Proceedings of the Standing Senate Committee on
Energy, the Environment and Natural Resources
Issue No. 42 - Evidence - April 19, 2018
OTTAWA, Thursday, April 19, 2018
The Standing Senate Committee on Energy, the Environment and Natural Resources met this day at 8:02 a.m. to continue its study on the effects of transitioning to a low carbon economy.
Senator Rosa Galvez (Chair) in the chair.
[Translation]
The Chair: Good morning and welcome to this meeting of the Standing Senate Committee on Energy, the Environment and Natural Resources. My name is Rosa Galvez, I am a senator from Quebec and I am the chair of this committee.
I will ask senators to introduce themselves.
Senator Dupuis: Renée Dupuis, independent senator, the Laurentian region, Quebec.
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Senator MacDonald: Michael MacDonald from Nova Scotia.
[Translation]
Senator Massicotte: Paul Massicotte from Montreal.
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Senator Richards: David Richards from New Brunswick.
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Senator Mockler: Percy Mockler from New Brunswick.
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Senator Cordy: Senator Jane Cordy, Nova Scotia.
Senator Neufeld: Richard Neufeld from British Columbia.
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Senator Seidman: Judith Seidman from Montreal, Quebec.
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Senator Patterson: Dennis Patterson, Nunavut.
The Chair: I would also like to introduce our staff, Maxime Fortin, the clerk of the committee; and our Library of Parliament analysts, Sam Banks and Jesse Good.
[Translation]
In March 2016, the committee began its study on the transition to a low carbon economy. The committee is studying five sectors responsible for 80 per cent of Canada’s greenhouse gas emissions. They are: electricity, transportation, oil and gas, emission intensive and trade-exposed industries, and buildings.
Today, we welcome, from the Smart Prosperity Institute, William Scott, Research Associate. Thank you very much for joining us.
[English]
We also have Mr. Stewart Elgie, Co-Chair, Smart Prosperity Institute.
Stewart Elgie, Co-Chair, Smart Prosperity Institute: Mr. Scott will be testifying.
The Chair: Thank you very much for joining us. I invite you to proceed with your opening statement, after which we will go to a question and answer period.
William Scott, Research Associate, Smart Prosperity Institute: My name is William Scott, Research Associate from the Smart Prosperity Institute. We are a national research network and policy think tank based at the University of Ottawa and focused on helping Canada become an economic and environmental leader globally.
We also meet in a group of 28 respected Canadian leaders from diverse communities of business, labour, Indigenous, youth and NGOs. They are all working to help accelerate Canada’s transition to a stronger and cleaner economy.
Today, I would like to discuss some of the findings of our recent report looking at the clean innovation opportunity for Canada.
The global demand for new technologies, products and practices that improve environmental performance is rapidly growing. This is what we refer to as clean innovation. Accelerating the pace of clean innovation in Canada not only is an important tool for meeting climate and environmental goals, but it also represents a critical economic opportunity. For example, the global market demand for clean technologies is expected to reach $2.5 trillion by 2022. Clean innovation will help us achieve our environmental and climate targets, as well as help us reduce the cost of achieving those targets.
For example, in the last eight years, the costs of solar energy have fallen by 70 per cent at the same time as installed capacity has increased by 25 times. Similar market trends can be seen for electric vehicles and other technologies. But it’s not just an opportunity for solar panels and electric cars. There is an opportunity for Canada’s resource and manufacturing industries as well. McKinsey estimates that improvements in energy and resource efficiency will offer a savings opportunity of $3.6 trillion by 2030. Companies are already acting on this imperative.
There was an article in the paper last week about VeriForm, a metal fabricating plant based in Cambridge, Ontario. Since 2006, they have reduced emissions by 77 per cent. Now they are buying offsets to achieve carbon neutrality. At the same time, they realized over $2 million in energy and resource efficiency savings, they have increased their staff by 25 per cent, and they have more than doubled their annual revenue.
Leading economic experts from the OECD, the World Bank, the World Economic Forum and major international banks agree that as the world moves towards a more sustainable economic model, the countries and companies that are able to find low-carbon and resource-efficient ways of doing business will be rewarded. This is the clean innovation opportunity for Canada: to trust pressing environmental challenges to reduce the cost of achieving our environmental and climate targets and to capture a share of these growing global markets.
Entrepreneurs, researchers and investors are widely regarded as the engines of innovation. And that’s true. But government has an important role to play — this is particularly true for clean innovation — by correcting market failures and removing barriers so that markets can do their job. In addition to the regular market failure for innovation known as knowledge spillovers, which means that inventors generally can’t capture the full value of their inventions, clean innovation faces a second market failure. This is known as environmental externalities. A healthy environment is a fundamental value to society. But because market prices don’t accurately reflect the cost of environmental harm, there is little economic reward for most pollution-reducing innovations, and little profit incentive to invest in or develop these products.
For example, when someone invents a new phone that is faster, has a better camera or a new feature, they can receive a price premium for that, so investors can see the rewards. They get on board. If I were to invent the same phone with the exact same performance and it looked the same but had zero environmental impact, I can’t competitively charge the same price premium for it. They don’t have the same economic reward. Investors are more reluctant to get on board.
The result of this environmental externality is that too few clean innovations are produced or used and the market fails to deliver the environmental solutions that society needs. The impact of these two major market failures is further compounded by additional barriers that create risk and uncertainty and discourage private investment. For example, because demand for clean innovation is largely driven by environmental policy, uncertainty about future policy directions or incongruent policies between jurisdictions or between sectors creates risk and puts a chill on investment. There are also other barriers such as infrastructure lock-in, technological uncertainly and principal agent problems, such as tenant and landlord issues, which impede clean innovation.
