Proceedings of the Standing Senate Committee on
Energy, the Environment and Natural Resources
Issue No. 23 - Evidence - March 9, 2017
OTTAWA, Thursday, March 9, 2017
The Standing Senate Committee on Energy, the Environment and Natural Resources met this day at 9:01 a.m. to continue its study on the effects of transitioning to a low carbon economy.
Senator Paul J. Massicotte (Deputy Chair) in the chair.
[Translation]
The Deputy Chair: Welcome to this meeting of the Standing Senate Committee on Energy, the Environment and Natural Resources. My name is Paul Massicotte and I am a senator from the province of Quebec and the deputy chair of the committee.
I would like to welcome the members of the public who are here in this room, as well as those watching us on television. As a reminder to those watching, these committee hearings are open to the public and also available online on the Senate website www.sencanada.ca. There is more information to be found in the schedule of meetings under the heading "Senate committees.''
I would now invite the senators around the table to introduce themselves, starting with the colleague to my right, Senator Black.
[English]
Senator Black: Good morning. Doug Black from Alberta.
Senator MacDonald: Michael MacDonald, Nova Scotia.
Senator Mockler: Percy Mockler, New Brunswick.
Senator Galvez: Senator Galvez from Quebec.
Senator Seidman: Judith Seidman from Montreal, Quebec.
Senator Fraser: Joan Fraser from Quebec.
[Translation]
The Deputy Chair: I would also like to introduce our staff, beginning with our clerk, Maxime Fortin, and our two analysts from the Library of Parliament, Sam Banks and Jesse Good.
In March 2016, the Senate mandated our committee to embark on an in-depth study on the effects, challenges and costs of transitioning to a low carbon economy. The Government of Canada has pledged to reduce our greenhouse gas emissions to 30 per cent below 2005 levels by 2030. This is a huge undertaking.
Our committee has taken a sector-by-sector approach to this study. We will study five sectors of the Canadian economy, which are responsible for over 80 per cent of all greenhouse gas emissions. They are electricity, transportation, oil and gas, emission-intensive trade-exposed industries, and buildings.
Today, for the thirty-sixth meeting of our current study, I am pleased to welcome our witness from the Canadian Steel Producers Association, the president, Mr. Joseph Galimberti.
Thank you for having agreed to testify before our committee today. I would invite you first to make your opening statement, and then we will have questions and answers. You have the floor.
[English]
Joseph Galimberti, President, Canadian Steel Producers Association: Good morning, honourable senators. Thank you for the opportunity to present to you today on behalf of the Canadian Steel Producers Association in relation to your important work on the effects of Canada's ongoing transition to a low carbon economy.
The Canadian Steel Producers Association is the national voice of Canada's $14 billion primary steel production industry. Canadian steel producers are integral to the automotive, energy, construction and other demanding industrial supply chains in Canada. CSPA seeks in that context to work with governments and industry partners to advance public policies that enable a globally competitive business environment for its member companies and supply chain stakeholders.
Canada's steelmakers understand implicitly the need to address GHG emissions. Since 1990, GHG emissions directly associated with iron and steel production in Canada have been reduced by 31 per cent, while overall energy consumption in the sector has been reduced by 26 per cent.
Additionally, advances in steel technologies have played a crucial role in the development of renewable energy technologies, for instance, in the development of photovoltaic systems for solar power generation and in the construction of onshore wind turbine technologies. Steel will continue to contribute to global energy and raw materials savings because of its highly recyclable nature. Steel is easily recovered and can be infinitely recycled with a minimum loss of quality.
Steel will continue to make vital contributions to energy responsibility in end use through longer product lifecycles for infrastructure projects such as energy pipelines, bridges or rapid transit systems, attributable to the increasing durability of steel as an input. Steel will also contribute through advancements in high strength, advanced high strength and ultra-high strength steel which will facilitate vehicle weight reductions of between 25 and 39 per cent compared to conventional steel, generating an approximate 4.5-tonne lifetime GHG savings when applied to a typical family car.
Domestic steel production is a vital facilitator of the manufacturing economy in Canada, a critical input in the responsible development of Canada's natural resource economy and an essential participant in any truly green infrastructure development plan. Our member producers, who are dedicated to continual improvements in both process and product, are ready to meet the needs of a low carbon Canadian economy.
That said, the fixed chemical process associated with producing steel does imply the emission of GHGs. In absence of the discovery of a revolutionary new technology or technique, in acknowledging both the significance of climate change and need to reduce GHGs those emissions will remain a reality.
Appreciating that steel and advancements in steel technology will be critical to the accomplishment of emission reduction targets in other sectors, this committee should also appreciate that from an emissions perspective the most responsible steel for use in Canada is steel made in Canada.
