Proceedings of the Standing Senate Committee on
Agriculture and Forestry

Issue 1 - Evidence - Meeting of April 23, 2009


OTTAWA, Thursday, April 23, 2009

The Standing Senate Committee on Agriculture and Forestry met this day at 8:04 a.m. to study on the current state and future of Canada's forest sector.

Senator Percy Mockler (Chair) in the chair.

[English]

The Chair: I welcome you all to the meeting of the Standing Senate Committee on Agriculture and Forestry.

I am Senator Mockler, from New Brunswick, chair of the committee. I would like to start by introducing the members of the committee. I will ask each committee member to identify and introduce themselves, and I will ask our deputy chair to start.

Senator Fairbairn: Senator Fairbairn from Lethbridge, Alberta.

Senator Eaton: Senator Eaton from Ontario.

Senator Rivard: Senator Rivard from Quebec.

Senator Housakos: Senator Housakos from Montreal.

Senator Duffy: Senator Duffy from Prince Edward Island.

Senator Cordy: Senator Cordy from Nova Scotia.

Senator Mercer: Senator Mercer from Nova Scotia.

[Translation]

This is our second meeting to study the current state and future prospects of the forestry sector.

[English]

In order to gain an overview of the forest industry, the first phase of the study is the gather more global information. With us today we have representatives from the following national groups: the Forest Products Association of Canada, Avrim Lazar, President and CEO; the Canadian Wood Council, Bill Love, Chairman of the Board; and the Canadian Federation of Woodlot Owners, Peter deMarsh, President.

[Translation]

We also have Jean-Pierre Dansereau, Executive Director of the Fédération des producteurs de bois du Québec. Thank you for being here.

[English]

Witnesses, the committee thanks you for accepting its invitation to appear today. I would now invite you to take the floor. We will start with Mr. Lazar and will continue to Mr. Love, to Mr. deMarsh and to Mr. Dansereau.

Avrim Lazar, President and CEO, Forest Products Association of Canada: Thank you and, senators, thank you for choosing to pursue this topic. We could call it the future of the forest industry, but we should probably call it the future of rural Canada. Three-hundred towns across this country depend upon the forest industry. The direct employment number is 275,000; even after all the job losses. Three times as many people in addition to that depend on the industry for their employment, bringing it to almost a million in total.

Perhaps more importantly still, in the towns where the forest industry is present, very few alternatives for employment exist, especially high-paying, high-tech, high-quality jobs, such as we provide. Finding out how to keep our forest industry is really about learning how to keep the backbone of our rural society.

As you know, we have gone through difficult times over the last few years. The housing market collapsed, the credit market collapsed and, in some terrible sense, the forest industry has been leading edge in that we were the first to come into this recession, and we have been among the hardest hit. In the last two years, 50,000 people have lost their jobs. Most of them do not want to get a job in tourism, changing bed sheets, or as nurse assistants. They like working in the forest industry where they have good wages and good work.

Is there any hope? What can we do, and what is the role of government? Let me answer each of those.

There is more than hope; there is a certainty — a complete certainty — that the markets will return. They will never be as high as they used to be for newsprint; the move world moves on to the Internet. However, for pulp, other types of paper and lumber, not only will the market return but given global growth, the growth of the economy, the scarcity of natural resources globally, the markets will be stronger than they have ever been, and Canada will be well placed to meet them. The old model of "when demand increases, increase plantations in places such as Brazil and Indonesia'' will break. The reason that model will not continue is that good agricultural land will be used for biofuels, such as sugar- cane in Brazil, or for food to feed an expanding global population.

The supply of fibre for the forest industry will come from the boreal forests — from Canada and from the Scandinavians and Russians. The Russians have been expanding their industry quickly, but they were very highly leveraged, and this credit crisis has left them weak. Even the Europeans have suffered as much as we have.

Therefore, a market will develop, and we will be well positioned to benefit from it. However, how do wet get from here to there? How do we survive this downturn and prepare to prosper?

It is worth remembering that both questions, not just survival but preparing to prosper, should be the focus of our concentration.

Three factors determine the fate of jobs in the forest industry: markets, which are bad, but they will get better; specific business strategies of companies, some of which have bet right and some wrong. That is the nature of free enterprise. If you figure it out, you are rewarded and, if you do not, the consequences are clear. The third factor is government policy, which affects every single cost factor in the forest industry: transportation, energy, trees, labour and access to markets. Government has a huge role.

We are hoping that you will focus on the role of government and what government can do to create more competitive business conditions.

What is the role of government?

We have to acknowledge that the treasuries of all the provinces and the federal government do not have enough money to save an industry that is not competitive. We also have to acknowledge that the ministries of finance do not have enough financial power. However, you can set competitive business conditions, and then, with returning markets, the industry itself will bring prosperity back.

For the immediate, we all know that we need safety nets. The initiatives that the governments have taken, in extending EI and work sharing and community adjustment programs, are the right steps that will help us through from today until tomorrow.

Government also has an immediate role in stimulating economic activity in general. The spending programs and macro-economic policies we have seen are headed in the right direction. Some might second guess the stimulus programs and what has been done on macro-economic policy. However, let us be fair; these are uncharted waters. We have to respect the bravery of the Governor of the Bank of Canada and the innovative approach he is taking. Good faith abounds, and the approach being taken to help us through this is impressive.

We have seen slower progress in the role of government in improving business conditions. Let me give you a few simple recommendations that could be done soon to improve business conditions.

First is to address the rail monopoly. Eighty per cent of our mills are captive to a single-line railway. Transportation is 40 per cent of our cost structure. The railways overcharge. Their prices do not go down in a recession. Prices go up when fuel prices go up. They never come down when fuel prices come down.

They do what any intelligent businessman with a monopoly would do: They extract as much as they can from their customers. The victim of this is Canada's rural communities that depend on cheap transportation.

Senator Duffy: Forty per cent are captive?

Mr. Lazar: It is 80 per cent. It is not that the railways are bad. We have great respect for them. They are intelligent, efficient and well run. It is that they have a government-given monopoly. They use it to get profits for their shareholders at the expense of rural Canadians. We are not saying they should not make money. However, they should not be the only people making money in the supply chain.

That is something government can do. It would be pro-competitive. You do not have to worry about the Softwood Lumber Agreement. Nothing in the agreement says that railways need to have a monopoly, and it would affect the bottom line.

Second, when we invest in research and innovation currently, a tax credit is available, but only if we are profitable. Why would we want to make that tax credit available to those who are profitable and hold it back during a recession when almost no one is profitable when we want companies to innovate their way out of trouble?

They are not asking for handouts or pity. They are saying that they will invest in research to try to think their way out of this box, to find new ways. The government says that is good, and if they ever become profitable again, they will give them their tax credit. However, until that moment, they will keep it in the federal treasury. I do not understand this.

Third is to extend the accelerated capital depreciation. The government has done this in two-year initiatives. Big capital projects do not happen in two-year terms. Some say that no one is investing anyway. That is exactly the point. We should not think only of the current situation. We should be looking to the recovery and be first out of the starting blocks. It will be a mean, competitive world after this recession. If we are ready, we can get a large share of the market. The United States, France and many forward-looking countries are changing their tax rules now to prepare to be first out of the starting blocks when markets return.

Fourth is to better support our transformation to a green industry and the use of green energy. Incentives for the use of renewable energy tend to focus on wind and solar. Canada has a very large supply of biomass. If you help us with that, it will not only be more cost effective but also increase our performance on greenhouse gases. It is an easy thing to do.

Fifth is credit markets; we made that our number one request in our last budget. The government recognized it. I have to give credit to the Export Development Canada, EDC. Not only have they stepped up to the plate with increased funding but have been braver and more imaginative than in the past. We have the sense that the government understands the need to make credit markets work. We understand they cannot replace the whole global financing system. However, every single piece of aggressiveness, urgency and expansiveness of the government helping credit markets work will save job.

