Proceedings of the Standing Senate Committee on
Energy, the Environment and Natural Resources
Issue No. 44 - Evidence - May 1, 2018
OTTAWA, Tuesday, May 1, 2018
The Standing Senate Committee on Agriculture and Forestry met this day at 6:32 p.m., in public and in camera, to consider the subject matter of those elements contained in Part 5, insofar as that Part relates to farming, of Bill C-74, An Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018 and other measures.
Senator Diane F. Griffin (Chair) in the chair.
[English]
The Chair: I call the meeting to order. This is a special study regarding Part 5 of Bill C-74, An Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018, and other measures.
With that, I’m going to ask the senators to introduce themselves before we introduce the panel.
[Translation]
Senator Maltais: Ghislain Maltais from Quebec.
Senator Dagenais: Jean-Guy Dagenais from Quebec.
[English]
Senator Doyle: Norman Doyle, Newfoundland and Labrador.
Senator Oh: Victor Oh, Ontario.
[Translation]
Senator Petitclerc: Chantal Petitclerc from Quebec.
Senator Gagné: Raymonde Gagné from Manitoba.
[English]
Senator R. Black: Rob Black, Ontario.
Senator Mercer: Terry Mercer, Nova Scotia.
The Chair: We are from one end of the country to the other.
We have a large panel. From Environment and Climate Change Canada, John Moffet, Associate Assistant Deputy Minister, Environmental Protection Branch; and Philippe Giguère, Manager, Legislative Policy.
From Agriculture and Agri-Food Canada, Tom Rosser, Assistant Deputy Minister, Strategic Policy Branch.
From the Department of Finance Canada, Gervais Coulombe, Director, Sales Tax Division, Tax Policy Branch; Pierre Mercille, Director General (Legislation), Sales Tax Division, Tax Policy Branch; and David Turner, Tax Policy Analyst, Sales Tax Division, Tax Policy Branch.
Mr. Moffet is going to make a presentation, I understand, so I’ll turn the floor over to him. Thank you.
John Moffet, Associate Assistant Deputy Minister, Environmental Protection Branch, Environment and Climate Change Canada: Thank you, senator. We’re all pleased to be here. I’m going to start with a brief overview of the Pan-Canadian Framework on Green Growth and Climate Change and how carbon pricing fits into that framework, and then I’ll ask my colleague Mr. Mercille to describe the way the carbon charge portion of the bill applies. Then we’ll be happy to answer any questions that you have.
Part 5 of the budget implementation act establishes what is known as the Greenhouse Gas Pollution Pricing Act. Carbon pollution pricing or carbon pricing is a foundational element of the Pan-Canadian Framework on Clean Growth and Climate Change, which was agreed to by first ministers in December 2016. The pan-Canadian framework also included a number of other measures, complementary regulations for areas where pricing might not work, because the markets might not be as direct as desired or where we needed action to be taken with more certainty or more quickly.
It also includes various financial measures — for example, to help entrepreneurs develop and bring clean technologies to market — and it also included extensive support for communities to become more resilient and adapt to what is inevitably occurring in the climate.
Carbon pricing, however, is a foundational element, and the reason for that carbon pricing is, generally speaking, the most efficient way to reduce greenhouse gas emissions, essentially because it provides maximum flexibility. It provides a price signal that gets distributed throughout the economy and then provides complete flexibility as to how to respond to that price signal as opposed to other kinds of regulations that might prescribe certain actions or funding decisions that are targeted to certain activities.
About a month before the first ministers signed the pan-Canadian framework, the Prime Minister issued a document also known as the Pan-Canadian Approach to Pricing Carbon Pollution. In that document, the federal government set out its goals for carbon pricing; namely, that carbon pricing is applied to a broad and common set of emission sources throughout Canada, again with the goal of ensuring that a price signal is circulated as broadly as possible throughout the economy.
That document, which we refer to as the benchmark, also provided flexibility to provinces and territories to develop their own pricing system. At the time it was published, three provinces already had their own pricing system — British Columbia, Alberta and Quebec — and Ontario had made a formal commitment in law to introduce a cap-and-trade system, which it intended to link with the system in Quebec, which in turn was linked with the system in California.
Recognizing those four systems were in place and that they were all different, the federal government’s approach was to say, “We’ll respect a variety of types of pricing systems and we’ll give flexibility to the remaining jurisdictions in Canada to develop their own pricing systems, so long as they align with a broad set of criteria that were articulated in that document, and we want to see pricing in place throughout Canada by the end of 2018.”
