Regulations Amending the Fuel Charge Regulations, No. 2: SOR/2024-282

Canada Gazette, Part II, Volume 159, Number 1

Registration
SOR/2024-282 December 16, 2024

GREENHOUSE GAS POLLUTION PRICING ACT

P.C. 2024-1357 December 16, 2024

Her Excellency the Governor General in Council, on the recommendation of the Minister of Finance, makes the annexed Regulations Amending the Fuel Charge Regulations, No. 2 under sections 166 and 168 of the Greenhouse Gas Pollution Pricing Act footnote a.

Regulations Amending the Fuel Charge Regulations, No. 2

Amendments

1 Section 1 of the Fuel Charge Regulations footnote 1 is amended by adding the following in alphabetical order:

eligible heating activity
means the use of light fuel oil exclusively for providing heat to a home, building or similar structure but not for generating heat in an industrial process, including a commercial process that involves removing moisture from a good. (activité de chauffage admissible)

2 The portion of section 16 of the Regulations before the formula is replaced by the following:

Amount of charge — adjustment day

16 Subject to section 31, for the purposes of the fuel charge system and of applying subsection 38(1) of the Act in respect of fuel that is a qualifying power plant fuel and that is held at the beginning of an adjustment day in a listed province by a person that is a remote power plant operator, the formula in that subsection and the descriptions in that formula are adapted as follows:

3 The Regulations are amended by adding the following after section 28:

PART 10
Eligible Heating Activities After November 8, 2023 and Before April 2027

Charge not payable — delivery for eligible heating activities

29 For the purposes of section 27 of the Act, no charge is payable under subsection 17(1) of the Act in respect of a quantity of light fuel oil that is delivered by a registered distributor in respect of light fuel oil to a person if the light fuel oil is for use exclusively in eligible heating activities, the person is not a registered distributor in respect of light fuel oil and the quantity of light fuel oil is delivered to the person after November 8, 2023 but before April 2027.

Charge — diversion from eligible heating activities

30 (1) For the purposes of section 26 of the Act, if at any time light fuel oil is delivered in a listed province by a registered distributor in respect of light fuel oil to a person and no charge is payable in respect of the delivery of the light fuel oil because of section 29, the person must pay a charge in respect of the light fuel oil and the listed province in the amount determined under section 40 of the Act to the extent that, at a later time, the light fuel oil is

When charge payable

(2) For the purposes of section 26 of the Act, the charge referred to in subsection (1) becomes payable at the later time referred to in that subsection.

Amount of charge — adjustment day before April 2, 2027

31 For the purposes of the fuel charge system and of applying subsection 38(1) of the Act in respect of light fuel oil that is held in a listed province by a person at the beginning of an adjustment day that is after November 8, 2023 and before April 2, 2027, the formula in that subsection and the descriptions in that formula are adapted as follows:

[(A − B) − C] × (D − E)
where
A
is the quantity of the fuel;
B
is the quantity of the fuel that is held by the person for use exclusively in eligible heating activities;
C
is
  • (a) if the person is a remote power plant operator, the quantity of the fuel that
    • (i) was delivered to the person by a registered distributor in respect of that type of fuel and in respect of which an exemption certificate applies in respect of the delivery in accordance with section 36, and
    • (ii) is not included in the determination of B, and
  • (b) in any other case, zero;
D
is the rate in respect of fuel of that type for the listed province applicable on the adjustment day; and
E
is the rate in respect of fuel of that type for the listed province applicable on the day before the adjustment day.

Registration — delivery for eligible heating activities

32 For the purposes of paragraph 55(3)(c) of the Act, a person may apply before April 2027 under subsection 55(3) of the Act to be registered as a distributor in respect of light fuel oil if the person carries on the business of selling, delivering or distributing light fuel oil and, in the ordinary course of that business, delivers in a listed province light fuel oil that is for use in eligible heating activities.

Coming into Force

4 These Regulations are deemed to have come into force on October 26, 2023.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Issues

The Greenhouse Gas Pollution Pricing Act (GGPPA) provides the legal framework and enabling authorities for the federal carbon pollution pricing system (the federal backstop system) for the purpose of establishing minimum national standards of greenhouse gas (GHG) price stringency to reduce GHG emissions. The federal backstop system has two components: a regulatory charge on fossil fuels (the fuel charge) and an output-based pricing system for large industry.

