Federal Carbon Pricing Regime Now Two-for-Two

On June 28, 2019, the Ontario Court of Appeal released its decision on the Ontario government’s reference regarding the constitutionality of the federal carbon pricing regime.  Like the Saskatchewan Court of Appeal ruled in May, the majority of the Ontario Court of Appeal held that the federal Greenhouse Gas Pollution Pricing Act (the “Act”) is valid under the Constitution.  This article will give a brief summary of the Ontario court’s decision.  For a discussion on the possible ramifications of this decision, see our article on the Saskatchewan Court’s decision.

The Act

As a brief refresher, the Act came into effect on June 21, 2018.  In general, the Act contains two regimes: a charge on carbon-based fuels that applies to fuels produced, delivered, or used in a “listed province” based on a rate per CO₂ equivalent (Part 1 of the Act); and a mechanism for pricing greenhouse gas emissions by emission-intense industrial facilities (Part 2).

As of July 1, 2019, Part 1 of the Act applies in Ontario, New Brunswick, Manitoba, Saskatchewan, Yukon, and Nunavut, and is scheduled to apply in Alberta beginning on January 1, 2020.  Part 2 of the Act applies in Ontario, New Brunswick, Manitoba, Prince Edward Island, Yukon, Nunavut, and partially in Saskatchewan. The Act does not apply in certain provinces, like British Columbia and Quebec, which have their own carbon pricing mechanisms which meet the federal standard.

Subsection 165(2) of the Act requires any money raised under the Act to be redistributed in the province it was collected in.  Section 122.8 of the federal Income Tax Act provides for a refundable tax credit for residents in provinces subject to Part 1 of the Act starting with the 2018 taxation year.

The Decision

In July 2018, the Ontario government announced that it would withdraw from the national carbon pricing program.  Ontario then brought a reference to its Court of Appeal to determine if including Ontario as a “listed province” for purposes of the Act was constitutional.  The Court heard arguments on April 15-18, 2019.  Like the Saskatchewan Court, the Ontario Court reached a split decision on the constitutionality of the Act, with four judges deciding that the Act is constitutional and one holding that it is not.

Aside from the governments of Canada and Ontario, the Court heard submissions from British Columbia, Saskatchewan, and New Brunswick, as well as various First Nations and private associations.

As was the case with the Saskatchewan decision, all of the parties to this reference agreed on the serious issue of anthropogenic climate change and the need to take immediate action to combat it.  Statements from the majority and minority reasons on this point include:

• “There is no dispute that global climate change is taking place and that human activities are the primary cause.” (majority reasons, paragraph 7)
• “climate change will cost Canada’s economy $5 billion per year by 2020, and up to $43 billion per year by 2050 if no action is taken to mitigate its effects.” (majority reasons, paragraph 15)
• “Ontario agrees that climate change is real, is caused by human activities, is having serious effects, particularly in the north, and requires proactive measures to address it.” (majority reasons, paragraph 55)
• “all of the governments that are party to the reference…proceed on the basis that climate change is a real and pressing problem that must be addressed.” (minority reasons, paragraph 192)

The Ontario Court undertook a similar analysis as was performed by its counterpart in Saskatchewan, albeit in a different order.  Both the majority and minority reasons first analyzed the “pith and substance”, or practical effect and intention, of the Act in order to determine if the Act falls under the “national concern” branch of the federal government’s “peace, order and good government” (“POGG”) power under the Constitution (paragraph 67).

The majority reasons (written by Chief Justice Strathy and accepted by Justices MacPherson and Sharpe) did not accept either Canada’s or Ontario’s characterization of the pith and substance of the Act, but instead undertook its own analysis and concluded that the Act’s pith and substance is “establishing minimum national standards to reduce greenhouse gas emissions [GHGs]” (paragraph 77).  The majority held that the Act’s effect “is to put a price on carbon pollution, thereby limiting access to a scarce resource: the atmosphere’s capacity to absorb GHGs” (paragraph 76).

After making this determination, the majority held that the Act does fall within the federal government’s POGG power.  The majority reasoned that provinces acting on their own cannot establish minimum carbon pollution standards, as one province opting out of such a program would adversely impact the remaining provinces.  That is, “[t]his is the quintessential case in which the failure of a province to cooperate would undermine the actions of other provinces, and would place unfair burdens on other provinces, potentially subverting a cooperative national scheme” (paragraph 120).  The majority held that “GHGs are not inherently divisible”, such that emissions in one province do not only affect that province (paragraph 123).  The majority held that the Act does not unduly affect individual provinces’ ability to legislate on GHG emissions, and concluded that the Act is valid under the Constitution.

Associate Chief Justice Hoy, while agreeing with the majority that the Act is constitutional, did so for slightly different reasons.  Justice Hoy characterized the Act’s pith and substance as “establishing minimum national greenhouse gas emissions pricing standards to reduce greenhouse gas emissions” (paragraph 166).  Justice Hoy reasoned that the majority’s characterization of the Act’s pith and substance was too broad and could improperly impede on provincial legislative jurisdiction.

Justice Huscroft wrote the lone dissenting opinion, holding that the Act is unconstitutional and invalid.  To reach this conclusion, Justice Huscroft characterized the pith and substance of the Act as simply “GHG emissions” (paragraph 213), as did the minority reasons of the Saskatchewan Court of Appeal.  Using this pith and substance, Justice Huscroft concluded that the Act unduly impacts the ability of provinces to legislate on GHG emissions, stating that without the Act, “nothing stops the provinces from taking steps to reduce their GHG emissions, and hence the emissions of Canada as a whole, and they are in fact doing so” (paragraph 230).  Like Justice Hoy, Justice Huscoft also criticized the majority’s characterization of the Act’s pith and substance as being too broad, asking whether “minimum national standards” for GHG emissions could allow Parliament to legislate into provincial territory such as home heating and cooling, public transit, road design, fuel efficiency, manufacturing, and farming (paragraph 237).

Conclusion

Of the 10 judges in Canada who have now heard arguments regarding the constitutionality of the Act, seven have upheld it as falling within the federal government’s legislative powers.  The next step for the Act will be a hearing in front of the Supreme Court of Canada.  The Supreme Court will hear Saskatchewan’s appeal of that Court’s decision in December, and Ontario has already announced its intention to appeal its own Court’s decision to the Supreme Court as well, which will be sure to increase the reported $30 million that the Ontario government has already spent on its challenge to the Act.  Thus, the uncertainty surrounding the future of the Act is likely to be determined by the Supreme Court of Canada sometime in 2020, if not earlier depending on the outcome of the federal election which is scheduled for October 21, 2019.