Canada is from a steel production perspective a jurisdiction almost unlike any other. Canada has ready access to raw materials required for steel making, such as high quality iron ore, metallurgical coal and scrap metal that can all be sourced close to our production facilities. Those materials can be transported efficiently through Canada's modern rail and marine networks. The bulk of Canadian production facilities derive their substantial energy inputs from renewable sources, and there is minimal transportation to end markets.
There is a stark comparison to be had, for instance, when reviewing production in China, which now maintains approximately 50 per cent of global steel-making capacity. China, by contrast, sources its iron ore from jurisdictions like Australia and Brazil. Its metallurgical coal comes from jurisdictions like Mongolia and its scrap metal, counterintuitively, comes increasingly from North America. Materials are then shipped to Chinese production facilities with considerable implied emissions in that process. Those production facilities remain largely reliant on coal power generation to support the production process, which significantly increases the emissions profile associated. The end product would then again be transported to Canada for use in this jurisdiction.
When all these factors are considered in the context of steel production, the GHG emission differentials associated with one tonne of steel are significant. Production in Canada for use in Canada implies 1.1 tonnes of GHG emission per tonne of steel while production in China implies 3.5 tonnes of GHG per tonne of steel. Production in India implies 2.3 tonnes of GHG per tonne of steel, and production in Korea implies 2.4 tonnes of GHG per tonne of steel.
On an annualized basis, assuming current market share in Canada for Chinese material, approximately 1,380,000 additional tonnes of GHG are emitted globally as the result of those products being brought to Canada as opposed to ones which would be manufactured locally. As a jurisdiction committed to reducing global emissions and effectively addressing the challenge of climate change, clearly this effective import of carbon into the Canadian economy must be accounted for.
From a policy perspective, what does this mean as Canada transitions to a low carbon economy?
First, as governments across Canada move to place a price on carbon we should ensure we are not in instances pushing the production of vital inputs abroad, which will serve the dual function of damaging Canada's industrial base and hurting Canada's middle class while tacitly increasing global emissions and encouraging less responsible means of production.
At a minimum, government procurements and funded infrastructure projects should include consideration of the domestic cost of carbon in the sourcing of material.
If additional costs are incurred to produce materials in Canada because of carbon pricing, it is incumbent on government to ensure that foreign producers, not bearing the same financial obligations, do not then gain an unfair cost advantage when competing for government contracts. To achieve this goal, Canada's government procurement policies should exclude steel imports from countries that do not have a demonstrably implemented and equivalent national carbon pricing regime.
The government should consider all options with regard to the implementation of a border carbon adjustment to ensure that inputs from jurisdictions that do not apply a price on carbon are respecting the price established by the Government of Canada. Failure to do so will allow inefficient foreign producers to unfairly leverage a carbon price advantage to displace efficient, responsible domestic production.
Carbon costs associated with inputs entering Canada should be calculated using a full lifecycle carbon analysis of the product in question, including emissions associated with the transportation of raw materials and consideration of fundamentals associated with the manufacturing process like access to renewable power generation.
Finally, the Government of Canada should work with industry to conduct further research into the development of breakthrough game-changing technologies and process improvements, which will reduce GHG emissions associated with the process of making steel, should encourage through funding and development the implementation of end-of- pipe solutions to curb actual GHG emissions and should support process reuse technologies like cogeneration where opportunities to do so exist.
Thank you, honourable senators. I am happy to take questions.
Senator MacDonald: Thank you for being here, sir. You compared the emissions of China, India and Korea to Canada, but how do we compare to the U.S.?
Mr. Galimberti: Our raw material transportation advantage would not be as significant versus the United States. At the same time, from a renewable perspective we have a much more efficient electrical system. That input is significant. Steel is a tremendous consumer of hydroelectric power. That would be a significant advantage from a carbon perspective versus the U.S.
Senator MacDonald: You mentioned about achieving certain goals. You said that Canada's government procurement capacity should exclude steel imports from countries that are not demonstrably implementing and applying equivalent national carbon pricing regimes.
Does that apply to the U.S.? Would you expect the Government of Canada to get into a trade war with the U.S. over steel?
Mr. Galimberti: This is a fundamental question about what constitutes a green infrastructure program. If the Government of Canada is establishing a price on carbon, it has to respect that price on carbon.
As I said in my remarks, you cannot create a system where government contracts are favouring more inefficient producers that emit more without a cost, while at the same time you are trying to build Canada's green infrastructure program.
There are certain U.S. jurisdictions, albeit minimal, that want a state level and are moving toward what we would consider an equivalent carbon pricing framework. You will have to see how that advances in the U.S. jurisdiction.