So then in December of last year, December 2017, Minister Morneau and Minister McKenna wrote to their counterparts and provided a little more clarity in terms of timelines. Essentially they asked provinces and territories to provide information by September 1 about either the system they have in place or the system they plan to put in place. The goal is that that would then give us time to determine whether those provincial and territorial systems align with the criteria and the benchmark, in which case good for them, off they go. Or if they don’t, then the federal government would have the authority to implement a federal pricing system, and that pricing system is the one set out in Part 5 of the budget implementation act. The ministers explained that their intention was to implement the federal system, or the federal backstop, if you will, by January 1, 2019, in any jurisdiction that either asked for it or that did not have a system in place that aligned with the benchmark.
The Greenhouse Gas Pollution Pricing Act establishes the legal framework for that backstop and, consistent with the government’s overall approach to pricing, the explicit goal of the legislation is to help reduce greenhouse gas emissions by ensuring that a carbon price applies broadly throughout Canada and increases over time.
The federal pricing system will look a lot like the system in Alberta. It will be a two-part system. First, there will be a charge on fuel, and that charge will be set at a rate that is equivalent to $10 a tonne rising by $10 a year to $50 a tonne in 2022. Of course, the actual price on fuel won’t be $10; it will translate into a number that corresponds to what $10 a tonne of emissions would correspond to when that fuel is combusted. One relatively easy translation is that every $10 of carbon pricing translates to a little more than two cents per litre of gasoline.
The law is silent as to where the federal pricing system applies. The federal pricing system will apply in a jurisdiction after the government passes an order-in-council identifying the jurisdiction or jurisdictions in which it will apply and that order-in-council will populate a schedule in the legislation.
That schedule is empty at the moment. We can add a jurisdiction and we can apply the federal system in part or in whole so we could, in theory, apply the fuel charge portion of the system in one jurisdiction and the output-based pricing system for large emitters in another jurisdiction. Indeed, on an informal basis, at least one jurisdiction has asked us to apply only the output-based pricing system.
And that’s the second part of the federal pricing system, a system that’s designed to be applied to competitively exposed industries. The idea there is to minimize the total amount of carbon price that those facilities pay, thereby minimizing the impact on their international competitiveness while nonetheless providing a continuous incentive to reduce emissions. If you’re interested, I can get into details. I’m happy to explain at great length how that system works but in the interest of time I’ll just mention that that the system is there.
I also want to refer to a study that we released yesterday of the anticipated impacts on greenhouse gas emissions and on the overall economy of implementing carbon pricing throughout Canada. That study, it’s important to emphasize, was based on a scenario where we assumed that the four existing systems remain in place and that the federal system would be imposed everywhere else in Canada.
We know that’s not going to be the case. Some provinces have already indicated they intend to develop their own systems, but until they finalize their designs we’re not able to fully model those systems so we modelled the implication and impact of our system and we confirmed that, by 2022, having carbon pricing across Canada would make a difference of about 80 to 90 megatonnes of emissions, which would be emitted in the absence of carbon pricing in Canada, and that there would be negligible impact on the overall economy.
The study projected that GDP, for example, would continue to grow by about 2 per cent out to 2022, regardless of whether carbon pricing is in place or not.
Finally, here are some general comments about the impacts of carbon pricing on agriculture. I’ll start with the general observation that we anticipate that the impacts on agriculture will be modest. The reason for that is that most agricultural emissions will not be priced, so emissions from animals will not be priced.
The systems in British Columbia and Alberta and the federal system that’s the subject of the budget implementation act exclude fuels used on farms for farming activities, so diesel and gasoline used on farms; what’s often referred to as coloured fuels in some jurisdictions are not subject to pricing.
In addition, we’ve also provided in our system, and a number of the other provincial systems, to apply for the use of offsets. There is fairly significant potential for the agriculture sector to generate carbon offset credits that they can, in turn, sell to emitters who need to offset some of their excess emissions.
As I briefly explained, we’ve also included in the federal system a component for large industrial facilities, including large food processors. Of course, there are a number in the Prairies, in Ontario and at least one very large facility in P.E.I. that could be subject to the output-based pricing system, and that system is designed to, as I said, minimize the exposure to carbon price.
With that, I’ll turn it over to my colleague to describe the fuel charge component of the federal system and how it will be applied to agricultural activities, and then any of us will be happy to answer questions that you may have.
[Translation]
Pierre Mercille, Director General (Legislation), Sales Tax Division, Tax Policy Branch, Department of Finance Canada: As was already stated, Part 5 of the bill implements the Greenhouse Gas Pollution Pricing Act. Part 1 of the legislation contains provisions that implement one component of the carbon pricing system, namely a fuel charge.
