Proceedings of the Standing Senate Committee on
Energy, the Environment and Natural Resources
Issue No. 46 - Evidence - May 24, 2018
OTTAWA, Thursday, May 24, 2018
The Standing Senate Committee on Energy, the Environment and Natural Resources met this day at 8 a.m. to study the subject matter of those elements contained in 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.
Senator Michael L. MacDonald (Deputy Chair) in the chair.
[English]
The Deputy Chair: Good morning and welcome to this meeting of the Standing Senate Committee on Energy, the Environment and Natural Resources.
My name is Michael MacDonald, deputy chair of this committee, and I represent the province of Nova Scotia in the Senate.
I will now ask senators around the table to introduce themselves.
[Translation]
Senator Massicotte: Paul Massicotte from Quebec.
[English]
Senator Neufeld: Richard Neufeld, British Columbia.
Senator Mockler: Percy Mockler, New Brunswick.
[Translation]
Senator Seidman: Judith Seidman, from Quebec.
[English]
Senator Richards: David Richards, New Brunswick.
[Translation]
Senator Dupuis: Renée Dupuis from Quebec.
[English]
The Deputy Chair: Today we are continuing our study on the subject matter of 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. Part 5 of the bill deals with the proposed greenhouse gas pollution pricing act.
For our first panel, we will hear from two organizations. We welcome from Nature Canada, Stephen Hazell, Director of Conservation and General Counsel, and by video conference from Montreal, Sidney Ribaux, Co-founder and General Manager of Équiterre.
Thank you for joining us. I invite you each to proceed with your opening statements, after which we will go to a question and answer session.
Mr. Ribaux, the floor is yours.
[Translation]
Sidney Ribaux, Co-founder and General Manager of Équiterre: Mr. Chair, Honourable Senators, I’d like to thank you for having invited Équiterre today to contribute to your study of Bill C-74, and more particularly to Part 5.
Équiterre is a not-for-profit organization with 22,000 members and 110,000 supporters. We have offices in Quebec City, Montreal and in Ottawa. We have been involved in environmental protection, and more particularly in climate issues, for 25 years.
To tackle smoking in Canada, our government increased the price of tobacco. To tackle the acid rain that was destroying our forests, President George Bush put a price on sulfur dioxide using a cap and trade system. If we want to reduce greenhouse gases, we have to put a price on carbon.
Putting a price on carbon is also one of Canada’s international commitments that were made in Paris, and it is essential policy in achieving our greenhouse gas reduction target for 2030. It’s a simple, inexpensive approach that has proven effective on many occasions.
According to a recent report from Environment and Climate Change Canada on the estimated impacts of carbon pricing, it could reduce greenhouse gases by 80 to 90 million tonnes by 2022. Moreover, the report believes that the impact on Canada’s GDP growth would be minimal, since we still expect to fall 64 megatonnes short of our greenhouse gas reduction target for 2030. We need to see the expected results for carbon pricing.
According to the World Bank, more than 67 countries, including China and several of Canada’s other trading partners, have already set a price on carbon. It is high time for Canada to join this list of countries.
Some are concerned that Canadian industry would suffer a competitive disadvantage, but the federal system sets out specific measures to mitigate risks for industries exposed to this type of competition.
The new clean innovation fund or the low-carbon economy challenge, for example, will stimulate a reduction in greenhouse gas emissions in a number of economic sectors. This will ensure the competitiveness of our industries in this new economy.
I’d like to tell you a little story. A few years ago, the concrete industry in Quebec maintained that if we set up a carbon exchange, all cement companies would move to Ontario. Well, this was not the case. Five years later, the sector is doing very well. What’s more, the first major industrial project to see the light in Quebec since carbon prices were established was in fact a cement plant.
There is now a political consensus in Quebec for a carbon cap-and-trade system and no major party is opposed to it. It is here to stay. The cap-and-trade system in Quebec covers almost 85 per cent of the province’s emissions and as of January 1, it has been extended to link the Quebec and California markets with that of Ontario.
To date, the carbon market has generated more than $2 billion in revenues, which will be fully channelled into the Green Fund. This fund is intended to finance investment in the economy of tomorrow. For example, the fund supported Lion, a small Quebec company which makes fully electric school buses, and more recently began exporting them to California. One day, all school buses in the world will be electric, and Quebec will have carved out a lucrative part of this market thanks to the Green Fund.
It is important to note, however, that putting a price on carbon pollution, although essential, is not sufficient in itself to reach our greenhouse gas reduction target. As a result, provincial and territorial governments as well as the federal government must implement complementary policies. Here is one example: regulating greenhouse gases from passenger vehicles. Without such regulation, manufacturers will continue to spend billions of dollars in advertising to sell us large vehicles, and above all light trucks, making consumers prisoners of fluctuating gas prices, as we have seen in the past few weeks. It is therefore essential to regulate the energy efficiency of cars and light trucks, for example.
The debate on carbon pricing is nothing new. When the Kyoto Protocol was adopted in 1997, carbon pricing had already become the main principle advocated by signatory countries including Canada. Before implementing a carbon exchange, Quebec adopted a carbon pricing system in 2006; British Columbia did so in 2008. In the same year, the federal Conservative Party of the time adopted a climate change plan entitled “Turning the Corner,” which proposed setting a national price on carbon.
The bill before you today is therefore the fruit of some decades of debate and concrete experiments in other countries, but also in the country’s four most densely populated provinces. In addition, the multiple consultations and technical reports from the federal government have led to a firm commitment; this bill has therefore been expected for quite some time.
Let’s also remember that all revenue from the federal system will be returned to the jurisdiction where the federal carbon price will eventually be applied. According to Équiterre, we cannot fight climate change without sending a clear signal to the Canadian economy through carbon pricing. We believe that it is impossible to develop a credible plan to fight climate change without imposing a price on carbon. Without the expected greenhouse gas emission reductions through this pricing, it will be necessary to have regulations that are much more strict and more costly in order to reach our target.
I also want to emphasize that Canada’s target for 2030 was set by the previous government. It is therefore a minimum political consensus. Although the target is not ambitious enough, we believe that it needs to be reached. Therefore, it goes without saying that Équiterre supports the bill, which seeks to implement carbon pricing.
I would like to thank you.
[English]
The Deputy Chair: Mr. Hazell, the floor is yours.
Stephen Hazell, Director of Conservation and General Counsel, Nature Canada: I am the Director of Conservation and General Counsel at Nature Canada, Canada’s voice for nature.
I also chair the Green Budget Coalition, which represents 20 of Canada’s leading conservation and environmental groups and over 600,000 Canadians in providing recommendations to the government and Parliament to green the federal budget every year. We produce a document every year focused on producing a green federal budget.
I very much appreciate the opportunity today to speak to you about the proposed greenhouse gas pollution pricing act.
First, I congratulate the government on its budgets upon coming to office. Budgets 2016 and 2017 and the pan-Canadian framework represent historic investments in green infrastructure and a low-carbon economy.