The Regulations Amending the Fuel Charge Regulations, No. 2 (the Amending Regulations) contain amendments that temporarily pause the application of the fuel charge on deliveries of light fuel oil for use exclusively to provide heat to a home or building (sometimes referred to as heating oil), effective November 9, 2023. As announced by the government on October 26, 2023, this measure aims to lower energy bills for Canadians, and to provide more time and support to help Canadians transition to cleaner, more affordable home heating options, such as heat pumps.

Background

Part 1 of the GGPPA is under the purview of the Minister of Finance and is administered by the Canada Revenue Agency (CRA) and, at the border, the Canada Border Services Agency. It provides the legal framework and enabling authorities for the fuel charge system. The fuel charge currently applies in Newfoundland and Labrador, Prince Edward Island, Nova Scotia, New Brunswick, Ontario, Manitoba, Saskatchewan, Alberta, Nunavut and Yukon (listed provinces). The fuel charge is generally paid by fuel producers or distributors and generally applies to fossil fuels produced, delivered or used in a listed province, brought into a listed province from another place in Canada, or imported into Canada at a location in a listed province.

The fuel charge applies at the rates set out in Schedule 2 to the GGPPA, which vary by fuel type. The rates represent a carbon price of $80 per tonne in 2024–25. Part 1 of the GGPPA also provides that certain modifications and additions to the fuel charge system may be made by way of regulations. The existing Fuel Charge Regulations were made to provide such additional rules for the proper functioning of the fuel charge system.

Section 27 of the GGPPA enables the making of regulations prescribing persons or classes of persons by whom, or conditions under which, the fuel charge under Part 1 of the GGPPA is not payable. Such upfront relief from the fuel charge is consistent with the spirit and purpose of Part 1 of the GGPPA. The GGPPA and the existing Fuel Charge Regulations provide targeted upfront relief from the fuel charge to farmers, fishers, greenhouse operators, remote power plant operators, and users of aviation fuel in the territories — in particular because of the small number of alternative options they may have in the face of carbon pollution pricing. Low- to median-income households that rely more heavily on heating oil for home heating can have fewer alternatives to cleaner fuels or more energy-efficient heating systems, such as heat pumps. While the operating costs of oil furnaces are higher than a heat pump, the upfront costs of switching from oil furnaces to a heat pump can be a significant financial barrier that can deter households from switching.

On October 26, 2023, the Prime Minister announced a proposed temporary pause of the fuel charge on deliveries of light fuel oil that is exclusively for use in providing heat to a home or building until March 31, 2027.footnote 2 This announcement was part of a suite of new measures aimed at lowering energy bills for Canadians, and to provide additional time and support to help Canadians transition to cleaner energy technologies, such as heat pumps. To help Canadians switch to heat pumps, one of the new measures included enhancements to the Oil to Heat Pump Affordability Program, which provides a federal grant of up to $15,000 for low- to medium-income Canadians in provinces and territories that have agreed to support the delivery of enhanced federal heat pump grants. The new measures, in combination, are expected to result in long-term reductions in greenhouse gas emissions (see Rationale section below for further details).

The next day, on October 27, 2023, additional technical details on the measure were released in a backgrounder posted on the Department of Finance Canada’s website.footnote 3 On November 3, 2023, the Amending Regulations were released in draft form on the Department of Finance website.footnote 4

Objective

The objective of the Amending Regulations is to temporarily pause, until March 31, 2027, the fuel charge on deliveries of light fuel oil that is exclusively for use in providing heat to a home or building, in all listed provinces where it currently applies.

Description

The Amending Regulations provide that the fuel charge is not payable by registered distributors on light fuel oil that is delivered exclusively for use in providing heat to a home, building or similar structure. This relief applies from November 9, 2023, until March 31, 2027, in all listed provinces. The relief applies upfront without the need for the buyer to provide an exemption certificate to the registered distributor.

More specifically, the fuel charge is not payable in respect of light fuel oil that is delivered by a registered distributor in respect of light fuel oil to a person if:

Eligible heating activities means the use of light fuel oil exclusively for providing heat to a home, building or similar structure, but not for generating heat in an industrial process, such as processes that involve removing moisture from goods.

