The Shifting Carbon Landscape

Introduction of new framework has clients turning to counsel for advice on navigating the carbon-pricing regime

When Prime Minister Justin Trudeau announced in December 2016 the “historic” Pan-Canadian Framework on Clean Growth and Climate Change to meet the country’s 2030 emissions reduction targets, there was a quintessentially Canadian element to the varied reactions by the political parties. As the Toronto Star would later note, for federal Environment and Climate Change Minister Catherine McKenna, it would be like “herding cats to get all provinces and territories on board.”

Under a primary component of the framework, the provinces and territories would agree to impose a carbon price of, at minimum, $10 a tonne on GHG emissions starting in 2018, which would rise by that same amount each year until it reached $50 a tonne by 2022. How they met those requirements would be left up to each jurisdiction. “Practical implementation will be a huge challenge,” the Organization for Economic Co-operation and Development said in a December 2017 report.

For Canadian lawyers practising in the Energy and Climate Change sectors, the introduction of the framework meant that clients would be turning to them for advice on issues related to the new carbon-pricing landscape.

“As lawyers, we can help companies navigate the many nuances of climate-related policies,” says Selina Lee-Andersen, a partner in the Vancouver office of McCarthy Tétrault LLP and co-author of the firm’s 2018 report, Climate Change Essentials.

At the moment the details are, to say the least, still being worked out among the nation’s political stakeholders.

“We see that [lack of unanimity] in lots of different areas of practice and businesses in Canada because we have 10 provinces and three territories and a federal government, so we often have 13 or 14 different solutions to things,” says Jason Kroft, a partner in the Emissions Trading & Climate Change practice at Stikeman Elliott LLP in Toronto. Evan Dixon, a partner in the Calgary office of Burnet, Duckworth & Palmer LLP and co-author of the article “Challenging times for the competitiveness of Canada’s oil & gas industry,” published in Financier Worldwide magazine, concurs. The seemingly eternal political to-ing and fro-ing, “is both the reality of Canada and one of the obstacles of actually doing things on these kinds of topics.”

As of early summer 2018, all governments had signed on to the federal framework except for Saskatchewan, which adamantly opposes the federal imposition of any type of carbon-pricing plan and Ontario, led by newly elected premier Doug Ford, who has axed his predecessor’s provincial cap and trade plan. Ford said he will revoke Ontario Regulation 144/16 under the Climate Change Mitigation and Low-carbon Economy Act, S.O. c. 7 that outlines the carbon pricing system and took aim at carbon taxes in general, adding they are “no more than government cash grabs that do nothing for the environment. We are getting Ontario out of the carbon tax business.”

Manitoba, which had initially declined to sign on, came on board late last February. It agreed to set a flat carbon emissions tax of $25 a tonne, which exceeds the federal government’s requirement for the first two years. After that, however, Manitoba said it saw no need to raise the price higher, meaning the province would not reach the federal government’s $50 a tonne threshold for 2020.

British Columbia opted for an explicit price-based system, such as a carbon tax. “The main thing clients here want help with,” Lee-Andersen says, “is compliance. But there is a whole slew of other issues. For example, we recently assisted a client with assessing the potential impacts of the proposed federal output-based pricing system on their facilities, which are located in multiple provinces, some of which will likely be backstop jurisdictions.”

Alberta — which is responsible for approximately one-third of Canada’s total GHG emissions — chose to impose a carbon levy and performance-based emissions system. This did not mark, however, Alberta’s first foray into combatting GHGs.

“Alberta is the leader [in Canada] in terms of climate change legislation, policy development and implementing legislation,” says Tom McInerney, a partner in the Calgary office of Bennett Jones LLP and co-head of its Climate Change & Emissions Trading team. “Alberta was the very first jurisdiction, before the federal government, that came out with binding climate change legislation … in 2007.”

Ontario, under then premier Kathleen Wynne, and Québec both opted for a cap and trade approach, under which their governments set a cap on the amount of emissions allowed and permit companies that exceed the limits to purchase allowances, through auctions, from those that did not. In 2017, the two provinces signed a linking agreement with California, as part of the US Western Climate Initiative, to use carbon allowances issued by any of their governments, interchangeably, and to hold joint carbon auctions. In a notice to market participants in mid-June, California and Québec said the Western Climate Initiative would no longer allow trades between companies registered in their jurisdictions and those registered in Ontario.