The fuel charge under Part 1 of the legislation applies to 22 types of fuel. This covers common types of fuels such as gasoline, diesel and natural gas, but also other lesser known types of fuels such as methanol and petroleum coke. The fuel charge can be found in Schedule 2 of the legislation. You will find the rates starting on page 546.
The fuel charge represents a carbon tax of $10 to $50 per tonne of carbon dioxide equivalent. However, to make administration and compliance with the charge easier, the rates are expressed in terms of normal commercial units. You can find all of these rates in Schedule 2. For example, for gasoline, at $10 per tonne, this represents 2.2 cents per litre and at $50 per tonne, in 2022, this will represent 11.05 cents per litre. For light oil, which includes diesel, at $10 per tonne, this represents 2.68 cents per litre; at $50 per tonne, this represents 13.41 cents per litre.
[English]
Part 1 of this legislation, for which I’m going to use the acronym of GGPPA, which is very long but shorter than saying the name of the act at length, provides that a charge applies to fuels that are produced, delivered or used in a listed province. It also applies to fuels that are brought into a listed province from another place in Canada, and it applies to fuels that are imported into Canada at a place in a listed province.
A listed province is, by definition, a province, territory or area that is listed in Part 1 of Schedule 1 to the GGPPA. So my colleagues explained when some province or territory would be listed on this schedule. The power to populate the schedule, the Governor-in-Council is provided with the authority to add a province, territory or area to that schedule.
Generally, in the most typical case, the fuel charge is paid by fuel distributors that are registered for the purpose of the GGPPA. Registered distributors are, most commonly, persons who produce fuel or persons who sell fuel generally at the wholesale level. Typically, we’re talking here about corporations. It’s the person who delivers the fuel who pays the charge, not the person who receives it.
A registered distributor is responsible for paying the charge in respect of fuel that is delivered to another person. They are also responsible to pay the charge in respect of fuel that they use directly.
Part 1 also provides for specific circumstances in which no charge is applicable to certain fuels that are delivered to certain persons if an exemption certificate is being provided. In these cases, when a registered distributor delivers fuel to those types of persons, the registered distributor does not have to pay the fuel charge in respect of that delivery. Therefore, the fuel charge is not embedded in the selling price of the distributor.
There are a number of types of persons who can use an exemption certificate under the legislation. I will give just a few examples. One is another registered distributor in respect of that type of fuel; farmers, in respect of certain fuel in certain circumstances; or persons subject to the output-based pricing system under Part 2 of the legislation, who are usually very large emitters.
The exemption certificate, what is that? It is essentially a certification that the purchaser provides to the vendor that relieves the distributor of the obligation to pay the charge in respect of that fuel.
I tried to tailor my presentation in respect of farming, so I apologize for the detail I’m going to provide for all the exemption certificates in the case of farmers, but I’m sure the question will come, and I will have to explain it in any case.
In the case of a farmer, a registered distributor can deliver gasoline or light fuel oil, like diesel, to a farmer if the farmer certifies four things: first, that they are a farmer; second, that the fuel is being delivered at the location of a farm; third, that the fuel is exclusively for use in the operation of eligible farm equipment; fourth, that all of the fuel is for use in eligible farming activities.
If these conditions are met, the fuel distributors will be allowed to deliver the fuel to a farmer without the fuel charge applying to the fuel. These concepts I mentioned — farmer, eligible farming equipment, eligible activities — are all defined terms within the legislation.
A farmer is defined as a person who carries on a farming business with a reasonable expectation of profit. Eligible farm equipment generally means property that is primarily used for the purpose of farming, and that is a farm truck or tractor, an industrial machine or stationary or portable engine, or a vehicle not licensed to be operated on public roads. Eligible farm equipment does not include a vehicle that is an automobile as defined in the Income Tax Act or property that is used for the purpose of providing heating or cooling to a building or similar structure.
An eligible farming activity generally means the operation of eligible farming machinery on a farm for the purpose of farming or for the purpose of going from a location at the farm to another location at the farm. That doesn’t need to be the same farm.
I’m going to skip some of this description of the other area of the economy where they have special rules.
[Translation]
In Part 1, the act provides for registration requirements for those that conduct certain fuel-related activities subject to fees. The most important requirement is for a fuel producer in a listed province to register as a distributor. A person who operates a marketable natural gas distribution system in a listed province must also register as a distributor.
Under the law, farmers are generally not subject to certain administrative rules that apply to other people who are eligible for an exemption on fuel charges.
For example, it is important to note that farmers do not have to register with the Canada Revenue Agency, which is generally the case for other people who may be eligible for an exemption certificate. In addition, given that producers do not need to be registered, they generally do not need to provide monthly reports as other registered people do.