Innovation is a complex system and requires different policy tools at different stages. Our report dives deeply into four areas that can be used together to help accelerate clean innovation in Canada. I’ll give you a quick overview.
First, there are push policies that target the early stages of innovation and particularly this knowledge spillover market failure through things like R&D grants, SR&ED tax credits. Public universities are an example. There is evidence that knowledge spillovers are greater for clean technologies than other types of technology. They are more similar to general purpose technologies like IT. This provides a greater justification for targeting clean innovation with government programming.
Next, there are growth policies which help translate these innovations from ideas into marketable solutions. Clean innovations face significant financing gaps, largely due to the environmental externality. They also face long scale-up timelines that are often capital intensive. When they finally do get to market, they often have to compete with established incumbent industries in price-taking commodity markets.
Pull policies — which I’ll get to next — go a long way to addressing some of these barriers, but until we get those to a sufficiently stringent level, we need transitional targeted measures to help these businesses scale up and compete.
Pull policies work to correct the environmental externality of market failure. These are things that are used to stimulate demand, like environmental regulation, carbon pricing or public procurement.
There is great research by the OECD on how to design environmental regulations to stimulate innovation. In particular, they need to be flexible to give them the freedom to innovate and to give businesses the opportunity to lower the cost of innovation. You can see these four policy areas on the chart slides in front of you. They also need to be stringent, so they actually induce change. Businesses must find different ways of doing business to reduce their environmental impacts.
The last and perhaps the most overlooked aspect is that they need to be predictable. You need to give businesses the long-term certainty to make the investments to develop these innovations, giving them a timeline of 10 years or more so that they can make the large capital investments.
Finally, there are strengthen policies that work to make the entire system more effective and resilient as a whole. These are things like better data collection, training and skills development, networks and clusters, and better designing institutions to encourage innovation.
The Government of Canada has recently taken significant steps toward encouraging and improving our clean innovation performance, between the Pan-Canadian Framework on Clean Growth and Climate Change, having a carbon price nationwide by the end this year and making significant investments to help bridge this financing gap. Those are great starts, but we still need to do more to be among the global leaders in clean innovation. We need world-class environmental regulations that are flexible, stringent and predictable. Carbon pricing is a good start with the five-year ramp-up plan, but we need to provide long-term predictability of 10 years or more, for instance, by building in a default trajectory with a review period that has clear and public criteria so that businesses can look and make their own decisions based on future policy trajectory.
At the same time, we can’t unduly increase the cost of doing business. We need to find ways to simplify and de-complexify regulatory barriers so that businesses aren’t unduly burdened by these environmental regulations. These can be things like using carbon pricing revenue to lower income or business tax rates. It can be targeted tax incentives like the Accelerated Capital Cost Allowance for clean technologies or finding ways to de-complexify the regulatory framework.
The Netherlands has what’s called a “front-runner desk.” Businesses, when they run into regulatory roadblocks, can refer to this desk and try to identify and work through the roadblocks. The Clean Growth Hub could perform this kind of role.
Finally, the government announced major investments in infrastructure. This will play a critical role to underpin Canada’s economy for the next 20, 30 and 50 years. It’s important we take a long-term view to make these investments and incorporate a low-carbon vision into it. Working low-carbon aspects into federal-provincial infrastructure agreements could be one way to do this, as could choosing life-cycle carbon pricing to infrastructure funding agreements.
This gives you a broad overview. We have a lot of content here. You will see the slides in front of you. I’m happy to answer questions you might have.
The Chair: Colleagues, I am happy to see most of you here. It’s not like last Tuesday. We will talk about that after the meeting.
We’ll have two rounds of questions.
[Translation]
Senator Dupuis: Thank you both for being here today. You mentioned the possibility for the government to use carbon tax revenues to reduce taxes. Should this tax be used to reduce taxes or to fund a national drug plan?
On page 4 of your document, we see a table illustrating the clean innovation system. I see almost everyone except the public. Can you tell me who influences the development of push policies? Who benefits from pull policies, and grow and strengthen policies? And, finally, I can see that there are people who benefit, but from the public’s point of view, how do they participate?
[English]
Mr. Scott: Going back to the carbon pricing example, the point of a carbon price is to have people not pay it. You want to incentivize business and consumers to move away from carbon-emitting activities. It’s used as an incentive measure. It will make activities that produce emissions more expensive, but it will incentivize people to move away from those activities.
There is a lot of evidence that businesses can find efficiencies by looking at ways to reduce pollution. Pollution is inherently an inefficiency.
The public benefits by having a cleaner environment, by not having to deal with the impacts of climate change and by having healthier air. At the same time, as companies are all incentivized to move this way, they will compete and find different ways to reduce costs, which will eventually lower costs for consumers. It’s the same way the markets work now. As companies compete, when that incentive to move away from emissions is added, it will be the companies and business that find ways to emit less that will be rewarded by markets and consumers. It will influence consumer behaviour by influencing their choices.
Senator Massicotte: Thank you.
I buy into externality. That economic theory is very clear. It’s a significant problem in that the market, which works extremely efficiently compared to government decisions, doesn’t consider that cost because it’s borne by many. You mentioned that, and I buy that.
If that is a problem — the problem — carbon pricing is the right solution. Why is it you must add all these other subsidies and complications? It seems to me that pricing carbon automatically resolves the economic problem. In time, it reflects properly the cost, and they will fall in line. Why all these other programs?
Everybody wants money. I did a quick calculation to look at all the demands we get for money; it’s around twice the economic growth of our country. It doesn’t make any sense. It’s usually inefficient, as history will tell us.
Why all this other complicated stuff? Why not just say externality, carbon pricing. You want stability? Let’s predict the next 20 years. Why not only that as opposed to all the other gimmes?
