Canada: Second Appeal Court Rules Federal Carbon Tax Constitutional But The Debate Continues

With its decision on June 28, 2019, the Ontario Court of Appeal became the second appellate court to conclude that Canada's federal carbon tax regime complies with the Constitution. The Saskatchewan Court of Appeal released a decision reaching the same result in May of this year, which we discussed in a previous blog post,  Federal Carbon Tax Ruled Constitutional... For Now.

Like the majority of the Saskatchewan Court of Appeal, in Reference re Greenhouse Gas Pollution Pricing Act, 2019 ONCA 544, a majority of the Ontario Court of Appeal held that the Greenhouse Gas Pollution Pricing Act, SC 2018, c 12 (the "Act") is supported by the federal government's power to legislate for peace, order, and good government (POGG). The majority concluded that "establishing national minimum standards to reduce greenhouse gas emissions" is a matter of national concern that falls exclusively within federal legislative jurisdiction.

As reviewed in our earlier post, the Act adopts two different mechanisms to incentivize behavior and reduce greenhouse gas emissions. Part 1 of the Act applies a levy to fuels that are produced, delivered, used, or imported in specified provinces, and Part 2 sets output-based emission standards for large industrial facilities. In light of the Alberta Government's decision to repeal Alberta's provincial carbon tax, Part 1 of the Act will apply in Alberta beginning on January 1, 2020.

The Court's Decision

Ontario initiated a reference to the Court to determine whether the Act is unconstitutional. Ontario challenged the legislation and Canada defended the legislation. Eighteen intervenors participated, including the Attorneys General for New Brunswick, British Columbia and Saskatchewan.

In assessing whether the Act is constitutional, the Court first characterized the legislation's subject matter or "pith and substance." While Canada characterized the legislation as addressing the "cumulative effects" of greenhouse gas emissions, the Court held that this classification was vague and confusing, as greenhouse gas emissions are inherently cumulative. The Court instead characterized the Act as "establishing national minimum standards to reduce greenhouse gas emissions." The next step was for the Court to determine whether this characterization would properly fall within any of the heads of federal power set out in section 91 of the Constitution.

The courts have previously held that the environment is not a matter assigned exclusively to either federal or provincial jurisdiction. Environmental protection is a shared responsibility, and allocation of that responsibility must find the appropriate balance between federal and provincial jurisdiction. Canada argued that the Act could be upheld under the federal POGG power, which allows the federal government to address gaps in the Constitution and issues of national concern, and to temporarily legislate in times of emergency. Canada's primary submission was that the Act's subject matter is a national concern.

Once a subject matter is recognized as a national concern, the federal government will have exclusive authority to legislate in that area. Courts are therefore tasked with recognizing matters as national concerns only where the matter in question is singular, distinct and indivisible. Recognizing a broad subject matter as a national concern can have the effect of inappropriately vesting provincial legislative authority in the federal government. 

The Court concluded that establishing national minimum standards to reduce greenhouse gas emissions is a singular, distinct and indivisible matter that qualifies as a national concern. Importantly, the Court noted that the effects of greenhouse gas emissions often bear no relationship to their source, requiring a collective response to address the problem. The risk of non-participation from any one province means that even a majority of provinces would be unable to establish similar minimum standards. Further, the Court noted that allowing the federal government to impose minimum standards does not unduly intrude on provincial legislative jurisdiction. The Court stated that plenty of room remains for provincial legislation to operate concurrently in the same space. Provinces can set more stringent standards than those defined in the Act or adopt other mechanisms to reduce greenhouse gas emissions. As a result, the Court held that the Act is supported by the federal POGG power.

Ontario also advanced a second argument, asserting that the charges in the Act are unconstitutional taxes. However, the Court held that charges intended to modify behavior and not to generate revenue are properly characterized as regulatory charges rather than taxes. All amounts collected under the Act are returned to the provinces, and the Act has no revenue-generating purpose. The charges under both Part 1 and Part 2 of the Act are intended to reduce greenhouse gas emissions by modifying behavior. The Court therefore rejected Ontario's argument that the amounts are unconstitutional taxes and concluded that the Act imposes regulatory charges.

A Difference in Characterization

Two individual justices each wrote their own set of reasons, disagreeing primarily with the majority's characterization of the Act's subject matter.

Associate Chief Justice Hoy, concurring in the result, stated the Act's subject matter should be stated as narrowly as possible to reduce the impact on provincial jurisdiction. She would have adopted a narrower characterization than the majority: "establishing minimum national greenhouse gas emissions pricing standards to reduce greenhouse gas emissions." Adopting this more narrow view, any federal legislating purporting to set "minimum standards" other than "pricing standards" would need to be evaluated on a case-by-case basis for constitutional compliance. With minor changes for her alternate characterization, Associate Chief Justice Hoy agreed with the majority's constitutional analysis and that the Act was authorized under the federal POGG power.

Justice Huscroft also rejected the majority's characterization of the Act. In his view, the subject matter of legislation must be defined without reference to the means used to achieve the legislation's purpose. Justice Huscroft therefore would have characterized the Act as regulating greenhouse gas emissions, removing any reference to national minimum standards. He concluded that this subject matter was not sufficiently singular, distinct, or indivisible to be considered a national concern. Further, he stated that recognizing the Act's subject matter as a national concern would remove too much authority from the provinces. Adopting the majority's view of the subject matter could set a precedent that would allow the federal government to establish minimum standards for things like public transit, heating and cooling and fuel efficiency. Justice Huscroft therefore would have held that the Act is wholly unconstitutional.

Continued Debate: Supreme Court Set to Rule on Carbon Pricing

As with other reference cases decided by the highest court in a province, Ontario has an automatic right of appeal to the Supreme Court of Canada. Saskatchewan has already filed a notice of appeal from the Saskatchewan Court of Appeal's decision, and the Supreme Court set a tentative hearing date for December 5, 2019. Ontario has given notice of its intention to intervene in the Saskatchewan appeal, along with the Attorneys General for Alberta, British Columbia, Manitoba, Prince Edward Island and New Brunswick, as of June 28, 2019.

So far, ten judges have weighed in on the Act, with 3 of 10 judges concluding that the Act is wholly unconstitutional. With two decisions and five sets of reasons setting the stage, the federal carbon pricing regime is set for a contentious hearing before the country's highest court later this year.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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