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Ottawa Cuts Carbon Tax to Ease Competitiveness Concerns

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On July 31, 2018, the federal government issued "Update on the output-based pricing system: technical backgrounder." This innocuous sounding ‘update’ outlines a highly significant scaling-back of carbon pricing requirements for some of the country's heaviest energy users, and signals that more easing could well be on the way.

The federal carbon pricing system - often referred to as the ‘backstop’ -- will apply on January 1, 2019 in all jurisdictions that do not have a federally-approved carbon pricing system in place. To this end, all jurisdictions choosing to opt out of the federal plan have to submit their carbon pricing plans by September. If they don't meet federal requirements, the federal ‘backstop’ system will apply.

The federal system has two components: a minimum carbon price of $20 per tonne of emissions for most fuels such as gasoline, diesel, propane and natural gas, and a separate output-based pricing system (OBPS) for larger industrial emitters whose annual emissions exceed 50 kilotonnes of carbon dioxide equivalent or more per year. The latter will be exempted from paying the carbon price on their fuel inputs, but will instead pay a price on what they emit over a certain amount.

In January, the federal government suggested that threshold would be set at 70 per cent of the average emissions intensity for their industry. The carbon price would apply to any emissions exceeding the threshold, and companies that emit below the threshold will receive credits from the government they can trade to companies that exceed the limit, to create a market incentive for companies to find a way to reduce their greenhouse gas footprint. More detail on the proposed compliance options under the output-based pricing system is available Here.

However, after a two-phase review that looked at historic emissions and trade exposure for several industries, the federal government’s latest ‘technical backgrounder’ now proposes to raise its threshold as follows:

First, four sectors assessed to be in a high competitive risk category will have their output-based standard adjusted to 90% of the sector’s average greenhouse gas emissions intensity. They are: cement; iron and steel manufacturing; lime; and nitrogen fertilizers. Second, the starting point for all remaining industrial sectors is revised from 70 per cent to 80 per cent of the sector’s average greenhouse gas emissions intensity.

In addition, stakeholders are invited to submit additional supporting information and analyses on aspects of competitiveness. "This information could include, for example: evidence of significant facility-level impacts; domestic or international market considerations; consideration of indirect costs on sectors associated with carbon pricing."

Automakers, petrochemical companies, refiners and other manufacturers are currently meeting to persuade the government that they can afford to bear higher carbon taxes as they face an increasingly tough, tariff-bound market in North America. The government says that "further sectors or sub-sectors may see adjustments to their output-based standards based on the results".

Following further analysis, "a detailed paper on the draft output-based pricing system regulations will be released in fall 2018 for comment." Access an "update on the output-based pricing system - technical paper" Here.