Blog – Carbon Pricing, Vulnerable Communities, and the Constitution

Blog posted by Richard Lindgren, CELA Counsel

In a lengthy 6-3 ruling, the Supreme Court of Canada has recently upheld the constitutionality of the federal Greenhouse Gas Pollution Pricing Act (GGPPA).

Part 1 of the GGPPA establishes a fuel charge that generally applies to producers, distributors and importers of various types of carbon-based fuel. Part 2 sets out an output-based pricing system for greenhouse gas (GHG) emissions from large industrial facilities.

Since the GGPPA operates as “backstop” legislation, these regulatory levies are intended to serve as a national minimum standard to incentivize businesses and individuals to reduce their GHG emissions. A province or territory can still design and implement its own carbon pricing program (e.g. cap-and-trade or carbon tax), but the prescribed levies under the GGPPA may become applicable if the federal Cabinet determines that a provincial or territorial pricing mechanism is either non-existent or insufficiently stringent.

The Supreme Court’s majority opinion concluded that Parts 1 and 2 of the GGPPA are constitutionally valid under the “national concern” branch of Parliament’s “peace, order and good government” (POGG) power under section 91 of the Constitution Act, 1867.

In reaching this conclusion, the Court recognized that “climate change is real,” and that “the effects of climate change have been and will be particularly severe and devastating in Canada”:

Canada is also expected to continue to be affected by extreme weather events like floods and forest fires, changes in precipitation levels, degradation of soil and water resources, increased frequency and severity of heat waves, sea level rise, and the spread of potentially life-threatening vector-borne diseases like Lyme disease and West Nile virus [para 10].

The Court also identified the increasingly adverse impacts of climate change on northern and Indigenous communities:

The Canadian Arctic faces a disproportionately high risk from climate change. There, the average temperature has increased at a rate of nearly three times the global average, and that increase is causing significant reductions in sea ice, accelerated permafrost thaw, the loss of glaciers and other ecosystem impacts… Climate change has also had a particularly serious effect on Indigenous peoples, threatening the ability of Indigenous communities in Canada to sustain themselves and maintain their traditional ways of life [para 11].

The Court’s concern about environmental quality, public health and social equity is precisely why CELA lawyers intervened in the Supreme Court appeals (and in two of the constitutional references discussed below) on behalf of Ontario-based clients that support the GGPPA.

As noted in a recent blog, fossil fuel pollution and climate change effects disproportionately impact vulnerable populations:

Low-income households and Black, Brown, and Indigenous communities are more likely…to live in proximity to polluting industries like oil refineries and pipeline infrastructure, leading to greater exposure to pollution from burning fossil fuels and chemicals leaching into the water table. And because of discriminatory policies and poor city planning, these same communities are often hit first and worst by climate-exacerbated events like extreme drought, major floods, wildfires, and urban heat islands.

Despite these environmental justice considerations, in 2018 Ontario abruptly terminated its well-regarded cap-and-trade regime under the Climate Change Mitigation and Low-carbon Economy Act, 2016. Notably, Ontario’s former Environmental Commissioner reported that the cap-and-trade program “was on its way to producing many economic and environmental benefits” for Ontarians, and that it raised almost $3 billion in provincial revenue that was used to fund various initiatives to reduce GHG emissions (e.g. energy efficiency retrofits in 19,000 social housing units, improvements in public transit, etc.).

Because of the revocation of the provincial cap-and-trade program, Ontario became subject to Parts 1 and 2 of the GGPPA. In response, Ontario commenced a judicial reference that asked the Ontario Court of Appeal to rule whether the law is unconstitutional. Ontario also intervened in similar references in Saskatchewan and Alberta to argue that the GGPPA is unconstitutional.

However, both the Saskatchewan Court of Appeal and the Ontario Court of Appeal found that the GGPPA is constitutionally valid on the basis of the national concern doctrine under POGG. In contrast, the Alberta Court of Appeal ruled that the GGPPA is unconstitutional.

All three court opinions were then appealed to Supreme Court of Canada, which dismissed the appeals against the Saskatchewan and Ontario decisions, and allowed the appeal against the Alberta decision.

This result means that the Part 1 fuel charge continues to apply in Ontario, at least until the provincial government decides to develop its own charge that meets or exceeds the federal minimum standard. In the meantime, most of the federal revenues generated by the Part 1 levy in the province will be directly returned to individuals and families in Ontario via the Climate Action Incentive that can be claimed in personal income tax returns.

Most households will receive more in the tax-free Climate Action Incentive payments than they incur from the fuel charge. For example, Canada’s Parliamentary Budget Officer reported that “a typical household will receive higher transfers than the average amounts it pays in fuel charges,” and that “the net benefits are broadly progressive by income group… lower-income households will receive larger net transfers than higher-income households.”

These cost savings can then directed toward activities that help reduce GHG emissions (e.g. insulating or sealing homes, switching or upgrading heating systems, etc.). This is particularly important for low-income energy consumers who may experience financial constraints in investing in energy efficiency or conservation measures.

At the same time, the Supreme Court’s judgment does not displace Ontario’s ability to craft its own programs, regulatory measures and other tools for reducing industrial GHG emissions. In September 2020, for example, the federal government announced that Part 2 of the GGPPA will cease to apply to Ontario because the province’s new Emissions Performance System for regulating industrial GHG emissions meets the federal benchmark.

However, CELA and other groups draw little comfort from this questionable federal determination, particularly in light of certain weaknesses in the Ontario regime. More fundamentally, the Parliamentary Budget Officer has suggested that the federal benchmark (which is currently $40 per tonne of carbon dioxide equivalent) must be increased up to $239 per tonne in order to meet Canada’s GHG reduction target by 2030.

Now that the Supreme Court has confirmed Parliament’s carbon pricing jurisdiction, the federal government must fully exercise its authority under the GGPPA in order to achieve deep and rapid decreases in GHG emissions throughout the country.

Nevertheless, a United Nations special report cautions that as carbon prices are increased, consideration must be given to avoiding adverse socio-economic impacts on low-income persons:

In every country the design of carbon pricing policy implies a balance between incentivizing low-carbon behaviour and mitigating the adverse distributional consequences of higher energy prices… Carbon taxes can offset these effects if their revenues are redistributed through rebates to poor households [page 377].

Accordingly, it remains to be seen if Ontario will increase its industrial GHG pricing beyond the minimal federal backstop (and, more importantly, if Ontario will undertake other regulatory and policy measures in addition to carbon pricing) as part of a green and just transition to a low-carbon economy.

To its credit, Ontario achieved important reductions in GHG emissions by closing its coal-fired energy plants years ago. However, recently released data indicates that Ontario’s GHG emissions remained relatively constant in 2018-19, and did not decrease by the sizeable volumes needed to effectively mitigate climate change.

This stalled progress is alarming, particularly since Ontario’s Auditor General warned in 2020 that the province “has not set short-term targets to achieve the longer-term target of reducing Ontario’s greenhouse gas emissions by 30% below 2005 levels by 2030.”

Similarly, a 2019 report by the provincial Auditor General noted that “Ontario is warming faster than the global average,” and the warming rate in Ontario is expected “to be almost double the global average by the end of this century.”

In these circumstances, CELA concludes that there is no time to waste for taking serious climate action and ensuring climate justice in Ontario and elsewhere across Canada.