The Amending Regulations also include minor consequential technical amendments, which are analogous to existing technical provisions in the fuel charge system, to ensure that the temporary pause of the fuel charge on deliveries of heating oil applies in a manner consistent with the existing framework. These technical amendments include rules that apply the fuel charge to light fuel oil that is diverted from eligible heating activities, such as use of such light fuel oil in a vehicle.

It also includes technical rules related to the fuel charge applicable in respect of light fuel oil that is held during the temporary pause period and after it ends in 2027. During the temporary pause period, the Amending Regulations modify the formula for determining the amount of fuel charge applicable on inventories of light fuel oil by excluding from the computation of the inventory charge the quantity of such fuel that is held for use exclusively in eligible heating activities. After the temporary pause period ends in 2027, the fuel charge applicable to inventories will be determined in accordance with the existing rules of the GGPPA and the Fuel Charge Regulations.

Regulatory development

Consultation

On November 3, 2023, the Government publicly released a draft of the Amending Regulations on the Department of Finance website which included the provisions to temporarily pause the fuel charge on deliveries of heating oil and minor consequential technical amendments to ensure that the temporary pause of the fuel charge on deliveries of heating oil applies in a manner consistent with the existing framework. The Department of Finance did not receive any submissions directly related to the draft Amending Regulations themselves. However, following the October 26, 2023, policy announcement, some feedback was received from the public, several municipalities, and certain organizations that represent either the trucking industry or certain school boards, labour or Indigenous groups, requesting additional relief from the fuel charge — for other heating fuels (particularly marketable natural gas), all light fuel oil (e.g. diesel), municipalities volunteer emergency service providers, school boards, or First Nations and their members—as well as relief from the fuel excise tax on diesel. Feedback was also received from one environmental non-governmental organization to not allow relief for certain regions or sectors from the fuel charge. The comments did not result in changes to the measures included in the Amending Regulations since they suggested changes beyond the intent of the announced pause of the fuel charge on deliveries of heating oil and were disconnected from the remainder of the suite of measures focused on addressing the specific issues arising from reliance upon home heating oil. Comments related to the fuel excise tax went beyond the scope of the Amending Regulations.

Given that the Amending Regulations were already publicly released in draft form on the Department of Finance website, the Amending Regulations were exempted from prepublication.

Modern treaty obligations and Indigenous engagement and consultation

For the measures contained in the Amending Regulations, no impacts have been identified in respect of the Government’s obligations in relation to Indigenous rights protected by section 35 of the Constitution Act, 1982, modern treaties or international human rights obligations.

Instrument choice

With the passage of Bill C-74 (the Budget Implementation Act, 2018, No. 1) on June 21, 2018, Parliament provided the Governor in Council with the authority to implement rules relevant to the application of the fuel charge under Part 1 of the GGPPA, including rules establishing circumstances in which the fuel charge is not payable in respect of a type of fuel. Regulatory changes are therefore the appropriate mechanism under the GGPPA to implement this new policy measure in respect of the fuel charge system.

Regulatory analysis

Benefits and costs

Benefits and costs analysis

The federal price on pollution is revenue neutral for the federal government; the direct proceeds from the federal backstop system remain in the province or territory where they are collected. For those provinces where the fuel charge applies — Newfoundland and Labrador, Prince Edward Island, Nova Scotia, New Brunswick, Ontario, Manitoba, Saskatchewan and Alberta — the majority of direct proceeds from the federal fuel charge are returned to households, which are the ultimate bearers of the carbon price, through the Canada Carbon Rebate (CCR, formerly known as Climate Action Incentive payments). Under this approach, 8 out of 10 households get back more money than they pay, with lower-income households benefiting the most. In Yukon and Nunavut, all direct proceeds from the federal fuel charge are returned to the territorial governments. Please refer to the Gender-Based Analysis Plus analysis section below for more details on how fuel charge proceeds are being returned to individuals.

The Amending Regulations provide that the fuel charge is not payable on heating oil that is delivered exclusively for use in providing heat to a home, building or similar structure from November 9, 2023, until March 31, 2027, in all listed provinces. A quantitative analysis was undertaken for the period of the pause of the fuel charge — from 2023–2024 to 2026–2027. A quantitative analysis was not conducted for the remainder of the 10-year period (2027–2028 to 2032–2033) as it is expected there will be minimal impact to emissions and air quality (air pollution) due to the Amending Regulations alone. Furthermore, there remain interactions with other affordability measures such as the enhancements to the Oil to Heat Pump Affordability Program that are available during the period of the pause.