Budget 2018 represents an historic federal investment in nature conservation. Nature Canada is truly excited about the promise of spending this $1.3 billion prudently over five years to reverse the decline in biodiversity in Canada by establishing and managing protected areas and recovering species at risk.
Nature Canada wishes to express our unreserved thanks to the Government of Canada for this budget investment, and the 116 members of Parliament and senators that supported the Green Budget Coalition recommendation for this investment in nature conservation.
Nature Canada supports the greenhouse gas pollution pricing act. A nationwide carbon pricing scheme is long overdue. Climate change is probably the biggest global threat to nature and biodiversity, and carbon pricing clearly has been demonstrated to be the most economically efficient way to reduce greenhouse gas emissions.
Nearly 30 years ago, the Greenprint for Canada coalition of environmental and Indigenous organizations first proposed a federal carbon tax to Prime Minister Mulroney. His government’s $3 billion 1990 Green Plan was a very important environmental initiative, but it didn’t include a carbon pricing scheme as we recommended.
Some 25 years ago, Canada signed the United Nations Framework Convention on Climate Change, our first international commitment to reduce greenhouse gas pollution. We’ve barely begun to deliver on that promise.
Then 14 years ago, Prime Minister Martin first announced plans to put a price on greenhouse gas pollution by creating a market for emissions reductions in all sectors of the economy. It never happened.
Just 10 years ago, Environment Minister John Baird called carbon trading a “key part” of the government’s “Turning the Corner” plan to reduce greenhouse gas pollution. The corner still hasn’t been turned.
Later in 2008, the government promised to develop and implement a cap-and-trade system to reduce greenhouse gas emissions and air pollution. It never happened.
Finally, in 2015, the current government made a clear commitment to put a price on greenhouse gas pollution. That commitment is manifested in the proposed greenhouse gas pollution pricing act.
Over these three decades of inaction, the terrible realities of climate change for Canada and the world are now clear.
The city of Calgary has had two 100-year floods in eight years, the most recent of which in 2013 resulted in $6 billion in financial losses and property damage.
In 2016, two years ago this May, almost 90,000 people were evacuated from wildfires around Fort McMurray. Thousands of homes were reduced to ash. According to the Insurance Bureau of Canada, the Fort McMurray wildfire is the costliest insured natural disaster in Canadian history, with an estimated $3.77 billion in claims filed by mid-November 2016.
In spring 2017, the military was called in to deal with flooding in Montreal, Gatineau and Ottawa. That flooding caused more than $220 million in insurable damage in Ottawa alone.
Last summer, B.C. recorded the worst fire season in the history of the province. More than 1,300 fires burned more than 1.2 million hectares, displacing 65,000 people from their homes and costing B.C. over $500 million. The wildfire season included a 10-week state of emergency, the longest ever in B.C.
This spring, all we have to do is look east or west to the tragic flooding in New Brunswick and B.C. As Premier Brian Gallant put it:
We are seeing weather events like we have never seen before. This is most likely going to end up being the largest, most impactful flood that we have ever recorded here in New Brunswick.
We can’t say that any of these events are directly tied to climate change, but we know the risks of these events grow higher as greenhouse gas emissions increase in the atmosphere.
What is the bottom line? The costs of inaction on climate change now far exceed the costs of action, according to the Insurance Bureau of Canada.
To return to the greenhouse gas pollution pricing act, let me say that carbon pricing is only one tool. We will need to use all of the tools in the toolbox if we are to achieve the GHG emissions reductions that we need to reach our targets.
This legislation will no doubt be imperfect and will need to be adjusted as different carbon pricing approaches are tested by different provinces. The key, and I guess my main message, is to make a start now and to stop fiddling while our communities burn and drown.
Nature Canada urges the Senate to complete its review and enact this bill in an expeditious manner.
Thank you very much.
The Deputy Chair: We’ll now go to questions from our senators.
[Translation]
Senator Massicotte: Thank you to both our witnesses for being here with us today.
I very much agree with the idea of putting a tax on carbon. All economists are in agreement. First, I’d like to go over some technical points.
As you know, the bill seeks to compensate or to protect our large emitters that face unfair American competition where carbon is not taxed. About 63 or 83 Canadian emitters will be exempt from the act. They will be part of a separate category. In this case, a price on carbon will only be put on a portion of their emissions. Up until now, we have been talking about 30 per cent. In other words, they will benefit from a 70 per cent credit similar to what is done in provinces that have a cap-and-trade system.
Do you believe that the proposed structure with the 30 per cent portion is fair and equitable in order to achieve our economic objectives and to protect our Canadian industries from unfair competition? Is it well crafted? Have we correctly targeted the number of emitters? Will we reach our objectives? How does this compare to provinces such as Quebec where there is a cap-and-trade system that offers a similar structure when it comes to credits, but in a different format? When it comes to the bill itself, Mr. Hazell, what is your opinion?
[English]
Mr. Hazell: Thank you very much for that question. It’s a good one because, as the senator alluded to, this bill does in fact have two separate schemes. There is the scheme which sets a $10 per tonne price on carbon, on fuels that are burned. There is a separate scheme for large emitters that produce 50,000 tonnes or more of greenhouse gas emissions per year in a number of named industrial sectors, including oil and gas, et cetera. That scheme only applies when the amount of the emissions are above the industry average.
I can’t speculate as to why the government has gone with this particular approach, but it’s fair to say that it can only help in terms of Canada’s competitiveness. Maybe that was the reason why they outlined this approach as they did.
It may need to be revisited over the years, but, as I said, the key is to get started with a carbon pricing scheme and then see how it works. No doubt we will have to make adjustments. That has been the experience in the European Union and elsewhere.
[Translation]
Senator Massicotte: Mr. Ribaux?
Mr. Ribaux: I would like to make two or three comments in order to answer your question.
Indeed, the Quebec system offers credits for certain large emitters that face international competition. The system in Quebec has been in place for five years, and the large emitters have not left the province. The system seems to have worked. From an environmental standpoint, it is not perfect. In an ideal world, there would be a price on carbon for the continent or even around the world, so that everyone would have to pay the same price on carbon. As my colleague mentioned, it is a system that will need to be adapted with time. Close to 50 per cent of the world’s economy is subject to a price on carbon. Eventually, these exceptions will become less and less relevant.
We will have to be careful with the act. We are currently very comfortable with the wording of the act. We will have to be vigilant when it comes to the rules to ensure that exempt industries are indeed industries that are affected. For example, we believe that electricity is not an affected industry. Electricity should not benefit from a credit because essentially it is a market that serves national markets. We are very comfortable with the current wording of the bill.
Senator Massicotte: The federal government is leaving it up to the provinces to decide how they will spend the money, especially when it comes to a tax on carbon. As is the case for all bills, and for all funding, there are winners and there are losers. Some are able to cover the supplementary costs. However, some families don’t have the means to pay for this tax. Consequences on households are very important.
These are fine words when you say that we must find means to help the people and to make sure that there are no consequences, but the government is leaving it up to the provinces. It is a political choice. It is sort of our country’s model. However, certain people believe that the federal government needs to make an extra effort to at least protect families that are affected by the financial repercussions. We can also set other objectives. Mr. Hazell, do you agree with the idea of leaving it up to the provinces without setting objectives?
