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Last week, the Ontario Court of Appeal released its decision in Reference re Greenhouse Gas Pollution Pricing Act, 2019 ONCA 544 on the constitutionality of the federal carbon pricing scheme. The Court held that the Greenhouse Gas Pollution Pricing Act, which imposes charges for various fuel emissions, is constitutional and within the jurisdiction of the federal government to enact laws for the “Peace Order and Good Governance” of Canada. The following is a review of the court’s reasons.

Background

The Greenhouse Gas Pollution Pricing Act (“Act”) was introduced in Parliament on March 27, 2018, and received royal assent on June 21, 2018. The Act creates charges for carbon emissions for the purpose of reducing greenhouse gas emissions in Canada.

Specifically, the Act places a regulatory charge on carbon-based fuels on various producers, distributors, and emitters of carbon and other greenhouse gases. The Act also establishes a regulatory trading system for large industrial emitters of greenhouse gases, known as the Output-Based Pricing System (the “OBPS”). The OBPS places limits on emissions giving credits to those who remain within their limits, and imposing charges on those who exceed them. The fuel charges currently apply to approximately 21 different fuels that emit greenhouse gases, including gasoline, diesel fuel and natural gas. The rate of charge will increase annually by $10 per tonne, up to $50 per tonne in 2022.

The Act does not automatically apply to all provinces, instead serving as a “backstop” for provinces that have failed to adopt their own carbon-pricing mechanisms (“Listed Provinces”). The fuel and excess emissions charges in the Act only apply to these Listed Provinces.

In July 2018, the Province of Ontario announced its withdrawal from the national carbon pricing program, revoked its cap-and-trade regulation, and prohibited trading of emissions allowances. The Lieutenant Governor in Council subsequently referred the Act to the Ontario Court of Appeal for a determination of the Act’s constitutionality. The Court of Appeal heard the matter From April 15- 18, 2019. The primary issues at the Court of Appeal were whether the fuel pricing and carbon credit regime was within the constitutional jurisdiction of the federal government, and whether the regime constituted an unlawful tax contrary to s.53 of the Constitution Act, 1867.

The Positions of the Parties at the Court of Appeal

The Attorney General Ontario asserted that the Act’s fuel and excess emissions charges are unconstitutional because they do not fall under any federal head of power contained in s.91 of the Constitution Act, 1897. In addition, Ontario argued that the charges improperly impose a tax in contravention of s.53 of the Constitution Act, 1897.

In response, the Attorney General of Canada argued that the Act had been validly enacted under both the “National Concern” and the “Emergency” branches of the Peace Order and Good Governance (“POGG”) power under s. 91 of the Constitution Act, 1867. According to Canada, the regulation of greenhouse gas emissions constitutes both a national concern and an emergency that the provinces are not capable of addressing under the Constitution.

The Attorneys General of New Brunswick and Saskatchewan, the United Conservative Association, and the Canadian taxpayer’s Federation supported Ontario’s position that the Act is unconstitutional. The remaining 15 intervenors supported the Constitutionality of the Act.

The Court’s Decision

The Majority of the Court of Appeal held that the Act is constitutionally valid under the National Concern branch of the POGG power contained in s. 91 of the Constitution Act, 1867.

Pith and Substance

In determining whether the subject matter of the Act was properly the jurisdiction of the federal government, the Court characterized the Act’s “pith and substance” as the establishment of “minimum national standards to reduce greenhouse gas emissions”. The Court noted that the “environment” is not a constitutional head of power and that the framers of the Constitution would have likely considered various environmental issues, depending on their scale, to be the jurisdiction of both the provinces and the federal government.

A National Concern

The Court found that while the environment, broadly speaking, is an area of shared constitutional responsibility, the “environment” as that concept is envisioned by the Act, is not merely a local concern, but a concern to the nation as a whole. According to the Court, minimum national standards to reduce greenhouse gas emissions are a national concern. The Court characterized the Act as the product of extensive efforts to develop a pan-Canadian approach to reducing greenhouse gas emissions and mitigating climate change.

The Court reasoned that the reduction of greenhouse gas emissions is predominantly extra-provincial and international in character, and beyond the practical or legal capacity of the provinces. The Court opined that the fact that the Act is related to Canada’s international obligations is pertinent to its importance to Canada as a whole. The Court noted that greenhouse gases have no concern for provincial or national boundaries, reasoning that while a province can pass laws in relation to greenhouse gases emitted within its own boundaries, its laws cannot affect greenhouse gases emitted by polluters in other provinces.

