Carbon Taxes and the Constitution Nathalie Chalifour Faculty of Law, University of Ottawa October 18, 2008

Carbon Taxes and the Division of Powers

Which level of government has the authority to legislate a carbon tax? Which level of government has the authority to legislate a carbon tax? –The short answer is…both Under which powers? Under which powers?

Division of Powers 101 Determined by sections 91 to 95 of the Constitution Act, 1867 and the Constitution Act, 1982 Determined by sections 91 to 95 of the Constitution Act, 1867 and the Constitution Act, 1982 Sections 91 and 92 enumerate classes of subjects for which the federal and provincial governments can legislate Sections 91 and 92 enumerate classes of subjects for which the federal and provincial governments can legislate The key to determining whether something is within a government’s authority is the « pith and substance » of the measure The key to determining whether something is within a government’s authority is the « pith and substance » of the measure

Carbon Taxes and the Division of Powers Which level of government has the authority to legislate a carbon tax? Which level of government has the authority to legislate a carbon tax? –The short answer is…both Under which powers? Under which powers? –The respective taxation powers… right?

Carbon Taxes and the Division of Powers Which level of government has the authority to legislate a carbon tax? Which level of government has the authority to legislate a carbon tax? –The short answer is…both Under which powers? Under which powers? –The respective taxation powers… right? –The short answer is…. it depends

Some relevant powers for a carbon tax Federal Powers National concern branch of the POGG power National concern branch of the POGG power Trade and commerce power Trade and commerce power Criminal power Criminal power Taxation power Taxation power Provincial Powers Licensing power Licensing power Property and civil rights power Property and civil rights power Natural resources power Natural resources power Taxation power Taxation power

Characterization What would be the ‘pith and substance’ of a carbon tax?  Is it environmental protection?  Is it to address climate change?  Is it to regulate energy?  Is it to raise revenue? This will be determined based on design of the actual measure

Characterization –Design factors that could be influential in the characterization exercise include the following (among others):  Is it a direct or indirect tax?  Is it a stand-alone measure or part of a broader regulatory scheme?  Is it a stand-alone measure or part of a broader tax shift (eg. revenue-neutral)?  Is the measure incorporated into an existing tax regime or apart from it?  Is it meant to be a corrective Pigouvian tax?  Is it meant to ‘make polluters pay’?

Québec’s carbon levy An annual duty (redevance annuelle) applicable to gasoline, diesel, heating oil, natural gas, coal and thermal energy, payable by natural gas distributors, fuel distributors and any person or partnership bringing fuel to Québec for the production of electricity An annual duty (redevance annuelle) applicable to gasoline, diesel, heating oil, natural gas, coal and thermal energy, payable by natural gas distributors, fuel distributors and any person or partnership bringing fuel to Québec for the production of electricity as of October 1, 2007, the levy works out to a 0.8 cent- a-litre charge on gasoline and 0.9 cent-a-litre charge on diesel as of October 1, 2007, the levy works out to a 0.8 cent- a-litre charge on gasoline and 0.9 cent-a-litre charge on diesel part of the province’s climate change plan part of the province’s climate change plan

BC’s carbon tax a tax on the purchase of a broad range of fuels, including gasoline, diesel, natural gas, and coal a tax on the purchase of a broad range of fuels, including gasoline, diesel, natural gas, and coal the rate of the tax is established for five years, starting at 2.4 cents per litre for gasoline on July 1, 2008 and achieving 7.23 cents per litre by July 1, the rate of the tax is established for five years, starting at 2.4 cents per litre for gasoline on July 1, 2008 and achieving 7.23 cents per litre by July 1, the Act creates an administrative system for the collection of the taxes that mirrors that of the province’s existing fuel taxes the Act creates an administrative system for the collection of the taxes that mirrors that of the province’s existing fuel taxes

Characterizing the Québec levy enabling legislation is “An Act respecting the implementation of the Québec Energy Strategy” enabling legislation is “An Act respecting the implementation of the Québec Energy Strategy” Québec’s Energy Strategy identifies its purpose as to “empower the Québec society to maximize the economic, social and environmental benefits associated with the development of its energy resources.” Québec’s Energy Strategy identifies its purpose as to “empower the Québec society to maximize the economic, social and environmental benefits associated with the development of its energy resources.” the Strategy identifies the further goal of “prepar[ing] the Québec of tomorrow – a more prosperous Québec that is more concerned about the environment, and less burdened by debt.” the Strategy identifies the further goal of “prepar[ing] the Québec of tomorrow – a more prosperous Québec that is more concerned about the environment, and less burdened by debt.” the Strategy identifies six key objectives, including: the Strategy identifies six key objectives, including: –strengthening the province’s energy supply security –making better use of energy as a lever for economic development –using energy more efficiently and becoming a leader in sustainable development.

