By David Ljunggren
OTTAWA, May 18 (Reuters) - Canada said on Thursday it planned to impose a cap on pollution in provinces that refuse to adopt a national price on carbon, setting up a potential fight with the country's powerful energy-rich west.
Last December the Liberal government of Prime Minister Justin Trudeau reached a deal with eight of the 10 provinces to introduce a carbon price as part of a push to curb emissions of greenhouse gases.
Trudeau said at the time he would impose carbon pricing on holdout provinces.
The federal environment ministry on Thursday proposed a levy on fossil fuels that would increase annually and also said it wanted to set limits on pollution. The more a facility exceeded its target, the more it would pay.
"Making polluters pay is a critical part of any climate plan," Environment Minister Catherine McKenna told reporters, saying every penny raised would be returned to the provinces.
Canada has the world's third-largest proven crude reserves, much of which lies in Alberta and Saskatchewan in the west.
Saskatchewan premier Brad Wall says a national carbon price would boost firms' costs at a time when U.S. President Donald Trump wants to cut corporate taxes. Wall is threatening a lawsuit against the federal government.
The central province of Manitoba has not yet decided what it plans to do.
Under Trudeau's plan, carbon pollution would cost C$10 ($7.35) a tonne in 2018, rising by C$10 a year until it reaches C$50 in 2022. The provinces can either implement a carbon tax or a cap-and-trade market and eight have already announced plans to go for one of the two options.
One of the eight is Alberta, where the left-leaning New Democratic Party government backs the idea of pricing carbon.
But as McKenna spoke on Thursday, Alberta's two right-leaning parties announced plans to merge. The move would create a serious challenger ahead of a 2019 election and if the new party won, it would undoubtedly ditch carbon measures that the New Democrats have introduced.
That in turn would cause tensions with Trudeau, who would be forced to impose a carbon price.
Until he was elected in late 2015 Liberal governments had a long history of squabbling with Alberta and western provinces over energy and taxation policies, which helped ensure few federal Liberal legislators were elected in the region.
The Liberals though won an unexpectedly large number of Alberta seats in 2015, heralding what party insiders hoped was the start of a political breakthrough.
($1=$1.36 Canadian) (Reporting by David Ljunggren; editing by Diane Craft)