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Prime Minister Justin Trudeau makes an announcement that the government will double the carbon price rebate for rural Canadians beginning next April in Ottawa on Oct. 26.Sean Kilpatrick/The Canadian Press

On Oct. 26, Prime Minister Justin Trudeau made a surprise announcement that would soften the much-debated federal carbon tax policy.

In an effort to battle rising prices, the federal government is increasing the rebate on carbon pricing for rural Canadians and lifting the carbon price off of home heating oil entirely for the next three years. The new rules would apply to the Prairie provinces, Ontario and Atlantic Canada to address affordability concerns, but have been largely criticized by climate groups.

So, what, exactly, is carbon pricing? What are the newly announced exemptions? Why is there backlash from provinces? Here’s what you need to know about the latest changes.

What is carbon pricing? What is a carbon tax?

Carbon pricing means charging a minimum cost for fossil fuels such as gasoline, diesel and coal, and the goods made from them, so that their prices come closer to the real environmental costs. This can be applied either as a carbon tax on goods produced or sold, or as a carbon cap and trade system that corporations can trade on a regional market. Both have the same goal – to give companies and individuals a financial incentive to reduce their emissions.

Carbon tax:

A carbon tax is a fee imposed on each tonne of emissions from fossil fuels that includes oil products, such as gasoline and diesel, natural gas and coal-fired electricity. Under this system, everyone who buys a product that creates greenhouse gases pays for their emissions. Companies also pay, but those who face competitive pressures get a special break.

Cap and trade:

A “cap and trade” system sets a limit on the amount of carbon that companies are permitted to burn. It also offers the option for companies to buy the right to burn more than their quota by purchasing allowances, also known as carbon credits, from companies that burn less. By doing this, they exchange their right to emit greenhouse gases. The government also allows free allowance to some companies that face competitive pressure.

How much is the carbon tax?

The Trudeau government announced in 2018 that all provinces would need to implement a carbon-pricing system by April 1, 2019. The federal government intended the law to meet the country’s obligations under the 2015 Paris Agreement, which seeks to limit the increase in the Earth’s surface temperatures to 1.5 C by 2050.

For consumers, the federal minimum price is set at $65 per tonne of CO2 equivalent as of April 2023. It started at $20 per tonne in 2019 and will increase by $15 annually until it reaches $170 in 2030.

Provinces and territories are allowed to create their own system of carbon pricing as long as they meet or exceed the minimum requirements set by the federal government. If a province has no plan, or if it’s below the standard, the federal government applies a “backstop” that applies the minimum price through federal taxes.

Is it legal?

The Trudeau government had most provinces on board when it developed the carbon framework in 2018′s Greenhouse Gas Pollution Pricing Act, but some provinces elected new governments opposed to it, such as Doug Ford’s Progressive Conservatives in Ontario. Alberta, Saskatchewan and Ontario asked their appeal courts for a judgment on whether the act was constitutional: Alberta’s said no, Saskatchewan and Ontario’s said yes. Quebec, Manitoba and New Brunswick also intervened to oppose the law, while B.C. intervened in support.

The Supreme Court of Canada’s final decision was that the federal law is constitutional under the Constitution’s “peace, order and good government” clause, which gives the federal government jurisdiction over issues of “national concern.” Successful POGG claims are rare, but in the court’s 6-3 ruling, Chief Justice Richard Wagner wrote that Ottawa had met the threshold:

[Climate change is] a threat of the highest order to the country, and indeed the world. This context, on its own, provides some assurance that ... Canada is not seeking to invoke the national concern doctrine too lightly. The undisputed existence of a threat to the future of humanity cannot be ignored.

What are Ottawa’s carbon-pricing exemptions?

Mr. Trudeau said he would increase the carbon price rebate for rural Canadians and pilot a new rebate program in Atlantic Canada that will entirely cover the costs for lower-income households to switch to heat pumps.

He also introduced a three-year carbon price exemption to home heating oil, which will take effect in two weeks. It will apply to oil used for heating homes or buildings, meaning businesses will also benefit from the carveout. The government is not making a similar exemption for any other fuels used for heating, so people who use natural gas to heat their homes will still have to pay the carbon price.

The government did not release cost breakdowns for the changes. Mr. Trudeau said the rural rebate increase is within the “existing envelope” of revenues from the levy. He also said the changes would not affect Canada’s overall emissions targets.

The federal government has since rejected calls for more carbon-pricing concessions, saying its carveout aimed at improving the affordability of home heating oil won’t be extended to households who use other fuels to heat their homes.

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Conservative Leader Pierre Poilievre rises during question period in the House of Commons on Parliament Hill in Ottawa on Wednesday, Nov. 1, 2023.Sean Kilpatrick/The Canadian Press

What has been the backlash?

There has been a significant backlash against the carbon tax in Atlantic Canada. Federal carbon pricing took effect on the East Coast in July. Since then, local MPs have received an earful about the higher costs. Opinion polling shows the Conservatives have gained a double-digit lead over the Liberals in the region.

The carbon pricing exemptions have led to accusations of a two-tier system and regional favouritism. Premiers in several provinces have criticized the changes with Saskatchewan’s Scott Moe threatening to stop collecting fees from the carbon price applied to natural gas in his province.

Conservative Leader Pierre Poilievre noted that the timing of the changes mean the carbon levy will be reintroduced on home heating oil only after the next election. The federal Conservatives have also said they will force a vote in the House of Commons on expanding the government’s carbon price carveouts to all home heating fuels. The vote is expected to take place Monday.

The carbon carveouts were also largely criticized by climate groups. The government-funded Canadian Climate Institute warned that the change brings uncertainty to federal climate policy and dilutes the effectiveness of the carbon levy.

With reports from Marieke Walsh, Susan Krashinsky Robertson, Sean Fine, Ian Bailey and Emma Graney

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