As I said, the fees will be managed by the Canada Revenue Agency. Therefore, there are a good number of rules under the act that are administrative rules. Many of them do not apply to producers here because they are rules to determine reporting periods, registration rules and a requirement to pay the charge. Part 1 also sets out the execution rules to ensure that people who must pay the charges comply with the rules in Part 1.
I would like to mention that these administrative and execution provisions are similar to other provisions found in other acts administered by the Canada Revenue Agency. Part 1 gives the Minister of National Revenue the power to assign the net amount of charges collected under Part 1 to a province, a territory or a zone.
The net amount must be determined for one period and essentially represent the amount of fees collected for one period, minus the amounts that were reimbursed or given back for that period. I would just like to mention that Part 1 contains all the necessary rules to ensure that the fuel charge will function well. However, the government needs to be able to react quickly in certain situations where a submission may be made by stakeholders for the Canada Revenue Agency. The Governor-in-Council is authorized to make regulations when enforcing fuel charges in certain cases.
I would like to conclude by saying that Part 1 also authorizes the Governor-in- Council to set fuel charge rates in Schedule 2, which includes the power to set rates for subsequent years up until 2022. This concludes my presentation. Thank you.
[English]
The Chair: Thank you for your presentations. We have roughly half an hour, and there are 10 senators here to ask questions, and there is a big panel. That is about three minutes each, including the question and answer.
[Translation]
Senator Maltais: I thought of something that is very simple. This does not involve you, but I would invite you to explain this to a farmer in the back forty. I don’t think that he would properly understand what you just explained. This will not be easy to administer for a farmer.
In fact, this is an escalating tax. It only goes up. It does not go down. According to experts, agriculture produces 5 per cent of greenhouse gases. If greenhouse gases are reduced to 3 per cent, the tax will continue to rise, if I understand correctly what Mr. Moffet said just a while ago. An escalating tax continuously rises. Make no mistake. At least that’s how farmers and I understand it.
And how will you adjust this tax with Quebec, Ontario, Alberta and British Columbia, provinces that already have their own carbon tax? Will it be added on? Are you going to reinvest this tax in less polluting technologies for the agricultural sector? Or are you going to focus on the large emitters, like coal plants and so forth? Will the amount that the farmers have to pay be reinvested in new farming technologies? I am not talking about technologies like those for railways, boats or the aviation sector. I am talking about the guy who has both his feet in dirt. You know that your act is already being challenged in court even before it has begun?
[English]
Mr. Moffet: First, the federal pricing system will not be applied in jurisdictions that already have a pricing system that aligns with the benchmark that the federal government has articulated. So long as Ontario, Quebec, British Columbia and Alberta continue with their systems as currently described in law, the federal pricing system will not apply in those jurisdictions. There will not be a double system.
Where the federal pricing system applies, the federal government has committed and indeed is required in this bill to return the revenues to the jurisdiction from which the revenues were generated.
It will then be up to the government of those jurisdictions to decide how to spend that money. The federal government is not using this pricing system to raise money for itself. It is not a revenue-generating mechanism. It has no plans, therefore, to determine how to spend that revenue.
The final point I would make is that the pan-Canadian framework I spoke about at the beginning of my remarks, in addition to pricing and regulations, also included a suite of spending programs, some of which are targeted at farmers and agricultural activities so each province has access to a portion of the low carbon economy fund and some provinces have decided to use some of that fund to support carbon storage in agriculture lands, for example.
In addition, Budget 2017 included financial support for the adoption of clean technology by Canadian agriculture producers, for innovative projects to help farmers mitigate greenhouse gas emissions.
[Translation]
Senator Maltais: That is not what I want to know. What you are saying is in the law. Everyone can read it. I am talking about the escalating tax.
Tom Rosser, Assistant Deputy Minister, Strategic Policy Branch, Agriculture and Agri-Food Canada: I would like to add a few points. The four provinces that already have a system in place represent 70 per cent of agricultural production in Canada. I am referring to Alberta, British Columbia, Ontario and Quebec. In addition to the programs that Mr. Moffet described, you mentioned innovation. We are making significant investments to improve agricultural knowledge and practices for the purpose of reducing emissions. Furthermore, we have programs set up with the provinces to help farmers reduce their environmental impact, by making investments on the farm, in order to reduce greenhouse gases.
Senator Maltais: I understand, but what about the escalating tax? When will it go down? Farmers are responsible for 5 per cent of greenhouse gases. You are asking them for 0.02 cents per litre of gas. When they only produce 2 per cent, what tax reduction will you grant them?
