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Ontario’s largest industries are finding themselves caught in a political tug of war between the federal government and the province over which jurisdiction will regulate greenhouse-gas emissions and how onerous the carbon tax will be on the companies’ greenhouse-gas emissions.

Ottawa has introduced a carbon levy with two distinct components: a broad-based tax on gasoline and heating fuels that begins April 1; and an "output-based pricing system” that came into effect on Jan. 1 covering large industrial facilities with the aim of protecting their competitiveness by taxing only a small portion of their emissions.

The federal carbon tax is being imposed in four provinces − Ontario, Saskatchewan, Manitoba and New Brunswick − that do not have their own carbon pricing system in place, although Saskatchewan has a deal with Ottawa to regulate its large industrial emitters.

Ontario’s Progressive Conservative government scrapped the province’s cap-and-trade plan after taking office last June. However, provincial Environment Minister Rod Phillips is now demanding that the federal Liberal government back off and allow Ontario to replace the federal large-emitter system with provincial regulations that are still under development.

Industrial companies − from steel makers, to petrochemical firms, to refiners − have tens of millions of dollars at stake. They face the prospect, if Ontario gets its way, of having to comply with the third carbon-tax regime to apply in Ontario since 2018. As Ottawa digs in, many companies see the prospect for lower costs under Ontario’s fledgling plan, which would be less costly and would achieve fewer GHG reductions.

“Ontario’s proposed new emissions performance standards take into account the unique circumstances of industry and Ontario’s economy, and will reduce greenhouse-gas pollution from the biggest emitters, while allowing for economic growth," Mr. Phillips said in an e-mailed statement.

Federal Environment Minister Catherine McKenna said it was “unfortunate” that Ontario Premier Doug Ford cancelled cap-and-trade, but Ottawa had to impose its backstop when the provincial government failed to meet its fall deadline for a replacement plan.

The federal system will stay in effect until at least 2022 when a review is scheduled, Ms. McKenna said in an interview. “This provides certainty to businesses and creates the incentive for them to innovate, reduce emissions and create good jobs,” she said. Federal Conservative Party Leader Andrew Scheer criticized the Liberal plan for larger emitters, saying it amounts to “a free pass for polluters.”

The federal carbon tax will certainly cost companies more than they would have paid under the former Ontario cap-and-trade plan, which allowed them to buy cheaper credits under the joint Ontario-Quebec-California carbon market, known as the Western Climate Initiative. Prices under cap-and-trade were projected to hit $23 a tonne in 2022, while the federal carbon tax will rise to $50 a tonne in 2022 from $20 a tonne this year.

After announcing a $2-billion expansion for Sarnia in December, 2017, Calgary-based NOVA Chemicals Corp. is viewing the proposed tax changes with some alarm. The company spent some $250-million to overhaul its Sarnia facility in order to process natural gas-based ethane rather than oil-based naphtha. By doing so, it reduced both its costs and its carbon emissions, for which it got credit under the cap-and-trade plan introduced by the provincial Liberals in 2017.

View of the Nova Chemical plant in Sarnia.Louie Palu/The Globe and Mail

NOVA Chemicals − owned by the Emirate of Abu Dhabi’s sovereign wealth fund − could see its carbon costs increase by $50-million over four years as a result of the shift from cap-and-trade to the federal tax, Ken Faulkner, vice-president for government relations at NOVA Chemicals, said in an interview. Under the federal plan, petrochemical companies would be exempt from paying the tax on emissions up to 90 per cent of the industry average, so a typical plant would pay on 10 per cent of its emissions.

Mr. Faulkner said Ottawa is using a broad measure of “industry average” that disadvantages NOVA’s Sarnia plant. Ontario’s proposal, he said, would likely set a lower bar. He said the company sees few options to get significant emissions reductions for its operations now, and so any extra tax levy will achieve no environmental improvement.

The country is competing internationally for investment in the booming petrochemical sector, and can ill afford uncompetitive tax regimes or constant changes to the regulatory system, Mr. Faulkner added.

Ontario’s refiners also complain that the federal system is boosting their tax burden while insisting they have few options to dramatically reduce emissions. The refining sector will also be exempt from tax on emissions up to 80 per cent of the industry average. But under Quebec’s cap-and-trade system, refiners get more than 95 per cent of their emission allowances at no cost, and pay a lower price under the Western Climate Initiative for the allowances they must purchase.

Refineries in Ontario would pay four times in carbon tax costs what a comparable operation in Quebec would pay over the next five years, said Peter Boag, president of the Canadian Fuels Association. Ontario has four refineries while New Brunswick − which will also be covered by the federal carbon tax − is home to Irving Oil Ltd., which operates Canada’s largest refinery in Saint John.

Mr. Boag said no refinery in Canada − and few in the world − can attain the emissions threshold set by the federal government, and so the companies will merely have to pay the tax.

However, the federal plan is designed to finance industrial emissions reduction where they are the least expensive, said Dale Beugin, executive director at EcoFiscal Commission, an Ottawa-based think tank. Refiners and petrochemical companies that can’t hit their targets can purchase credits from firms who can achieve greater reductions, Mr. Beugin noted, while Ottawa intends to recycle all revenues back to the industrial sector to finance GHG-reducing innovation.