Carbon Taxes Carbon Taxes and the Constitutionand the Constitution

Nathalie ChalifourNathalie Chalifour

Faculty of Law, University of Faculty of Law, University of OttawaOttawa

October 18, 2008October 18, 2008

Carbon Taxes and theCarbon Taxes and theDivision of PowersDivision of Powers

Carbon Taxes and theCarbon Taxes and theDivision of PowersDivision of Powers

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

Under which powers?Under which powers?

Division of Powers 101Division of Powers 101 Determined by sections 91 to 95 of the Determined by sections 91 to 95 of the

Constitution Act, 1867Constitution Act, 1867 and the and the Constitution Act, 1982Constitution Act, 1982

Sections 91 and 92 enumerate classes of Sections 91 and 92 enumerate classes of subjects for which the federal and subjects for which the federal and provincial governments can legislateprovincial governments can legislate

The key to determining whether The key to determining whether something is within a government’s something is within a government’s authority is the « authority is the « pith and substancepith and substance »  » of the measureof the measure

Carbon Taxes and theCarbon Taxes and theDivision of PowersDivision of Powers

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

Under which powers?Under which powers?– The respective taxation powers… right?The respective taxation powers… right?

Carbon Taxes and theCarbon Taxes and theDivision of PowersDivision of Powers

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

Under which powers?Under which powers?– The respective taxation powers… right?The respective taxation powers… right?– The short answer is…. it dependsThe short answer is…. it depends

Some relevant powers Some relevant powers for a carbon taxfor a carbon tax

Federal PowersFederal Powers

National concern National concern branch of the branch of the POGG powerPOGG power

Trade and Trade and commerce powercommerce power

Criminal powerCriminal power Taxation powerTaxation power

Provincial PowersProvincial Powers Licensing powerLicensing power Property and civil Property and civil

rights powerrights power Natural resources Natural resources

powerpower Taxation powerTaxation power

CharacterizationCharacterization

What would be the ‘pith and What would be the ‘pith and substance’ of a carbon tax?substance’ of a carbon tax? Is it environmental protection?Is it environmental protection? Is it to address climate change? Is it to address climate change? Is it to regulate energy?Is it to regulate energy? Is it to raise revenue?Is it to raise revenue?

This will be determined based on design This will be determined based on design of the actual measureof the actual measure

CharacterizationCharacterization

– Design factors that could be influential in the Design factors that could be influential in the characterization exercise include the following characterization exercise include the following (among others):(among others): Is it a direct or indirect tax?Is it a direct or indirect tax? Is it a stand-alone measure or part of a broader Is it a stand-alone measure or part of a broader

regulatory scheme?regulatory scheme? Is it a stand-alone measure or part of a broader tax Is it a stand-alone measure or part of a broader tax

shift (eg. revenue-neutral)?shift (eg. revenue-neutral)? Is the measure incorporated into an existing tax Is the measure incorporated into an existing tax

regime or apart from it?regime or apart from it? Is it meant to be a corrective Pigouvian tax?Is it meant to be a corrective Pigouvian tax? Is it meant to ‘make polluters pay’?Is it meant to ‘make polluters pay’?

Québec’s carbon levyQuébec’s carbon levy

An annual duty (redevance annuelle) applicable to An annual duty (redevance annuelle) applicable to gasoline, diesel, heating oil, natural gas, coal and gasoline, diesel, heating oil, natural gas, coal and thermal energy, thermal energy, payable by natural gas distributors, payable by natural gas distributors, fuel distributors and any person or partnership fuel distributors and any person or partnership bringing fuel to Québec for the production of bringing fuel to Québec for the production of electricity electricity

as of October 1, 2007, the levy works out to a 0.8 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 cent-a-litre charge on gasoline and 0.9 cent-a-litre charge on dieselcharge on diesel

part of the province’s 2006-2012 climate change plan part of the province’s 2006-2012 climate change plan

BC’s carbon taxBC’s carbon tax a tax on the purchase of a broad range of a tax on the purchase of a broad range of

fuels, including gasoline, diesel, natural fuels, including gasoline, diesel, natural gas, and coalgas, and coal

the rate of the tax is established for five the rate of the tax is established for five years, starting at 2.4 cents per litre for years, starting at 2.4 cents per litre for gasoline on July 1, 2008 and achieving gasoline on July 1, 2008 and achieving 7.23 cents per litre by July 1, 2012.7.23 cents per litre by July 1, 2012.