Mr. Mercille: The bill that was tabled provides for rates of between $10 and $50 a tonne. Those rates were established following a political decision. The government has committed to review, around 2020, what will happen after 2020. This will be a political decision about what the rates will be then and whether they will change or not.
Senator Maltais: Farmers need to understand that the escalating tax goes from the first floor up to the top. So they will always have to pay. The tax will not go down in the next 10 or 15 years. Is that correct?
Mr. Mercille: I cannot confirm what you are saying. The rate will be a political decision.
Senator Maltais: Based on what we know now, you say it will be good for five years.
Mr. Mercille: Yes.
Senator Maltais: Over the next five years, rates will not go down.
Mr. Mercille: The proposed rates are all in Schedule 2 of the bill.
Senator Maltais: Why are you referring me to that? My question is simple.
Mr. Mercille: Because you are asking a question on a political decision that only ministers and the government can answer. I cannot speak to the government’s position for the years to come.
Senator Maltais: Is it for five years or eight years?
Mr. Mercille: Currently, the rates increase up to $50 per tonne. If no other decision is made, the law sets out that those rates will remain the same until a political decision is made to propose a change.
[English]
Senator Oh: Thank you, gentlemen. Last summer, I visited some of the greenhouses in Ontario, some as big as five acres of covered area. They were very concerned. They told me if this carbon tax pricing comes in, they won’t be able to compete with their U.S. counterparts because America has no carbon pricing.
My question is: Has the government examined the economic impact of the GHG pricing? What will be the change in the agricultural sector?
Mr. Moffet: I have three points. First, the greenhouse producers in Ontario will not be subject to the federal pricing system unless Ontario eliminates its current cap and trade system.
Senator Oh: All the greenhouses?
Mr. Moffet: The Ontario already has a pricing system in place, a cap and trade system. Our system will not replace that system unless the Ontario government decides to eliminate its system. There will only be one system in place in Ontario; either the provincial system or the federal system.
Second, yesterday we published a study looking at the overall economic impacts of carbon pricing. At a macro level that analysis shows there will be negligible impact on economic activity.
In addition, of course, there have been some efforts to consider the impact on agriculture. As I said in my opening remarks, our initial analysis suggests that the impacts will be modest because most agricultural emissions will not be subject to carbon pricing.
Mr. Rosser: In the interest of time I would flag that we, too, at the Department of Agriculture have looked at the potential competitive impact of emissions pricing on the agriculture and agri-food sector and our conclusions are similar to our colleagues in Environment that the impacts generally are quite modest for the reasons cited.
Senator Oh: The farmer told me that any pricing that comes in is going to kill them because the U.S. has nothing. We are imposing. Even Ontario, as you mentioned earlier, has the pricing. The federal government doesn’t come into it if Ontario already has the pricing. But the same thing, they told me if any pricing comes in, their competitiveness is out compared to the U.S. They had better all move to the U.S.
Senator Woo: I have two questions, but I’m going to condense it to one. The first part has to do with output-based carbon pricing. We do not have time for you to give the explanation but I would appreciate a written summary because I think this committee needs to understand what that is about because the objection to carbon pricing is often based on these trade-sensitive, competitive sectors that allegedly have no recourse. It would really be helpful for the committee, on record, to understand what output-based pricing is about and how it can ameliorate, not eliminate, the problem of these large emitters.
Another part of the question is a point always raised by witnesses about how unfairly agriculture is treated. We heard it most recently from two ministers from Saskatchewan. It’s all about sequestration, carbon sinks and the whole question of offsets.
How far along are you in coming up with proper measures of offsets that are scientifically based and have a proper benchmark so you can measure incremental progress? How willing is the government, through its framework, to acknowledge past work done on sequestration? It’s a big issue Saskatchewan has brought up.
Are you also willing to accommodate the so-called CCS technologies that Saskatchewan, again, claims is taking up so much carbon from the atmosphere? Alberta is developing some of its own technology. Will all of these efforts to take carbon out of the atmosphere through natural means as well as through technology be factored in?
Mr. Moffet: The short answer is that the federal pricing system does allow for the use of offsets, but it is silent as to which offsets.
We hope to release a paper in the next days explaining our approach to offsets. The plan is essentially to start with recognizing provincial offsets and allowing entities that are subject to regulation in the federal system to use provincially-recognized offsets for the purpose of compliance.
As you know, a number of provincial offset systems exist in Alberta, Ontario and Quebec, in particular. They all recognize both activities that reduce emissions, you can get offsets for those activities and also get offsets for activities that sequester emissions, including a number of agricultural practices.