At the same time there is a buy America program in some infrastructure developments that specifically excludes Canadian steel. We do not have an equivalent program. I don't think anyone is looking for a trade war. Our trade relationship with the United States is extraordinarily balanced. We are very sensitive to the state of the relationship right now.
Senator MacDonald: It is extraordinarily balanced. In fact, about $5 billion worth of steel annually goes across the border each way. It is what the new president would call fair trade.
About a decade ago the Canadian dollar was $1.09 U.S. and now it is down to about 75 cents. I assume it had a positive impact on steel exports to the U.S. over the past decade. What would the effect be of a carbon tax on the steel you are trying to export to the U.S. over the next decade? What would the effect be on the price? Could you be competitive?
Mr. Galimberti: Certainly with carbon pricing there will be a cost implicit in the manufacturing process in Canada. This is not necessarily surprising. There will not be an optionality to pass that on to customers. If in other jurisdictions where they do not have a carbon price we will be competing against facilities that do not bear that cost, there will not be an opportunity to say to customers, as an example, that we have a carbon tax that we will flow through and we expect them to pay $5 more a tonne when there is another producer that is not imposing that charge. The price will stay.
Canada will have to figure out a way to be price competitive, but that is invariably going to damage businesses and reinvestment.
Senator Black: I want to confirm my understanding of what you would have us do. I'm not judging it. I just want to make sure I understand what you have suggested.
To build on what Senator MacDonald has raised with you, I have taken from your testimony that if you had your way, if you were the boss of the world, there would be a border adjustment tax, to use language that we are getting more familiar with, applied to steel coming into Canada, which would be the equivalent of some offset to balance carbon pricing in various jurisdictions. That's what you would have us do.
Mr. Galimberti: I wouldn't suggest it is a tax. I think it is a border carbon adjustment.
The government has established a price on carbon in Canada. When inputs are coming in from other jurisdictions, I don't believe it does the government any favour from a policy perspective, if the intent is to address global warming, to encourage other jurisdictions that emit more carbon to send their products here.
There has to be a consistency. As Canadian producers we are absolutely willing to compete with market traded steel from any jurisdiction in the world on a fair basis. If the government has determined that carbon should be commodified, I would argue that it needs to be commodified across the board. There are additional carbon emissions implicit in steel from other jurisdictions.
Senator Black: I understand your point of view. I think we are saying the same thing. If you could, I take it you would have some kind of border tax applied to steel coming into Canada. The natural takeaway from that is you would interfere with open and free trade between Canada and other nations. That is what you would have us do.
Mr. Galimberti: I don't believe it's interference. When you are comparing it on a carbon basis apples to apples when it gets to the Canadian market, I don't believe that is an interference with free trade.
Senator Black: Your industry is to be commended. You told us you have reduced GHG emissions by 31 per cent. Tell us how much further you can go, in what period of time, and what you need to do that.
Mr. Galimberti: As I said in my remarks, the chemical process through which steel is made is a fixed emissions process. The 31 per cent, representative of some process refinements and advances in the quality of metallurgical coal used in the process, right now it is an open question. There is not an imminent breakthrough technology.
Senator Black: You believe you have gone as far as you can go. You talked about innovation and great new discoveries. Where are we there?
Mr. Galimberti: There are some interesting end-of-pipe solutions being considered. One of our member producers is using a biorecovery process; algae ponds essentially. There are some opportunities with cogeneration that are probably out there. I know there is research being done at Canmet into biochar, which would replace metallurgical coal to some extent with a bio-agent that would emit less. The question is the degree to which these can be practically implemented.
Senator Black: There is nothing imminent, then.
Mr. Galimberti: I wouldn't say there was anything imminent, no, but I would say the industry is very motivated globally to get there.
Emissions by any sort of calculation imply a degree of cost and efficiency. A zero-emitting business is the most cost- efficient business you're going to find. I will tell you there is a significant preoccupation with finding any opportunity to reduce emissions.
Senator Black: Is the 31 per cent that you talk about just in the manufacturing process, or is that also involving the numbers with the production of coal?
Mr. Galimberti: It's directly related. That's direct iron and steel production. It doesn't take into account any kind of efficiencies that would have been gained over that period in the electrical grid.
Senator Black: Thank you. That is very helpful.
Senator Lang: Senator MacDonald indicated that there was an estimated $5 billion of value put on the steel industry in Canada and $5 billion in the United States. Are those figures accurate?
Mr. Galimberti: The 2016 numbers for cross-border trade were just finalized in the last month or so. It is closer to $6 billion either way: $6 billion of sales into the U.S. and of $6 billion in U.S. product coming in.
Senator Lang: That leads me to the next question. Given this rush to put in place carbon taxes Canada, which is not going to happen in the United States, is the American industry able to provide the additional steel required in the United States that we're now producing here and providing to the United States?