Characterizing the Québec levy the Strategy introduces the idea of a levy as a means to finance an assistance plan for new energy technologies (part of the broader Green Fund Plan) the Strategy introduces the idea of a levy as a means to finance an assistance plan for new energy technologies (part of the broader Green Fund Plan) the Explanatory Notes state that the legislation “…provides for the financing of measures aimed at reducing greenhouse gas emissions and adapting to climate change.” the Explanatory Notes state that the legislation “…provides for the financing of measures aimed at reducing greenhouse gas emissions and adapting to climate change.” In Québec Premier Jean Charest’s speech opening the provincial parliament in May 2007, he committed to putting in place a climate change plan, create prosperity with the province’s renewable energy, hydroelectricity and gas, and made one of eight concrete promises the establishment of the carbon charge “to protect the environment” In Québec Premier Jean Charest’s speech opening the provincial parliament in May 2007, he committed to putting in place a climate change plan, create prosperity with the province’s renewable energy, hydroelectricity and gas, and made one of eight concrete promises the establishment of the carbon charge “to protect the environment”

Characterizing the BC tax From the Budget Speech: From the Budget Speech: –“to put a price on carbon emitting fuels in British Columbia” Minister Taylor introducing the legislation: Minister Taylor introducing the legislation: –“Bill 37 introduces a groundbreaking revenue-neutral carbon tax that will encourage all British Columbia families and businesses to lower their carbon footprint and will help meet our goal of reducing emissions by 33 percent by 2020”

Possible justifications Taxation power Taxation power –must be a direct tax for raising revenues, within the province, for provincial purposes Licensing power Licensing power –allows provinces to institute charges that are part of a regulatory scheme Natural resources taxation Natural resources taxation –is the C02 emitted from burning fossil fuels a natural resource? Property and civil rights Property and civil rights –regulation of polluting industries in the province Others… Others…

Section 92(2) The provincial taxation power Is the measure a “tax”? Is the measure a “tax”? The five Westbank Tax Criteria:  compulsory and enforceable by law;  imposed pursuant to the authority of the legislature;  levied by a public body;  intended for a public purpose; and  unconnected to a regulatory scheme Is it a direct tax? Is it a direct tax?

Section 92(9) The provincial licensing power To determine whether a charge is connected to a regulatory scheme, we apply the Westbank Two-Part Connection Test: (1) Is there a regulatory scheme? –a complete, complex and detailed code of regulation; –a regulatory purpose which seeks to affect some behaviour; –the presence of actual or properly estimated costs of the regulation; –a relationship between the person being regulated and the regulation, where the person being regulated either benefits from, or causes the need for, the regulation.

Section 92(9) The provincial licensing power Westbank Two-Part Connection Test: (2) Is the charge tied to the regulatory scheme? –The connection will exist “when the revenues are tied to the costs of the regulatory scheme, or where the charges themselves have a regulatory purpose, such as the regulation of certain behaviour” (Westbank)

Taxation or licensing power? While “many charges will have elements of taxation and elements of regulation, the central task for the court is to determine whether the levy’s primary purpose is, in pith and substance: While “many charges will have elements of taxation and elements of regulation, the central task for the court is to determine whether the levy’s primary purpose is, in pith and substance: (1) to tax, i.e. to raise revenue for general purposes; (2) to finance or constitute a regulatory scheme, i.e., to be a regulatory charge or to be ancillary or adhesive to a regulatory scheme; or (3) to charge for services directly rendered, i.e., to be a user fee.” (Westbank) How does one select the appropriate regulatory scheme? How does one select the appropriate regulatory scheme?

A federal carbon tax? Taxation power Taxation power –direct or indirect –revenue-raising as the dominant purpose –section 125 Trade and commerce power Trade and commerce power –part of a general regulatory scheme; –monitored by the continuing oversight of a regulatory agency; –concerned with trade as a whole rather than with a particular industry; –the provinces jointly or severally would be constitutionally incapable of enacting such legislation –the failure to include one or more provinces or localities in a legislative scheme would jeopardize the successful operation of the scheme in other parts of the country. –the failure to include one or more provinces or localities in a legislative scheme would jeopardize the successful operation of the scheme in other parts of the country.

A federal carbon tax? Criminal law power Criminal law power –a valid criminal law purpose (now includes environmental protection) –a prohibition associated with a penalty POGG (National concern branch): POGG (National concern branch): –singleness, distinctiveness and indivisibility  extraprovincial inability test –a scale of impact on provincial jurisdiction that is reconcilable with the fundamental distribution of legislative power under the Constitution

Conclusions Scope for provincial and federal carbon tax measures Scope for provincial and federal carbon tax measures Jurisdictional validity depends on design of the measure Jurisdictional validity depends on design of the measure Respective taxation powers not optimal Respective taxation powers not optimal –licensing power (provincially) and POGG (federally) more likely candidates for justification Opportunity for courts to modernize division of powers analysis for environmental taxes Opportunity for courts to modernize division of powers analysis for environmental taxes

Carbon Taxes and the Constitution Nathalie Chalifour Faculty of Law, University of Ottawa October 18, 2008