the Act creates an administrative system the Act creates an administrative system for the collection of the taxes that mirrors for the collection of the taxes that mirrors that of the province’s existing fuel taxes that of the province’s existing fuel taxes

Characterizing the Québec levyCharacterizing the Québec levy

enabling legislation is “enabling legislation is “An Act respecting the implementation of An Act respecting the implementation of the Québec Energy Strategy”the Québec Energy Strategy”

Québec’s Energy Strategy identifies its purpose as to “empower Québec’s Energy Strategy identifies its purpose as to “empower the Québec society to maximize the economic, social and the Québec society to maximize the economic, social and environmental benefits associated with the development of its environmental benefits associated with the development of its energy resources.”energy resources.”

the Strategy identifies the further goal of “prepar[ing] the Québec the Strategy identifies the further goal of “prepar[ing] the Québec of tomorrow – a more prosperous Québec that is more concerned of tomorrow – a more prosperous Québec that is more concerned about the environment, and less burdened by debt.”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 securitystrengthening the province’s energy supply security– making better use of energy as a lever for economic developmentmaking better use of energy as a lever for economic development– using energy more efficiently and becoming a leader in sustainable using energy more efficiently and becoming a leader in sustainable

development. development.

Characterizing the Québec levyCharacterizing the Québec levy

the Strategy introduces the idea of a levy as a means to the Strategy introduces the idea of a levy as a means to finance an assistance plan for new energy technologies finance an assistance plan for new energy technologies (part of the broader Green Fund Plan)(part of the broader Green Fund Plan)

the Explanatory Notes state that the legislation “…provides the Explanatory Notes state that the legislation “…provides for the financing of measures aimed at reducing for the financing of measures aimed at reducing greenhouse gas emissions and adapting to climate greenhouse gas emissions and adapting to climate change.”change.”

In Québec Premier Jean Charest’s speech opening the In Québec Premier Jean Charest’s speech opening the provincial parliament in May 2007, he committed to putting provincial parliament in May 2007, he committed to putting in place a climate change plan, create prosperity with the in place a climate change plan, create prosperity with the province’s renewable energy, hydroelectricity and gas, and province’s renewable energy, hydroelectricity and gas, and made one of eight concrete promises the establishment of made one of eight concrete promises the establishment of the carbon charge “to protect the environment” the carbon charge “to protect the environment”

Characterizing the BC taxCharacterizing the BC tax

From the Budget Speech:From the Budget Speech:– ““to put a price on carbon emitting fuels in to put a price on carbon emitting fuels in

British Columbia”British Columbia”

Minister Taylor introducing the legislation:Minister Taylor introducing the legislation:– ““Bill 37 introduces a groundbreaking revenue-Bill 37 introduces a groundbreaking revenue-

neutral carbon tax that will encourage all neutral carbon tax that will encourage all British Columbia families and businesses to British Columbia families and businesses to lower their carbon footprint and will help meet lower their carbon footprint and will help meet our goal of reducing emissions by 33 percent our goal of reducing emissions by 33 percent by 2020” by 2020”

Possible justificationsPossible justifications Taxation power Taxation power

– must be a direct tax for raising revenues, within the province, must be a direct tax for raising revenues, within the province, for provincial purposesfor provincial purposes

Licensing powerLicensing power– allows provinces to institute charges that are part of a allows provinces to institute charges that are part of a

regulatory schemeregulatory scheme

Natural resources taxationNatural resources taxation– is the C02 emitted from burning fossil fuels a natural resource?is the C02 emitted from burning fossil fuels a natural resource?

Property and civil rightsProperty and civil rights– regulation of polluting industries in the provinceregulation of polluting industries in the province

Others…Others…

Section 92(2) Section 92(2) The provincial taxation powerThe provincial taxation power

Is the measure a “tax”? Is the measure a “tax”? The five Westbank Tax Criteria:The five Westbank Tax Criteria:

compulsory and enforceable by law;compulsory and enforceable by law; imposed pursuant to the authority of the legislature; imposed pursuant to the authority of the legislature; levied by a public body; levied by a public body; intended for a public purpose; andintended for a public purpose; and unconnected to a regulatory schemeunconnected to a regulatory scheme

Is it a direct tax?Is it a direct tax?