In other words, if nothing is done other than putting on these various carbon taxes, are we looking at a possibility of our losing part of this industry to the United States? Will they fill the gap that we were previously filling if we do nothing?
Mr. Galimberti: That is a complex question. There are a couple of different levels to take a look at. In the U.S. industry, yes, there is unused capacity. They certainly could increase production. It's not really much different from a grocer who is selling a tomato for $2 and next door you have another grocer selling it for $1.50. The grocer at $2 will have to find a way to come down to $1.50. If they don't do that everyone will buy the cheaper tomato.
Across markets, there will be an adjustment. We'll have to find a way to price-compete. When you have to battle that way for price competition, what effect does it have on reinvestment? How are you damaging the viability of your facilities in the long term? There is a whole series of questions that will roll out from that.
Senator Lang: I am trying to look ahead. I am assuming the status quo stays the same and government does nothing as far as any of your recommendations. We have this free flow of steel between the two countries and we price ourselves to the point where obviously it's not competitive. Do you see those that were utilizing and buying their product in Canada buying more of the American product? Subsequently, will the Canadian product be put off to the side because it's too expensive compared to the one in the U.S.?
Mr. Galimberti: Any damage to the Canadian industry's ability to compete will de facto translate into sales pressure.
Senator Lang: So loss of jobs.
Mr. Galimberti: It will mean a loss of jobs and loss of investment, yes.
Senator Lang: Well, let's just say it.
Mr. Galimberti: We talk about what the Canadian industry wants to do in terms of implementing and maintaining their status as responsible producers, in terms of maintaining tight supply chains and in terms of reinvesting in their facilities to produce lower carbon steel. Ultimately, it all gets undermined, yes.
Senator Lang: I want to follow up on your reference to the production of steel in China. Is steel being imported into Canada from China?
Mr. Galimberti: Yes.
Senator Lang: To what degree?
Mr. Galimberti: It's happening in fairly significant volumes.
Senator Lang: What is it in dollar terms?
Mr. Galimberti: In dollar terms I would have to get back to you on the precise number because I wouldn't want to be imprecise, but there is a significant percentage of Chinese steel.
The Deputy Chair: Do you know the market share?
Mr. Galimberti: Again, I would prefer to report back with an accurate number.
Senator Galvez: I gather that your industry is very important in this process of reducing GHG emissions because it has direct and indirect impacts. It has direct impacts because as an industry it has a footprint but indirect because you use a lot of energy to produce your product and because it is used in construction and in building.
If we want to tackle the problem of the environment with respect to your industry, we have to talk about production and then after trade, as my colleagues have suggested. I have two questions in these areas.
First it is about production. As you mentioned, Canada is blessed with important natural resources that provide the ingredients for your product. You came up with a couple of initiatives to go further than 31 per cent production.
What about using microwaves for electricity and using dolomite instead of limestone? I am mentioning this because I know colleagues who are working in this area in Canada. I will let you answer that question.
Mr. Galimberti: I think this is a larger Canadian question. Ultimately, we will make a series of improvements to our power generation to ensure that it is as renewable as possible. I saw the committee's recently released report on electrical pricing in part.
What is that supporting? Is that supporting efficient manufacturing? Is that supporting activities that we believe to be responsible? I would suggest, and the numbers bear it out, that producing steel in Canada for use in Canada is very responsible. Any incremental improvements in power generation, infrastructure and clean technology as applied to transportation use, have an impact on the ultimate GHG profile of the steel.
Senator Galvez: On a second aspect of trade, you mentioned several times the role of China. We are talking about the Trans-Pacific Partnership trade agreement. Is there any specific situation on which you want to comment about the Trans-Pacific Partnership trade agreement with respect to steel?
Mr. Galimberti: With respect to the steel and the TPP I would reiterate, as you mentioned in the preamble to your question, that Canada is a unique jurisdiction as far as our ability to produce steel in a responsible way given our access to raw materials and an efficient power supply.
I mentioned the numbers as applied to steel from Korea emitting 2.4 tonnes per tonne of steel. That applies as well. Increased trade from Asia has an increased the GHG profile in steel and I think the math is pretty good.
We have concerns certainly about dumped and subsidized steel from a couple of Asian jurisdictions. We would not in the TPP want to give up any of our rights as far as redress through WTO-approved trade remedies to make sure those commodities were fairly traded.
Senator Seidman: Thank you very much for your presentation, Mr. Galimberti. The CSPA is a member of the World Steel Association.
Mr. Galimberti: That's correct.
Senator Seidman: In the fact sheet of the World Steel Association, they say that the horizon for breakthrough technologies resulting in major changes to the way steel is produced will come after 2020.
