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The federal government will drastically reduce the scope of its planned carbon tax to address competitiveness concerns as it prepares to replace Ontario’s cap-and-trade system with its own levy.

After a closed-door meeting with industry officials last week, Environment and Climate Change Canada issued new guidelines that lower the percentage of emissions on which large polluters will have to pay the carbon tax and offer bigger breaks for energy-intensive companies that face tough international competition. The guidelines will be imposed on every province that doesn’t meet the federal standard for carbon pricing.

Companies will try to pass along any costs of the carbon tax to consumers, but industry leaders say they may have to absorb it in competitive markets. The reduced tax means businesses will have fewer costs to pass along, face less competitive pressure and likely produce higher emissions.

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Ottawa issued draft regulations in January indicating companies would have to pay the carbon tax on roughly 30 per cent of their emissions, with a benchmark set at 70 per cent of their industry’s average emissions performance. The new rules to start in January will lower that requirement to pay tax on 20 per cent of emissions, and some particularly vulnerable industries – including cement and steel making – will pay tax on roughly 10 per cent of their greenhouse gas emissions.

“This approach reduces pollution by putting a price on all carbon emissions that exceed a given threshold,” Environment Canada spokesman Mark Johnson said in an e-mail. “It encourages industry to innovate, and rewards companies that meet or exceed the performance standard.”

The decision follows months of lobbying by industries concerned about how the carbon tax will affect their competitiveness and comes just as Ontario is backing out of cap-and-trade, setting off a sudden expansion of the tax. But companies expect that in many cases, the federal system will still be more onerous than the one it will replace in Ontario, adding to their costs at a time of growing competitive threats arising from U.S. President Donald Trump’s corporate-tax cuts and protectionist tariffs.

The levy will kick in at $20 a tonne in January, rising to $50 in 2022.

The federal government has no estimate of the cost of the output-based pricing system on industry, as Environment Canada is still working with companies to determine who will pay what rate, one official said on Tuesday. There were 102 such large-final emitters in Ontario under the cap-and-trade system who will now be paying the federal carbon tax.

In one of his first actions after forming government, Ontario Premier Doug Ford killed the cap-and-trade system that set a limit on industrial GHGs and required companies to purchase allowances to cover any emissions above their cap, which was set to decline over time. Gasoline marketers and natural-gas distributors were required to buy allowances to cover emissions from all the fuel they sold, but large industrial polluters were given free allowances up to their individual caps, which then declined over time.

The federal government will impose its carbon tax in Ontario, as well as in Saskatchewan and – either in whole or in part – in those provinces that do not meet Ottawa’s stringency standards.

Automakers, petrochemical companies, refiners and other manufacturers are all meeting with the federal government to persuade them they can ill afford to bear higher carbon taxes as they face an increasingly tough market in North America. They argue loss of investment and jobs to the United States – which does not have a carbon tax – will not only hurt the Canadian economy, but will fail to address climate change because the emissions will simply occur elsewhere, a phenomenon known as “carbon leakage.”

Finance Minister Bill Morneau has indicated the Liberal government is focused on those competitiveness concerns and will address them in his budget update this fall. Industry lobbyists argue Ottawa needs to offset any cost impact of a rising carbon tax.

“If the countries with whom we are competing – and especially that big one to the south of us – do not have that kind of a [carbon tax] system in place, then you are having your hands tied behind your back,” said Dennis Darby, president of the Canadian Manufacturers and Exporters association. He urged the government to find a way to return the revenues to companies to help them adjust and innovate.

Environmentalists worry the government is weakening its climate-change policy without providing clear evidence of how companies are being evaluated. “Why is the stringency of carbon pricing being reduced for industry across the board – even for those sectors identified as ‘low risk’ – rather than targeting relief for those sectors at highest risk?” said Catherine Abreu, executive director of Climate Action Network Canada.

Automakers are already facing difficulty in maintaining jobs and investment in Canada and cannot afford sharply higher carbon taxes, said Mark Nantais, president of the Canadian Vehicle Manufacturers’ Association, which represents the Canadian units of the Detroit Three companies.

Ottawa is assessing energy-intensive companies that face tough international competition to determine whether they qualify for special breaks on the carbon levy. Mr. Nantais said the car makers would not qualify as “energy intensive” but are particularly vulnerable to any increase in their cost structure.

Oil companies with refineries in Ontario also worry about the shift from cap and trade, to the federal carbon tax, said Carol Montreuil, vice-president with the Canadian Fuels Association. He said the current federal proposal will be twice as expensive for Ontario refiners as they would have faced under cap and trade.

There are four refineries in the province – two owned by Imperial Oil Ltd., one by Suncor Energy Inc. and one by Royal Dutch Shell PLC. As well, Irving Oil Ltd.’s refinery in New Brunswick and the Federated Co-operatives Ltd. plant in Saskatchewan will be covered by the federal system.

“It is a concern but the process hasn’t ended,” Mr. Montreuil said, adding the industry welcomed the easing of the burden announced last week.

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