Section 92(9)Section 92(9)The provincial licensing powerThe provincial licensing power

To determine whether a charge is connected to To determine whether a charge is connected to a regulatory scheme, we apply the a regulatory scheme, we apply the WestbankWestbank Two-Part Connection TestTwo-Part Connection Test::

(1) Is there a regulatory scheme?(1) Is there a regulatory scheme?– a complete, complex and detailed code of regulation;a complete, complex and detailed code of regulation;– a regulatory purpose which seeks to affect some a regulatory purpose which seeks to affect some

behaviour;behaviour;– the presence of actual or properly estimated costs of the presence of actual or properly estimated costs of

the regulation;the regulation;– a relationship between the person being regulated and a relationship between the person being regulated and

the regulation, where the person being regulated either the regulation, where the person being regulated either benefits from, or causes the need for, the regulation.benefits from, or causes the need for, the regulation.

Section 92(9)Section 92(9)The provincial licensing powerThe provincial licensing power

WestbankWestbank Two-Part Connection TestTwo-Part Connection Test::

(2) Is the charge tied to the regulatory (2) Is the charge tied to the regulatory scheme?scheme?

– The connection will exist “when the revenues are The connection will exist “when the revenues are tied to the costs of the regulatory scheme, or tied to the costs of the regulatory scheme, or where the charges themselves have a regulatory where the charges themselves have a regulatory purpose, such as the regulation of certain purpose, such as the regulation of certain behaviour” (Westbank) behaviour” (Westbank)

Taxation or licensing power?Taxation or licensing power? While “many charges will have elements of While “many charges will have elements of

taxation and elements of regulation, the central taxation and elements of regulation, the central task for the court is to determine whether the task for the court is to determine whether the levy’s primary purpose is, in pith and substance: levy’s primary purpose is, in pith and substance:

(1) to tax, i.e. to raise revenue for general purposes; (1) to tax, i.e. to raise revenue for general purposes; (2) to finance or constitute a regulatory scheme, i.e., to (2) to finance or constitute a regulatory scheme, i.e., to be a regulatory charge or to be ancillary or adhesive to a be a regulatory charge or to be ancillary or adhesive to a regulatory scheme; or regulatory scheme; or (3) to charge for services directly rendered, i.e., to be a (3) to charge for services directly rendered, i.e., to be a user fee.”user fee.”

((WestbankWestbank))

How does one select the appropriate regulatory How does one select the appropriate regulatory scheme?scheme?

A federal carbon tax?A federal carbon tax? Taxation power Taxation power

– direct or indirectdirect or indirect– revenue-raising as the dominant purposerevenue-raising as the dominant purpose– section 125section 125

Trade and commerce powerTrade and commerce power– part of a general regulatory scheme; part of a general regulatory scheme; – monitored by the continuing oversight of a regulatory monitored by the continuing oversight of a regulatory

agency;agency;– concerned with trade as a whole rather than with a concerned with trade as a whole rather than with a

particular industry;particular industry;– the provinces jointly or severally would be the provinces jointly or severally would be

constitutionally incapable of enacting such legislationconstitutionally incapable of enacting such legislation– the failure to include one or more provinces or localities the failure to include one or more provinces or localities

in a legislative scheme would jeopardize the successful in a legislative scheme would jeopardize the successful operation of the scheme in other parts of the country. operation of the scheme in other parts of the country. 

A federal carbon tax?A federal carbon tax?

Criminal law powerCriminal law power– a valid criminal law purpose (now includes a valid criminal law purpose (now includes

environmental protection)environmental protection)– a prohibition associated with a penaltya prohibition associated with a penalty

POGG (National concern branch):POGG (National concern branch):– singleness, distinctiveness and indivisibility singleness, distinctiveness and indivisibility

extraprovincial inability testextraprovincial inability test

– a scale of impact on provincial jurisdiction that a scale of impact on provincial jurisdiction that is reconcilable with the fundamental is reconcilable with the fundamental distribution of legislative power under the distribution of legislative power under the Constitution Constitution

ConclusionsConclusions Scope for provincial and federal carbon tax Scope for provincial and federal carbon tax

measures measures

Jurisdictional validity depends on design of the Jurisdictional validity depends on design of the measuremeasure

Respective taxation powers not optimal Respective taxation powers not optimal – licensing power (provincially) and POGG (federally) more licensing power (provincially) and POGG (federally) more

likely candidates for justificationlikely candidates for justification

Opportunity for courts to modernize division of Opportunity for courts to modernize division of powers analysis for environmental taxespowers analysis for environmental taxes

Carbon Taxes Carbon Taxes and the Constitutionand the Constitution

Nathalie ChalifourNathalie Chalifour

Faculty of Law, University of Faculty of Law, University of OttawaOttawa

October 18, 2008October 18, 2008