The Department of Finance Canada estimates that the temporary pause of the fuel charge on deliveries of heating oil will lead to foregone reductions in GHG emissions of about 257 700 tonnes of carbon dioxide equivalent over the period of application (see Table 1 for incremental breakdown). Statistics Canada’s physical flow for GHG emissions data was used to estimate baseline emissions associated with residential and commercial heating oil use in listed provinces. Using the same data, the foregone GHG emissions reductions due to the temporary pause of the fuel charge on deliveries of heating oil were estimated by taking into account the price elasticity of demand and the estimated price impact of the pause. This estimate accounts for foregone GHG emissions reductions from increased heating oil usage due to the reduction in its price, assuming no other changes in the price apart from the fuel charge pause. The estimated foregone GHG emissions reductions are net of the impact on GHG emissions from alternative heating sources that would have been used otherwise under the baseline, such as electricity, natural gas and wood (estimated using Natural Resources Canada’s space heating data). A price elasticity of demand of -0.15 was selected to estimate the extent by which the consumption of heating oil could increase because of the temporary pause of the fuel charge on deliveries of heating oil. The estimate aligns with those found in the economic literature for the short-term response of consumers to heating oil price changes. Assuming the relief is fully passed on to consumers, the temporary pause is estimated to reduce heating oil prices by 12.3% for 2023–2024 — potentially foregoing emissions reductions by 1.9%.

To monetize the costs of foregone emissions reductions, the Department of Finance utilized Environment and Climate Change Canada’s (ECCC) social cost of carbon,footnote 5 a measure of the incremental damages expected from a small increase in carbon emissions. Each year, the social cost of carbon increases as a result of larger incremental damages to physical and economic systems due to future emissions, and increased impacts to wealth due to the higher willingness to pay to avoid economic damages. In 2023, the social cost of carbon was estimated to be $261 per tonne and is expected to reach $280 in 2027 (in $2021). Using the social cost of carbon figures for 2023 to 2027, the monetized cost of foregone emissions reductions over the period of the temporary pause of the fuel charge pursuant to the Amending Regulations is estimated to be about $82 million (in nominal prices) and in present value $73 million (in 2022 dollars, discounted at 2% to 2023–24). See Table 1 for incremental breakdown.

Table 1: Estimated incremental foregone emissions reductions and monetized costs ($2022)
Impacted stakeholder Description of cost 2023-2024 2024-2025 2025-2026 2026-2027 Total
Canadian society Estimated Foregone emissions reductions (in tonnes of carbon dioxide equivalent) 41,083 49,501 67,743 99,374 257,701
Canadian society Estimated social cost of carbon of foregone emissions reductions ($2022) 11,668,094 14,048,385 19,115,015 28,002,126 72,833,620

The temporary pause of the fuel charge on (deliveries of) heating oil is relieving in nature and would not impose new compliance costs on individuals or businesses. This relief is provided upfront without the use of exemption certificates and it does not change the manner in which stakeholders account for their fuel charge obligations under Part 1 of the GGPPA.

As a result of the Amending Regulations, households that use heating oil in listed provinces are expected to benefit by incurring lower energy costs. On average in Canada, a household that heats with oil will use 1 640 litres over a winter season and can expect to save up to $1,594 ($2022) in present value on their direct expenditures for heating oil deliveries over the period of the temporary pause of the fuel charge on heating oil. This figure was calculated by multiplying the fuel charge rate each year (from 2023–24 to 2026–27) by the 2021 national average use of heating oil of 1 640 litres (converted from gigajoules), as per Statistics Canada Table 25-10-0060-01. An elasticity of demand of -0.15 was also applied to the national average consumption amount to estimate the extent by which the consumption of heating oil would increase because of the temporary pause of the fuel charge on deliveries of heating oil.

Generally, these cost savings are expected to be offset by lower CCR payments for all households overall over time in listed provinces, proportionately to heating oil use, as the CCR reflects lower fuel charge proceeds. The net impact per household of cost savings from the temporary pause of the fuel charge on deliveries of heating oil and the lower CCR will depend on a household’s specific circumstances. These impacts are explored further in the distributional analysis section below. In Yukon and Nunavut, the fuel charge proceeds returned to the territorial governments reflect any reduction in proceeds collected due to the Amending Regulations.