What is the expectation? Why after 2020? Is there something in the pipeline? Is there something on the horizon? What is the participation of CSPA in whatever ongoing work there is in R&D with world associations?
Mr. Galimberti: We're an active participant in the World Steel Association and on its environment committee. I will be meeting with World Steel as a meeting of all the global association heads in a couple weeks' time in Paris before an OECD meeting. We do maintain an active dialogue.
As far as the 2020 horizon is concerned, I think they're making a prediction based on R&D going on at various member countries. I mentioned the work that is being done in Canada at Canmet on biochar technology. I think that's something promising, but as far as the runway to commercialization and a widespread implementation I would say their 2020 estimate a fair one. Beyond 2020 I would say that's correct.
Senator Seidman: From your perspective, there is technology on the horizon.
Mr. Galimberti: It's a longer term horizon. Manufacturing steel is a fixed emission process. The industry is motivated to address that. There is an acknowledgment in the industry that GHG emissions need to be reduced. I believe sincerely that the Canadian industry, when a technology is developed that will do that, will be on the forefront of implementing.
I guess the question is acknowledging that globally this is not an issue of Canada being out of step. Canada is actually more efficient. When that breakthrough technology arrives, having as much Canadian steel manufacturing around at that point would be the consideration.
Senator Seidman: What you're implying — you're not quite saying it — is that the CSPA is not at the forefront of R&D but would participate in implementing whatever R&D is developed around the world.
Mr. Galimberti: The CSPA itself is not a research institution. Our members are actively participating in the development of this kind of technology. I mentioned earlier the end-of-pipe solution, the Pond Biofuels solution that is being pursued. Our member Stelco is implementing that now. I know that other members are doing research with Canmet on the biochar technology that I mentioned. The investment in cogeneration has been significant for a couple of different members: Essar Steel Algoma and ArcelorMittal Dofasco in Hamilton.
I wouldn't want to give the impression there isn't significant R&D. There is preoccupation with energy use in GHG emissions. I've been at member facilities where they do things like lights are kept off in the bathroom. They take this very seriously.
Senator Seidman: You did make a passing comment about the process to commercialization. I know in many areas of R&D in other disciplines it's a complicated one and a challenging one to move through the process to commercialization.
Is that the same situation in your industry? If so, are there particular blockages or challenges that the federal government could help with?
Mr. Galimberti: I would think that would be technology dependent. It kind of depends on the breakthrough that you're talking about. I mentioned the end-of-pipe solution. There are some funding challenges associated with that one. Does it truly qualify for certain funding envelopes under GHG reduction programs? It's an end-of-pipe solution.
Clearing some of those funding challenges would be helpful. Ultimately, the road to commercialization is really dependent on technology. Once that presents itself I'm sure you will find an industry that is very willing to partner with government in whatever way it can to bring that to market as quickly as possible.
Senator Fraser: Good morning, Mr. Galimberti. Thank you for being here.
I will come back to trade. Churchill said never use a long word where a shorter one will do, so I will talk about a border carbon tax or, if you will, tariff. What I would like you to explain to us is how the imposition of such measures squares with our obligations under NAFTA, the World Trade Organization and possibly CETA, if we ever get a rejigged TPP. We don't know about that yet, but the others we know. They exist. How does a border carbon thing square with those?
Mr. Galimberti: Broadly, we believe there are ways that it can be implemented in a manner that is WTO compliant. That's sort of the crucial part. If it's WTO compliant, you can extend it into trade agreements so long as you have not given up that redress. I think this goes to what the government's fundamental policy goal here is. Is the goal to reduce global emissions?
Senator Fraser: I understand that. You were quite eloquent about that. I'm just trying to understand technically how these things fit together.
Mr. Galimberti: We believe there are ways it can be done in a WTO-compliant manner. You mentioned Churchill saying never use a long word, but because we're talking about the WTO the technical explanation is a lot of very long words. I'm more than happy to supply the committee afterward with a brief on how we think we can do it.
Senator Fraser: I would like to see that.
Mr. Galimberti: Yes. I can certainly do that because we have the material on how it can be done in a WTO- compliant manner, but it is a significant sort of brick of ideas.
Senator Fraser: You also say the government procurement policies should exclude steel imports from countries that have not done what they ought to do. I doubt that the government or governments buy much raw steel in bulk. I don't know, but are you talking about calculating the proportion of Chinese steel in a turbine that we're importing? How would that work?
Mr. Galimberti: It depends on the product. There is not an insignificant amount of steel plate, for instance, involved in Canada's shipbuilding initiative. What I'm speaking to a little more directly there is the infrastructure program that the federal government has enunciated for renewing Canada's green infrastructure. You're talking about things like, for instance, a light rail system or a major construction initiative where there is a significant amount of steel.