Finally, a strange thing has happened in the U.S. What was intended to be a biodiesel subsidy, where you receive 50 cents per gallon if you add biofuel to your diesel, has turned into a very large subsidy to the pulp markets. People who use black liquor, which is a natural product from trees, figured out that if you add a small amount of diesel to the black liquor, you can call it biodiesel. Biodiesel is defined by having a certain minimum of biofuel in your diesel. This product was not diesel fuel at all but only green energy. However, they added a bit of diesel to it, and it became a subsidy of $200 to $300 per tonne for pulp that sells for $400 to $500 per tonne. Therefore, it will kill us. The answer to this is that the government has to find a way, fast, to offset this.

The Chair: Thank you, Mr. Lazar. We will follow with questions after the other presentations. I would ask Mr. Love to proceed.

Bill Love, Chairman of the Board, Canadian Wood Council: Thank you Mr. Chair. I want to thank the committee for inviting me to appear. Nothing is more important today than addressing the current challenges facing our industry. I am truly grateful for this opportunity.

I have a small handout to help me as much as you. I am not a paid lobbyist; I am not a professional. I am an industry person, a simple dirt forester. I do not do this type of presentation often.

I believe I am well qualified to speak to the subject. I am currently employed with Tembec. We are a Canadian forest products company with about $2 billion in sales in pulp, paper, lumber, chemicals and flooring. I am living this current crisis every day.

Tembec had a near-death experience last year, but we were able to recapitalize and avoided the fate of AbitibiBowater, which is bankruptcy protection. The pain continues; I have laid off 10 people in my group. Tembec employment has dropped from 10,047 people in 2004 to 6,727 in 2008. It is still dropping. We have laid off another 1,400 people this year. Our salary, payroll and benefits dropped from $771 million in 2004 to $508 million in 2008. That is a reduction of more than one-quarter billion dollars in salary and benefits.

As Mr. Lazar said, much of that is in single-industry, rural towns. I spoke to my brother this weekend; he is in this business as well, and he has received his notice. I am living this every day.

I am here today as the chairman of the Canadian Wood Council, CWC. It is a voluntary position, one I am proud to hold. However, I do not profess to be an expert on codes and standards. I am a simple industry person. The Canadian Wood Council is over 50 years old. The purpose and value statement are on pages 1 and 2 of the handout. The CWC is the single national organization that maintains and expands market access for solid wood products in North America. My perspectives today relate directly to the solid wood product sector of our industry. CWC has not been immune to the industry's pain. We have reduced staff from 22 to 14 people over the last three years.

Ten minutes does not seem like much time to address an industry crisis, so I have only a few simple messages today. First, sustainably managed forests and wood use provide tremendous economic benefits in Canada — you have heard Mr. Lazar speak to the numbers — locally, provincially and nationally. While doing that, we maintain the ability of future generations to use that same reinforced resource.

Canada is a world leader in protected areas. We have the most third-party, independently certified, managed forests in the world. Wood is the only renewable and sustainable building material. Growing trees absorb carbon dioxide. They release the oxygen and store the carbon. That carbon, whether in lumber, flooring or paper, is stored for the life of the product. A typical 2,400-square-foot, wood-frame house stores approximately 29 tonnes of carbon. That offsets the CO2 released when driving an automobile for about five years.

Additional details on page 3 of the handout show some of the other advantages of using wood rather than concrete and steel. Wood is the only carbon-neutral building material in existence.

We have world-leading forest practices and an environmentally friendly product, so what is the problem? As indicated on page 4, it is obvious. If we do not have a customer, we do not have a business; if we do not have a business, we do not have employees.

That is the current crisis. I included a few graphics to illustrate how bad it has become. On page 5, I illustrate the precipitous drop in demand. We have gone from a peak of about 2.2 million housing starts down to 600,000. That is a 75 per cent drop in demand.

On page 6 you will see what this has done to our prices. They have gone from over $400 a unit to $190 a unit; a 50 per cent decline. By simple calculations, a 50 per cent decline in volume and a 50 per cent decline in price results in 25 per cent of business remaining. Not many industries can survive at those rates, which is why today we see both permanent and temporary layoffs as well as closures.

What is the answer and how can the federal government help? On page 7 I have included a few simple statistics. The lumber industry has a capacity to produce 30-plus billion board feet every year from sustainably managed forests. In 2008, we only produced 24 billion board feet. We ship about 10 per cent of that, or 2.4 billion board feet, offshore. In Canada, we consume between 9 billion and 10 billion board feet. That means that we have between 10 billion and 20 billion board feet of leftover capacity that has to find a home.

Where will it go? We need to grow the pie; we need to diversify the markets; and we certainly need to be less reliant on both residential construction and the U.S. market. We do not need more research and development at this time to develop new markets; we need markets for the products we already have. This is survival time: No customer equals no business equals no employees.

The federal government can play a leading role in helping the industry to diversify our markets in four areas: offshore markets; what we have traditionally called non-residential or commercial markets; an emerging market called mid-rise; and internal federal policies on wood.

With respect to offshore markets, the federal government Canada Wood Export Program — more commonly referred to as Canada Wood — is active. Efforts could be accelerated and better focused with some clear targets. I would like to see a target of increasing offshore exports by 10 per cent per year for 10 years. We have to think longer term than we have traditionally done. That could result in 5 billion board feet going offshore.

On page 8 is something of which we are quite proud. This is an example of a non-residential type application. It shows the 2010 Olympic Oval, which is constructed of wood. It is the largest clear-span roof in North America, and it is an innovative system. The design can be reused for other commercial roofs. The key is that we did not invent any new products. This uses lumber and plywood; 2 million board feet of lumber and 19,000 sheets of plywood.

Think of fruit salad. No one invented fruit salad. We took existing products and reconfigured how they are put together. The Olympic Oval is an example of taking commodity products and using ingenuity to put them together in a different form. At this time, I am not sure that we need more R&D. We need to figure out how to use the products we have.

The North American, non-residential market is in the order of 6 billion to 8 billion board feet. Currently North American market efforts are not eligible for funding under Canada Wood. Canada Wood has a clear offshore focus. It is much more difficult to cobble together funding and a long-term commitment to do things in North America.

On page 9 is an example of mid-rise construction. I would like the federal government to encourage and support the use of wood in mid-rise construction, which is zero to ten stories. Europe and Scandinavia have developed and commercialized this technology. You see here a nine-story building in England constructed 100 per cent of wood, although in the finished state no one would know that it is wood. That one building used about 1 million board feet with no steel whatsoever. The structure of the building is entirely wood. Its performance is equal to or better than concrete, and it has a huge positive impact on the reduction of greenhouse gases. Every 1,000 board feet of lumber that is used to replace concrete results in 3.6 metric tonnes of either sequestered carbon in the wood or avoided CO2 emissions in the concrete.

This is a huge North American market potential; in the order of 5 billion to 15 billion board feet. Again, North American market efforts are not eligible for funding under Canada Wood. This is not to say that the federal government is not helping, but no pot of money with a long-term commitment to tap into that market is available.

Finally, on the federal policy on using wood, we have world-class forestry, an environmental product and a desire to be greener. However, we do not seem to understand how to use wood effectively and how to use more wood. The federal government should adopt a policy to require a wood construction option for all federal buildings, infrastructure projects and joint federally funded projects to show some leadership.

On page 10, I have shown what leadership can do. In Finland, the government decided they needed a program to use more wood. Much of it was based on reducing CO2 emissions. The government set up a program linking the efforts of industry and the associations of research providers with strong government leadership and participation by all. They doubled their per capita consumption of wood over five years, so it can be done.

In conclusion, we have world-class, sustainable forestry and the world's greatest renewable building product, a product that needs to find new markets. The federal government can play a key role in helping us to develop those markets as well as encouraging the increased use of wood. It can support the tremendous economic benefits that our industry, locally, provincially and nationally, provides, all while making positive contributions to the environment.

The European Union gets it. They put out this book in 2005 called Tackle Climate Change, Use Wood, which outlines the merits of using wood over steel and concrete. I have the Canadian edition available for handout.

Tackle climate change; use wood.

[Translation]

Peter deMarsh, President, Canadian Federation of Woodlot Owners: Thank you for inviting us to appear here today. We apologize for not presenting our document in both official languages.

[English]

I want to stress three solutions that we believe will help both woodlot owners across the country and the forest industry as a whole.