Since the cost savings for households using heating oil are offset by lower CCR payments, no direct aggregate benefits are attributed to the Amending Regulations. However, at the household level, even with lower CCR payments over time, it is expected that households that typically use home heating oil will experience a positive temporary income effect due to the immediate savings incurred in 2023–2024. Without accounting for the benefits of the other suite of measures announced by the Government of Canada to lower energy bills for Canadians (see Rationale section below), the Amending Regulations will result in a social cost of carbon of foregone emissions reductions of $73 million, which is a net cost, during the period of temporary pause of the fuel charge on the deliveries of heating oil (2023–2024 to 2026–2027).

Distribution analysis

Based on 2020 data from Natural Resources Canada’s Comprehensive Energy Use Database, there are approximately 610 000 oil-only-heated households across Canada, approximately 580 000 of which are spread across all the provinces and 30 000 across the territories. In addition, there are approximately 555 000 homes that partially heat with oil (for example with oil and electricity, or with oil and wood).

Table 2 provides a distribution of estimated foregone GHG emissions reductions by province.footnote 6 The estimated foregone GHG emissions is largest in Nova Scotia and Ontario. This is largely because Nova Scotia has the highest number of households who use heating oil, representing 43% of households in the province. This is followed by Ontario, representing 2% of households in that province.footnote 7

Table 2: Distribution of estimated foregone GHG emissions reductions by province
Province and territory Estimated change in foregone GHG emissions reductions (tonnes of carbon dioxide equivalent) Distribution of estimated change in foregone GHG emissions reductions (%)
Alberta 711 0.3%
Saskatchewan 1,170 0.5%
Ontario 69,220 26.9%
Manitoba 2,183 0.8%
Nova Scotia 85,231 33.1%
New Brunswick 38,594 15.0%
Prince Edward Island 15,475 6.0%
Newfoundland and Labrador 43,515 16.9%
Nunavut N/A N/A
Yukon 1,602 0.6%
Total 257,701 100.0%

Household cost savings as a result of the temporary pause of the fuel charge on heating oil will vary based on region, income and fuel use. Further discussion on income is included in the gender-based analysis plus section. Approximately 25% of households in Atlantic Canada currently heat with oil, compared to approximately 6% across the rest of Canada. The Atlantic average heating oil use per household was 1 670 litres in 2021, slightly higher than the national average of 1 640 litresfootnote 7. As such, the present value cost savings for at Atlantic Canada is expected to be $1,623 ($2022), higher than the Canadian average of $1,594 ($2022), over the period of the temporary pause.

CCR amounts are set the same for everyone in a listed province, but the total amount received depends on household composition, not on fuel use. As such, it is expected that households who do not use heating oil in jurisdictions where heating oil is more prevalent would see a reduction in CCR amounts without the benefit of a reduced cost of home heating fuel. Meanwhile households who use heating oil would benefit from a reduced cost of home heating fuel. In general, the cost savings for households using heating oil are expected to be offset by the reduction in CCR payments.

Sensitivity analysis

Given the potential uncertainty due to various assumptions, sensitivity analyses were conducted to assess the impact of changes to the following parameters: price elasticity of demand and discount rate.

The short-term price elasticity of heating oil may vary due to factors such as availability of substitutes, household income, severity of weather, consumer awareness and government programs. The short-term price elasticity of demand used for the analysis was -0.15. A sensitivity analysis was conducted by increasing and decreasing this elasticity by 30%. With a higher price elasticity of -0.20, the total social cost of carbon of foregone emissions reductions increased by 21% to $88 million ($2022). With a lower price elasticity of -0.11, the total cost decreased by 17% to $61 million ($2022).

ECCC recommends that in any cost-benefit analysis (CBA) or analysis in which social cost of greenhouse gas values are applied to multiple future years, a 2% discount rate should be used to arrive at a present value of all costs and benefits. For sensitivity analysis, ECCC recommends applying a 1.5% and 2.5% discount rate to assess different incremental damages from GHG emissions. A sensitivity analysis was done to compare the central analysis (2% discount rate) with a higher (2.5%) and lower discount rate (1.5%), but this does not have a large impact due to the short time frame of the measure. Using a 1.5% discount rate, the total social costs of carbon of foregone emissions reductions increase by 1% to $74 million ($2022) and using a 2.5% discount rate, total costs decrease by 1% to $72 million ($2022).