That is generally not sourced directly by the federal government, but what we'd be looking for is the creation of program criteria that would lay out how that material is to be sourced in order for it to be consistently green. We call this the development of green infrastructure.
It makes sense to ensure that the inputs in that infrastructure are as green as they can be. Otherwise, you're increasing an emissions profile for the sake of constructing it where you don't really have to. That would be kind of what we're after.
I agree with you. I don't think the federal government directly buys a lot of steel, but what we would be looking for is program criteria or direction.
Senator Patterson: Very quickly, I do want to get on the record how impressed the committee was with our visit to the Dofasco mill in Hamilton, one of your members: the steps they have taken to reduce emissions, this great Canadian company's history, their immense contributions to the community and their impressive labour relations. We met with their senior executives and they explained to us how challenging it is to make a profit in this highly competitive industry. I am sorry, that was a bit of a preamble.
I have a couple of questions. First, the government is spending $86 billion on infrastructure. I think it's a brilliant idea for you to say criteria for Canada's funding, which will be 75 per cent, should include consideration of the domestic costs of carbon and the sourcing of the material. This program is rolling out as we speak. Has your association made any headway with this great idea of getting Canada to build this into its program criteria? Have you tried to get this implemented?
Mr. Galimberti: I would be remiss not to thank the committee for visiting ArcelorMittal Dofasco. That's important work that the committee undertook and I'm glad to hear it was a valuable visit for you. I've been there myself; it's a very impressive facility. The work they do is tremendous.
We had discussions, principally at the political level, with the government about how the infrastructure program will roll out. We haven't received indication from them as to whether this is something that they would consider doing. We have indicated our willingness to have an ongoing discussion and to share, as openly as we can, as much math as we can to back up the case that we're making about Canadian steel being the greenest steel for use in Canada.
Senator Patterson: I've listened to this discussion about border tax or border adjustment. We don't want Donald Trump to do this to our products. I think it's a real tough sell to say that we should be trying to find creative ways to do it in Canada. It may be a great idea, but I don't know how practical it is.
I'm really surprised that I didn't hear you say this, and let me ask you: Should not emission intensive and trade exposed industries like steelmaking be exempted from carbon pricing programs?
Mr. Galimberti: Some provincial jurisdictions through the first compliance period received credits that account for emissions. When I say equivalent carbon costing programs in my presentation I mean that. If there's a carbon costing program in another jurisdiction that includes the extension of credits to trade exposed energy emissions, that would be equivalent and their products would not be penalized or taxed. There would not be a cost applied. We believe that those credits are very important and we would like them to continue as they relate to fixed process emissions.
There is also a cost associated with the carbon tax applied on all of the rest of our members' operations. Because we have the credit for the fixed process it does not mitigate the fact that the cost of natural gas has increased and the cost of electricity has a carbon price associated with it.
You mentioned how difficult it was to make a profit in this jurisdiction. All of these secondary inputs I mentioned which contribute to Canada being an efficient jurisdiction to produce steel now have a cost of carbon applied to them that ultimately increases the cost of production and ultimately either defrays whatever small profit you're able to make or makes manufacturing impossible.
Senator Patterson: How are they doing in Ontario where many of your members are producing steel? How are they doing with the credits?
Mr. Galimberti: How are they doing with credits on the fixed process for the first compliance period through 2020? We don't have clarity on the second compliance period yet. Obviously the fixed process on all secondary costs is a concern. Our members have seen an increased cost of doing business.
Senator Meredith: I'll be brief with my two questions. I get back to a point Senator Lang raised with respect to the impact on our potential to employ people within the sector or losing jobs. In your presentation you indicated governments across Canada moved to place price on carbon. What is an acceptable price range? I know you talked about cost of fuel and the increasing cost of electricity for your members, but what would be an acceptable range if the government contemplated setting a price, particularly for your industry, to ensure we're not exporting those raw materials abroad that will impact on production in this country and then impact on loss of jobs?
Mr. Galimberti: An appropriate price for carbon, essentially; that's a good question.
Senator Meredith: I think so.
Mr. Galimberti: Honestly it's not something that I have come prepared to quantify for you today. I would say any additional cost that is not borne by a competitor is going to negatively affect your business.
I don't really have a good answer for you, so much as to say that even a small additional cost that your competitors don't have will damage your business, hurt investment, hurt employment and hurt sales.
Senator Meredith: In your next paragraph you talk about foreign producers not bearing the same financial obligations, not gaining unfair cost advantage when competing for government contracts.