Mr. Scott: I think that’s absolutely right. Economic theory will tell you that’s the most efficient way to address this problem. You’re right: If we had a sufficiently stringent carbon price that ramped up to the level we needed to hit our 2030 targets, that would be all you need. You would be done. But we’re not implementing that kind of price.
I saw research that said the price would have to be close to $130 a tonne or more to reach our 2030 targets. We haven’t implemented those prices, which is why we need to find alternative policies that can compliment that. They might be more expensive, but they’d be able to help us boost that and can target specific sectors to help decarbonize the economy as a whole.
Senator Massicotte: Why not just say that? As opposed to espousing and saying, “Give me some more money, all these other programs,” you guys have to get it right. Get the carbon pricing higher, quicker. Shouldn’t that be the principle message?
Mr. Scott: Yes, and groups like the Ecofiscal Commission will tell you that, but it’s up to the politicians to be able to do that. Until you have that, you need the complementary policies to help different sectors.
Senator Massicotte: What you’re saying is that if we can get the carbon pricing higher, in your long speech, you can say, “Just forget the rest. Give me carbon pricing.”
Mr. Elgie: Carbon pricing is definitely the most important policy, but it’s not the only policy you need. There are a few reasons for that. Big parts of the economy are public. For example, 13 per cent of GDP is government expenditure. That doesn’t respond to a market carbon price. Infrastructure, again, is a public funding decision. If you think about the transition to a low-carbon economy, you think about energy systems and transportation systems. Those are mainly public funding decisions. Again, they are not going to respond to a price.
Second, if we were starting with a blank slate in building an economy today, just getting a carbon price would send the right signal. The problem is that we have decades of inertia in a high-carbon economy that has a bunch of locked-in advantages already — field distribution systems, personal buying habits — a whole economy that’s been built for 50 or 60 years on the back of coal-based energy and fossil-fuel-based transportation. You actually have to tilt the playing field, at least for a decade or so, to begin to make it a fair fight. It’s not a permanent intervention.
The third point is that almost every major innovation in the last century has had a major role for public investment, everything from the smartphone to the Internet to aviation to canola.
There is a myth that innovation is all private. It’s a lot of private. Private tends to carry it over the finish line, but we wouldn’t have pretty much every major commercial technology today, including the oil sands, which had billions of dollars of public investment to build that technology, without a big role for public investment.
So we have this myth that government always gets in the way of innovation. The truth of it is that government has been a significant partner in every innovation. The challenge is how do you actually create public institutions that are inclined to make smart investment choices? There are a lot of examples of bad investment choices, but you can’t rule the public part of innovation out of the equation. It has been a fundamental part of every innovation.
Senator Massicotte: I don’t know if I buy that fully. Even with infrastructure, the market works quite well. Yes, if you lump it all into this big pot and make a big soup, as a taxpayer you don’t know where the problem lies. Right now, the government has an infrastructure program. They created the Canada Infrastructure Bank, and in large part they want it to be economical. There is a portion that is uneconomical, but we can identify with that.
But now if you say it’s going to be a combination of all, I would suggest that any innovation is going to be government funded. Which one do you choose? There are thousands of innovations happening every day. I just don’t like this. It is going to make it very complicated, it’s going to be a lot of money, and a solution may occur.
Mr. Elgie: Give me an example of a major commercial technology we have today that didn’t have significant public investment in it.
Senator Massicotte: It’s often not in our country. Look at the GPS system. It didn’t cost Canadians a dollar.
Mr. Elgie: No, but it cost the U.S. government. Every single part in this smartphone was invented largely by a public lab. It wouldn’t exist without those investments.
Senator Massicotte: You should live in a communist country.
Mr. Elgie: It was U.S. government investment.
Senator Massicotte: That’s their problem. As a country, we benefit from that technology at zero cost.
The Chair: I think this point is very important. Do you think you can provide us with this list? Do you have that?
Mr. Elgie: You will see a chart showing every part in that smartphone and every public investment that went into it, including Canadian. University of Toronto labs are responsible for a bunch of the software that went into this phone.
The Chair: Is this your document on Canada’s next force, the red one?
Mr. Elgie: Without the billions in public investment that went into the oil sands jointly with AOSTRA, we wouldn’t have the billions in oil sands revenue that the country has enjoyed.
Senator MacDonald: Now you’re trying to shut it down.
Mr. Elgie: I am not going to shut it down.
Senator Massicotte: Somebody is.
Senator Seidman: Thank you for your presentation, Mr. Scott. I guess I’m going to be accused of pursuing a similar line as Senator Massicotte did. But I’m on your website, and I read that:
Smart Prosperity Institute is a national research network and policy think tank based at the University of Ottawa. We deliver world-class research and work with public and private partners — all to advance practical policies and market solutions for a stronger, cleaner economy.
That’s a noble cause. And congratulations, because I see you have $10 million in funding. You also say, “Canada 150 Research Chair, 50 international experts, and $10 million in funding: meet our new research network!”
Okay, that’s all wonderful. Congratulations. You talked about knowledge spillovers being greater for clean technology, and you spoke about it in a very theoretical way. I look at your clean innovation system, on page 4, whose goal is to “. . . grow ideas into marketable products.”
After all this, I’m going get to my point. How are you, as this institute with all this money, going to, in fact, work the systems from idea into commercialization, which has been a huge weakness in this country, to help achieve our goals? How are you going to do that?
Mr. Scott: We’re a not-for-profit policy research institute. So a lot of that money is going to fund academic researchers and students looking at different aspects of this problem and looking at market-based solutions to drive environmental policy. We’re looking at ways and working to come up with reports like this to help give suggestions for you to make policy to help drive this transition. We’re not in the business of making products.
