Federal carbon levy ruled unconstitutional by Alberta Court of Appeal

Greenhouse gas emissions are generally considered as one of the major causes of global warming. Along with other governments around the world, Canada has taken steps to curtail greenhouse gas pollution by passing legislation aimed at reducing emissions. In 2018, the federal government passed the Greenhouse Gas Pollution Pricing Act, S.C. 2018, c. 12, s. 186 (the Act) which mandates minimum national standards for the pricing of commodities and activities that produce greenhouse gases. Known as carbon pricing, or carbon tax, the federal regulations come into effect when provincial standards fall below certain benchmarks. By taxing greenhouse gas emitting fuels and producers, these measures are intended to help Canada reduce its emissions and fight climate change.

The substance of the Act is made up of two parts. Part 1 of the Act sets out taxes on different kinds of fuel. Part 2 of the Act goes on to put limits on large industrial emitters. Under Part 2 of the Act, industrial producers are required to reduce their greenhouse gas emissions or pay, in effect, a fine under an output-based pricing system.

The Alberta reference

Since the Act was passed, several provincial governments have challenged the constitutionality of this federal carbon tax including Ontario, Manitoba and Saskatchewan. Under the Act, each part only applies to a listed province meaning the Governor in Council has the power to list a province under either or both parts and impose the tax when a province does not meet federal pricing standards.

As of January 1, 2020, Part 1 of the Act has been in effect in Alberta because Alberta no longer has a carbon tax. The fuel levy under Part 1 is to be paid by a registered distributor which includes provincially listed fuel producers, processors, importers, deliverers and users. Currently, Alberta is not subject to Part 2 for industrial emitters because the federal government has accepted the province’s current output based pricing system.

The breadth of application of the Act in Alberta affects the province’s entire oil and gas industry and virtually every other Albertan including consumers. Under the Act, all aspects of Alberta’s management of its natural resources, and therefore many actions of its citizens would be subject to the regulation. Many other provincial industries are also impacted from manufacturing (reliant on energy), to farms that need gas to harvest crops, to even travel agencies which price airplane tickets based on fuel costs. The effect of the Act is not only an increase in production costs but also in costs associated with implementation and compliance. Given the wide-reaching economic impacts of the Act, especially on Alberta’s oil and gas industries, Alberta’s attorney general representing the province put forth a reference to the courts questioning the constitutionality of the Act.

In Reference re Greenhouse Gas Pollution Pricing Act, 2020 ABCA 74 (Reference), the Alberta Court of Appeal (ACA) sided with Alberta finding that the Act was a federal government incursion into provincial powers. While the ACA was actually the third appeals court to consider the Act, it was the first one to rule that the Act was outside of the federal government’s legislative scope under the Canadian constitution. Saskatchewan and Ontario have both appealed the appeals court decisions to the Supreme Court of Canada (SCC). The SCC has tentatively postponed hearing the appeals until June 2020. In the meantime, Canada has 60 days to appeal the ACA’s decision to the SCC.

Alberta’s Position

The main argument that Alberta put forward (as supported by Ontario, Saskatchewan and other intervenors) was that the Act does not fall within the national concern branch of Parliament’s peace, order and good government (POGG) clause under the constitution. The federal government’s constitutional POGG powers are generally reserved for narrow subject matters such as zoning laws in the national capital region or national emergencies, and has only been used six times in Canada’s 153-year history. Of the six times, three of them involved temperance legislation when Canada’s highest court of appeal was the Privy Council. In the three most recent decisions, only one dealt with the environment (ocean dumping).

Alberta contended that the heart of the legislation was to regulate greenhouse gases. By giving the federal government exclusive authority to regulate emissions, the Act encroaches on the province’s constitutional right to govern its own natural resources. Alberta took the position that by regulating greenhouse gases pursuant to its limited POGG power, the federal government has overstepped its legislative authority.

The federal government’s position

As granted under s. 91(1) of the constitution, the federal government may pass laws that are of national concern. This authority includes all matters not coming within the exclusive jurisdiction of provincial governments. Canada’s position was that the matter at the heart of the Act was to set minimum national standards in order to reduce Canada’s nation-wide emissions which is a national concern.

Other intervenors that supported Canada’s position such as the Assembly of First Nations, Canadian Public Health Association, and others, put forth other arguments including the federal government’s criminal law powers, and even emergency measures under Canada’s POGG powers.

The ACA’s decision

In a 4 to 1 majority, the ACA decided in favour of Alberta.

The ACA stated that in order for a matter to qualify as a national concern, the federal government must show that the subject of the law falls within its jurisdiction. The ACA went on to conclude that the subject matter of the Act was to regulate greenhouse gas emissions.

In order for the Act to be constitutional, it cannot intrude on any exclusive jurisdiction given to provincial governments. The ACA found that the Act did intrude on several heads of power reserved exclusively for provinces.

First, the Act interferes with the provinces’ exclusive jurisdiction over their right to control their natural resources. For example, the Act would directly contradict Alberta’s Methane Regulation which explicitly gives smaller facilities more time to focus on reducing methane emissions. The Act would therefore be regulating an area reserved for Alberta.

Second, regulating greenhouse gas emissions would be intruding on the provinces’ exclusive jurisdiction over property and civil rights. Because the levy is a tax, it easily impacts many areas of a citizen’s life and ownership rights. The Act imposes charges on a potentially infinite list of greenhouse gas producing items, from cars, to televisions, to vacations. This represents an extensive intrusion into regulating the daily lives of citizens, a power granted to the provinces under the constitution.

Further arguments in support of upholding provincial powers under the constitution include the Act’s disproportionately negative impact on certain provinces without taking into account regional differences, as well as the erosion of federalism.

Ultimately, the ACA ruled both parts of the Act are unconstitutional.  

SCC to rule on the constitutionality of the Act

Two very powerful forces are at play: the urgent need to address global climate change versus the provinces’ right to govern their economies and citizens without undue interference from the federal government.

Should the carbon tax be ruled as constitutional, middle market businesses may need to be prepared for increased costs and to budget accordingly to meet the regulatory standards of the Act. Ultimately, it will be up to the SCC to work through balancing these pressing issues and clarify the federal government’s powers to pass sweeping legislation on taxing greenhouse gas emissions. We anticipate that Canada will appeal the ACA’s decision, especially given the conflicting decisions by the Ontario and Saskatchewan courts of appeals. However, due to the postponement of the Ontario and Saskatchewan appeals to June 2020, Canadians may not obtain any further clarity on the carbon tax until either at midsummer or fall.