I am a woodlot owner from New Brunswick, and I am here representing the federation of woodlot owners across the country. We are 450,000 families, in all provinces, which amount to about 2 million Canadians in all. We own a very small part of the Canadian forest — about 9 per cent —yet, if that 9 per cent were the forests of a country, we would be somewhere between Finland and France in terms of the size of our country's forest. Therefore, while we are a small part of the Canadian forest, we are a significant share of the world's forests.

We have also been an important supplier of raw material to the forest industry, represented by the two gentlemen on my left. During normal times, we have contributed about 14 per cent of the raw material used in this country, and it has been worth to the rural communities, as raw material, over $1.5 billion. The last normal year, from our perspective, was 2004-05.

We have heard about the devastation to the industry, companies and mill employees. This is very visible pain being felt by the Canadian economy right across the country. The less visible part of this pain is the loss of revenue that we have experienced as woodlot owners. It has been devastating for us, as well. We have given you some figures for both Quebec and New Brunswick. In the last three years, Quebec estimates that woodlot owners and the rural community have lost over a half billion dollars in sales. In my own province of New Brunswick, our losses this year will be close to $100 million. Our sales in New Brunswick have declined by 80 per cent compared to 2004. We are sharing this pain in a big way.

The causes of the crisis have been well explained by the previous presenters and do not require any elaboration. We would like to stress one point, however: Our forests, in their present state across the country, have not been an asset for the industry in helping it get through the tough times that we are sharing. We compare our situation with the Nordic countries, which have built an industry that is very competitive, very modern and relies, to a significant extent, on a very productive, accessible and well-managed forest. We believe this is one of the keys to rebuilding in Canada an industry that will have a future as a competitive player in world markets.

As best anyone can foresee the future, we expect the industry here will look a bit different five years from now than it looked five years ago. Perhaps it will be somewhat smaller or have fewer larger companies. Two other possible trends, however, may both strengthen existing industry and strengthen rural economy across the country. We see the possibility of an increase in smaller, value-added forest products companies serving local and regional markets. We see, as well, new industries developing, and, in particular, energy. It is important to stress that these possible trends will not compete with a re-established traditional forest products industry; they will complement it.

In the area of energy, it is essential that the energy companies have access to markets for high-quality sawlogs. It is not possible to go into the forest and produce wood for energy only and make money. As well, having good markets for low-quality wood for energy plants will be complementary to the wood supply needs of the lumber industry. They will need each other.

I will now return to my three key points. I will deal with silviculture first. We have had a serious tax problem due to the series of natural disasters that have affected both woodlot owners and other forests across the country. The most recent one is the mountain pine beetle devastation in British Columbia. Before that, it was Hurricane Juan in Prince Edward Island and Nova Scotia. Before that, it was the ice-storm in Eastern Ontario and Southwestern Quebec.

When a woodlot is devastated by one of these events, woodlot owners have a big spike in our revenue over one or two years due to the need to salvage as much of the damaged timber as possible. Therefore, we pay higher taxes than we normally would have to. Then, three or five years down the road, when it is the time to replant that destroyed forest, we have no revenue against which to apply those expenses. It is a "double whammy.''

We have proposed to the federal government what we call an individual silviculture saving and investment plan; details are in the written presentation. We believe that such a plan would correct the unfairness caused by situations such as the British Columbia and Alberta mountain pine beetle problem. It would also be a really positive tool to encourage owners across the country to invest more in silviculture. Ultimately, an action such as this would give us a big boost in terms of confidence and optimism.

The second specific recommendation is in the area of markets for wood energy. Two types of product interest us: wood pellets and small and medium-sized district heating systems, at the community level.

I am involved in a small start-up business in Central New Brunswick that will be producing wood pellets in the next two or three months. We are a small company. We have raised our share of $3 million in the capital cost of the business from about 125 shareholders in the immediate area within about 20 kilometres of the plant. The plant will create 12 jobs. We see this as an incredibly interesting model to be repeated elsewhere in the country.

In terms of small- and medium-scale district heating systems, Europe, especially Northern Europe, has hundreds of these in small communities. Finland alone has 200. These are replacing heating requirements formerly supplied by oil from Saudi Arabia. They are fuelled by cooperatives of woodlot owners within 10 or 20 kilometres of the community.

I look at my province of New Brunswick and can see 25, 30 and possibly 40 communities that could benefit from this sort of self-sufficient, secure, long-term system for heating. It would be for public buildings in the centre of the community. Add several hundred more across the country. This type of wood pellet or heating system enterprise is an opportunity, as well, for woodlot owners, consumers and community groups to invest in industry that serves their own needs and keeps their energy dollars in the local economy.

The federal government could do a number of things to encourage this development. A serious problem with regulatory regimes at the provincial level across the country exists that is discouraging this type of development. Some details are provided. To add to a comment from Mr. Love, we think more wood should be used in federal buildings, as well as wood heat. That would be a tremendous opportunity to demonstrate the viability of wood heat and to demonstrate cutting-edge technology that is available, especially from Europe.

We would like to work with the government to develop a model of local investment funds to support the efforts by communities and woodlot owners to build pellet plants and heating systems in their communities.

I mentioned the project I am involved with in Central New Brunswick. If we were to try to raise the financing needed to support that project under today's circumstances, we would have zero chance of being able to proceed with that project. Financing is one of the big obstacles in what appears to us to be an extremely promising opportunity for rural Canada.

The final point relates to carbon. A market is emerging, especially as the political process unfolds in the United States and as Canada finds ways to work with that new American system. We want to be involved in the processes that establish the rules for trading carbon in forests on these markets. We see this as a source of revenue for woodlot owners that will allow us to increase our efforts around sustainable management of our woodlots and continue to provide raw material to the lumber and paper industries.

We need to be part of the processes developing these rules to ensure they work not only for large players but also for woodlot owners. We have mentioned that we need assistance to allow us to cover the cost of that participation, which is significant.

We are also working with the Canadian Model Forest Network to establish pilot projects to test the methods we will use as woodlot owners to bring large numbers of people together. For example, to get involved in the carbon market, it will be necessary to group from several hundred to several thousand owners to practically and feasibly be able to take part in this new market. We believe we know how to do this. We have experience doing this in other areas, but we need to test these methods in pilot projects right away. We would like the federal government to be a partner in those pilot projects.

My final comment has to do with short-term assistance. We repeat that the forest industry, if it is to have a future, will need better-managed, more productive forests growing better-quality timber. We also stress that for the forest industry to have a future, people who depend on it for employment will need to continue to work while the industry is in transition. We can assure you that many opportunities across the country to invest in silviculture exist. This is true in all provinces. Of course, tree planting and other forms of silviculture have many long-term benefits in wood supply and the environment as well as the short-term contribution of employment.

We understand that the federal government is considering a community adjustment fund that may serve these purposes. We want you to know that our associations will do everything we can to work with the federal government to participate in this program. Our main concern is that the rules be such that we will be able to participate.

I would conclude by asking the committee to support efforts to ensure that the rules under which the community adjustment fund money will be allotted include woodlot owners as one of the participants.

Senator Mercer: Gentlemen, thank you for coming. You have started to put some meat on the bones of our study to get a grasp of what we are doing.

We are now getting to smaller-sized industries. We sometimes are focused on the AbitibiBowaters of the world. As you have indicated, the health of rural Canada is at stake. This committee recently finished a detailed study on rural poverty. In our study, we discovered how important woodlots, in particular, are in many parts of the world. I am from Nova Scotia and I understand how important woodlots are. I understand how important it is to use wood as energy. I partially heat my home in Nova Scotia with wood.

Mr. deMarsh, you can either confirm or correct me on this, it is my perception that many of the woodlot owners, particularly in Eastern Canada, do not necessarily have woodlots as the primary or only source of revenue. Many of the woodlot owners are farmers or are doing many other things, and the woodlot operation is an adjunct to that. Do you have numbers that support that?

Mr. deMarsh: The average woodlot in Canada is about 45 hectares, or a little over 100 acres. It supplies a supplementary income for most of us. In hard times especially, that supplementary income can be critically important. You are absolutely right. It is a part-time income for the vast majority of us. However, when the benefits are aggregated across communities, regions and provinces, we begin to see the economic significance to the rural community.