Senator Seidman: I know you’re not. And I don’t mean to interrupt you, but let me try to be clearer. Could you give us a concrete example? Are you just brand new?
Mr. Scott: We’ve been around since 2007.
Senator Seidman: Okay, good, all the better. Could you give me a concrete example of a successful product from your work in public-private partnerships, from academia, through to the link with business and a final product on the market? Could you give me a concrete example of how this works, from your own institute?
Mr. Elgie: Will is relatively new, so I’ll give it a try. The challenge in any kind of policy or think tank role is that you can never have a line of sight to say, “The government made this decision simply because of my smart idea,” as you’ll appreciate. The workings of government are a black box, so you can’t say, “That’s my idea they used.”
I’ll give you ones that the government would agree we significantly influenced. In its early days, we were retained to help advise in the design of B.C.’s carbon tax system. We have been retained to evaluate —
Senator Seidman: I’m going to stop you. Again, I’m sorry. I don’t mean to be rude, but that’s not what I’m asking. I want a product, not a policy.
Mr. Elgie: You mean a commercial product?
Senator Seidman: You talked about the smartphone.
Mr. Elgie: As Will said, we’re not a manufacturing business. Our line of work is to try to come up with smart policy ideas that will create the market conditions that will result in those products. If you look both on the website and in this report, you’ll see examples of dozens of clean, innovative Canadian companies in everything from the oil industry to manufacturing to forestry to mining to automotive.
We don’t run any of those companies. We don’t make any of those products. But the policies and incentives we have helped to put in place have created economic conditions that have helped enable the growth of those companies.
Senator Seidman: I’m still trying to understand. I know you’re not a business, of course, and you don’t actually produce a product. But your website says that you’re a national research network and policy think tank. So they are two-pronged. You’re not just a policy think tank. You work with public and private partners to advance practical policies and market solutions.
I’m trying to understand what market solutions you have helped develop. I am trying to be concrete here and get beyond developing policy because there is more to it than that. We have a huge failing in this country around this area.
Mr. Scott: You need the policy conditions that will drive the market in this direction. I’ll give you an example of a company that did benefit from this. Enerkem came out of a lab at Concordia University, from a professor there, and they developed a technology that turns waste into alcohol-based fuels. Thanks to policy that was implemented, the City of Edmonton’s waste diversion targets as well as renewable fuel standards in Alberta helped to create market for the product. They were able to take trash from the City of Edmonton, turn it into fuels and sell it back to the market. It created a product because of the policy conditions.
Mr. Elgie: China has just invested over $100 million to bring that technology over there.
Senator Seidman: Okay, thank you.
The Chair: Can you give us a second example?
Mr. Elgie: There are tonnes of examples.
The Chair: Choose the one you want and walk us through it exactly as you just did.
Senator Massicotte: Start at the bottom of your list.
Mr. Scott: VeriForm was an example I brought up in my speech. They found ways to reduce their environmental emissions and ended up hiring more people, doubling their revenue and finding great opportunities in these efficiencies.
CarbonCure is a great example of another company. They found ways to take the carbon that is involved in concrete production and reinject it back into the concrete, which actually makes the concrete stronger. They have had 150 plants throughout Canada outfitted with this technology.
BioAmber is Montreal-based and has a big plant in Sarnia. They are using these market policies to turn sugar-based feedstocks into a chemical production input. So in replacing petroleum bases for chemical development, they use biofuels, essentially.
There are tonnes of successful examples throughout Canada.
Mr. Elgie: Another really cool one, called Carbon Engineering, was developed by a University of Calgary physics professor, David Keith. They are trying to strip carbon from the atmosphere. Their first pilot plant is in Squamish, B.C. They take it out of the atmosphere, which helps the climate, but then they turn it into end products like advanced biofuels. Their challenge is they need a high enough price on carbon to make that cost competitive.
Without the existence of climate policies and carbon pricing, none of these products would have been economically viable. We have quotes from their CEOs, if you want to look in these reports, telling you the important role that policies and carbon pricing have played in letting every one of those job-creating businesses get off the ground.
Senator Seidman: So your $10 million in funding and your 50 international experts, and your centre of excellence, if that’s what you are — I’m not sure that’s correct, but you’re a national research network, one the networks — that is what that $10 million goes towards? Towards somehow integrating and ensuring that policies are turned out that help corporations meet our clean energy, sustainable energy goals? Is that what you’re saying?
Mr. Scott: Essentially, what we talked about earlier is the important role that public policy plays in driving this transition. What we’re doing is looking for those solutions, finding the evidence to implement smart policies that will help drive this transition for Canada, so that we improve our environmental performance and continue to grow the economy.
Senator Seidman: But you can’t make a direct link between your policies that you put out there and the end products, or the changes that take us closer to our so-called goals?
Mr. Elgie: No. Any policy think tank, even the C.D. Howe Institute, wouldn’t make that claim, obviously. Our job is to generate smart ideas. One thing we have done differently, and we hope has more effect, is we have a leadership group, as Will said, that includes CEOs from oil, mining, forestry, manufacturing; Dominic Barton is on the group, the head of Shell is on the group, Galen Weston is on the group. By working with them as a leadership council, they help to guide our work and make sure what we are doing is economically relevant, but they also serve as ambassadors. When we put this report out two months ago, many of them stood on the stage with us and said these are great ideas, our economy needs these ideas. So we’re doing what we can to try to make sure these ideas don’t just sit in good publications. But absent our being made king, we can’t necessarily say that we’re making the policies.
The Chair: Thank you very much.