[English]
Mr. Hazell: That’s a really good question. The inequities that can come from a carbon pricing system are clear, and we have to address them. As we move to a low-carbon economy, it will present challenges. We have to ensure that it’s done in an equitable manner.
I appreciate why the federal government would be reluctant to wade into these waters before we have any national carbon pricing scheme on the table. Again, for the time being, we have to trust to the good offices of the provinces to ensure that the carbon pricing and carbon tax regimes they institute will be fair and that they can make adjustments for low-income Canadians.
As we learn from experience with the bill, there may be a need for the federal government to take some action to ensure equity across the country.
[Translation]
Mr. Ribaux: It would make sense to leave it up to the provinces to adopt compensatory measures for people with low incomes, which would be relevant for those provinces. There are several ways to deal with this question. In the past, certain governments sent cheques directly to consumers, therefore to people. This method is not the most efficient one, nor is it the fairest one, but it is one way of doing things.
There are also ways of doing this through energy efficiency for buildings, for houses, and for the homes of people who have low incomes.
Obviously, there are other ways related to transportation, public transit, etc. Therefore, given all of the measures, appropriate measures for one province such as in the Maritimes where provinces are less urbanized, would not be the same measures as those that would be appropriate for Toronto. We believe it is important to tackle this issue, but it would be preferable to leave it up to the provinces to adopt the measures that they need. Whether they decide to put a price on carbon or whether it’s the federal government that decides to do so, the provinces will be able to decide how to invest the money as they will have the revenue.
[English]
Senator Wetston: As you both know, and I think as Senator Massicotte indicated, there’s a compelling case to address climate change nationally and internationally. It does seem there are a number of methods to address it. It’s not just carbon tax or cap and trade, as I think both of you more or less indicate.
We have some programs in place, and we are in pre-study of a bill here. In thinking about the bill, in thinking about what we need to do as a committee, and in thinking about the programs in place potentially in B.C., Alberta, Quebec and Ontario, we are given some sense of the price of pollution.
If you think about B.C., Alberta, Quebec and Ontario, would you both be able to comment on what you like about those programs? What do you see as positive about those programs? What do you see as negative about those programs? What do you see as successes or failures?
Following up on what Senator Massicotte was suggesting, equity is important. All Canadians need to be treated fairly in this regard and need to have the opportunity to benefit from reducing climate change in the way you’ve both been talking about. At the same time, they need to be able to manage it within their life and their lifestyle.
Would you both be able to comment on that, please?
Mr. Hazell: Sure. I’ll jump in with both feet. Mr. Ribaux has a very different experience with the Quebec system, but I favour a carbon tax.
Carbon tax has the great advantage that governments actually know how to tax. This is something governments have learned to do very well over decade after decade, right?
There is a lot of experience. We know how to do it. It’s an efficient way to go about it in terms of setting up the bureaucracy. Most Canadians don’t think about it necessarily, but setting up the cap-and-trade system is much more complicated than just working on a carbon tax.
I prefer the carbon tax for that reason, just the ease of administration. B.C. has shown the way in how to make a carbon tax really work. It has been around long enough in British Columbia that we know it has actually changed behaviour, even with its five cents on a litre of gas.
Will that destroy the B.C. economy? The evidence is that it hasn’t. The B.C. economy is one of the best in the country. The greenhouse gas emissions of British Columbians have been decreasing more rapidly than elsewhere in the country. The study by the International Institute for Sustainable Development attributes that to the B.C. carbon tax.
Anyway, I favour the carbon tax. The bill in front of us is kind of an amalgam of approaches. I am sure Mr. Ribaux will have views that differ slightly from mine.
Mr. Ribaux: We favour a price on carbon. We think both tax and cap and trade can be efficient ways of attaining reductions.
The first point on your question, initially at least, is that we’re talking about a very small price signal. As we’ve mentioned, almost every year in Canada one level of government increases the price of gasoline, increases the price of tobacco or increases the price of alcohol. We don’t have decades of debate around that.
The carbon tax, for all sorts of reasons, has blown up into a huge debate. We’re talking about a few cents on gasoline or fuel at the end of the day. We have seen in other jurisdictions that when the intention is to send price signals on any product that’s taxed like this one, eventually the cost to consumers doesn’t necessarily go up.
In Quebec, people are buying smaller cars because the price of gasoline is one of the highest in North America. In Europe, people are consuming a tenth of the gasoline that we do in North America because there are higher taxes on gasoline. At the end of the day, they’re not actually paying more to get around. They’re just getting around or heating their homes in different ways.
That’s a very important first point. We need to put this in perspective. We’re not talking about a huge impact. We’ve talked about the impact on low-income people, and that needs to be addressed.
With respect to the difference between tax and cap and trade, the tax guarantees the price. You know what the impact on the price signal will be. That’s the advantage. The disadvantage is that it doesn’t guarantee emissions reductions. The tax can go up, but if the economy flourishes and people get richer, maybe they’ll just absorb the tax and pay the extra five cents on gasoline, for example.
Cap and trade, on the other hand, doesn’t guarantee the price. It does guarantee reductions because cap and trade is a mix of sending a price signal and regulating the large emitters to reduce. They have to reduce. It’s done through a system where the industry can reduce in the most efficient places, but at the end of the day they have to reduce their emissions.
Quebec is guaranteed to reach its target because it has regulated the targets and it has regulated the cap-and-trade system. It’s more complex. Stephen Hazell is right on that one. You need to get the regulations right.
At this point we think the way it has been set up in Quebec, California and Ontario will get us the reductions. Both systems have their advantages and disadvantages.
Senator Mockler: In order to implement or bring forward changes, we need to make sure the people who will pay at the end of the day know why they’re doing what they’re doing.
It’s nice and dandy to say that no doubt regions of Canada are waking up this morning to snow. Down home today in New Brunswick there were anywhere between 4 and 6 centimetres up north.
We believe in climate change, but we also believe in the fact that we need a strong economy to make those changes. We cannot just push on a button. Something we are faced with is that where we have political or social instability, we don’t have progress. The left hand sometimes doesn’t know what the right hand is doing, or vice versa.
In March 2016, we saw Prime Minister Trudeau and President Obama publish a joint statement. I want your opinion, because you did not touch on that.
[Translation]
Mr. Ribaux, in your presentation you mentioned what happened with the concrete industry.
[English]
We are faced with the U.S. withdrawal from the Paris Agreement. I would like to have your opinion on the view of government knowing best how to tax. I know, if we tax too much, what will happen to our economy. We are facing it now. You have not touched on that.
My question to you would be: In view of what is happening with our biggest trading partner ever, the U.S., what would be the potential impact of carbon pricing or cap and trade on the competitiveness of Canadian businesses, particularly in relation to our American competitors?
If you want to convince me so that I can convince people at Tim Hortons and McDonald’s, the ones who pay that tax at the end of the day. We need to be mindful that you have a role to play in helping us prove that we are on the right track.