Some agricultural practices have been recognized for the purpose of offsets in some jurisdictions for what I would describe as some possibly not completely additional activities. And the debate there is in some cases those activities have become so much the norm that it’s hard to argue they would not have occurred anyway, so are they really adding in something?
Nonetheless, there are agricultural offsets that are being recognized and that we plan to recognize. The criteria we plan to use are criteria we have spent the last year and a half working with all provinces to develop through the CCME, which initiated the project, looking at standardized criteria for offsets and we are planning to adopt that criteria.
Mr. Rosser: Quickly, Madam Chair, if I might. Going back to the provincial systems, if memory serves, I think the Alberta system has eight protocols that allow different agricultural activities to be measured and generate offsets. I know in Quebec there are efforts afoot to develop similar protocols and in the case of the Alberta system, some very significant quantities of offsets have been generated and put into their system.
Senator Woo: Can you comment on carbon capture and sequestration?
Mr. Moffet: At the moment there are no provincial systems that have a process to create offsets through the use of CCS, so no decision has been taken on whether investment in a carbon capture and sequestration project could qualify as an offset. The answer is neither no nor yes; it’s just that we haven’t looked at it, we haven’t been presented with a proposal yet.
The Chair: Following up with Senator Woo’s request for written documentation, we need that Monday at the latest.
Mr. Moffet: We actually have a paper we are consulting on now. It’s a framework document that explains the output-based pricing system and we’re using it as the basis for consultation with industry at the moment. I would be happy to share that paper with the committee and of course if you have follow-up questions we would be happy to answer them.
The Chair: If we could get that ASAP, because we’re under the gun for time.
Senator Mercer: Mr. Moffet, if I heard you correctly, you said that you don’t count animal emissions in the calculation? You’ve nodded yes.
Mr. Moffet: Sorry. We’re not pricing those emissions.
Senator Mercer: Some people don’t think that’s a significant factor. Anybody who’s visited New Zealand knows the single cause of greenhouse gas emissions in New Zealand is the rear end of a cow and that’s the single biggest problem they have, the fact that that’s where the emissions are coming from and they’re going to continue to sell dairy products to the world.
I’m surprised we’re not doing that. Maybe you can explain in a moment why.
I also want to go to the issue of pricing of electricity. This is a significant problem in my province. We pay the highest power rates in the country. We have basically no hydroelectric. We will when we complete the project with our colleagues in Newfoundland and Labrador in Labrador, but that’s a long distance off and the price of building that is pretty high.
Will carbon pricing drive up the price of electricity a little further in provinces without significant hydroelectric capacity, such as Nova Scotia and P.E.I.?
Mr. Moffet: I think I can address both of your points.
First of all, in terms of emissions of methane from animals, yes, it’s a fairly significant, non-trivial source of greenhouse gas emissions.
I’ll come back to Senator Woo’s questions about offsets. It’s quite conceivable that an offset protocol could be developed for — I’m speculating here, but we know that there are certain types of animal feed being developed precisely to reduce methane emissions from animals. It may be a company could say or a farmer could say, “I have introduced this new animal feed and I can demonstrate I have reduced emissions from my livestock by X tonnes over the course of a year so I should get credit for that.”
I’m just giving you an example. We’re building into our system the possibility for financial incentives to reduce those kinds of emissions.
On electricity, carbon pricing will apply to — or does already apply, in the four provinces that have their own systems — to electricity generation from the use of carbon fuel. In the federal system, in the paper that I described that we will circulate to the committee, we have proposed to include electricity generation under the output-based pricing system so that it would be subject to pricing on the margin.
The short answer is yes, it would likely lead to an increase in the price of generating electricity through the use of carbon fuel.
Senator Mercer: My final question is: I assume there will still be incentives available to those farmers who find ways of generating their own electricity through wind power. Because I think of the small egg farmer in Masstown, Nova Scotia, who has a windmill on his farm. When we visited, my one comment to him was that it goes right to the bottom line. When he pays the capital cost of that windmill, all that money will go directly to his bottom line and it becomes that much more profitable.
Are there incentives that will be provided to people in the sector to diversify their source of power, particularly when the price of power in Quebec and Ontario is a lot different than it is in Nova Scotia and P.E.I.?
Mr. Moffet: So the direct incentive is if you generate your own electricity, you don’t pay for electricity. If you generate your own electricity through clean technology then you also avoid any carbon price.
Whether there are financial funds available, I’ll turn to my colleague from Agriculture and Agri-Food Canada. In addition, of course, there may be provincial financing available.
Mr. Rosser: We do, Madam Chair, and I’ll be very brief.