Small business lens

Analysis under the small business lens concluded that the Amending Regulations will not impose any direct administrative or compliance costs on Canadian small businesses. The fuel charge requirements under Part 1 of the GGPPA, the Fuel Charge Regulations and the Amending Regulations generally apply to fuel producers and fuel distributors upstream in the distribution chain, which are generally medium or large-sized businesses. It is possible that some small businesses, to the extent that they use light fuel oil for heating purposes, may benefit from the temporary relief from the fuel charge as provided for under the Amending Regulations. On the other hand, CCR for Small Business payments could be lower in future years, as they reflect lower fuel charge proceeds.

One-for-one rule

The one-for-one rule does not apply, as there is no incremental change in administrative burden on business, and no regulatory titles are repealed or introduced. The relief does not change the way stakeholders account for their fuel charge obligations under Part 1 of the GGPPA. Therefore, these amendments are not expected to lead to an increase or decrease in administrative burden costs to businesses.

Regulatory cooperation and alignment

The proposed amendments do not require regulatory cooperation or alignment with other jurisdictions.

Effects on the environment

In accordance with the Cabinet Directive on Strategic Environmental and Economic Assessment (SEEA Directive), an SEEA has been conducted. Regulatory proposals subject to the Cabinet Directive on Regulation are exempted from the economic analysis elements of the SEEA Directive. This proposal is exempt from the economic analysis elements of the SEEA Directive since a cost-benefit analysis was conducted as part of the Regulatory Impact Analysis Statement, per the Cabinet Directive on Regulation. Furthermore, no positive net federal spending in absolute value is associated with the proposal.

The temporary pause of the fuel charge on deliveries of heating oil was announced as part of a suite of measures that aims to support Canadians in transitioning to cleaner heating options like heat pumps, with the goal of long-term GHG emission reductions. Over the 2023–2027 period, the temporary pause of the fuel charge on deliveries of heating oil is estimated to result in foregone GHG emissions reductions of approximately 257 700 tonnes of carbon dioxide equivalent, which is less than 0.3% of Canada’s building sector emissions in 2022.

The only environmental effects that this measure is expected to have relate to the estimated foregone GHG emission reductions. In the long-run, the suite of measures that the temporary pause of the fuel charge on deliveries of heating oil was part of is expected to encourage consumers to switch to energy-efficient heating systems by 2027, which is expected to result in long-term reductions in greenhouse gas emissions to contribute to Canada’s climate change mitigation strategy.

Additionally, in combination with other measures outlined in the Pan-Canadian Framework on Clean Growth and Climate Change and Canada’s 2030 Emissions Reductions Plan, the federal backstop system (including the fuel charge) provides incentives to reduce energy use through conservation and efficiency measures, while also serving to drive fuel switching and technology advances, and thus ultimately leads to reductions in greenhouse gas emissions and air pollution. These outcomes will directly and indirectly contribute to all the 2022–2026 Federal Sustainable Development Strategy goals, but specifically the goals of effective action on climate change, clean growth, and clean energy.

Gender-based analysis plus

The amendments contained in the Amending Regulations are temporary and make modifications that are relieving in nature to the existing rules contained in the fuel charge system under Part 1 of the GGPPA. A preliminary GBA Plus was undertaken to assess the impacts on diverse groups in listed provinces, as summarized below.

The temporary pause is available in all listed provinces, and its benefit would be gender balanced. This would typically benefit Canadians aged over 18, as these are typically individuals paying for heating expenses. Households in rural and remote communities tend to rely more heavily on heating oil for home heating, since other alternatives such as natural gas are more often inaccessible in these areas. Regionally, use of heating oil for home heating is most prevalent in Atlantic Canada: Prince Edward Island (61% of households), Nova Scotia (43%), Newfoundland and Labrador (22%), and New Brunswick (8%) (Statistics Canada Table 25-10-0060-01, 2021 data). It is used to a lesser extent in other listed provinces: less than 2% in Ontario, and less than 1% in Manitoba, Alberta and Saskatchewan. Of those households in Atlantic Canada that heat their homes with oil, nearly two thirds fall at or below the median income level according to Natural Resources Canada 2020 data. As a result, it is expected that, in the Atlantic region, households below the median income level who primarily rely on heating oil will incur the most savings during the temporary pause of the fuel charge on deliveries of heating oil, even when future adjustments to the CCR are taken into account.