I would like to hear from you what you think in view of what the government is proposing under Bill C-74 and the changes you are asking government to consider about the competitiveness of Canada.
Mr. Hazell: The first point is that when we talk about competitiveness we have to look at the cost of inaction as well as the cost of action. This largely gets ignored. That’s why I would encourage this committee, if you haven’t invited them already, to invite the Insurance Bureau of Canada to come speak to you.
The costs associated with extreme weather events are accelerating. Every year they are higher and higher and higher, and those costs are borne by Canadians. That is a part of the equation, as well, when we talk about competitiveness. We have to include the costs associated with recovery from these various disasters. I would strongly encourage you to do that.
With respect to taxation, there is a principle in economics that you want to tax the bad things, not to tax the good things. Taxing pollution is a good idea because pollution is bad. Taxing income, you could argue, is a bad thing because you want people to save.
In moving toward a system of carbon pricing, you are in essence trying to discourage bad things. Similarly, with all the revenue they are getting from a greenhouse gas pricing system, provincial and federal governments can adjust other taxes such as income taxes, for example, so that there is tax neutrality. That’s an important principle that I think has been applied in British Columbia.
I don’t know whether that has worked out. I am not an expert in that, but I think it’s an important part of the equation. I don’t think we need to assume that adding a greenhouse gas emissions price or tax will automatically increase taxes overall. We may be able to reduce taxes in other areas and encourage saving, for example.
Mr. Ribaux: Your question raises many points. I’ll try to deal with them very quickly for the sake of time.
I was in Bonn at the last negotiation session of the United Nations on climate in October 2017, after Paris and after President Trump announced that he would withdraw from the Paris accord.
Guess what? The U.S. delegation was there. They were very present. They are still negotiating because the process to withdraw from the Paris Agreement is a four-year process. That’s the first point.
I agree they have signalled they will withdraw. My point is they haven’t withdrawn yet. They are still in the process.
The second point with respect to the U.S. is that at least half of the economy of the U.S. is engaged in reducing greenhouse gas emissions that do have various pricing schemes and regulations to reduce. For example, I was talking about regulating the car industry. Many states in the U.S., including California and New York, have signalled they would regulate this industry if the Trump administration decided to withdraw.
It’s not like we have one country below us that has said they will do nothing on climate. Actually, most of the United States is doing quite a lot. In many cases, they are doing more than we are to reduce greenhouse gas emissions. It’s important to nuance this issue.
The third part is that a huge segment of the Canadian economy stands to benefit from a global strategy to reduce greenhouse gas emissions. We talked about electricity earlier. We export a few billion dollars of electricity each year to the United States. Hydro-Québec, BC Hydro and Manitoba Hydro are very well positioned to reap the benefits of states below us that are asking for producers to supply low-carbon alternatives.
Also an important wind industry is now being developed in Canada. Some of these companies are international but many of them are Canadian based. Bombardier builds trains. Nova Bus in Quebec builds buses. Public transit will have to be developed in Canada and elsewhere if we are to attack this issue seriously. In Ontario, car manufacturers have already started to segue into building hybrid and electric vehicles.
The question is not whether we are going to a low-carbon economy. The question is: Will Canada lag behind, or will we help our industry to adapt to this new low-carbon economy that many economists and economic observers around the world are saying we are going to?
Over the years, many large industries have signalled that a price on carbon is the most efficient way to reduce greenhouse gas emissions. They say that because they need to have a clear idea of where the government is going on regulating this issue. The price on carbon is something that they have generally favoured. This includes the oil industry. They have said that many times.
[Translation]
Senator Dupuis: Thank you both for being here this morning. Mr. Ribaux and Mr. Hazell, you talked about the inequalities that can result from carbon pricing. I would like you to tell us more about this. In the 2030 Agenda for Sustainable Development, they made a link between economic growth and environmental protection, to create more inclusive societies and reduce inequalities. And Mr. Ribaux, in your presentation, you talked about consumers — or rather citizens — and that particularly got my attention. We are first and foremost citizens who pay taxes. We have subsidized natural resource development companies, including oil companies, only to be told today that we need to radically change our resource development system. In the end, it is always the taxpayers who foot the bill. Could you tell us more about this?
Mr. Ribaux: Once again, there are a number of ways of mitigating the impact of tax measures, such as a price on carbon, on the most vulnerable people. It is important to note that the most vulnerable people who have a right to social assistance or who have very low incomes, generally use very little energy. Unemployed people who rent apartments, generally in cities, where the cost of heating is included, are people who don’t have the means to increase their consumption, because their consumption is very low, but at the same time, they’re less affected by taxes on energy than the average consumer.
That said, there are exceptions to every rule. Some low-income individuals live in old houses in isolated regions, or they drive old cars. In Quebec, and elsewhere in Canada, energy efficiency programs for low-income individuals have been set up over the years. Efforts have been made in terms of home renovation. Programs to get old vehicles off the roads have been set up in several provinces. These programs allow low-income individuals to get a discount when they trade in their old vehicle or allow them to have access to other modes of transportation.
Many indigenous communities are located in far-flung areas. They are served by independent electricity distribution networks that generally run on diesel. That diesel is largely subsidized. We provide funding to ensure that these people have access to energy at a lower price. The other side of the coin is that opportunities to transfer that pollution-creating energy to green energy are enormous, because the price gap is very significant. There is a huge range of measures to be put in place. I am not as familiar with Alberta’s plan, but I know that there are a whole series of measures that have been set up to mitigate the impact of carbon pricing on the most vulnerable. This is an important challenge that we have to face. However, we can’t hesitate to adopt such a measure out of fear that the impact on low-income individuals will be too great.
[English]
Mr. Hazell: I agree with everything Mr. Ribaux said. The Green Budget Coalition has recommended, year after year, that we institute a program for subsidizing energy efficiency for low-income Canadians renovating homes so that we reduce their energy costs and reduce greenhouse gas emissions from leaky homes.
I am reminded of a study that Professor Lars Osberg at Dalhousie University did some years ago looking at greenhouse gas emissions from different groups of Canadians based on income levels. His study found that the lower 80 per cent of Canadian income earners were already meeting the Kyoto target at the time.
The problem really is the upper 20 per cent of income earners. Those folks are emitting all the greenhouse gas emissions. It’s not the folks in the lower 80 per cent. That was an extremely interesting study. It should make those of us who fly around in airplanes all the time think a little bit.
[Translation]
Senator Dupuis: That is exactly the type of concern I was talking about. If you are third generation “jet setters,” or if you have children who don’t have the means to buy property, who live in apartments whose owners don’t take care of these matters, there is an intergenerational question at play as well.
[English]
Senator Neufeld: Many of my questions have already been asked. I worry about Fred and Martha, the average people in the system, and about our economy. I am not just talking about low income. I am talking about the people who are probably in their 30s. It could be a single mother with a couple or three children, living in a 30-year-old home.
It’s fine to say that there should be programs. I’ve been involved in developing some of those programs. They always come with the people having to invest a certain amount of money themselves to actually access the help. They don’t have that money. Single moms raising two or three kids and living in a 30-year-old home don’t have the money, the $6,000 or $7,000 to put up front to say, “Government, you come along with your 50 per cent and help me change my windows, help me change my insulation, help me change my heating,” and all those kinds of things. Those are the kind of people I worry about.
