Supreme Court of Canada Upholds Federal Government’s Carbon Price Backstop To Address “existential threat to human life”

On March 25, 2021, the Supreme Court of Canada (“SCC”) released its long-awaited decision in Reference re Greenhouse Gas Pollution Pricing Act. A majority of the SCC found that the federal government’s Greenhouse Gas Pollution Pricing Act (the “Act”) is constitutional.

The decision affirms that the federal government can continue to establish a national minimum “backstop” price on greenhouse gas emissions (GHGs).

Background

The SCC’s decision stems from a political and legal dispute between the federal government and the provinces. The specific dispute concerned whether the federal government through the Act can and should impose a price on carbon in provinces unwilling to do so. For a history of this case, see our February 28, 2020 Update, Alberta Court of Appeal Finds Federal Carbon Price Backstop Unconstitutional: The Stage is Set for a Heated Battle Before the Supreme Court.

The SCC also addressed a larger tension on the regulation of the environment. Canada’s Constitution establishes that the federal government and provinces may only regulate matters falling within the “heads of power” set out in the Constitution. These matters are broadly worded and are not considered to be “water-tight compartments”, meaning there is a great deal of overlap. In disputes on these divisions of power, courts are empowered to consider the purpose and effects of the disputed power and confirm whether the exercise of the power is constitutional.

The Constitution is notably silent on the regulation of the environment. Provincial environmental laws are often justified under the province’s authority over property and civil rights, natural resources, and local undertakings. Some consider that federal environmental laws are more vaguely defined, but are often justified under various powers, including its criminal law power.

The federal government also retains a residual authority to regulate for the “Peace Order and Good Government” of Canada. In earlier decisions, the SCC established that the federal government could rely on this provision to gain permanent jurisdiction over the regulation of specific matters as matters of “national concern”. Some of these matters have included environmental issues such as a prohibition on ocean dumping.

The Act

The dispute had its origins in 2016 when the federal government and the majority of provinces entered into the Pan-Canadian Framework on Clean Growth and Climate Change (the “Framework”). The Act was to play a central role in the federal government’s implementation of GHG pricing as a core element of the Framework.

The Act, which was brought into force in 2018, establishes a national backstop price on GHGs, consisting of two mechanisms: (1) a regulatory charge on fuels, and (2) an emissions trading system known as the Output-Based Pricing System (OBPS). In our July 20, 2020 Update, Government of Canada Publishes Revised Proposal for Greenhouse Gas Offset System, we explored the OBPS in further detail.

The two elements of the Act only apply in provinces and territories without “comparable programs” in place, as determined by the federal Cabinet.

Currently, the regulatory fuel charge applies in Ontario, Alberta, Manitoba, Saskatchewan, Yukon, and Nunavut. The regulatory fuel charge does not apply in British Columbia, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland, and the Northwest Territories.

The OBPS applies in Manitoba, New Brunswick, Prince Edward Island, Yukon, and Nunavut, and is partially in force in Saskatchewan. The OBPS is also currently in force in Ontario but is scheduled to be phased out as the province’s new Emissions Performance Standards program is brought into force. The OBPS does not apply in British Columbia, Alberta, Quebec, New Brunswick, Nova Scotia, Newfoundland, and the Northwest Territories.

The Reference Cases

In 2018, Saskatchewan brought a reference case to the Saskatchewan Court of Appeal to determine whether the Act is constitutional. Saskatchewan was later joined in its opposition to the Act by Ontario and Alberta. Although Ontario and Alberta initially supported the Act, provincial elections in both provinces brought new governments into power that also opposed the Act. Alberta and Ontario repealed their respective carbon pricing programs, intervened in Saskatchewan’s reference case, and brought their own reference cases to their own Courts of Appeal. Various other provinces intervened in all three decisions, including BC in favour of the Act, and Quebec in opposition to the Act.

In all three cases, the federal government argued that the Act was constitutional as a matter of national concern. The federal government characterized the Act as establishing a “minimum national standard of price stringency” for GHGs. The federal government argued that the Act was necessary as provinces were incapable of combatting the threat of climate change individually. The provinces, on a number of grounds, argued that the Act represented an unconstitutional intrusion into provincial jurisdiction.

Majorities in the references before the Saskatchewan and Ontario Courts of Appeal upheld the Act as constitutional. The Attorney Generals of Ontario and Saskatchewan appealed from their respective Courts of Appeal to the SCC.

A majority of the Alberta Court of Appeal found that the Act was unconstitutional. The Attorney General of British Columbia, which had intervened in support of the federal government before the Alberta Court of Appeal, also appealed to the SCC, setting the stage for a heated battle.

For more information, please see our February 28, 2020 Update referenced above.

The SCC Decision

In a 6-3 decision, the SCC found the Act is constitutional. The majority’s decision penned by Chief Justice Wagner has two parts: (1) the purpose and effects of the Act, known as the “pith and substance” and (2) the scope of the federal government’s jurisdiction to regulate the pith and substance as a matter of national concern.