In Newfoundland and Labrador, Prince Edward Island, Nova Scotia, New Brunswick, Ontario, Manitoba, Saskatchewan and Alberta, the federal government returns the majority of the direct proceeds from the fuel charge directly to individuals and families through the quarterly CCR, with a top-up of 20% for those living in small and rural communities. In Yukon and Nunavut, the federal government returns all direct proceeds from the fuel charge to the territorial governments.

While lower-income households may spend a greater proportion of their income on heating oil, the impact of the Amending Regulations varies depending on the province and the fuel used to heat each home. The relief provided by the Amending Regulations will be mostly offset by reductions in CCR payments in backstop provinces, which would be relatively larger in the Atlantic provinces. That said, most households in backstop provinces continue to receive more money back than they pay as a result of the federal carbon pollution pricing system, with lower-income households benefiting the most. The net impact on households in the backstop territories is unknown as proceeds are returned to territorial governments.

Rationale

The Amending Regulations pausing the fuel charge on deliveries of heating oil is part of a suite of measures intended to enable Canadians using heating oil in listed provinces to switch to cleaner heating options such as heat pumps to result in a long-term reduction in greenhouse gas emissions. The measure is narrowly tailored in that it only applies to heating oil used exclusively for providing heat to a home, building or similar structure but not for heat in an industrial process, and is also temporary, resulting in time-limited costs to Canadian society.

To help Canadians switch to heat pumps, the Government of Canada announced as part of the suite of measures enhancements to the Oil to Heat Pump Affordability Program, which provides a federal grant of up to $15,000 for low- to medium-income Canadians in provinces and territories that have agreed to support the delivery of enhanced federal heat pump grants.

To date, the Oil to Heat Pump Affordability Program has provided support to almost 10 000 low-to median-income households to help them transition from expensive oil heating to more energy efficient, cost-saving electric heat pumps. While the operating costs of oil furnaces are typically higher than those of a heat pump, the upfront costs of switching from an oil furnace to a heat pump can be a significant financial barrier that can deter households from switching. The government’s announcement in October 2023 to enhance the Oil to Heat Pump Affordability Program increased the federal grant amount from up to $10,000 to up to $15,000 to low- to median-income homeowners. This up-to-$5,000 in additional federal funding is available to households in provinces and territories that agree to co-deliver the Oil to Heat Pump Affordability Program and match federal contributions. Switching from an oil furnace to a cold-climate heat pump is expected to support Canada’s emissions reduction goals while saving households between $1,500 to $4,500 per year in home heating bills.

Post-2027, it is expected that consumers will respond to the price increase in 2027 by lowering their consumption of heating oil and/or switching to more energy-efficient heating in or before 2027 to avoid the application of the fuel charge when it resumes at the rate that will then be in place. Households are likely to take advantage of the enhancements to the Oil to Heat Pump Affordability Program while funding remains available until March 2027 in provinces that have co-delivery agreements (currently Newfoundland and Labrador, Nova Scotia and Prince Edward Island). In provinces that do not have a co-delivery agreement with the federal government at the moment (Ontario and New Brunswick), some households may defer purchases of more fuel-efficient heating alternatives like heat pumps until after 2027.

Overall, combined with the new supports under the Oil to Heat Pump Affordability program, the temporary pause of the fuel charge on deliveries of heating oil provided by the Amending Regulations is expected to contribute to decreases in emissions over the longer term as households are highly incentivized to switch to cleaner alternatives such as heat pumps during the temporary pause.

Implementation, compliance and enforcement, and service standards

The Amending Regulations are administered and enforced by the CRA as part of the fuel charge under Part 1 of the GGPPA. This measure is currently being administered by the CRA on a provisional basis and has a retroactive coming into force date of November 9, 2023, which is authorized under the GGPPA.

Contact

Nina Gormanns
Sales Tax Division
Tax Policy Branch
Department of Finance Canada
90 Elgin Street
Ottawa, Ontario
K1A 0G5