Uncertainty for clients due to carbon pricing

On April 1, the federal carbon price backstop came into effect, which meant that a $20/tonne charge for greenhouse gas emissions is being applied in Ontario.

Uncertainty for clients due to carbon pricing
Jennifer King says emitters will continue to be subject to greenhouse gas emission reporting requirements, whether that is through a provincial or federal pricing system.

On April 1, the federal carbon price backstop came into effect, which meant that a $20/tonne charge for greenhouse gas emissions is being applied in Ontario.

Meanwhile, the Ontario government continues to wage a legal battle at the provincial Court of Appeal against the federal government, calling the carbon price legislation unconstitutional.

Lawyers say that, while their Ontario-based clients are advised to comply with the federal rules, there remains uncertainty as to what they should expect going forward.

Jennifer King, a partner at Gowling WLG in Toronto and a member of the firm’s environmental law group, represented the Canadian Public Health Association in both the Saskatchewan and Ontario courts of appeal during their respective reference cases on the federal carbon price.

The Saskatchewan government had asked the Saskatchewan Court of Appeal whether the federal price was constitutional, followed by a similar reference from the Ontario government at the Ontario Court of Appeal.

In early May, the Saskatchewan Court of Appeal ruled in Reference re Greenhouse Gas Pollution Pricing Act 2019, 2019 SKCA 40, that the federal price was constitutional in a 3-2 decision.

The court also agreed that the federal price was a regulatory charge and not a tax.

“It is likely that the decisions of the Ontario and Saskatchewan Courts of Appeal will be appealed to the Supreme Court of Canada,” says King.

“There are other provinces now who have indicated that they may challenge the [Greenhouse Gas Pollution Pricing Act] in some way or the other. The Manitoba government filed its own court challenge of the act in Federal Court.”

King says it’s important to remember that businesses in Ontario did have a cap-and-trade system, which was ended in July 2018.

The cap-and-trade system used emissions credits trading to impose a price on carbon in the province.

The uncertainty around the carbon pricing system in Ontario is not new, she says.

Tyson Dyck, a partner at Torys LLP in Toronto, says his clients in the energy, infrastructure and mining sectors are asking about both the short-term and long-term carbon pricing issues.

His clients tend to be industries that are subject to emissions regulations, he says. They have questions about the immediate compliance obligations required by the federal Greenhouse Gas Pollution Pricing Act, but the more difficult questions are about the long-term outlook of carbon pricing.

“[Clients have] seen different governments propose some form of carbon pricing or climate regulation only to see it fall by the wayside and another government step in with something different,” says Dyck.

King says it may be prudent for Ontario businesses to wait to voluntarily participate in the federal Output-Based Pricing System, which imposes a price when industrial emissions exceed a certain benchmark, until there is more regulatory certainty.

She says she anticipates that there will eventually be a system, either federal or provincial, that will ensure that large emitters will pay for their carbon output.

“Whether it is a federal or provincial carbon pricing, cap-and-trade or another system, we assume that some form of carbon pricing is here to stay,” says King.

“Currently, every province’s climate change plan includes some kind of carbon pricing, including the provinces challenging the federal government’s jurisdiction to enact the Greenhouse Gas Pollution Pricing Act.”

King adds that she expects emitters will continue to be subject to greenhouse gas emissions reporting requirements, whether that is through a provincial or federal pricing system.

“Businesses would be wise to quantify and verify greenhouse gas emissions, monitor changes in performance and keep diligent records,” says King.

“This will allow businesses to anticipate implications of new statutory requirements, including not only the potential costs but also the potential opportunities, such as saleable carbon credits or carbon offsets.”

Dyck says that clients involved in emissions-intensive industries realize that, longer term, there will be some form of climate regulation. Meanwhile, he says, his clients are starting to make business decisions in line with the direction of future climate action, while they wait for the details of the carbon pricing to be unveiled.

“In advising clients on the long term, we often talk to them about how there’s going to be some form of carbon pricing,” says Dyck.

“It’s probably going to take the form of the Output-Based Pricing System, which is looking at your emissions relative to an industry benchmark and seeing whether there are opportunities to improve.”

Dyck says that there are different compliance strategies to talk to clients about, such as emissions trading, which is now less prominent than it was under Ontario’s cap-and-trade system.

Roxie Graystone, an associate at Merovitz Potechin LLP in Ottawa, says the long-term issue around a price on carbon is not much of a debate, given that he doesn’t think there is a sustainable argument at the various courts of appeal about whether the federal government has the jurisdiction to impose one.

“I’ve advised clients that carbon pricing is here, and it’s going to become a lot broader over the next five years, probably, and you need to plan for that,” says Graystone. “In terms of the bottom line for business, the fact that carbon pricing is coming can’t be ignored.”

Regarding the advice to businesses that deal with carbon pricing, Graystone says clients need to be aware of how the prices of goods are affecting their supply chains.

He recommends that lawyers undertake added scrutiny of supply contracts, given there may be price increases that are blamed on carbon pricing but which may simply be trying to extract more profit while using the carbon price as a cover.

“That type of gouging is an inherent concern with this type of [carbon pricing] mechanism,” says Graystone. “To the extent that you don’t have the transparency down the supply chain or up the supply chain, depending on where you are, that exacerbates that type of fear and maybe exacerbates that gouging.”

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