Senator Neufeld: Thank you, gentlemen, for being here, and thank you for the presentation. When I look at your first page on the handout that you gave us, and I see the trillions of dollars that have been invested in all kinds of things to reduce carbon, I’d say you’re doing pretty well when you actually look at those numbers. So things seem to be going not that badly. When you talk about solar, how the cost of installing solar is reduced by 70 per cent, good. There was a person here just a while ago who told us how cheaply Alberta was able to purchase wind power.
So we hear those things. I hear those things. Why do you need to actually tax carbon with a much higher carbon price? In today’s world, if we get to $50 a ton, the price of carbon is going to be more than the price of natural gas for heating my home and 50 per cent of the homes and about 70 per cent of the businesses in Canada. Why do you need to do that to the economy if, in fact, you’re doing so well that solar has come down by 70 per cent? Alberta can buy wind power real cheap. You talked about coal-based energy. We don’t have a lot of coal in Canada. We have some in Alberta and some in Saskatchewan. We have an 85 per cent clean electricity system. We should be proud of that. We should talk about that, not about a coal-based energy system. I think Alberta and Saskatchewan are doing whatever they can to get off coal, but they have some real challenges with that because there are just not a lot of mountains in either of those provinces that can give you a lot of water for hydro or those kinds of things.
How do you answer that? Trillions of dollars are happening. You talk about all the successes, and the smartphone you pulled out of your pocket, and said that was all done already by regulation, by investment of government. Why do you need to price Fred and Martha out of their homes? Because a lot of that will happen. Not everybody can afford to just come up with the cash to change their way of heating their home or their water. I’m talking about Fred and Martha. I’m not talking about the huge industries. I’m talking about the ordinary person on the street, or the one that’s renting an apartment and all of a sudden the apartment owner says, I have to pay $5 million and your rent is going to double. In today’s world, how do you do that?
Mr. Scott: You’re right that renewable forms of energy production technology are becoming cheaper than fossil fuel, and that’s great, moving that transition. But the reason you need a carbon price is because energy isn’t the only emitting source. Transportation is a huge cost, business process development is a huge cost. So you need to put that incentive on it to get people to try to find solutions and find ways of avoiding that cost. If it costs them to pollute, they’ll find ways to avoid it, and they can find cheaper ways to avoid it than just paying the price. The point of the carbon price is for people not to pay it. When the price of everyday objects gets a little more expensive, it’s so that people choose products that aren’t polluting and don’t have that same price premium on them.
At the same time, you can find ways to counteract the regressive effect. What you do with the revenues can go a long way so that Canadian households are not negatively impacted. You can take all of that revenue and give it right back to households, and particularly target low-income households. In Alberta’s system, based on the consumption of low-income households, the rebate they’re getting is more than they are spending on the carbon tax. They’re coming out with a net benefit, and they can maximize that benefit by changing their behaviour away from polluting activities. So you need to put that incentive on everything, with the aim of people not paying it.
Mr. Elgie: The other thing I would add is that, going back to Adam Smith, markets work when they reflect real costs. The whole idea of a market economy is that it works because it reflects real costs. Every credible economist in the world will tell you that pollution is the biggest example we have of a market failure. It’s an area where there are real costs, but markets don’t capture them. Milton Friedman, from the Chicago school of economics who won the Nobel Prize, used to tell his students at the University of Chicago that that was the one big exception to his free market theories.
If we want markets to work the way they’re supposed to, we have to step in and put a real price on pollution. Preston Manning backs the idea for that reason, because it lets markets tell the truth. So there are literally billions and billions in costs, both in health care costs and in the cost of adapting to climate change, that are driven by burning fossil fuels across the whole economy, and if we don’t put that price into the market, we’re actually subsidizing polluting behaviour.
Senator Neufeld: I was part of the government that put in the carbon price in British Columbia. I don’t recall your organization being part of that, but you probably were in the background, I guess. I’m sure they would have used some of your knowledge and whatnot. Actually, I was the energy minister when it was put in.
Mr. Elgie: Congratulations; that’s great.
Senator Neufeld: When we put it in, we had it as revenue neutral. It was the first revenue-neutral carbon tax in the world. Guess what happened when the government changed? It went into general revenue. That’s where the carbon tax goes now, into general revenue, to be spent by politicians. Not all on changing to lowering people’s costs so they can actually afford to maybe move forward into other things, but just into general revenue to be spent however the present government wants to spend it. That’s what happens. I don’t care what province you have. When you get that carbon tax and you get all those dollars, federally and provincially, they will go into a multitude of things that have nothing to do with trying to reduce carbon.
That’s my fear. When we put it in and it was revenue neutral, people accepted it. In fact, we got elected right after that again. They accepted it. But I think they’re a little upset now, and they’re getting a little upset when we talk about going to $50. When I listen to Simon Fraser University, they say we need $300 a ton to actually get to utopia. I’m telling you $300 a ton — the country can’t afford it. At least, Fred and Martha can’t afford it. Maybe people that can go to the bank and just about print money can afford it, but not Fred and Martha. How do you deal with these issues?
It’s fine to put that in and say it’s going to be revenue neutral, by one government, but the next one comes along and says, “I have a bunch of pet projects I want to spend this on,” some of them being environmental but most of them being pet projects. That’s what’s going to happen to it. So that’s one question, and, before I get cut off, I’m going to ask the other question.
You said not deal with climate change. If you did all of these wonderful things that you’re talking about, you don’t deal with climate change. Do you really believe that? Climate change is happening, and it’s going to happen whether we like it or not. You can live in that world thinking that, my goodness, we don’t have to have climate change. Climate change is happening. I think we should be doing more about adaptation — I’ve talked about that for a long time — rather than actually figuring out how we could do a whole bunch of other things because adaptation is going to be a big part of what we’re going to deal with because climate change is happening. We’re not meeting our targets; neither is the world meeting their targets.