The Court of Appeal found that the pith and substance of the Act is a single, distinct, and indivisible matter as required for the operation of the National Concern branch of the POGG power. The Court distinguished the greenhouse gases in this case from the polychlorinated biphenyls (“PCBs”) that the were the subject of the impugned legislation in R. v. Hydro-Québec, 1997 CanLII 318 (SCC). According to the Court, the effects of the pollutant being regulated in Hydro-Québec were temporary and localized and well within provincial ability to regulate, whereas greenhouse gases are “diffuse, persistent and serious and of virtually infinite duration”. According to the Court, greenhouse gases are exactly the type of pollutant that the Court in R. v. Crown Zellerbach Canada Ltd., 1988 CanLII 63 (SCC) contemplated would fall within the National Concern branch of the POGG power.

Impact on Provincial Jurisdiction

The Court rejected Ontario’s argument that Canada’s jurisdiction on the regulation of greenhouse gases would limit provincial autonomy and displace broad swaths of exclusive provincial jurisdiction. According to the Court, the scope of the Act is narrowly constrained to address the risk of provincial inaction. The Court emphasized that the Act permits the provinces to create their own regulations, and merely establishes minimum standards for greenhouse gas reduction measures.

Section 53 of the Constitution Act, 1867: Taxes versus Regulatory Charges

The Court also rejected Ontario’s argument that the Act offends s.53 of the Constitution Act by creating an unlawful tax regime. Section 53 essentially provides that taxes cannot be imposed by a regulatory statute unless expressly authorized as such. The issue before the Court was whether the charges under the Act constitute a tax or a regulatory charge.

Ontario argued that in order for a government levy to be considered a regulatory charge as opposed to a tax, the government levy must be “connected” or “adhesive” to the regulatory scheme itself. According to Ontario, there is no nexus between the fuel and excess emissions charges and the regulatory purposes of the Act because: (1) the revenues generated by the charges are not linked to the cost of administration of the regulatory scheme; and (2) those revenues will not be spent in connection with the purposes of the Act.

The Court found that the fuel and emissions charges imposed by the Act are regulatory charges, as opposed to taxes. According to the Court, if a levy is imposed primarily for a regulatory purpose, or as necessarily incidental to a broader regulatory scheme, it is a regulatory charge; if it is imposed primarily to raise revenues for general fiscal purposes, it is a tax. The Court found that where a regulatory purpose exists and the charge is levied for a benefit or privilege, no nexus is required between the amount of the levy and the costs of the scheme.

The Court also rejected Ontario’s assertion that in order for a levy to be a regulatory charge, it must reflect the cost of administration of the scheme and serve solely as a cost recovery mechanism. The Court held that revenue raised by a regulatory charge need not be used to further the purposes of the regulatory scheme. According to the Court, even if it is necessary to show that the revenues raised are used for the purposes of the Act, this was established in this case: the funds are returned to provinces, taxpayers and institutions to reward them for their participation in a program that benefits the provinces and the entire country.

Dissent

Huscroft J.A., in dissent, found that the Act is unconstitutional as it does not fall under any federal head of power. According to Huscroft J.A., the Act, whose pith and substance is the regulation of greenhouse gas emissions, imposes charges on intraprovincial economic endeavours such as manufacturing, farming, mining, agriculture, which are all matters that fall under property and civil rights (s. 92(13)) or matters of a local or private nature (s. 92(16)).

Huscroft J.A concluded that the Act does not fall within either the National Concern or Emergency branches of the POGG head of power. Huscroft J.A. noted Canada’s admission that Act was not passed on the basis that climate change constitutes an emergency. With respect to the National Concern branch, Huscroft J.A. reasoned that the National Concern branch of the POGG power does not authorize federal lawmaking authority wherever there is “intense, broadly based concern”. According to Huscroft J.A., the matter of national concern identified by the majority is too vague to limit the reach of Parliament’s authority in the manner required. Huscroft J.A. also pointed out that carbon pricing is not the only means of addressing climate change, and held that Parliament cannot insist that its preferred means of dealing with a problem be implemented by the provinces when those means encroach on provincial lawmaking authority.

Generally

This decision was preceded by the recent Saskatchewan Court of Appeal ruling in Reference re Greenhouse Gas Pollution Pricing Act, 2019 SKCA 40. The Saskatchewan Court of Appeal also declared the Act constitutional and similarly characterized the Act’s pith and substance as establishing minimum national standards of price stringency for GHG emissions. According to the   Saskatchewan Court of Appeal, the Act was validly enacted within the National Concern branch of the POGG head of power. In addition, the Saskatchewan Court of Appeal found that the Act’s fuel emissions charges did not impose a tax and did not offend s.53 of the Constitution.

Saskatchewan has appealed the Saskatchewan decision to the Supreme Court of Canada. It will be interesting to see whether the Supreme Court will affirm the Saskatchewan majority decision, or if it will adopt the view of the dissent that the scope of the Act is too broad and encroaches on the provincial ability to legislate on matters of local importance.

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