In reference to an earlier question on the Canadian Agricultural Partnership which, as members will know, took effect on April 1 of this year, it has prioritized the environment and climate change. It does provide incentives of various kinds for producers to survey their operations, identify opportunities to lessen the environmental footprint and make investments to reduce those opportunities. The specifics on how they work vary. Although the project is cost shared, it’s delivered by provinces, so the details of how they work will vary across provinces.
As John mentioned, through the pan-Canadian framework there are various other programs and initiatives being established at both the federal and provincial level that can provide supplementary funds to help incent those types of investments.
[Translation]
Senator Dagenais: My first question is for Mr. Moffet. You must surely be aware that the Government of Saskatchewan announced last week that it will test the constitutionality of the carbon tax before the courts. How will you respond?
[English]
Mr. Moffet: Indeed, the Province of Saskatchewan has brought a reference to the Saskatchewan Court of Appeal. It’s a very simple reference: Is the federal carbon pricing legislation, in whole or in part, unconstitutional? The federal government is of the view that its legislation is constitutionally sound and that it has full constitutional authority to impose the federal pricing system in any jurisdiction in Canada, pursuant to the authorities that are provided for in the act.
[Translation]
Senator Dagenais: I have a second question. Obviously, there will be regional disparities that could make it more profitable for the processing plant to move to one province or another. Similarly, factories on the border with the United States may try to move there. Have you thought about that as well?
People want to go where production costs are lower.
[English]
Mr. Moffet: There are two mechanisms for addressing this concern, and I should have started by saying yes, absolutely, I can assure you that our ministers have paid attention to this issue and continue to pay attention to it.
The issue is both an economic one and an environmental one. It is an economic one because, of course, any loss of business in Canada is important for our economy and an environmental one because if a business simply moves to another jurisdiction that has less stringent environmental requirements in place then the environment loses, emissions could actually go up.
So there are two mechanisms that are available, and all revenue from carbon pricing will be returned to the jurisdiction from which it came. And that jurisdiction can use that revenue in ways very similar to how Ontario, Quebec, Alberta and British Columbia are already using the revenue, including to help minimize impacts on businesses through various measures ranging from relief from other taxes to direct financial transfers.
For large emitters, or for emitters that volunteer or ask to participate in the output-based pricing system, that system is explicitly designed to minimize the total carbon price paid. So a facility will essentially only pay a price on the marginal emissions, not on the entire emissions, which reduces the total amount paid, thereby reducing the added cost to that business, reducing the actual impact on the competitiveness of that business.
[Translation]
Senator Dagenais: Clearly, such a fragmented federal tax will require administrative acrobatics by those who will have to pay it. In addition, it will be a burden in terms of time and money for the purpose of application, classification and monitoring. How many public servants will have to be called on? I imagine you are already planning on hiring more public servants to manage this tax. Greenhouse gas emissions will go down, a carbon tax will be imposed, but this will incur costs elsewhere, right?
[English]
Mr. Moffet: Environment and Climate Change Canada has established a small organization to oversee the implementation of carbon pricing. Most of the resources for that organization came from a realignment of existing staff and resources. We have had a small number — off the top of my head I can’t give you the total number, it’s less than a dozen new people — and the Canada Revenue Agency anticipates spending money in the development of an information system.
In terms of its annual ongoing costs, they anticipate a negligible increase, because essentially they are already providing the same kind of oversight they will need to provide in the various compliance promotion and collection mechanisms they have in place throughout the Canadian economy.
[Translation]
Senator Dagenais: I trust you, but saying that costs will be negligible is not a clear or specific answer. Negligible costs could mean millions of dollars. We’ll see in five years. Thank you very much for your answers.
[English]
Senator R. Black: Mr. Mercille, you talked about heating and cooling of structures. Was that an exempted eligible activity? I missed the nuance there.
Mr. Mercille: You can’t use an exemption certificate for fuel that is going to be used for heating and cooling.
Senator R. Black: So that would be heating and cooling of chicken barns, egg barns, greenhouses? Those aren’t considered eligible farming activities?
Mr. Mercille: That’s correct.
Senator R. Black: That’s unfortunate. There are a lot of people who heat their greenhouses and barns for chicken production and egg production.
Mr. Mercille: When making the policy decision, the government looked at the model in British Columbia, and this is not really from the fuel tax in British Columbia.
Senator R. Black: Thank you.
[Translation]
Senator Gagné: Mr. Moffet, I think you mentioned that certain types of facilities or businesses involved in processing might be exempted, but you never really provided us with more specific information. Is that correct or did I miss something?
[English]
Mr. Moffet: I apologize if I implied that facilities would be completely exempted. I was suggesting that we have an output-based pricing system for large industries. If a facility is eligible to be priced under that system, it will not face the full price. It will not pay the price on every litre of fuel that it uses, for example. It will pay a price only on a percentage of its emissions.