Mr. Scott: Starting with your second point, you’re absolutely right. Climate change is happening now. The impacts are being felt. Canada spent more on natural disaster recovery in the last five years than in the previous 40 years combined. These things are happening now. They’re a real cost. Absolutely. But that’s not a justification for not preventing further climate change; it’s not a justification to not act, because we need to prevent climate change from getting worse. We don’t know what’s going to happen beyond 2 degrees, 3 degrees, 4 degrees. It could just turn into a runaway effect, and we don’t know what’s going to happen. Just because there are costs now, we’re absolutely going to have to face them. This is the reason we should have acted 30 years ago. But, now, we’re in this situation, so you’re right. We have to take steps to adapt. We also have to take steps to prevent this from getting worse.
On your first point, there are some institutional design practices that we can implement that can help with this sort of design. The U.K. is a great example. They enacted their climate-change targets into law. Then, they developed a non-partisan Committee on Climate Change. It’s a group of non-partisan experts that sets carbon budgets for the country. Every five years, they say, “This is how much carbon we’re going to use. This is how we’re going to meet those reductions. These are the policies that we recommend, and this is how we go about doing it.” Then, they send that to Parliament, and Parliament approves it. It’s taking the politics out of it, which I think is important, and finding practical solutions to be able to address this problem because it’s a problem for everybody.
Mr. Elgie: First of all, congratulations on what you did in B.C. I think it’s a model, and the OECD has held it up as a model for the world. We’ve just crunched the numbers on B.C.’s results up to the end of 2015 — this is a two-year data lag — and B.C.’s GDP outperformed the rest of Canada by about 1 per cent since its carbon-tax shift came in, probably in large part because you reinvested the revenues in other economic stimuli.
Senator Neufeld: There are a whole bunch of other reasons, but anyhow.
Mr. Elgie: Yes. Again, none of these prove any one thing, but the four strongest economies in Canada last year, by GDP growth, were the four provinces that were pricing carbon. You see the same kind of trend in Europe and the U.S. The places that have put in carbon prices have done as well or better than other states or other countries in those economies. So, if you price carbon and you reinvest the revenues either through tax cuts or by smart investments in clean growth, it doesn’t have to hurt the economy. It can actually help the economy, but I agree with you that what you do with the revenues matters. Certainly, our advice, and the advice the Ecofiscal Commission, which I cofounded, is that the money should either be put back into cuts or be reinvested in measures that help to promote low-carbon economic incentives, either for households or for businesses. That’s certainly our recommendation.
Senator Wetston: I just want to follow up on a couple of things here with you. One of the advantages of being a senator is that you can disagree with the other senators and get away with it. I’m not even picking on anyone in particular.
Senator Neufeld: But he’s looking at us.
Senator Cordy: Keep your eyes straight ahead.
Senator Wetston: I respect all the work you did in B.C, and I think it’s a great province.
But I just want to ask a couple of quick questions here, if I might, about the issue of public investment. So this is another disagreement I might have with my respectful Senate colleague Senator Massicotte. I think much has been achieved by way of public investment. Frankly, if you go back to the early days of this country in the 1930s, we would not have an Air Canada. We would not have a CNR. We would not have a Trans-Canada Highway. We would not have a St. Lawrence Seaway. We would not have any of this without huge public investment. I think you’d probably agree with me about that.
So what’s different today? I’ll just give you a small example. I don’t like to look at what another country has done, but, if you look at Israel and the amount of innovation that occurs there, they have more listings on the Nasdaq than anybody except the U.S. in innovation technology. It flows from their experience in the military. They then took that expertise and brought it into the private sector and created a very entrepreneurial economy. It’s another example of public investment. I agree with you on that point. But the question I really have about that is that, when you transfer that to the private sector and seek the innovation that you’ve been talking about, there’s another element here, and that is that we’ve had a rather weak history of being able to support start-ups and investing in start-ups.
What has your experience been between taking the policy framework that you might develop and support and support government initiatives? What has your experience been, if you have any, kind of following up a bit with Senator Seidman’s question, about the private sector being able to obtain the necessary capital to invest in order to grow these types of businesses? Any thoughts about that?
Mr. Scott: That’s what we found to be a major gap, and this is a gap generally for Canada to be able to fund the scale of these technologies. But it’s particularly strong for clean technologies and clean innovations for the reasons we mentioned because there isn’t the same market demand. You can’t compete in commodity price-taking markets, as a new innovation, without having that price premium. So there is a major gap there that we’ve noticed. Increasingly, as you mentioned, on a broad scale, there is a trend toward quick returns, low-risk, low-capital, quick returns. The software bubble changed the structure of venture capital investment, so few industries and few venture capitalists are willing to invest in these long-term scale-ups with relatively low returns when they can invest in a software product. You can have an IPO, like Snapchat, that doesn’t do anything. It has no way of making money yet, but it’s one of the biggest IPOs ever. That is a challenge in the financial system, and we need to find ways to address that. Part of that is the public role of de-risking and crowding in private investment. Using initiatives like SDTC has been successful, but it’s also a matter of finding innovative financing instruments. Things like carbon-related financial disclosures, getting better accounting for the risk that’s involved in emissions. These can start the shift in the financial sector to invest in these things.
Senator Wetston: That’s starting to occur. Securities regulators are requiring more disclosure of climate-change-related risks, and that’s occurring in the U.S. It’s occurring in Canada as of recent announcements. I think these are all important matters, but it doesn’t address the fundamental issue that many senators are concerned about, which is the impact of climate change and our role in that and what difference we can make by asserting a lot of policies that do have an impact on business.