How is your industry contemplating mitigating that? We see this openness in free trade agreements with Europe and the potential for greater trade with our country. That impacts greatly in terms of production and the quality as well. I understand, being somebody who is in the construction industry. I hear those criticisms all the time with respect to foreign imports.
Mr. Galimberti: How are our members are looking to mitigate that? I don't know that there is necessarily a strategy. There will be price competition. If you have a cost that your competitor doesn't, it becomes a zero sum game quite quickly. An unfair cost advantage is a very difficult hurdle to overcome, especially in something like procurement where it's in the government's interest to buy as much as it can and to get as much as it can built.
Senator Mockler: Thank you for your presentation. If we look at the intensive trade exposed sector emissions in Canada in 2014, we would emit approximately 78 megatonnes of emissions. For the iron and steel industry according to our facts it is about 16 megatonnes of CO2.
Therefore, if we are to respect the objective put forward by our government, it means that we could close the iron and steel, pulp and paper, smelting, refining, mining, chemicals and cement industries. I don't have to tell you we could be closing Canada.
If this is the case with the United States, in light of the new government in the U.S. and President Trump do you believe the Canadian governments, if we consider the provinces, must adjust their emission reduction goals? Should we slow the pace of emission reduction? We cannot close Canada.
Mr. Galimberti: I think you're right. You can't close Canada. I'm a bit of a Canadian exceptionalist. I believe that Canada should lead. We will be a jurisdiction that implements clean technologies properly and does it well. Leading also implies that you maintain the responsibility for doing it at home. To just close Canada, as you say, and delegate your steel production to China or your chemical production to the southern United States, or your pulp and paper to another jurisdiction, I don't think that's a responsible behaviour.
Should governments adjust targets? This is why I like the committee's approach to looking at this sector by sector. I think the government needs to be strategic in identifying where it can make gains in a sector. Where science does not allow you to make gains, in instances where policy would push production to places where it is less efficient to generate critical inputs, I think government needs to be strategic in how it addresses those industries.
Senator Mockler: I'm somewhat alarmed, especially as it was touched on by Senator Fraser and other senators, by the free trade agreements we have and what you're proposing to us. That would certainly be a deterrent for economic cooperation in the world. Why would you propose that and not look at other ways of finding solutions for your industry in particular?
Mr. Galimberti: I would not come here to advocate for anything that we believe to be internationally illegal or non- compliant. These are things that Canada has within its powers. At the WTO, you would need to individually examine trade agreements. We have established that our trading relationship with the U.S. is significant. It is not in the steel industry's interest to diminish or decrease trade.
What is in the steel industry's interest is to make sure that commodities are able to compete fairly, that our producers are able to compete fairly with a producer in the U.S. or China who does not bear costs that governments have decided to impose for the purposes of commodifying carbon. It's just that simple. The alternative is to probably dramatically reduce steel production in Canada, and that doesn't do anyone any favours.
The Deputy Chair: Before we go to Senator Black on the second round, could I ask some specific questions and have very short answers on the same line of questioning?
I'm trying to understand the whole competitiveness issue. In other words, I'm trying to understand the sensitivity of your industry to carbon pricing. Let's say we go to $30 a tonne. Relative to the commodity price of steel, which has improved quite a bit in the last year, what percentage of that sale price or value price, if you will, is carbon pricing at $30 a tonne? Is it a big number?
Mr. Galimberti: Yes.
The Deputy Chair: What percentage? Let's say at $30 a tonne what percentage of the value of the commodity is carbon pricing?
Mr. Galimberti: It's a fluid market. It depends on the product you're selling.
The Deputy Chair: Steel.
Mr. Galimberti: There are a lot of different kinds of steel. We could talk about somebody who is manufacturing a large diameter line pipe, like EVRAZ in Regina.
The Deputy Chair: Give me your highest volume product. I'm trying to get a sense of the sensitivity. Is that 1 per cent? Is it 20 per cent carbon pricing?
Mr. Galimberti: It would be product dependent. If the carbon price is $30 a tonne, that will mean that when you're going to a client who is buying several hundred thousand tonnes of steel, regardless of the percentage that it is of the commodity, you will be dramatically out of whack with a competitor who is not doing that.
The Deputy Chair: I understand that. How about electricity, power? What percentage of the value is that?
Mr. Galimberti: The cost of power is the second or third largest input into the actual product itself. It's a huge cost base.
The Deputy Chair: That's a big number. That's a high percentage. I think Dofasco told us 30 or 40 per cent.
Mr. Galimberti: I can give you a range on the cost of steel production. It depends on the product and it depends on the process, but 20 to 40 per cent.
The Deputy Chair: I presume carbon pricing is lower, probably a couple of percentage points.
Mr. Galimberti: I suppose so, yes.