Senator Mercer: It would also be an important part of overall income on a farm family with the average 100-acre woodlot. That would vary from farm to farm, but it is a substantial part of the income. It is also a part of the income not as subject to environmental catastrophes such as drought, flood or hail that might affect other crops. Trees are a little sturdier with the exception of situations such as Hurricane Juan.

Mr. deMarsh: Yes, that is correct.

Senator Mercer: I have noticed the development of a new product cropping up in Nova Scotia that I understand will be of some assistance in creating a new market for exterior wood furnaces. I have not had a chance to look at them in detail. They are furnaces for your home that use wood, but the furnace itself is not physically located inside the home. Is this a potential that we will see in the future in rural parts of the country?

Mr. deMarsh: It is one of a number of developments we will see. I would like to come back to wood pellets.

Senator Mercer: I want to do that too.

Mr. deMarsh: A large upsurge in demand for pellets occurred last fall and in the early winter. In fact, the marketplace went into somewhat of a panic. People are continuing to buy pellet stoves and furnaces. They are betting that the drop in oil prices we have seen will not be a long-term proposition. They recognize that it is very important as families and at the community scale that we learn to be self-sufficient in our energy requirements. Using wood for energy has all sorts of exciting possibilities; the outside stoves that you mentioned are one.

Senator Mercer: Those of us who live in Eastern Canada have seen signs at retail outlets saying that they have sold out of wood pellets. Some were sold out for weeks or months in the middle of winter. Have the people you represent been able to react quickly enough?

You indicated that you are involved in a wood pellet production outfit. I worry about us getting into this too quickly, but I also worry that we are not getting into it quickly enough because we are building a demand with people switching to wood pellet stoves and furnaces.

Is there a role for government to provide incentives for more people to get in, but in a controlled way, so that we do not set people up for failure?

Mr. deMarsh: At this time in history, governments are scrambling to bail out companies that have become so big that societies cannot afford to let them fail. We would like to see more money put into small companies that are starting out, some of which will fail, certainly, but in promising areas such as the development of the pellet market. We believe that the opportunity there is very solid.

The pellet market is not developing as quickly as it could, at least in the Maritimes, to respond to the upsurge in demand. We started out three years ago, and our business plan was that for the first five years, the majority of our production would be sold through brokers into Europe. We are now looking at selling all of our production in New Brunswick or, at the very least, in New Brunswick and neighbouring New England. The market has evolved that quickly.

Our plant will be small, and we have heard from our local regional development agency and the provincial government that we are too small to compete on the world market. We believe that we will compete because we will rely on a very close wood supply and a very close market for our finished product. In a world in which energy costs are likely to continue to rise, that will be a competitive advantage that will offset not being as large as some other producers.

Senator Mercer: My final two questions are directed to Mr. Lazar.

I share your concern about Canadians being held captive by railway monopolies. People will tell you that it is a competitive system, but in many places in the country it is not. In my part of the world, we are held captive by the Canadian National Railway Company, CN, and other people were held captive by Canadian Pacific Railway, CP. I am not sure how to get around that. You said that 80 per cent of the people in your business are held captive by one railway. I assume that is CN.

Mr. Lazar: Not entirely. Some is CP, but it is mostly CN.

Senator Mercer: You talked about black liquor and the black liquor subsidy that we have begun to talk about here. You said that the Americans get a biofuel subsidy of between $200 and $300 per tonne. That is a substantial amount of money.

Mr. Lazar: It is billions of dollars. I think the last figure I saw was $7 billion.

Senator Mercer: As the production of newsprint shifts, is there a commercial market for the producers of black liquor outside the actual production of paper?

Mr. Lazar: Black liquor is useful for energy in the mill. That is how the Americans use it, and that is how we use it.

We were speculating, somewhat tongue in cheek, that in British Columbia we could do what is called "splash and dash,'' that is, put the black liquor on a truck, add some diesel across the border, collect our $200 to $300 dollars a tonne, ship it back and use it in the boiler. We figured out that we could do that quite economically, especially on the West Coast where we could barge it back and forth. We floated this in the U.S. just to give them an idea.

The bottom line is that this is a public policy accident. Some guy in a pulp mill read the regulations for biodiesel and said, "Holy cow, if I put some diesel in my biofuel, these guys will have to pay me.''

We cannot afford to have it continue unmatched, simply because they will start opening unproductive U.S. mills. If U.S. mills are given $200 to $300 a tonne, that will cover three quarters of the cost of production. Canadian mills will close and U.S. mills will open.

With regard to pellets, you asked whether the governments can do something. We are great champions of bio- energy. Sixty per cent of the energy in our mills comes from bio-energy, and pellets are a great way to use wood that does not have other markets. We are cautious of government incentives to drive the use of wood in one direction or another because with the incentives for bio-energy in Europe, they have put pulp and paper companies out of business. We have started a study, together with provincial and federal governments, asking what the social, environmental and economic impacts are of using a tonne of fibre in various ways, including pellets, pulp and lumber.

If government gets too involved in trying to push it one way or another, you may have perverse incentives. The job- multiplier factor for a forest products manufacturing use of fibre is 7 to 1 as compared to burning the wood for energy.

It is much better to burn it for energy and have a market than to do nothing with it.

Senator Mercer: Are pulp and paper companies not going out of business now? You think this would drive them out of business, but they are going out of business now. Might this help save some of the industry?

Mr. Lazar: It certainly could help save some of the forest wood that would not otherwise be used. However, we do not want to put too many levers into the natural marketplace for wood use because we may get a distorted result.

We should think about the big and small companies as an economic ecosystem. They depend upon each other. We need the woodlot owners; they need the big companies. As Mr. deMarsh said, we need many more small, value-added companies; the niche players, the agile players, and the big, world-class heavy hitters. If they are all functioning, everyone prospers. If you take out one piece of the economic ecosystem, the whole ecosystem shakes.

Senator Eaton: Thank you very much. You have all been very interesting.

Mr. Lazar, educate me. This might seem like a very unknowledgeable question. The Americans hung us up for a long time over our softwood lumber, claiming that Canadians were being subsidized. Could we not say that black liquor is a form of subsidy to their mills?

Mr. Lazar: We certainly can say it, but countries are allowed to subsidize as long as they do not use it to get trade advantage. When we are selling into their market, they can take trade action against us, but we cannot take action against them if they are selling into their own market.

Some remedies might be available under the World Trade Organization, WTO. However, they take at least a year, and by that time it will be too late. The remedies are difficult to enforce. The U.S. could say that we are right, and they are sorry, but by that time the damage will have been done.

If it is stopped in the U.S., it will not be because Canadians are unhappy; it will be because U.S. senators say that they never intended to give the U.S. pulp industry $7 billion of taxpayers' money, that it was a public administration accident, and they will close the loophole themselves.

Senator Eaton: Maybe you should be lobbying in Washington.

Mr. Lazar: We thought about that, but we are worried that if we go there and say this is killing Canadian jobs, they might think it is not so bad.

Senator Eaton: To clarify on Senator Mercer's question on railway monopoly, would it be illegal for a couple of you to get together and put in your own rail line, if it would prove to be cheaper, or to use trucks? Do you have to use the railway?

Mr. Lazar: No, we do not have to use the railway. However, given our geography, rail is the only reasonable way of shipping. The railways own the lines, and the Canada Transportation Act gives them monopoly power to use those lines.

Senator Eaton: Can you build your own?

Mr. Lazar: No, and I do not think it would be good for anyone. We are looking for increased rights for competitors to use the rail line with fair compensation to the owner of the rail line.

It is similar to what has happened in telecommunications. When Bell owned the world and people said, "We need competition,'' they said that there would be no phone lines to Prince Edward Island. They would all be in Toronto. Everyone would have to send smoke signals if Bell does not have a monopoly. The opposite happened. When telecommunications opened up to competition, prices went down and service went up.

The same will happen with rail, and it must be done in a fair way. The railways do invest in infrastructure and equipment, and they have to be compensated for that.

Senator Eaton: Mr. Love, I do not know whether it is a Canadian phenomenon, but our marketing for this industry is minimal; I am a visual person and look at ads almost as much as I watch the content of programming these days. Have you ever thought of doing a broad marketing program?