Just a quick question in that area if I may, chair. I did a bit of work recently in a law-school setting. It’s a good place to test things. I wanted to compare some of the differences between cap and trade, which we have in Ontario with the allowance-based system. I think our government — you can correct me on this; I’m an Ontario senator — is using those allowances in the manner that you described as incentives toward achieving less carbon in the economy, greenhouse gas reduction, et cetera. I think you would agree with me there. So I just wanted to ask you because we’re in a report stage, and I don’t think this Senate necessarily has to say that carbon tax is the only way to go and the best way to go. Cost certainty versus environmental certainty was kind of the topic that I talked to some students about. I think you get cost certainty with carbon tax. You get more environmental certainty with cap and trade. Setting the cap, issuing the corresponding number of allowances, et cetera, you know how that system works.
Can you share with the Senate committee here your views about cap and trade? Because I, personally, think that we’ll never go to a global carbon tax. I don’t think we’ll ever get there. The EU has already committed to cap and trade. It’s working well. They have been able to iron out some of the fraudulent activity in the cap-and-trade scheme. I think that was in the early days. I use that word liberally. So give me your thoughts about that. I think it’s more likely that you’re going to see cap and trade continue, but I think it will be more global than carbon tax. Any thoughts?
Mr. Scott: I think both can be effective, and you can institute design principles that can counteract some of those effects, like putting a price ceiling in a cap-and-trade system by having an offset price or things like that. So, no, I don’t have a strong preference personally. I’m kind of agnostic, but it depends on what fits the jurisdiction and what fits their needs.
There is a great opportunity for Ontario and Quebec linking with California that keeps the price low. It gives a lot of opportunities to find the lowest-cost compliance methods, so that can be successful. Alternatively, in a carbon tax, when you ramp up that price, people will reach and find other low-cost alternatives.
Both can be effective if designed well, and it’s just a matter of being able to cover the whole economy and being able to capture all of those.
Mr. Elgie: On your previous question about the mix of policies, one thing government can do and has complete control over is its own procurement. If you asked me about the list of things we could do that we’re not doing as well as we should, I would say being a leader in clean procurement. A lot of the policies we’re putting in place are an attempt to create economic signals that would change the behaviour of businesses in the private sector. But just as we did two decades ago in fighting the deficit, government led by tightening its own belt. If government led by having an internal carbon price — they’ve imposed one on the market but haven’t imposed it on themselves yet — it would drive procurement of infrastructure, military procurement and all the expenditures the government makes for 13 per cent of the economy to be a market leader. And that would send a strong signal that would pull some of the rest of the economy with it.
Senator Wetston: As you know, in the budget there is a commitment to clean tech investment. It’s also job creation and innovation. There is some value there. Even if you’re not necessarily committed to the whole notion of climate change and Canada’s participation, that’s an important investment in any event because at it leads to other side benefits. I agree with on you on externalities. It’s hard to fit that into an economic model, with what you’re talking about on pollution.
I have a last question, and I raise it because whether it’s cap and trade, I would like to see less fragmentation in Canada. It would be nice it we had one thing across the entire country, but that’s hard to achieve. Look at Trans Mountain; we don’t need to go down that path, do we? And we don’t learn from our history, either. If you go back to the 1930s with Borden, Mackenzie King and Laurier, you’ll see that we went through this same east-west issue. It played out in a different way. This is more west, but nevertheless it’s playing out the same way.
The only issue that I would raise with you is either system, whether it’s cap and trade or carbon tax, market forces operate on both. You get the market working on both; they just work at different times and in different manners, so you can still achieve that outcome. That’s possibly why you might be agnostic about which one you choose. Would that be fair?
I got a lot into that question, Madam Chair.
Mr. Scott: You’re right in that if we could get a similar program, whether it’s cap and trade or carbon tax across Canada, that creates more efficiency because if there are cheaper opportunities to reduce emissions in Newfoundland than are there Alberta, then you can pay for those across the country. That’s the issue with fragmentation. It’s not quite as efficient as if we had one system across.
Senator Wetston: Thank you for that.
Senator Mockler: Thank you very much for the presentation. I link a bit with what Senator Neufeld was saying on Fred and Martha. We’re always asking government to do this and government to do that, and in my experience with the legislative assembly of New Brunswick for 24 years, we have a lot of demands. And you have a lot of demands too when you look at where we should go. I would like to quote John F. Kennedy: Don’t ask what the government can do you for. Ask what you can do for the government. Canada is not just Toronto, Montreal and Vancouver. We have rural realities that we have to face as a government and as community leaders at all levels.
As Chair of the Finance Committee, we were looking at that last night. We have a government that wanted to invest $14.2 billion in infrastructure coast to coast to coast, and with our analysis at the committee, we’re finding out that we have only spent approximately half of those billions of dollars in that first phase — $7.2 billion rather than $14.2 billion.
So that said, you’ve touched a bit on something where there’s a possibility that we would be looking at linking it to clean energy, smarter ways of doing things. Keeping in mind that even though we know that 60 per cent of the population of Canada lives in Montreal, Toronto and Vancouver, the fact is there’s a reality out there called rural New Brunswick. What would you recommend for those provinces? The reality of urban versus rural areas in infrastructure, for example.
Mr. Scott: I can’t speak exactly to the infrastructure needs of rural New Brunswick, but when we make these infrastructure investment decisions, we need to make them with the long-term vision, looking at what we want. What is Canada going to look like in 2030, 2050? How do we build the infrastructure that underpins that economy, not the 2018 economy?
There are different ways you can do that, like looking at a shadow price on carbon or a real price on carbon for the life cycle of infrastructure investments. How will that infrastructure investment play out over the next 30 years? And absolutely that will mean different things to different constituencies. It will look different in terms of high-speed rail in a city centre versus off-grid renewable transmission infrastructure in a rural community. But we need to find those solutions and go at them with a long-term lens into making those investments.
