Carbon Taxes
and the Constitution
Nathalie Chalifour
Faculty of Law, University of Ottawa
October 18, 2008
Carbon Taxes and the
Division of Powers
Carbon Taxes and the
Division of Powers

Which level of government has the
authority to legislate a carbon tax?
– The short answer is…both

Under which powers?
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 government’s authority is the « pith
and substance » of the measure
Carbon Taxes and the
Division of Powers

Which level of government has the
authority to legislate a carbon tax?
– The short answer is…both

Under which powers?
– The respective taxation powers… right?
Carbon Taxes and the
Division of Powers

Which level of government has the
authority to legislate a carbon tax?
– The short answer is…both

Under which powers?
– The respective taxation powers… right?
– The short answer is…. it depends
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
Characterization
What would be the ‘pith and substance’
of a carbon tax?
 Is
 Is
 Is
 Is
it
it
it
it
environmental protection?
to address climate change?
to regulate energy?
to raise revenue?
This will be determined based on design of
the actual measure
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’?
Québec’s 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 centa-litre charge on gasoline and 0.9 cent-a-litre charge on
diesel

part of the province’s 2006-2012 climate change plan
BC’s 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
province’s existing fuel taxes
Characterizing the Québec levy

enabling legislation is “An Act respecting the implementation of the Québec

Québec’s 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 “prepar[ing] 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:
Energy Strategy”
– strengthening the province’s 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.
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 Charest’s speech opening the provincial
parliament in May 2007, he committed to putting in place a climate
change plan, create prosperity with the province’s renewable
energy, hydroelectricity and gas, and made one of eight concrete
promises the establishment of the carbon charge “to protect the
environment”
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”
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…
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?
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.
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)
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 levy’s 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?
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.
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
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
Carbon Taxes
and the Constitution
Nathalie Chalifour
Faculty of Law, University of Ottawa
October 18, 2008