Sometimes it is me, the consumer, who tells my contractor that I would rather have something built in wood than concrete. As opposed to approaching the industry, have you ever thought of approaching the public with a grassroots campaign promoting that wood is sustainable and green? You have everyone on-side these days; everyone wants to be green.

However, no one has heard your story. I have not heard this story. Have you heard this story about how green the industry is and about the recent innovations?

Mr. Love: I cannot disagree, Senator Eaton. It is the best story never told. I do not have a very good reason except to say, bluntly, that the industry became fat, dumb and happy when times were good. This is feast and famine. We go from the highs to the lows, and when we are in the lows, we have no money to spend on anything.

The European Union has figured it out. They have district heating and pellets, and they are switching fuels and materials. They are doing all this strictly on the environmental agenda. Therefore, yes, we have to get better at telling that story. I do not have an answer on how to do it.

Senator Eaton: Perhaps the governments, both federal and provincial, can help tell that story.

Mr. Lazar: To give the federal government credit, they have provided us with new funding to help us explain to the public what our environmental credentials are. It is not sufficient to do a big, public campaign, but we are approaching architects, engineers and home depots to explain our credentials.

Senator Eaton: Do you have a program, for instance, in architectural schools or trades showing how to use wood; how it is stronger than steel and lighter than aluminum?

Mr. Love: We did have a person at the Canadian Wood Council whose job that was. The position is now vacant. That is a phenomenon of the cutbacks to industry funding.

Senator Fairbairn: I will return to the issue of railways. Having come from Western Canada, we are always in a state about railways. In the past, the farmers have had great trouble.

Is there absolutely no way, at a time when this is a huge issue in our country now, that our government can get the rail line folks back into the picture? We are losing something huge by not being able to have that effort. Currently, is there a very vigorous "fist'' on them to see if you cannot, in some way, involve them? It is the centre of how this industry can work for this country.

Mr. Lazar: The question we have been facing is whether we want to see more government control of the railways or more competition. Our instinct is to go to competition because the government's fist may be applied in a very intelligent way in the first instance, but then it never changes. Even when you have perfect government economic policy, the economics change and the policy does not change.

We are loathe to ask for that.

In the last session of Parliament, the government did pass Bill C-8, which allows groups to take the railways to arbitration on costs, and that helps. It is final-offer arbitration, which means the most reasonable wins, and we are pretty confident that we are more reasonable than they are, so we are really happy with that. The reason we did not use it in the past is because it is about $1 million a shot, and we do not have that many millions to shoot.

Senator Fairbairn: Is it working though?

Mr. Lazar: We will be out there with the first arbitration soon. We have a case developed, so watch that space.

That was a good step. The next step will be to increase the range of interswitching. The rule is that, if you are within so many kilometres of a switch where two lines are going, the competing line can come up and get the stuff and pay for the use of the tracks. It would be relatively simple — I say "relatively simple'' because nothing is simple in railway regulation — to extend interswitching distance, which will bring in competition. Therefore, even though we stamp our feet and pound the table and say "We need a revolution,'' a regulatory adjustment is the most practical move, and we are trying to find one.

Senator Fairbairn: That is fairly hard.

Mr. Lazar: We actually believe we have something that most of the captive shippers are interested in, and, within weeks, we will probably move on to a campaign to say, "Watch this space.''

Senator Fairbairn: It is to their advantage, as well.

Mr. Lazar: Yes, it is.

Senator Fairbairn: Let us hope.

I have one other question for Mr. deMarsh. With respect to woodlot owners and so on, let us look at the pine beetle, which is devastating. My colleague mentioned that, when we were doing our report on rural poverty, we were up in Prince George, in Northeastern British Columbia, where the devastation was so overwhelming that you did not want to look out of the plane.

Our group was quite down after we had gone through hearings there. We had been invited, unbeknownst to us, to a tiny town close by to see something. A couple of fellows had the idea that if no one else was looking to do something, they would see if they could get some of that pinkish wood to start making household items, whether tables, chairs or whatever.

The items turned out to be very attractive, very well done, and people were coming from Vancouver and elsewhere to buy this stuff. Then, because it was such a small community and a small business, and because they did not have enough financial wherewithal, they had to shut down, which was sad.

I am in an area — the Crowsnest Pass — where the pine beetles are creeping around or are about to, and it is disturbing because they do not stay confined to one area. It is very difficult because the infestation moves into communities that are not even close to the original area.

I know, for instance, that several people, especially young people, have been in the business of forestry and various other things. I meet them on the planes coming from New Brunswick and elsewhere, going to the Crowsnest Pass to create an army to take care of this.

Are any new efforts being made through science and physics to stop this now that we know the method and speed of the infestation? Do our science associations know of anything that will stop these pests before they get out of control as they did in British Columbia?

As we went across Northern Ontario, we saw various problems with the forestry industry as elsewhere in Canada. However, the one thing bothering them more than anything else was the fear that once the infestation gets going, that it would move right across Canada, which was probably true.

Mr. deMarsh: I understand that the situation in B.C. is past the point of preventing further damage. The damage has been done.

Senator Fairbairn: Yes, it has. We are hoping, in Alberta, that something can put up on the edge.

Mr. Love: When the beetle epidemic started, not much knowledge was available. People thought the beetle would only go five miles. Money has been invested, and we now know that the beetle can go hundreds of miles. It travels with the wind.

The initial strategy of trying to control it locally did not work. That is why B.C. ended up with the problem they have. We have operations in the South Kootenays to address the beetle. We go in, and as soon as we have an infestation, we cut the trees. If no market exists, however, we cannot afford to go in and cut trees simply to cut trees. This economic downturn has not made it easy to utilize that resource; because if no pellet, sawlog or pulp market exists, it is difficult.

[Translation]

Senator Rivard: We had the pleasure last night of having Mr. Lazar appear before the Committee on National Finance, where he gave a very good presentation as he has done this morning. We were concerned about the high costs of transportation. There was talk of a possible monopoly between CP and CN. It became clear that Bill C-8, the competition bill, could resolve that problem. If it is established that there is a cartel and that prices are being fixed, the legislator will be able to deal with the issue under Bill C-8.

My questions deal with the newsprint industry. Newsprint, of course, is produced from wood. Do you have any idea of the percentage that is used annually to produce newsprint?

Mr. Avrim: I do not have the exact figure.

Senator Rivard: Do you have an approximate figure?

Mr. Avrim: We are talking about an integrated industry. Newsprint is made from pulp, which is derived from the lumber industry. A tree is made into lumber, and the chips that result from that process are used to make pulp for paper. In fact, the industry produces no waste, since even sawdust and bark are used as an energy source. It is completely integrated.

I will find the exact figure and get back to you.

Senator Rivard: You have no idea whether we are talking about 5 or 10 per cent? Is it a very small proportion?

Mr. Avrim: No, it is not a small proportion.

Mr. Love: The AbitibiBowater plant at Iroquois Falls produces pulp for newsprint. The sawmills in Cochrane, Kirkland Lake and La Sarre, Quebec, depend on the Iroquois Falls plant. Chips account for some 50 per cent of production at those sawmills. The industry is completely integrated. The loss of the Iroquois Falls paper plant would have serious consequences for those three sawmills.

[English]

Mr. Lazar: That is why we use the concept of an economic ecosystem. People say that this one has gone down, but the other will do well; we depend on each other. The good news with newsprint, although people are switching from classified advertisements to Craigslist — and they will not come back — is that the same resource can be used for other types of paper. Global demand is increasing by 2 per cent per year for all sorts of paper and wood products. It is not as if this is end. It is one of many adaptations.

[Translation]

Senator Rivard: My question was really about newsprint. The economic crisis has meant a lot less advertising. In the United States, there have even been several large newspapers that have closed down. This is attributable partly to the economic crisis and partly to the Internet, which is being used by more and more people. So there is little hope that demand for paper, and therefore for wood chips, will be on the increase. In fact, it will probably continue to decline.

My next question is for Mr. deMarsh. It was surely a political decision to build the Olympic oval in Vancouver out of wood. Maybe it was because of the size of it.

