Compared to command-and-control regulations, carbon pricing is a market-based mechanism that creates financial incentives to reduce greenhouse gas emissions, making the reductions cost effective. Three Canadian provinces that are home to about 48 percent of Canada’s population and accounting for about 48 percent of the country’s GDP already have a price on carbon and are successfully reducing emissions. Those provinces are Alberta, British Columbia, and Quebec. Alberta and British Columbia have two market-based policies— a carbon tax and output-based pricing system — to reduce emissions. Quebec has an economywide cap-and-trade program linked with California’s program, and the federal government has a back-stop program which includes a pricing component.
In December 2016, Canada announced the Pan-Canadian Framework on Clean Growth and Climate Change. Carbon pricing is a central pillar of the Pan-Canadian Framework; jurisdiction can use the carbon-pricing revenues according to their needs. Provinces and territories are required to have carbon pricing programs in place by 2019 that meet federal benchmark elements, which could include either:
- An explicit price-based system (e.g., a carbon tax, or hybrid system made of up a carbon tax and output-based pricing system), or
- A cap-and-trade program.
The benchmarks for provinces adopting an explicit price-based system require that the carbon price should start at CA$10 per metric ton in 2018 and increase annually at a rate of CA$10 per metric ton to CA$50 per metric ton in 2022. For jurisdictions with a cap-and-trade program, the Pan-Canadian framework requires emissions caps to be set at least 30 percent below 2005 greenhouse gas emission levels by 2030 and annual caps to correspond at least with the projected emission reductions under a price-based system.
The Canadian federal government will implement an explicit price-based carbon pricing system to act as a federal backstop in jurisdictions that do not have a carbon pricing program that meets the benchmark. All Canadian jurisdictions — including the seven provinces currently without a carbon pricing program —will need to have carbon pricing programs starting in 2019. Of the seven provinces without a carbon pricing program, Manitoba announced plans to implement a carbon tax and output-based pricing system, and Nova Scotia announced plans to implement a cap-and-trade program.