The Deputy Chair: How about access to natural resources? We're pretty lucky in Canada. Most of our natural resources are very close to your mills. Am I correct in saying that?
Mr. Galimberti: Yes.
The Deputy Chair: You have ample natural resources of high quality. Is that also accurate?
Mr. Galimberti: It is accurate, yes, but you're not getting a discount on the commodity. You're getting an efficiency on the transportation.
The Deputy Chair: Our Canadian industry, therefore, is relatively competitive, relative to sourcing of natural product. It is energy pricing. I suspect that before you came here you had to decide how to best serve your industry. Contrary to what Senator Patterson said, most people that are high-intensive trade exposed say they won't exempt it.
In your industry, actually, you would gain if everybody priced carbon because you produce steel from a relatively low carbon input compared to your competitors in say China, which is predominantly coal based. You've got a high percentage of electrical, nuclear and so on.
Senator MacDonald raised the issue of the dollar, which is very low. You're being very competitive at this point in time. I am having difficulty. If you're a free trader and you believe in market pricing, which I certainly do, we should price this cost to our society called carbon.
Mr. Galimberti: Yes.
The Deputy Chair: You would win, but you can't have free trade and exclude me relative to international competition re major contracts of ships or bridges and so on.
Mr. Galimberti: I'm saying where there is not an equivalent carbon pricing mechanism. I agree with you; we're extraordinarily competitive on carbon, absolutely, 100 per cent. In that instance I believe there is a tremendous Canadian success story, but where a jurisdiction is not carbon pricing and Canada is there is a significant disadvantage.
The Deputy Chair: I understand that.
Mr. Galimberti: Government policy cannot have the function of driving competitive, responsible, efficient producers from the market in favour of inefficient ones that just don't have the same cost.
The Deputy Chair: Contrary to the others exposed, you are one industry that would significantly benefit from a very high carbon price if the whole thing were applied worldwide.
Mr. Galimberti: I would not say that we would benefit from very high.
The Deputy Chair: Significantly.
Mr. Galimberti: In an apples-to-apples comparison, if all producers on a global basis were paying the same price of carbon on a full lifecycle basis, yes, we would be very competitive because we're efficient, we're close to natural resources, and we've made the investments in process over the years that would benefit us in this instance.
Senator Black: This has been extremely helpful. What is the future of the steel industry in Canada?
Mr. Galimberti: I think it's a very positive future for the steel industry in Canada. When you look at global steel, one thing that jumps out at you about Canada is that it makes sense to make steel here. We have proximity to natural resources. We have made those improvements to the electrical grid. We can be competitive for the long term. Steel is a tremendous facilitator of manufacturing. If Canada wants to succeed in advanced manufacturing and in bringing technologies to market, steel will be a facilitator of that.
I mentioned the advancements we have made in steel such as ultra-high strength steel for automotive. I mentioned a minute ago the technology that goes into line pipe production or natural resource extraction. It's very bright, but I would encourage this committee to be mindful of not punishing what is essentially good behaviour relative to other jurisdictions that frankly have no interest at present in diminishing their carbon footprint or pricing the commodity.
Senator Black: Therefore you're saying the future is bright notwithstanding the concerns you have raised today.
Mr. Galimberti: Yes.
Senator Lang: I wanted to ask one question with respect to your recommendation. You said it was incumbent on government to ensure that foreign producers are not bearing the same financial obligations to gain an unfair cost advantage. You would exclude steel imports from countries that have not implemented and applied the equivalent national carbon pricing regime.
You're aware that we have iron mines that are providing ore for countries such as China and others.
Mr. Galimberti: Yes.
Senator Lang: Have you priced in the consequences if we were to do that? Would China not retaliate and go somewhere else and buy their ore if they could not import into Canada?
Mr. Galimberti: Iron ore and metallurgical coal are the ones that are sold. I don't honestly know how much at any given time. I guess that would be commercial information for the mines. I don't know how much is being sent to China at any given time. It would be difficult to price that.
Senator Lang: But you would think there would be an implication.
Mr. Galimberti: You're putting me in the position to prejudge the actions of the People's Republic of China. It would be difficult to guess.
Senator Lang: You're making a recommendation, so we have to know what the implications of it would be in the whole concept of what you're proposing. I'm asking if you considered that as part of what the implications to Canada would be in making that recommendation.
Mr. Galimberti: Honestly, it's not math that we're capable of generating.
Senator Lang: So you didn't.
Mr. Galimberti: I can't sit here and tell you that it's something that I'm even qualified to answer.
Senator Lang: Okay.
The Deputy Chair: Mr. Galimberti, thank you very much for being with us this morning. We had a very useful discussion. We now know much more about your industry and the sensitivities. Thank you very much for being with us this morning.
(The committee adjourned.)