The project to built the new hockey rink, the Colisée, in Quebec City has caught the interest of former minister Guy Chevrette. He used to be very involved in the government, and he still has some influence. Mr. Chevrette is pushing the idea that the new Colisée should be built of wood. To begin with, using wood instead of steel or concrete for that kind of building would cost between 20 and 25 per cent more.

There are also problems having to do with mechanical systems, ventilation systems, air conditioning and sound equipment that would be suspended from the structure for performances. Because of those problems, it will be better to use traditional materials rather than wood. What do you think of that hypothesis?

Mr. deMarsh: Mr. Love's example is music to my ears, since that is the way of the future, for a number of reasons.

Mr. Love: The material used to build the oval will cost less than if concrete or steel had been used. There will be great acoustical advantages, and it will last longer. So it is a good example of how our products can make projects more environmentally friendly and less costly. All that is possible if there is a strategy to do this across the country.

Senator Rivard: Rest assured that we will do our work diligently and carefully. If the project goes ahead and its promoters ask for federal and provincial assistance, we will look favourably on wood as the building material. If the costs are comparable, I believe that we will try to use our political weight to have the new Colisée made of wood.

Jean-Pierre Dansereau, Director General, Fédération des producteurs de bois du Québec, Canadian Federation of Woodlot Owners: I am happy to comment on this. There are questions around the table about the role of government. Here is an ideal example of the role that the government can play. Even where a project of the scope of the Colisée is concerned, people identify technical problems and cost issues. We need to put our shoulder to the wheel. We need to show leadership.

If there are extra costs, this kind of project will be possible only with government support. It may be the role of government, particularly the federal government, to lend a hand so that we can develop this expertise and refine our knowledge and techniques.

Then these construction techniques will develop and become known, and they will be very competitive if it is not already the case. You should not hesitate to insist on this.

Senator Rivard: You can count on us. We were talking about statistics. I will not ask what percentage of wood is used for toothpicks.

[English]

Senator Cordy: Thank you very much for appearing before us this morning to further enlighten us in our study.

In the last budget, $10 million was set aside for demonstrating the use of wood in offshore markets.

Mr. Lazar, I believe you said that none of this money can be used for developing North American markets.

Mr. Lazar: Canada Wood funds offshore partly because we do not want to get into any sort of tensions with the U.S. around softwood for funding in North America.

As part of the softwood deal, the governments established the North American wood council, the job of which is to promote the use of wood in construction in commercial buildings right across North America. That provides us with a forum to do it.

It has several benefits. One of the key solutions in the softwood dispute is to grow the market. With a larger market in North America, a fight over the pie is less likely to happen. Also, a council of CEOs from the forest industry around the table trying to figure out how to grow their market creates a sense of community and common cause.

As to whether it has been successful at that, I would say that the success has been modest at best because we currently have a very small pie. Everyone is very tense with everyone else. In a time of shrinking resources, community building is very difficult.

Senator Cordy: Yesterday one of our witnesses said, with regard to supply and demand, that supply is abundant but the demand has dropped substantially in the past few years.

Mr. Lazar: It will come back. Newsprint will not come back to where it was, except overseas, but wood is driven primarily by the amount of people in North America. We have been tracking the purchases of tents, and the Americans are not buying tents; they will continue to live in houses. The population is growing, and the demand for houses will come back.

The demand for wood will come back offshore as well. In fact, we think that the future of Canada's industry will be driven by the wood industry; by paper, which will be a partial economic support to the wood industry, and by the pulp industry. We will be selling pulp around the world. Those are two commodities for which global demand will grow year after year.

Senator Cordy: I am not sure whether it was you, Mr. Lazar, or Mr. Love, who said, about research and development, that if the research project is not successful, you cannot claim a tax deduction for it.

Mr. Lazar: There is a federal tax credit for investments in innovation and research, but you can only claim it if you are taxable. Therefore, in a year in which you are not taxable, you do not get the credit. What happens if we go through a three-year recession? The government keeps the money, almost betting that you will fail. They owe us the money. The first time we get profitable, they will give it to us, but in the meantime, we are teetering on the brink. In times of trouble, government wants industry to invest in innovation, yet the incentive is yanked away.

Senator Cordy: Are you suggesting that we change the tax laws?

Mr. Lazar: Yes, and make it refundable.

Senator Cordy: What about other changes to the tax laws with respect to investment in the industry overall? We have lost 100,000 jobs in a short period of time.

Mr. Lazar: We have been suggesting three changes to the tax laws. First, make research tax credits refundable. Second, extend accelerated capital depreciation over five years at least. Capital is out there; people are investing, and when the markets return, we will see a large amount. There is no nationalism in money. The investors look for the fastest return, and right after a recession, they are looking for speed of return. If we have accelerated capital depreciation, the money will be invested in Canadian mills. If we do not, it will be invested in Brazil or Europe. It is a very powerful incentive, and the beauty of it is that it does not cost the government a penny, unless someone invests in a Canadian mill, which is exactly the behaviour we want.

Third, we suggest improvement to the look-back for carry-forward losses. The Canadian wood industry got a huge infusion of money when we got our softwood refunds. If we could carry that forward more through this period of loss, it would help greatly. It could be a tax change of general application, but mostly it would only help the wood industry, so it would be softwood safe and cash in the pocket.

We have been promoting these three changes. None of them require change to the fundamentals of the tax system or a change in political economic philosophy, and they would significantly impact how many jobs we keep in Canada.

Mr. Dansereau: I would like to suggest incentives for silviculture and woodlots as a fourth change.

Senator Cordy: Mr. deMarsh, I am very interested in your comments about the use of wood pellets. I am not as informed on this as I should be. I always think of wood pellets as supplementary heat in a house. We have a wood- pellet stove in our family room with another central source of heating.

You are suggesting that the government use wood as a form of heating in their buildings. I would like to be able to visualize how this would work. Is there a big room that someone must monitor all the time? How is that workable?

Mr. deMarsh: In Northern Europe, we can see good examples of societies that have switched to a huge extent in favour of wood in general and wood pellets in particular. In Sweden, in 50 per cent of the homes, the primary heat source is wood pellets. They have systems of bulk delivery. Just as oil is delivered to fill our tanks, the wood-pellet storage bin is filled two or three times a year by use of a truck with a pressure hose to blow the pellets in.

This principle can apply to smaller, medium-sized and larger institutions. The furnace is fed by an automated feed system. You do not constantly fill the stove with another bag of pellets as we do with the pellet stoves in our living rooms or basements. A shift is already taking place. I will be replacing my oil furnace with a wood-pellet furnace as soon as my wood-pellet manufacturer seven miles down the road is in production. I think we will see this development expand quickly.

Senator Cordy: It is a sustainable and green fuel. The benefit is also in having the producer seven miles down the road. How will we market this to government, and even to individual Canadians who are currently using this as a supplementary source of fuel, to make it a primary source of fuel as it is in Sweden?

Mr. deMarsh: We certainly need to promote it, but it is difficult to promote it before the supply is available. In my own case, our company will be doing a large amount of promotion in the Fredericton area, as our number one market, as soon as we have product to sell.

I would like to add one more point on wood energy. As Mr. Lazar pointed out, we want to be sure that we do not encourage a new industry that will be detrimental to an existing industry. It is really important to stress that when we talk about wood going into pellets or district heating systems, we are not talking about the same wood that would go to a pulp mill or a paper mill, let alone a lumber mill. We are talking about different parts of the tree.

Our view is that these industries are entirely complementary. The higher-value product from the tree, presumably, will get a higher price in the marketplace as a raw material. However, we need all three product levels of quality and price to make forest management a profitable enterprise. I would ask my colleague, Mr. Dansereau, if he has any points to add on that.

[Translation]

Mr. Dansereau: We were talking earlier about the difficulties in the pulp and paper industry, particularly for resource producers such as private woodlot owners. The markets for low-quality wood, that is, pulp wood, are disappearing.

That is creating major problems with respect to our ability to grow forests for high-quality wood that would enable us to diversify our markets with value-added products. It is also important to develop new markets for low-quality wood so that we can use all our resources. The forestry industry in the future will be built on cultivated forests. Natural forests are a thing of the past now.