Talking about just low income, I don’t think is the answer. We have to talk a lot differently. It was interesting what Mr. Hazell said about the top 20 per cent. People like Al Gore, who preach we should really be reducing our greenhouse gas emissions, are the ones that should be targeted because they are living in the huge mansions and flying all over the world. I would agree with that, if that’s what you’re saying, and I think that’s what you are saying.
When we look at the price of natural gas at $50 a tonne, 50 per cent of the homes in Canada are heated with natural gas. The carbon tax costs twice as the fuel to heat their homes. In many cases there are no options. What do we do in those cases, in realistic terms?
Let’s not talk about averages. I don’t like averages because they don’t really tell our exact problems. We should actually be targeting different homes in different provinces and saying, “Let’s do a little work to see what their costs have been in the last 10 years and what they will be at $50 a tonne,” instead of just talking about averages.
What do you say to Fred and Martha, the average or the mom with two or three kids who is barely making ends meet today in the economy that we have and the economy that we will have? What do you say to those people?
Mr. Hazell: I also worry about the Freds and Marthas in the Saint John River Valley. I worry about the Freds and Marthas in Gatineau, Quebec. I worry about the Freds and Marthas in Grand Forks. I worry about the Freds and Marthas living along the B.C. coast in the city of Surrey who will have to sell their homes because of sea level rise. There are many Freds and Marthas around the world, and we have to look at all of them.
I want to talk about different approaches to encouraging energy efficiency, which really will help Canadians in the lowest brackets. You can pick the income bracket. We tried government-sponsored low subsidies to do home renovations, et cetera, but other schemes can be run through the private sector. If we could convince the banks to lend money so that folks could make renovations, the amount of money that is saved from lower energy costs could go to pay the additional mortgage cost.
There are different schemes. There are property tax schemes that may actually make it easier for folks to get into the system. We recognize that a singe mom with a few kids, or whatever, it’s difficult to find out about these government schemes and to take advantage of them.
You’re absolutely right. We have to find ways to make it easier for those folks to get some entry into the system, absolutely. Part of my point is that we haven’t really been taking it seriously so far. It has not really been a priority.
As I said in my remarks, government after government after government, Conservative and Liberal, have talked a good game and have done precious little, even though the writing has been on the wall at least since the late 1980s.
Mr. Ribaux: Monsieur et madame tout le monde, or Fred and Martha as you put it, are in Canada right now. Although you don’t want to talk about averages, if you look at polls people are actually in favour of the carbon tax. If you poll people and ask them if they are in favour of a tax, it doesn’t happen often, as I am sure you know, that people are in favour of any tax. However, a majority of Canadians right now are in favour of this tax.
Part of your preoccupations can be responded to by saying that this leaves the ball with the provinces in terms of approaches is important. The issues that will affect average people across Canada are different in every province. Alberta does not have the same economic issues as the Maritimes. B.C. and Quebec have very different economic structures as well. That’s part of it.
Another part is a comment I made in my introductory statements. There need to be there complementary measures. I agree that an energy efficiency program will not reach everybody. It will never reach everybody. However, you also need to regulate. Part of the Pan-Canadian Framework on Clean Growth and Climate Change includes getting building codes to net zero energy. We need to look at existing buildings as well.
Everything will not be solved in the next year or two. I assume this is part of the reasoning behind the government’s approach to having a price on carbon that goes up gradually over several years. It will take some time to put in place some of the regulations and some of the programs you’re preoccupied with.
I would end by saying that any fiscal measure will never be perfect. The tax on tobacco has been said to disproportionately affect lower income people because lower income people tend to smoke more. Does that mean we don’t want to send a price signal for tobacco? Probably not. It might mean, though, that we want to invest more in making sure we reach those populations that are still smoking.
This is something that needs to be tailored to the various communities where the price on carbon will be adapted, depending on what the provinces decide on how they want to go about it.
This is a small tax. This is not a big tax compared to the rest of the fiscal network we pay as Canadians. This will be a very small proportion of what Canadians are paying.
The Deputy Chair: We have gone over our time. Thank you, gentlemen, for your testimony this morning.
For the second segment, I am pleased to welcome from the Chamber of Marine Commerce, Bruce Burrows, President.
Mr. Burrows, I invite you to proceed with your opening statement, after which we will go to a question and answer session from the senators.
Bruce Burrows, President, Chamber of Marine Commerce: Thank you for inviting me to participate in today’s hearing on Part 5 of Bill C-74.
[Translation]
I am Bruce Burrows, President of the Chamber of Marine Commerce, the CMC. The new chamber is an organization that represents over 130 members of the marine sector in Canada and the United States. Our members work in the Great Lakes, the St. Lawrence Seaway, on the coasts of Canada and the United States, and in the Arctic. The CMC works to promote a strong and competitive marine industry in Canada.
[English]
My remarks today will focus on the federal carbon pricing system proposed in Bill C-74, or what I will call the backstop system. Just like the airline sector, the marine sector is internationally regulated and with that marine shipping requires a coordinated global response, not a patchwork of regional emissions, regulations and standards.
It is our view that should a province be required or choose to use the backstop system versus current provincially proposed cap-and-trade programs, it would create an undue administrative burden on the marine sector in Canada and would unfairly disadvantage domestic shippers.
We are, after all, in direct competition with U.S. and international ship owners in the same bathtub. Therefore, to mitigate any uncertainty, we would ask that the marine sector is excluded from the backstop system on the following points.
The marine mode is already the most efficient mode of transportation, with the lowest GHG emissions for cargo carried. The marine mode has invested over $2 billion in new fuel efficient eco ships that will further reduce its GHG emissions. Progress is expected to continue as new vessels come into service over 2018 and 2019.
Even with this significant environmental advantage, Canadian ship owners are committed to further environmental protection and have been trailblazers in tackling GHGs through programs like Green Marine and adopting new technologies.
The International Maritime Organization, IMO, just recently adopted its initial strategy for reducing GHG emissions from ships on April 13, this year. It is an ambitious, groundbreaking agreement to reduce GHG emissions from marine shipping in absolute terms by 50 per cent by 2050 despite increasing trade and puts the industry on a path to complete decarbonization of the sector.
Under this new strategy, IMO will reopen negotiations on additional CO2 reduction measures to reach this goal. This will also require governments to help facilitate the development and distribution of new carbon zero fuels and technologies. Therefore, CMC members are supporting measures that would be applied on a global basis.
Canada has always strongly supported IMO-based regulations to reduce GHG emissions from marine shipping. However, applying the backstop to marine carriers as drafted in Bill C-74 puts Canada in a position of proposing unilateral regional regulations on marine shipping.
In terms of reporting, IMO has put in place requirements for annual reporting on fuel consumption under a convention to which Canada is already a party that Transport Canada is required to implement. As well, Transport Canada already seeks annual fuel consumption data in its annual surveys carried out under the Transportation Information Regulations of the Canada Transportation Act.