The “Pith and Substance” of the Act

The SCC found that the subject matter of the Act should be characterized as establishing minimum national standards of GHG price stringency to reduce GHGs. In reaching this decision, the SCC accepted that Parliament’s purpose was to “cure the mischief” of some provinces failing to adopt GHG pricing systems, jeopardizing Canada’s ability to regulate GHGs overall, while recognizing the flexibility of provinces to enact their own GHG pricing system.
Further, the SCC found that the legal effect of the Act was consistent with its stated purpose. The Act’s legal purposes are aimed at pricing GHGs, while leaving it open for individual consumers and businesses to choose how they will respond to market signals.

The SCC also found that the federal government’s discretion to determine various matters under the Act could not be exercised in an unreasonable manner. The provinces opposed to the Act argued that the Act empowered the federal Cabinet to decide which GHG substances covered under the Act and to which provinces the Act would apply. In doing so, the provinces argued that this authority allowed the federal government to regulate “any substance, material or thing known to mankind.” The SCC rejected this argument and found that the federal government must exercise its powers in accordance with the Act’s purpose, with its decisions being open to judicial review.

National Concern

In setting out the national concern doctrine, the SCC held that the scope and exclusivity of the federal government’s authority depends on the nature of the national concern itself. The SCC recognized that the federal government’s authority under the Act extends to “different aspects of the same matter”, rather than the same matter under a different justification. As such, the majority found that the federal government’s power under the Act did not “override” or “displace” provincial authority to regulate GHGs.

The SCC set out a three-part test to establish a matter of national concern:

• the pith and substance of the measure must be of concern to Canada as a whole;
• the pith and substance of the measure must be “specific and identifiable matter that is qualitatively different from matters of provincial concern”;
• the pith and substance of the measure must have a “scale of impact that is reconcilable with the fundamental distribution of legislative power under the Constitution”. In particular, the SCC stated that this can be shown if: (1) the provinces are incapable of regulating the pith and substance of the measure, and (2) the province’s failure to regulate the matter would have “grave extra-provincial consequences”, such as serious harm to human life, health, or to the environment.

The SCC found that these elements were satisfied.

First, it was clear to the majority that the Act was necessary to enable Canada’s response to an “existential threat to human life in Canada and around the world”.

Second, the SCC found that GHGs themselves were specific, identifiable, and widely understood to have no regard to provincial or international borders. The Act’s regulatory pricing mechanism likewise imposed a specific backstop that supplemented, rather than overrode, existing provincial GHG pricing systems.

Third, the SCC found that the absence of even a single province from any voluntary/cooperative scheme to establish minimum GHG prices would jeopardize the entire scheme. The SCC found that a withdrawal by or failure to include a province could lead to any GHG reductions being offset by higher GHGs in other provinces, or businesses relocating to provinces with fewer restrictions.

Fourth, the SCC found that a failure to establish a national minimum standard would have grave consequences for extra-provincial interests because every province’s GHGs would contribute to climate change and the adverse environmental impacts arising from climate change that cut across provincial borders. The SCC rejected the argument that an individual province’s GHGs would not have measurable harm, because each province’s GHGs were “clearly measureable and contribute to climate change”.

Finally, the SCC found that the establishment of a minimum price on GHGs was necessary and that the impairment to provincial jurisdiction was minimal. The SCC found that provinces retain a wide flexibility with respect to the specific instrument they use to price carbon, with the Act only providing a backstop if the provincial program fails to meet the minimum GHG price.

Implications

The SCC’s decision to uphold the Act means the federal government can continue to apply the Act in provinces that do not have comparable GHG pricing schemes. Given the federal government’s recent announcement that the price per tonne would continue to increase from $30 per tonne to $170 per tonne by 2030, it is likely that provinces subject to the Act will consider introducing their own carbon pricing schemes.

For many businesses, this decision will mean the Act and/or a provincial GHG pricing scheme will likely continue to apply to their operations. Businesses covered by the Act will be required to report on their GHG emissions and remit the required charge. The above-mentioned increase will also create opportunities for businesses and households to reduce costs by cutting their GHG emissions, and create new opportunities for Canadian cleantech firms to address the increasing demand for low carbon alternatives to traditional GHG alternatives.

The SCC’s decision also demonstrates that the federal government may be expected to play an increasingly important role in regulating environmental issues that transcend provincial or national boundaries. The SCC recognized that the national concern branch was not a “measure of last resort” and could apply to new matters or existing matters that have arisen to become a national concern, such as environmental issues. The decision accordingly confirms that federal and provincial jurisdiction over environmental issues must co-exist within the “cooperative federalism” framework of the Constitution.

Stay tuned for further developments in the steps taken by the federal and provincial governments to meet Canada’s targets for reductions in GHG emissions. Please contact any member of our Environmental or Cleantech groups for more information.