The 2016 Pan-Canadian Framework on Clean Growth and Climate Change revolutionised carbon pricing in Canada. It requires all jurisdictions to put their own form of carbon pricing in place or adopt the federal carbon price, which is set to increase over time. Thanks to the framework, more and more greenhouse gas emissions are priced in the country.
The pan-Canadian framework for carbon pricing
Abstract
Challenge
Canada’s federal structure and assignment of competences make it imperative for the federal, provincial and territorial governments to work closely together to translate international climate commitments into domestic action. Most key policy tools for greenhouse gas (GHG) emission mitigation are the responsibility of provinces and territories. These includes carbon pricing. Prior to 2016, carbon pricing was unevenly applied across the country. Early efforts in Alberta, British Columbia, Manitoba and Quebec covered about 38% of national emissions. A more consistent and broadly applied carbon pricing was needed to drive GHG emissions down in an efficient manner.
Approach
Until 2016, climate change policy was driven mainly by provincial initiatives. The 2016 Pan-Canadian Framework on Clean Growth and Climate Change (PCF) represents the first time since 2002 that concrete steps to develop a nationwide strategy have succeeded. The PCF aims to reduce emissions by 30% from 2005 levels by 2030, in line with the target Canada set in its nationally determined contribution under the Paris Agreement.
Carbon pricing is a foundation of the PCF. The other pillars include complementary mitigation action across sectors; adaptation and climate resilience; and clean technology, innovation and jobs.
A form of carbon pricing applies across the country using a benchmark approach. Since 2018, provinces and territories have had to implement their own carbon pricing scheme. Such a scheme can take the form of either a carbon tax, a cap-and-trade system, credit trading programmes for large emitters or a hybrid approach. The carbon pricing systems must be deemed as equivalent to the benchmark by the federal authorities. For cap-and-trade systems, for example, the benchmark requires: firstly, a 2030 emissions reduction target equal to or greater than Canada’s 30% reduction target; and secondly, progressively more stringent annual emission caps at least until 2022.
For any jurisdiction that lacks a system aligned with the benchmark, a federal carbon pricing backstop applies in the form of a fuel charge. The direct revenue remains in, or is returned to, the jurisdiction in which it originates. The minimum price under the federal benchmark was set at CAD 10 per tonne of carbon dioxide (CO2) in 2018, rising by CAD 10 per year to reach CAD 50 per tonne in 2022.
The 2020 climate plan “A Healthy Environment and a Healthy Economy” proposes further annual increases of the national backstop carbon price of CAD 15 per tonne of CO2 from 2023 until 2030, bringing the price per tonne to CAD 170 in 2030. This is roughly the mid-point of the range of prices (CAD 81 to CAD 239) the Parliamentary Budget Office estimated to be required to meet Canada’s Paris commitments.
As a result of the PCF, several carbon pricing systems coexist in Canada. As of end of 2020, a carbon tax was in place in British Columbia and Northwest Territories, and a cap-and-trade system applied in Nova Scotia and Quebec. The national backstop carbon pricing system applied, in whole or in part, in the other jurisdictions.
Outcomes and lessons learned
The PCF carbon pricing system allowed to double the national GHG emissions covered by carbon pricing, from 38% in 2016 to 78% in 2020.
The carbon pricing benchmark provides an economically efficient mechanism for raising the bar on emission reduction.
Some weaknesses in the PFC carbon pricing framework remain. These include the fact that provincial and territorial carbon pricing systems differ widely in terms of emission coverage, effective carbon price and cost burden on industry.
Further carbon price hikes are needed if the mechanism is to do the necessary heavy lifting towards climate change goals.
Further information
OECD (2017), OECD Environmental Performance Reviews: Canada 2017, OECD Environmental Performance Reviews, OECD Publishing, Paris, https://doi.org/10.1787/9789264279612-en.
OECD (2021), OECD Economic Surveys: Canada 2021, OECD Publishing, Paris, https://doi.org/10.1787/16e4abc0-en.
Sawyer, D., S. Stiebert, R. Gignac, A. Campney, and D. Beugin (2021), 2020 Expert Assessment of Carbon Pricing Systems, Canadian Institute for Climate Choices. https://climatechoices.ca/reports/the-state-of-carbon-pricing-in-canada/