Our industry is proud of its work to reduce and eliminate emissions. We believe the best way forward is to work toward harmonized international marine emissions regulations. Therefore, we ask that Part 5 of Bill C-74 respecting the greenhouse gas pollution pricing act be amended to reflect the marine sector’s unique position internationally and to allow for the sector to be opted out of this scheme and proceed with its work to implement international regulations.
I look forward to answering think questions you might have.
The Deputy Chair: I will start off with a question and then we will go to Senator Massicotte. I am intrigued by the last part of your proposal to implement international regulations and work with the international community.
I go back to your earlier comments and the claim that over $2 billion have been invested in new fuel efficient eco ships over the last number of years. Can you expand on that? Are we looking at the conversion of ships or the transformation of ships from diesel to LNG?
Mr. Burrows: By example, three weeks ago I was in Montreal for our latest christening. We’ve put about 26 new ships into the system over the last five years. There are probably another six to go in the current phase over the next year.
The latest one three weeks ago was an LNG-fuelled Deganya ship. We christened it in Montreal. It works on dual-fuel LNG plus fuel regular fuel distillates. We’re working with fuel suppliers to put in a network of LNG.
That’s the second ship, actually. We’re innovating in that area. LNG is good as a transitional fuel. We can get a 25 or 30 per cent hit in terms of improvement on carbon emissions.
The Deputy Chair: Yes. I was struck a few years ago on this committee by the level of emissions of large ships compared to vehicles on the highway. It was so substantially greater that it seemed like it was a foregone conclusion that we should be taking the marine sector and pushing them toward LNG.
How much more development do you see coming in terms of Canadian or worldwide shipping?
Mr. Burrows: Quite a bit. In fact, I would say a lot. We’ve set a very aggressive standard. It’s more ambitious than the Paris accord.
As you know, air and marine are outside of the Paris accord, which is why we’ve been working in parallel to put our own accord in place. Like the air industry, we are quite unique in the transport world because we are subjected to global regulation. IMO and ICAO are both UN organizations. In our case, IMO is based in London. Everything filters down to all the participating countries, including Canada, that are members of the convention.
Some 50 per cent by 2050 is a very ambitious target. We have a lot of work to do. The next phase is narrowing down what the combination regulations and practices will be. Certainly LNG will be one of the avenues to success. I suspect biofuels and other alternative fuels will be part of the mix, along with improved efficiency optimization of the ships.
The new eco ships with Canadian shipowners coming into Canada are world class. They’re pretty special. As you suggest, because each ship carries up to 30,000 tonnes, it is a hugely efficient operation to begin with. On one litre of fuel, we can move a tonne of product almost 250 kilometres, which is far superior to truck or rail.
From a pure fuel and carbon emissions perspective, because a ship equals 1,000 trucks or more, it’s probably a 500 or 600 per cent improvement over trucking, for example. It’s a huge difference in terms of the environmental footprint. It’s tremendous.
Senator Massicotte: Thank you, Mr. Burrows, for being with us this morning.
In your presentation you specifically said:
It is our view that should a province be required or choose to use the backstop system versus current provincially proposed cap-and-trade programs, it would create an undue administrative burden on the marine sector in Canada and would unfairly disadvantage domestic shippers.
What is the backstop system? Just to be clear, what are you referring to there?
Mr. Burrows: I am referring to the system as detailed in this act. This is the backstop with the formulas. It’s a bit of a complicated process, and that’s part of our challenge too.
Typically, if you look at a ship coming in or moving from Montreal all the way up to Thunder Bay, it crosses the border 24 times on average. We report to Transport Canada. We will be reporting as well under new IMO rules come January 1, 2019. This adds additional potential complication, the way it is reported, in how we would have to track our consumption on one voyage to meet that backstop requirement. It can get complicated in our business.
Senator Massicotte: You’re referring to the legislation per se.
Mr. Burrows: Yes.
Senator Massicotte: You’re not one of those that are deemed to be trade-exposed high emitters.
Mr. Burrows: No.
Senator Massicotte: You are indeed a regular.
Mr. Burrows: Yes, we’re not in that heavy emitter club.
Senator Massicotte: Are you referring to both systems, in other words, the federal system or the provincially proposed cap and trade with quotas unacceptable to you because they would cause an unfair administrative burden?
Mr. Burrows: For example, Ontario right now has a cap-and-trade system and Quebec is there too. We can live with the way those systems work.
Senator Massicotte: It’s the federal system you don’t like. You don’t mind the provincial system.
Mr. Burrows: Right.
Senator Massicotte: Why would you worry about that when Quebec, Ontario and most provinces have already dictated which system they are to follow? There are only one or two provinces that have yet to decide their pattern. If one or two provinces do it, obviously it is not a problem in Saskatchewan and Manitoba; there are not many ships there.
Mr. Burrows: It is if we were to see a change in Ontario in the future.
Senator Massicotte: You’re okay with the cap and trade in Ontario and Quebec.
Mr. Burrows: Yes, status quo is fine.
Senator Massicotte: At the very end in your last paragraph you seem to be saying, in spite of that, that you don’t want to be subjected to the federal or provincial systems. You want to be subject to the international commitments you have made. Is that my understanding?
Mr. Burrows: That’s the way the Ontario system allows us to be subjected to the international system de facto. That’s why we’re happy with the status quo in Ontario.
Senator Massicotte: Describe to me briefly the international system in 20 seconds or less. In the fundamental structure of the provincial systems there is a level of taxation.
In other words, in the federal system if you’re larger it’s 30 per cent and if not it’s 100 per cent. You’re immediately motivated to innovate and minimize the CO2 and structure in every province where the credits or the freebies go down gradually to maintain that pressure to cut your emissions.
Is the international system somewhat the same? I know the aeronautical is not. They don’t pay any CO2 if they maintain the program. What’s the proposed marine system? How does that compare structurally?
Mr. Burrows: This is all new, so that will be decided over the next six months, likely by November. The first step was to set the goal, which was the 50 per cent reduction by 2050. Then the next step, again at IMO, is to finalize what that structure will look like to get there.
I can’t answer that question yet. We are in the process of putting it together.
Senator Massicotte: You’re saying that you don’t want to be under the provincial or federal system. You want to be subject to the international system that will be defined in the future.
Mr. Burrows: Ultimately, we don’t want to be double-taxed. It would be ludicrous to have a duplicative system, particularly in our industry where we’re in the same bathtub competing against U.S. ships every day in the Great Lakes/St. Lawrence system. International ships are coming and going. Again, this would be duplicative if we were subjected to a backstop.
Senator Massicotte: I am sure you appreciate that there’s a lineup at the door. Everybody wants to be exempted from the system. We’re a bit cynical when a lot of people say, “Why not us?” I appreciate your point of view on that.
Mr. Burrows: As I said, we do have the alternative. We’re a bit unique. Air is pretty much in the same boat, in the sense that they have a system in place as well.
Senator Wetston: It’s my understanding that the marine industry is primarily regulated by the federal government. Isn’t that the case?