Mr. Elgie: We operate in a global economy, and sometimes that’s good and sometimes it’s bad, because forces beyond our control have a big effect on the jobs and wealth in this country. But if you look ahead in 20 or 30 years, pretty much every globally respected economic authority agrees that we’re moving towards a lower-carbon, more resource-efficient, cleaner economy across every part of the economy. And that will affect agriculture, forestry, manufacturing, buildings. I think one of the things this country did well 30 years ago is that we saw the world was shifting from protectionism to free trade, and now it is shifting back. But we are a nation built on economic protectionism for a century; that was our economic model. But we realized in the late 1980s and early 1990s, both Conservatives and Liberals, that as the world changed, we had to change. And the government got out ahead of that with free trade agreements.
There was a bumpy patch for a few years as we made the transition, but almost everyone agrees that that government policy leadership positioned us for two or three decades of economic success. That same kind of economic transitioning is happening globally now. We will live in 20 or 30 years in an economy in which energy is produced differently, transportation is different, buildings are different, agricultural production is different. We will still have the products and things we like, but they will be produced in a clean, more resource-efficient, low-carbon way.
I think our challenge, whether you’re in rural New Brunswick, rural P.E.I. or rural B.C. or urban, is how do we position Canadian firms so that, as we did with free trade, we’re actually at the leading edge of generating that wealth and jobs. That’s the next generation of jobs that my little kids will be competing for. There is a reason why you see leaders on our council from oil, from forestry, from manufacturing and from retail recognizing that it’s a good economic decision for Canada to get ahead of this curve so that we’re competing with the Chinas, the Norways, the Israels, the market leaders positioning themselves for that wealth.
You can drill down into any technology. Mining is a great example. Canada’s mining industry not only is working to try to be a leader in producing minerals in a low-carbon way, but they’re actually trying to make the minerals that will be used in lithium-ion batteries and solar panels. We’ve got most of the minerals that go into lithium-ion batteries and solar panels in Canada. If we had a big producing lithium mine three years ago, Elon Musk might have put his battery plant here. Quebec is close to having a commercial-scale one now, so hopefully we’ll get in on the game.
But that’s part of thinking this is where the economy is going. How do we help our industries to reposition themselves so that we’re actually thinking about the next generation of wealth and jobs and investing in them today? I can’t tell you exactly in every industry without a long time, but that’s the way I would think about it.
The Chair: Thank you so much. We are running out of time, so we’ll have a last question from Senator Richards.
Senator Richards: Thank you for coming. Senator Mockler mentioned rural New Brunswick, so I will mention this. We’re great at talking about things that we don’t have to see. We talk about shutting oil production down in Canada, and we get our oil from Iran and Saudi Arabia. And we don’t have to pretend that we get it from there, but we get it from there. Billions of dollars are lost in Canada and we get from elsewhere. But in China, three quarters of what goes into those phones is mined over there.
Now, there is a great tungsten plant in rural New Brunswick, a great deposit. It can’t be mined there because of the protests; so it might never be mined. That’s something we’re going to run out of. That’s something everyone is going to be worried about. Even the people who are, let’s say, demonically green are going to be worried about that because they won’t be able to use their phones either.
When push comes to shove, the future might not look so bright. There are a lot of things we are trying to implement and shut down without having resolutions for right now. That really bothers me. As I mentioned before to another speaker, there is quite a bit of evangelism going on about what we can do and what we should do and what we must do that hasn’t been overall proven that it will really help in this global crisis that the climate change might bring us to.
We’re not really sure, all the way around, if we are the main facts of this climate change. It’s not empirically proven that way. We can suggest we are, and perhaps we are. Some of this reminds me, just a bit, of when the Irish playwright George Bernard Shaw visited Moscow in 1932. He said, “I have seen the future,” because he was in the middle of Stalin’s five-year plan. We know what happened there.
The Chair: What is your question? Sorry.
Senator Richards: If we stop all of these potential beneficial mining explorations, what is going to happen to our economy? Where is it going to go?
Mr. Scott: That’s part of what this clean innovation is all about; it provides a solution for that. We need to find cleaner ways of doing business that are accepted by the public and that we can build on our natural resources and our natural advantages to be naturally competitive.
To use the mining example, there is a young company that is based out of Vancouver, but active all over, called MineSense. They use infrared measuring technology to help the sorting and to make mines less invasive, to have less of an environmental impact, to have to pull less out of the ground to find the valued minerals. Developing technologies like that, where we can reduce our environmental impacts, will also help get everyone on board that we can develop these resources if we do it in a responsible way.
Getting ahead of the curve, as more countries — and it’s not only happening in Canada where people are environmentally inclined and want to see those solutions brought, where we can develop our resources, be able to grow those businesses here as we develop those technologies as the world shifts in this direction.
The Chair: Thank you very much.
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Senator Dupuis: There is a European group called Energy Cities. You mentioned that the ideal would be to have one system, rather than a cap and trade system or a carbon tax. That group claims that the cap and trade system is less subject to political pressure than the carbon tax. Does this statement seem accurate to you? What do you have to say about that?
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Mr. Scott: That has to do with the political acceptability of the way these things have been framed politically. A carbon tax. Use the word “tax” and people react to it. The public is very responsive to that word. A cap and trade also puts a price on carbon. It can be at a similar level. It’s not seen in the same way. The way it has been advertised or presented doesn’t have that same political reaction to it.
The Chair: Thank you very much for your testimony. Thank you very much, colleagues, for your interesting questions and debate.
(The committee adjourned.)