We need to cultivate our forests in order to have them be more productive and closer to communities and processing plants. To do that, we need markets for all qualities of fiber up and down the production chain. For years, the market for pulp wood was the pulp and paper industry. In Quebec, wood producers practically lost access to those markets. There are still a few processors that buy logs. The others produce chips. What will the markets be for this quality of wood? It is important to work on this.

[English]

Mr. Lazar: I certainly agree that it is part of a zero-waste approach that those parts that are not commercial for anything other than pellets should go to pellets. That means more jobs.

I raised a concern because, in Europe, they have created subsidies for burning wood that are so high that parts that could be used for pulp, paper and lumber are now being burnt. As a result, the wood processing industry has lost an enormous number of jobs that could have been kept.

That distortion in the marketplace, as opposed to the use of wood of different values for different uses, is what I was worried about.

Senator Housakos: I have a couple of comments to make and a number of questions.

With respect to the rail track problem, I want to add my voice in support of that.

When the government, a few years back, decided to privatize CN Railways, it was a great initiative. However, simultaneously, when they gave them absolute monopoly right of one of our most important infrastructures — rail track — that was painstakingly laid out across the country, it created a mess in many other areas, and not just in your industry. Having served on the board of VIA Rail Canada for a year, one cannot imagine the difficulties a Crown corporation faces getting access to track for which taxpayers paid. It is unbelievable. Hopefully, the government will deal with that.

I also have a general perspective on the industry. Obviously, the industry has had some great years, and, hopefully, its best years lie ahead. Five or six years ago, I was at a round table discussion in Montreal. Senior management people from various companies were there. I think the presidents of Tembec and Cascades were there, as well as others.

At the time, they seemed like the happiest group of executives that I had ever seen in the country. I sat around the table being, by no means, an expert in the pulp and paper industry, and I heard them out. I just asked a couple of questions. I said, "Listen, obviously the industry, like all industries in Canada, is based in large part and do well on the success of the American market, the richest market of the world. When they buy, we sell, and when they do not buy, we suffer. Right now, we are experiencing the greatest economic boom in the history of humankind.'' I think at the time, the dollar was at 68 or 69 cents.

I asked simple questions as a layman who knows nothing about the pulp and paper industry: "Once that dollar goes up and once that revving cycle starts to decline in the U.S., what is your contingency plan? Are you managing yourselves accordingly? Are you reinvesting? Are you putting a sufficient percentage into R&D? Are you diversifying? Are you streamlining? Are you ensuring you are not leveraged in order to just keep up with the boom that is happening in the U.S.?''

I was struck by the answers from very intelligent individuals: First, they said that the Canadian dollar will not go up, and it was as blatant as that. Second, they said that the U.S. economy will always grow; they will continue to buy. I heard a little bit of that from Mr. Lazar when he said that a market will always exist. Yes, a market will always exist, but it is a question of trying to strategically determine how aggressive, or not, you should be in that market, depending on the circumstances.

It is a comment, and you can comment on that if you wish. It seems to me the industry was not at all prepared for the down cycle. They did not strategically plan for it in order to prepare for what is happening right now. As a result, it is no surprise to anyone that the industry was hit the earliest and hardest by the slowdown in the U.S.

With respect to how climate change is affecting Canada's forestry, what is the forecast over the next few years? How does the industry see it? Are there positive and negative elements to it?

The other question I have is about wood heating and how cost-effective is it compared to electricity and other forms of heating. What infrastructure costs would be required to change over to wood heating when it comes to government buildings or residential homes?

With respect to buildings that are made exclusively out of wood, which are eight stories high or more, what is their life expectancy compared to structural buildings that are made out of steel and cement?

In Montreal, the city announced a couple of weeks ago they would be thinking of banning wood-burning stoves. I know the stove industry was up in arms and all over city hall. I was wondering if the industry has really pushed back on those comments.

Mr. Lazar: A couple years ago, I was at a farm in Saskatchewan, and the fellow I was talking to said, "When the rains are good, you think bumper crops are your birthright. When there is a drought, you think it will never get better.''

Part of my reminding you that markets will return is to say that we are in a drought, but it is not forever. Was the industry dumb, fat and happy, as Mr. Love has said?

This is partly true. Some companies did quietly diversify. Some bought American assets as a hedge against the U.S. dollar. People have their own strategies, but the governments — and here I will be quite clearly critical — prevented the change of the industry model. I am speaking mostly of provincial governments. They did so by insisting that we keep the same industry structure we have always had.

Therefore, if you have three small mills in three towns, and the dollar is low and competition is not bad, you keep all three towns employed. The people who own the wood gain the social benefit out of the wood and distribute it across rural Canada. At the same time, a company may want to build one large mill instead of three smaller mills. It would be world class in efficiency and create profit with the dollar at par. If you go to the province and tell them you will invest in a large mill, you are told that you cannot have any wood because the social model is to give the wood to each town and keep all the small mills operating. It is the lumberjack version of a chicken in every pot.

As social policy, it is brilliant in the short term and a disaster in the long term. It is called "pertinency'' policies. It still happens in Quebec and Ontario. As a result of those policies, the modernization, amalgamation and rationalization of the industry were stalled. B.C. and Alberta woke up a little while ago because the softwood deal slapped them across the face, and they realized they had to change.

It is the same point I was trying to make before about government regulation. When government gets involved in the economy in a directive way, it is often doing exactly the right thing. The problem is that the world changes, and it is very difficult to change government policy. What was smart policy five years ago is disastrous policy now. Politics are such that it is very hard to move as quickly as the economy.

Yes, we could have adapted more. Yes, some companies "got it'' better than others. However, there was a very large government drag on industry rationalization.

With respect to reliance on the U.S. market, we have been Canada's most successful exporter to Asia, Europe and South America. We are in the top three in all those markets. We have also gone into markets in India and China with pulp and paper and wood. I do not think we will apologize for having serviced the world's greatest market. Those markets are not doing very well now either. Had we have been totally dependent on those markets instead of the U.S. markets, we would have been dependent on markets suffering from the same global recession.

Is climate change good or bad? It is bad. Some people say that it will get warmer and the trees will grow faster. Ecosystems are not like that. They are a clockwork mechanism. People think about climate change in terms of the geosphere. You will have floods, hail storms, et cetera. The biosphere is totally interconnected with the geosphere. If you change the climate, you change the biological clockwork mechanism. That is what we are seeing with the pine beetle. That is the first of many plagues we will experience.

It is not as if, all of a sudden, we moved the climate zone up or down a couple of degrees and that we will have the forests we used to have. An ecosystem is disrupted. The chances of this being good for production in the short run are very poor.

To its credit, the industry has been a first mover on greenhouse gas reductions. Sixty per cent of our fuel use is from renewables. We have gone eight times beyond Kyoto targets and have committed to being carbon neutral without purchasing outside offsets. One of the reasons we have been so fast out of the starting blocks on climate change is because we have had personal experience. When we depend upon nature to make a living, it takes a little less time to understand that when nature is threatened, we are threatened.

Mr. Love: I cannot disagree with the comments that when times are good, we all forget that bad times come.

This is an add-on to Mr. Lazar's comments. Part of our problem is that our forest products, and especially our wood industry, are fragmented in Canada. In Europe or other parts of the world, you need a taxi to carry CEOs. In Canada, we need a train.

How do we achieve a sector strategy in our sector? We do not have one. Part of the reason is that we have not been able to consolidate and rationalize to the stage where we are talking to 200 people, we are talking to 10. We do not have a good sector strategy. It has always been to ship to the U.S. and the residential market. We set ourselves up to live and die on feast and famine. When that market booms, we boom. When that market dies, we die.

We need to diversify the markets. We have opportunities in non-residential and mid-rise construction. We can sell our product in Canada. I would like nothing better than to sell 30 billion board feet in Canada and tell the U.S. that we are sorry because we have nothing for them. Sometimes the government has to lead on that. We are not smart enough as an industry to say that is the vision we have to achieve.

That is where I would say the European and Scandinavian models are very good. They figured this out. They want to have a strong forest products sector. They want the green benefits of biofuels and biomaterials. They have indicated that is where they are moving. They have had to drag the industry along with them at times, but that is the direction they are moving.

