Carbon Taxes and the Constitution

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Carbon Taxes and the Constitution

• Nathalie Chalifour
• Faculty of Law, University of Ottawa
• October 18, 2008

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Carbon Taxes and theDivision of Powers
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Carbon Taxes and theDivision of Powers

• Which level of government has the authority to
  legislate a carbon tax?
• The short answer isboth
• Under which powers?

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Division of Powers 101

• 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
• The key to determining whether something is
  within a governments authority is the  pith and
  substance  of the measure

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Carbon Taxes and theDivision of Powers

• Which level of government has the authority to
  legislate a carbon tax?
• The short answer isboth
• Under which powers?
• The respective taxation powers right?

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Carbon Taxes and theDivision of Powers

• Which level of government has the authority to
  legislate a carbon tax?
• The short answer isboth
• Under which powers?
• The respective taxation powers right?
• The short answer is. it depends

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Some relevant powers for a carbon tax

• Federal Powers
• National concern branch of the POGG power
• Trade and commerce power
• Criminal power
• Taxation power

• Provincial Powers
• Licensing power
• Property and civil rights power
• Natural resources power
• Taxation power

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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

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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?

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Québecs 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
• 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 provinces 2006-2012 climate change
  plan

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BCs carbon tax

• 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, 2012.
• the Act creates an administrative system for the
  collection of the taxes that mirrors that of the
  provinces existing fuel taxes

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Characterizing the Québec levy

• enabling legislation is An Act respecting the
  implementation of the Québec Energy Strategy
• Québecs 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
  preparing 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
• strengthening the provinces 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.

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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 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 Charests speech opening
  the provincial parliament in May 2007, he
  committed to putting in place a climate change
  plan, create prosperity with the provinces
  renewable energy, hydroelectricity and gas, and
  made one of eight concrete promises the
  establishment of the carbon charge to protect
  the environment

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Characterizing the BC tax

• From the Budget Speech
• to put a price on carbon emitting fuels in
  British Columbia
• 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

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Possible justifications

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

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Section 92(2) The provincial taxation power

• 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?

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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.

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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)

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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
  levys 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?

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A federal carbon tax?

• Taxation power
• direct or indirect
• revenue-raising as the dominant purpose
• section 125
• 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. 

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A federal carbon tax?

• Criminal law power
• a valid criminal law purpose (now includes
  environmental protection)
• a prohibition associated with a penalty
• 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

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Conclusions

• Scope for provincial and federal carbon tax
  measures
• Jurisdictional validity depends on design of the
  measure
• 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

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Carbon Taxes and the Constitution

• Nathalie Chalifour
• Faculty of Law, University of Ottawa
• October 18, 2008