“Our goals are to make certain that the program continues to reduce emissions of climate-changing gases as a crucial part of our efforts to combat the existential threat of climate change, while also continuing the smooth operation and integrity of our common carbon market,” the notice said.

The closing of the California and Québec markets to Ontario prevented companies from accessing some $2.8 billion in emissions allowances that were raised though joint auctions.

Keeping up with the complexities of the various initiatives across the country and in the US — and bear in mind that all the governments had existing plans to combat emissions prior to the announcement of the federal framework — is a critical service Kroft says he brings to his clients: “At Stikeman Elliott, we often find ourselves having to understand the cost and opportunities to businesses presented by the difference carbon pricing and cap and trade regimes that apply, and often involve cross-border or cross-jurisdictional issues.”

Clients involved in large projects that take time to develop, construct, implement and run, says Kroft, “require some consideration of what the rules are now, what they might be 20 years in the future and what they are in relevant jurisdictions. Because, increasingly, carbon and the cost of carbon will be a component of whether your project is feasible, profitable and whether it can be completed on time and on budget.”

Clients ask a range of questions, he says, that are largely centered around one primary concern: do I have a carbon liability or carbon asset? If a liability, how do I satisfy it and factor it into the diligence, viability or financeability of my project? If an asset, how do I monetize it and what are the constraints, opportunities or limits on transfer and trade?

While it has been argued that a carbon tax is economically more efficient than cap and trade, “some jurisdictions find the political implications of a taxation system unacceptable and prefer cap and trade because it is market-based," says Paul Manning, the principal of Manning Environmental Law in Toronto. “Cap and trade allows regulated parties, such as the large final emitters, to spread the pain of implementing emissions reductions through the ability to buy and sell emissions credits.”

In Atlantic Canada, the Nova Scotia government says it plans to implement a cap and trade system, while New Brunswick has indicated it would adopt a carbon-pricing approach, although it was unclear whether its plan to repurpose gas tax revenues would satisfy the federal requirements. Prince Edward Island announced its plan last May (but did not indicate which method it would choose), and Newfoundland and Labrador indicated it would announce its programs some time in 2018.

As for Nunavut, the Yukon and the Northwest Territories (the latter says its emissions will likely grow faster than anywhere else in Canada), they all agreed to work with the federal government to establish carbon-pricing mechanisms to meet the requirements of the framework.

Interestingly, some companies are not waiting for their lawyers to help them navigate the myriad rules, permutations and regulations as they get sorted out. In fact, says Lee-Andersen, many have already imposed their own internal carbon pricing, some as far back as the turn of the century. “Shell started using an internal carbon price in the early 2000s,” she says, adding that Suncor and Cenovus have also done the same.

The Center for Climate and Energy Solutions, in a September 2017 publication entitled “Companies set their own price on carbon,” reported that, “More than 1,200 companies worldwide are either pursuing internal carbon pricing or preparing to do so soon, up 23% from 2015.”

Although there is no question that some politicians, like Ford, and industry leaders oppose any form of carbon pricing as being a costly and crippling tax — in December 2017 the Calgary Herald reported that the price tag for large industrial emitters would “be a total of $1.2 billion a year by 2020” — many accept that it is not only an inevitable component of doing business in Canada but the right thing to do.

“Industries that are most effected by climate change policy are by and large a sophisticated group and are aware that climate change is an issue that is not going away,” says McInerney. “What they want is rational, fair, predictable policy and legislation that accounts for the challenges they face and, above all, does not render them uncompetitive.”

While the federal government continues to grapple with herding the cats, it’s hard to believe that some form of a national plan will not, ultimately, be arrived at. At any time, elections and overall politics in Canada and the US could play a role that might upset the carbon-pricing applecart, as happened in Ontario. But regardless of who comes to power, it’s unlikely they’ll be able to completely derail the initiative. “Dealing with carbon is the new reality,” Kroft says. “It just can’t be scrapped.”