I think when I used the word “exemption,” I was probably referring to the fact that some large facilities would not be eligible for that system. The reason is that there are certain large facilities not competitively exposed. A large hospital may emit a lot of emissions. It’s not competing with anybody south of the border, so we’re not relieving it from the MUSH sector, municipality, university, et cetera. Waste facilities will not be eligible, no matter how large they are. They will pay on every tonne of emissions. Otherwise, large industrial facilities will be subject to this alternative pricing system that is designed to minimize their competitiveness, any adverse competitiveness impacts.
[Translation]
Senator Gagné: Thank you.
[English]
Senator Doyle: I’m wondering how you police the business of gasoline for the family car versus what might be allowed for farm machinery, that sort of thing. Will responsibility for it be given to local law enforcement officials? How does the legislation provide for that?
Mr. Mercille: What the legislation provides is that, in certain circumstances, the farmers can present an exemption certificate. As I mentioned, they have to certify the use of the fuel that they’re purchasing using their certificate. If they’re going to use fuel for something else, they can have delivery of fuel without using a certificate and delivery of fuel with a certificate.
You used the word “policing.” I’ll talk more about administration and enforcement.
Essentially, it’s on a voluntary basis that the farmer essentially uses the exemption certificate. So the CRA will be responsible for the administration. It’s not the police. The CRA may, from time to time, do an audit or ask for information from the farmer, like they do right now, as with any business.
I want to mention that, if it is found that the farmer has used an exemption certificate and, basically, has taken the fuel and sold it to his neighbour who is not a farmer or something like that, there is a diversion rule in the legislation that says that the person would have to pay an amount equivalent to the charge plus an amount that is equivalent to a penalty.
Senator Doyle: There will be no way of really tracking it, will there?
Mr. Mercille: In practice, there is maybe a little bit of leakage there, but it’s always a balance between simplicity and putting all sorts. We cannot put a meter on every vehicle to know what kind of fuel goes in which.
Senator Doyle: Will farmers be given a similar exemption when it comes to fertilizer use, for instance? That is an emitter also, so will they be given a similar exemption there as well? Are there any plans to do that?
Mr. Mercille: Under Part I of the legislation, what is being priced is fuel. If there is a supply of fertilizer, it’s not subject to the charge.
Senator Doyle: There are no exemptions here on that.
Mr. Mercille: Because there is no application of the fuel charge on it because it’s not a fuel.
Senator Doyle: Okay. Thank you.
The Chair: It indicates in your paper that the following situations occur where no levy is payable, and one is where a portion of biofuel is added to blended fuels. My question in regard to biofuels is: If corn, for instance, is being raised for biofuels, that’s going to drive up the price in terms of food that’s being bought or used from corn. So, with the increase for food costs, how does the government ensure that biofuel sources do not negatively impact food prices, or can you do that?
Mr. Rosser: Mr. Moffet may have views in terms of his knowledge of biofuels. It is a public debate. Certainly, in North America, an important portion of corn does currently go to biofuel use. Certainly, there is research ongoing, and there are technologies that can allow for biofuels to be produced from waste products from both the agricultural and forestry sectors. Certainly, the use of grains for the production of ethanol and other biofuels, can put upward pressure on commodity prices.
The Chair: So it gets to be quite a balancing act, doesn’t it? We want to encourage more use of blended fuels, but there are consequences.
I would suggest that another consequence — and I don’t know if you will agree with me on this or not, but I’ll test it on you — is that, as more biofuels are being produced from crops, that could also drive up the price of farmland. Our committee has just done a study on the affordability of farmland. Do you anticipate any negative impact on the affordability of farmland as the result of more use of biofuel?
Mr. Rosser: Madam Chair, you note quite rightly that we have seen significant upward movement of prices of farmland over, certainly, the past decade or so. That has been in tandem, although it has actually outpaced the growth we have seen in farm income. In some cases, it is an indicator of positive activity in the agricultural sector, but it is a problem for new entrants or aspiring new entrants into the sector. We do, as a government, both through my department and Farm Credit Canada and others have programs to try to allow new entrants, younger farmers, into the industry.
There are a number of factors behind increases we’ve seen in land values. I guess it’s possible that demand for biofuel may be a contributor, but I would guess that, at most, it would be one among many.
The Chair: Thank you. On behalf of the committee, I’d like to thank our panellists. It’s been a good discussion. I know it could go on for some time, but we have run out of time. Thank you very much for being here with us this evening.
(The committee adjourned.)