Mr. Burrows: It’s regulated first and foremost by IMO and then Canada, as a signatory to the IMO convention, comes home and writes regulations in keeping with the IMO convention.
Senator Wetston: The reason I am asking is that obviously the scheme allows for provinces to introduce a price for pollution or a price for carbon according to what they think is in their best interest.
Ontario and Quebec have chosen cap and trade, which you’re obviously comfortable with. You’re probably uncomfortable with B.C., I take it.
Mr. Burrows: Yes.
Senator Wetston: Can you give me a sense of the significance of that with respect to marine traffic in and out of Canada?
Mr. Burrows: Are you suggesting what is the significance from a fuel cost perspective?
Senator Wetston: From the implication of carbon tax and cap-and-trade issues, other than just complexity.
Mr. Burrows: If you look at the background of using the formulas outlined in Bill C-74, we’ve done some calculations. Initially, we would probably be subjected to about $6 million, based on initial 2018 rates. That would then transition and grow to almost $30 million a year in terms of final rates.
Senator Wetston: Is that sort of a price for Canada as opposed to just B.C.?
Mr. Burrows: Yes, that would be a Canadian approach.
Senator Wetston: It would depend on the price of carbon, I take it.
Mr. Burrows: It would, and again prices are outlined.
Senator Wetston: You’re asking to be excluded from this part, but you’re not asking to be excluded from a program that puts a price on pollution.
Mr. Burrows: I don’t know exactly what you mean by that.
Senator Wetston: You’re satisfied with cap and trade in both Quebec and Ontario as I understand it.
Mr. Burrows: Right.
Senator Wetston: That is a different approach to putting a price on carbon.
Mr. Burrows: Right. It ultimately goes back to what we will be subjected to under IMO, which is really where the game is from a shipping perspective.
This is partly because it’s such a fluid industry literally, no pun intended, where boats float everywhere. There is a logic to having a single system. To the extent that there will be a price on pollution as part of the IMO scheme, we will be content with that and will live with that.
Senator Wetston: Would you be satisfied if the federal government said it’s important that there be a price of carbon associated with your industry? I understand all the work you’re doing, the eco shipping and very positive things like that.
Just speaking out loud for a moment, I will put it this way: For your industry, provided you are fully compliant with the standards set by the IMO and those standards put a price on pollution that is acceptable to the federal government, would you be satisfied with that?
Mr. Burrows: Yes, I think we would.
Senator Neufeld: In the Ontario and Quebec cap and trade, did they give you a cap? Is it that they didn’t give you a cap, or what took place there that would make you happy?
Mr. Burrows: In essence, we’re not subjected to that.
Senator Neufeld: You were taken out.
Mr. Burrows: Exactly.
Senator Neufeld: You’re happy with cap and trade because it doesn’t apply to you at all.
Mr. Burrows: Exactly. We’re not involved in the trading.
Senator Neufeld: It gets pretty easy to be happy about that.
Mr. Burrows: We’re not trading. We’re not into the auction, the annual market and those sorts of things.
Senator Neufeld: That helps me to understand it a bit. I can understand why the industry is so happy with that.
You’re under nothing, then.
Mr. Burrows: No, we’re under IMO.
Senator Neufeld: However, it still hasn’t been developed with IMO.
Mr. Burrows: We’re in the process of doing that right now.
Senator Neufeld: The fourth bullet of your presentation talks about:
. . . by 50 per cent by 2050 despite increasing trade and puts the industry on a path to complete decarbonization of the sector.
Can you tell me what you mean by “complete decarbonization” of your sector?
Mr. Burrows: To achieve that level of reduction is the major first step, but the goal beyond 2050 is for complete elimination of carbon. Basically, we’ll be moving to alternative fuels that have no carbon emissions associated with them. That’s the desired path beyond 2050.
Senator Neufeld: That’s a laudable goal. Can you give me a hint of what you think that would be? You must be thinking about some of that now.
Mr. Burrows: LNG is certainly a big part of the initial move. Biomethane fuels such as that will probably be in the mix on the fuel side.
In the meantime, we have many operational measures, partly under regulation 2, to reduce fuel consumption. It’s a bit of a mix, quite frankly. It’s a buffet of a number of different measures.
I’d be happy to come in at some time so that we could spend a bit of time on that because there’s a lot going on.
Senator Neufeld: It’s interesting.
When you say you don’t like the B.C. system on the West Coast, has the industry on the West Coast under the B.C. system found themselves to be financially disadvantaged in a huge way?
Have they lost business? Can you tell me that the marine industry on the West Coast has lost business and to whom they have lost business because of a carbon tax?
Mr. Burrows: First, I don’t speak for the West Coast industry.
Senator Neufeld: No, but you mentioned it. That’s why I am asking.
Mr. Burrows: Yes. I am certainly aware of the scheme. I know there is quite a concern about competitiveness vis-à-vis the northwest Pacific U.S. ports, L.A. to some extent but Seattle perhaps most importantly.
What some of those competitive impacts have been as a result of the tax, I can’t tell you precisely. I’d be happy to look into that and tell you.
[Translation]
Senator Dupuis: Thank you, Mr. Burrows. You talked about shipowners. If I understood correctly, it is the Canadian shipowners who are members of the Chamber of Marine Commerce.
When it comes to reducing greenhouse gases, currently pollution is not only produced by ships whose owners are Canadians. What is your position concerning the responsibility of shipowners? I could mention the ships that pass in front of l’île d’Orléans, where I live. There are increasingly large ships going by at increasing speeds, which makes them burn more fuel, and probably means that they pollute more.
Let’s imagine a system that would theoretically help reduce greenhouse gas emissions. When it comes to the exemption that you are requesting for Canadian shipowners, would it also apply to all marine activity conducted in Canadian waters? In other words, would it concern all of the pollution that is produced by foreign-owned ships?
Mr. Burrows: If you don’t mind, I will answer in English.
[English]
Canadian shipowners are my members, not international shipowners. As shipowners, regardless of whether we’re Canadian or international, we both drive our ships by île d’Orléans every day. You’ll see various different flags, including Canadian flags, but we are all subjected to the same regime under IMO.
If I were speaking on behalf of international shipowners, I would be saying the same. As we are global because we’re subjected to IMO, that’s where the regulations and the carbon scheme are coming into place. I would have the same argument for them.
Senator Massicotte: I want to make reference to the way you responded to Senator Neufeld when you said that you do not represent the B.C. maritime. Yet, from your presentation you seem to represent all maritime companies including the West, right?
Mr. Burrows: No. I did preface with the territories. It’s Great Lakes, St. Lawrence, East Coast and Arctic.
Senator Massicotte: I thought your presentation went on to say the maritime sector in Canada or the United States.
Mr. Burrows: I defined it further. There isn’t that much Canadian activity on the B.C. coast, with the exception of ferries and some barges. The main shipping activity is primarily international in and out of Prince Rupert and Vancouver, of course.
Senator Massicotte: As a question of interest, do you know how many oil tankers per month or per day there are in the Port of Vancouver compared to the St. Lawrence Seaway?
