1. Regulatory Charge on Fuel (Federal Fuel Charge)
The federal fuel charge is a direct price placed on fossil fuels, reflecting the greenhouse gas (GHG) emissions associated with their combustion. It is designed to encourage individuals and businesses to reduce their carbon footprint by choosing cleaner energy options.
Key Features:
- Coverage: The charge applies to common fuels such as gasoline, diesel, natural gas, propane, and home heating fuel. Different fuels have different rates, which are based on their carbon intensity (i.e., the amount of CO₂ emissions produced per unit of energy).
- Revenue Recycling: Most of the revenue collected from the fuel charge is returned to households and businesses in the form of rebates or programs. For example, households receive the Climate Action Incentive payment, which is designed to offset the increased costs of carbon pricing.
- Incentives: The fuel charge provides a clear financial signal to reduce fossil fuel use, adopt energy-efficient practices, and transition to renewable energy sources.
Goal:
The fuel charge aims to create a broad-based incentive for reducing GHG emissions across the economy while ensuring fairness through revenue returns to consumers.
2. Regulatory Trading System (Federal Output-Based Pricing System, or OBPS)
The Output-Based Pricing System (OBPS) is a market-based mechanism that targets large industrial emitters, such as manufacturers, oil and gas producers, and other energy-intensive industries. Unlike the fuel charge, which applies directly to emissions from fuel combustion, the OBPS applies to emissions generated by industrial operations.
Key Features:
- Performance Standards: The system sets benchmarks for emissions intensity (e.g., emissions per unit of production) for various industrial sectors. These benchmarks reflect best practices or technology standards within the industry.
- Compliance Options: Facilities that exceed the benchmark must:
- Purchase surplus credits from other facilities that perform better than the benchmark.
- Buy compliance units (emissions allowances) from the government.
- Pay a carbon price for the excess emissions.
- Offset their emissions by investing in approved GHG-reduction projects.
- Flexibility: Facilities performing below the benchmark can generate surplus credits, which they can sell to others. This creates a financial incentive for low-emitting facilities to continue reducing their emissions.
Benefits:
- Innovation: Encourages industries to develop and adopt cleaner technologies.
- Competitiveness: By only applying costs to emissions above the benchmark, the OBPS prevents the imposition of a full carbon price on the entire production process. This mitigates the risk of industries relocating to jurisdictions with weaker environmental regulations (carbon leakage).
- Fairness: Tailoring the system to emissions intensity ensures that facilities of varying sizes and outputs are treated equitably.
