricing regime and offset markets. We will continue to monitor the progress of the GGPPA and the regulatory scheme and will provide updates as they become available.

Please contact Selina Lee-Andersen, Joanna Rosengarten, Kim Howard, Will Horne, Ashley Wilson or Cindy Vaillancourt – we would be happy to assist you.

 

[1] Reference re Greenhouse Gas Pollution Pricing Act, 2021 SCC 11.

[2] GGPPA Decision, paragraph 2.

[3] R. v. Crown Zellerbach Canada Ltd., [1988] 1 SCR 401.

[4] GGPPA Decision, paragraph 12.

[5] Crown Zellerbach, paragraph 33.

[6] GGPPA Decision, paragraph 146.

[7] GGPPA Decision, paragraph 206.

[8] GGPPA Decision, paragraph 192.

[9] Ontario Hydro v. Ontario (Labour Relations Board), [1993] 3 SCR 327.

[10] GGPPA Decision, paragraph 138.

[11] GGPPA Decision, paragraph 50.

[12] GGPPA Decision, paragraph 20.

Supreme Court of Canada Greenhouse Gas Pollution Pricing Act greenhouse gas (GHG) emissions peace, order and good government fuel charge GHG emissions

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