On the life expectancy of buildings, someone recently completed a study looking at wood, steel and concrete buildings. The buildings are generally knocked down for reasons of obsolescence. They are changed over time because people do not like the building anymore. Life expectancy of wood is as good as or better than the others. They found that concrete had the shortest life expectancy. It was used, occupied and demolished before wood or steel buildings.

Mr. Lazar: Concrete is very ugly compared to wood.

Mr. Love: It is difficult to retrofit, among other things.

Senator Housakos: That would be a difficult study to do because not many wood buildings have been out there for many years.

Mr. Love: If you go back 50 years or 60 years ago, we knew how to build large buildings in wood.

Senator Housakos: Six or seven or eight floors?

Mr. Love: I would say four or five floors, arenas and so on. They looked at the commercial sector over 50 years, and that is what they found.

On climate change, Mr. Lazar made the point that it is probably not good for the industry and what it will do to our resource. We will have to adapt how we conduct the forest industry. We can probably take steps with respect to species, plantations, et cetera.

The biggest issue for me is that the wood industry has the ability to make Canada greener. We discussed the concept of "carbon neutral.'' We recently completed a study that indicates that when we harvest trees, transport them to the mill, process them in the mill and sell that lumber, more carbon is locked in that lumber than we have used to make those products.

These are carbon-negative products. If you want to have an impact on greenhouse gases and climate change, wood is part of that solution.

Mr. deMarsh: Concerning the cost of wood as a source of heat compared to other sources, wood is the best and cheapest source of fuel available. However, beyond a fairly small scale, provincial regulatory frameworks make it impossible to use in a practical way for larger institutions. We would like the federal government to show leadership in this area. It is governed by provincial regulation, but provincial energy ministers should be brought together and told that they have to move these regulations out of the 18th century. It is simply crazy.

To produce electricity using wood, our view is that a 1-, 2- or 3-cent per-kilowatt-hour gap exists between the costs of producing electricity from wood versus existing sources in most provinces. Does it make sense for us to wait until the next energy crisis hits before we start putting alternatives in place?

We need to be working on this now. It is feasible. Cutting-edge technology is available from Europe and being used widely. Nothing is experimental with this. We need to do it in Canada. It is better to start doing it now than to wait until we are desperate to have it.

[Translation]

Mr. Dansereau: I would like to comment, since I think it is important to follow up on something Mr. Lazar said about the role played by provincial governments in developing the industry. I think that we need to find the right balance. It is possible to go too far in one direction. But there is danger if consolidation is taken to an extreme. Right now in Quebec, AbitibiBowater is facing huge difficulties. It accounts for 30 per cent of the wood processing in the province.

A fragile giant creates problems when it falls. When giants run into problems, the smaller people around pay the price.

I can give you another example of the kind of problem that arises. Our colleagues in British Columbia, where the provincial government has allowed and promoted consolidation, have mentioned that having a healthy industry will be helpful because it will be able to pay good prices for our products. What they are dealing with today is regional monopolies with a very dominant market position that they are using aggressively.

Our colleagues who are used to having a share of the market are now facing huge difficulties. So care must be taken when it comes to allowing the industry to develop as it wants. We certainly recognize that we need major players on the world markets, and we want to sell our products to those people. But I would ask you to be a bit careful about your recommendations in that regard.

Where Montreal is concerned, old fireplaces and wood stoves cause pollution by releasing fine particles that create problems. There are programs for the replacement of those units. The City of Montreal has banned the installation of new high-performing units in new buildings. That is the wrong approach. They should allow the new units and ensure that the old ones that create problems are removed. Consumers need to be helped to change their demand.

[English]

Senator Duffy: I believe I speak for all of my colleagues this morning when I say that we are very impressed by the depth of your knowledge and, in particular, by your approach, which is forward-looking rather than simply saying that you are experiencing difficult times. We all know that, and we share your pain. We all know how important you are in our rural communities and smaller centres where you are often the largest single employer. As Mr. Lazar and I used to say on TV, when we would meet often, this industry reaches into every corner of our country.

Mr. deMarsh, you listed some steps that you thought could be taken through the tax system that would be helpful to woodlot owners. Can you update us on the reception you have received from the Department of Finance Canada and where you are in those proposals? I want to ask Mr. Lazar the same question in relation to both the larger regime and railway competition.

Mr. deMarsh, how have you been met in the last few weeks and months as you have pursued the idea of taking some of these anomalies out of the tax system in order to make your industry more viable?

Mr. deMarsh: We began by focusing on the unfairness issue. We have asked for an averaging provision so that revenue can be spread over a number of years. The Department of Finance is very reluctant to consider that. Other groups would like the same treatment, and they do not want to create a stampede. We wonder how we can be put in the same category as people who breed racehorses, for example.

Senator Duffy: Some years they have winning horses and other years they do not, and they would like to average it out.

Mr. deMarsh: This was actually the serious response we received to the question of who these other groups are that would want the same treatment if we received it.

However, the savings-plan approach seems to have received a much better reception. We are now trying to present it not only as a way to correct the unfairness but also, more importantly, as a way to look to the future and encourage more silviculture.

Senator Duffy: Would this allow you to set aside profits in your good years to level out the lean years?

Mr. deMarsh: Our proposal is that when it is withdrawn from the plan, it must be spent on silviculture.

Senator Duffy: Mr. Lazar, what have you heard about your requests about things such as accelerated capital cost allowance? Are you getting a good hearing on that?

Mr. Lazar: We have received a good hearing, and in the last budget, we got most of what we asked for around research, market development and dealing with debts. The government did not act on our requests for changing business conditions, for example, the tax system and the rail system.

To be fair, everything cannot be done in one budget, but the normal pace of change of economic policy is no longer acceptable. We have to act on an urgent basis, not to reach out and try to hold on to industry but to change the ground so that industry itself can effect the needed change. What people have been talking about in terms of creating more world-class hosting conditions for business in Canada must go from speculation and talk to urgent action because when the recovery comes, everyone will come out with sharp elbows trying to be the first to get to the new market share. We do not want to wait for them; we want to improve our business conditions today.

Senator Duffy: I do not know if you are aware that today in Truro, Nova Scotia a conference is underway sponsored by the Nova Scotia Department of Economic and Rural Development, McFetridge Farms and Pulsifer Associations Limited called "Growing Grass for Fuel Pellets — A New Industry.'' I suggest competition exists in the pellet business, and there is no time to waste. Thank you all for joining us.

Senator Eaton: In addition to the plants that will provide the wood pellets, have you thought of the delivery trucks and the furnaces? Is that all part of the package? In order to convert my house tomorrow to wood pellets manufactured by a wood-pellet producer near me, do you have the furnace, the trucks and the delivery system that will be required for that?

Mr. deMarsh: We have a number of stove and furnace manufacturers in North America. Last fall, we had a four- to five-month waiting list to get furnaces and stoves, but the capacity exists to produce them. The trucks are basically the same trucks as those that supply cattle feed. A new technology will not be needed.

Senator Eaton: Will you present your consumers with the entire package?

Mr. deMarsh: We will promote that and ensure it is available. It will be part of our job to either do it directly or ensure that other businesses are established to provide those services.

The Chair: I have a few questions, but if you cannot answer due to lack of time, perhaps you could send us your answers in writing.

Mr. Lazar, you talked about rail costs. Another factor in bringing our products to market destinations in North America is the trucking industry. I would like to have your comments on that.

With respect to black liquor, I have heard estimates of that subsidy that range from $125 to $175 per tonne. You mentioned this morning that it could go as high as $300 per tonne.

Without engaging in a debate on provincial and federal responsibilities, as forestry is in the jurisdiction of provincial governments, what role can the stakeholders in the industry play to encourage better relations between federal and provincial jurisdictions vis-à-vis forestry? Ten years ago it would have been very difficult to ask this question, but today, due to the meltdown we are experiencing, this is an opportunity to do so.

Mr. Dansereau, Mr. deMarsh, Mr. Love and Mr. Lazar, thank you very much for accepting our invitation today.

(The committee adjourned.)


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