Mr. Burrows: I don’t know what is the level of activity. I couldn’t tell you on the West Coast.
The Deputy Chair: I am sure the marine authority out there would have numbers.
Mr. Burrows: And the Chamber of Shipping of B.C., which is a sister organization.
The Deputy Chair: They would have the numbers. Good to see you again, Mr. Burrows.
Mr. Burrows: Good to see you, senator.
The Deputy Chair: Thank you for your statement and your time today. We will now await our witness from California.
Honourable senators, we will continue with the third portion of this meeting of the Standing Senate Committee on Energy, the Environment and Natural Resources. We are continuing our study on Part 5 of Bill C-74.
We now welcome by video conference from Sacramento, California, Rajinder Sahota, Assistant Division Chief, California Air Resources Board.
Ms. Sahota, thank you for joining us. We are sorry for the delay. I invite you to proceed with your opening statement, after which we will go to a question and answer session.
Rajinder Sahota, Assistant Division Chief, California Air Resources Board: Good morning from the West Coast, and thank you for the invitation to share our experience in California with the committee and respond to any questions this morning.
We are greatly encouraged to see more jurisdictions at the subnational and national levels taking important leadership action to address climate change, a critical issue that affects all of us.
As you may know, California has developed an economy-wide cap-and-trade program to help our state reduce our greenhouse gas emissions to the 1990 level by 2020 and achieve our 2030 target of 40 per cent below 1990 levels. The cap-and-trade program is just one of a suite of complementary policies in California. We do have other policies on renewable electricity, the low-carbon fuel standard and advanced clean cars.
At this time I am very happy to share with you that we are well on our way to achieving the 2020 target early, and we are in the process of enhancing our existing programs to help achieve our 2030 targets.
Here in California, in assessing which carbon pricing mechanism would work best for us, we assess multiple factors, including those mandated by our own legislature. This included balancing many of these factors to develop a program that would ensure we achieved our emission reduction targets in a way that didn’t overburden our economy, facilitating partnerships and linkages with other jurisdictions embarking on the same path, protecting our electricity and natural gas ratepayers and complementing our other air pollution programs at the state level.
Specifically on carbon pricing, we assessed several alternatives before settling on the cap-and-trade program. We looked at a carbon tax. We also looked at direct regulations, which would have meant no carbon pricing mechanism in California.
From our assessment and for California, we determined that a cap-and-trade program provides the highest certainty for achieving our targets. It also meets many of the other legislative mandates I mentioned earlier. The declining cap on greenhouse gas emissions provides the highest certainty of achieving our emission targets. We did an uncertainty analysis and with our suite of complementary policies we have a greater than 90 per cent chance based on our modelling of achieving our 2030 target. A cap-and-trade program also ensures flexibility for businesses and how they can comply, while ensuring we are following the lowest greenhouse gas reductions cross the economy. This means we are minimizing impacts to consumers and the economy while still meeting our GHG mandate.
In fact, we have demonstrated through our climate policies, including the cap-and-trade program, that our economy continues to grow, even while emissions are decreasing. At this time California is ranked as the fifth largest economy in the world, and for the last three or four years we were ranked as the sixth largest economy. The market program can better address the potential for emissions leakage, which allows for data-driven allocation of allowances to ensure our industries are not trade-exposed because there are no other carbon pricing or climate actions in other regions where they face competition.
Also, by including an auction mechanism, we allow for price discovery. There are revenues generated through this auction mechanism that have been used to benefit electricity ratepayers and to invest in specific greenhouse gas reduction programs designed to benefit some of our low-income households and disadvantaged communities in the state.
We also realize that our well-designed cap-and-trade program is tailor made for linking with similar programs. That brings me to one of the largest successes of our program to date. We have effectively demonstrated that we can link our cap-and-trade program with other subnational systems internationally. This is one of the few international linkages in the world right now.
Our linkage with Quebec in 2014 and the recent linkage with Ontario this year have leveraged the strengths of our respective programs into a larger carbon market that is expected to allow for greater greenhouse gas emission reductions than any of our programs alone. Each of our programs has resulted in infrastructure and implementation features that are effective and understood by the regulated community. This is demonstrated through the high compliance rates that we have seen and the continuing emission reductions in our jurisdictions.
This existing infrastructure of our linked program can assist other jurisdictions seeking to join or follow the same model. You may be well aware that last week Nova Scotia mentioned they will be utilizing our administrative structure for our program as they seek to implement their own cap-and-trade program, while not choosing to link with the Western Climate Initiative partners at this time.
In summary, we have found in actual practice over the last five years that a cap-and-trade program provides the most cost effective way to reduce greenhouse gas emissions while protecting against emissions leakage, facilitating partnerships and linkages with other programs and resulting in emissions reductions certainty. Our program has provided our regulated community both the flexibility and certainty needed to set us on a path to achieving our emission reduction targets without jeopardizing the economy. Our program has resulted in direct benefits to disadvantaged and had low-income communities with its cost effectiveness and the investment of our auction proceeds. For us, we are looking at expanding our partnerships and continuing to talk with other jurisdictions in the U.S., Canada and other national countries such as Mexico and the EU.
I will conclude my presentation now by saying there are great experiences at home that you can look to with both Ontario and Quebec, and some of the other regional programs. There have been decades or even more than decades of work that has been looking at carbon pricing and trading mechanisms. While they are ready to assist. We also stand ready to assist in any way as you embark on this effort at a national level.
Further, the ability for action at the national and subnational levels should be encouraged and supported as action in every form will be essential in staving off the most serious impacts of climate change.
Thank you, and I look forward to responding to any questions you may have.
Senator Wetston: Thank you for joining us today. Obviously California has a great deal of experience in this area.
I am a senator from Ontario. As you know, we have a cap-and-trade program and we’re part of that program with California and Quebec.
My question is around some recent material I read regarding the California Air Resources Board and the issue of credits. I am sure you’re well aware of this issue and of some of the controversy around the extensive number of credits which seem to be in your cap-and-trade system. I think there are some accountability issues associated with that.
Just from the perspective that we are reviewing federal legislation in Canada, can you provide some information about that issue and perhaps enlighten us as to what’s occurring and what some of the issues are?
Ms. Sahota: Of course, and I am well aware of that issue. The discussion is that when we set our caps initially for this part of the program, we estimated the amount of credits or allowances we needed to achieve our 2020 target. Because we were in this enviable position of achieving our 2020 target early, there are some unused allowances in the system.
What hasn’t been actually realized is that there are self-ratcheting mechanisms that remove those allowances out of the system over the time. The early reports that we had this difference between what was needed to comply with the program and what was available in the program did not factor in that there is a self-ratcheting mechanism that removes unused allowances over time.
For example, last year, we removed out of the system 45 million allowances. If there is low demand for those allowances through this year, we will be removing anywhere from 50 million to 80 million more allowances out of the system. This feature was designed from the very beginning, learned from lessons in the EU program and in the RGGI program that there were so many credits the price signal was being muted. People were seeing low prices for these credits. There was no incentive to take actions to reduce emissions.
In learning from those lessons when we designed the program with our partners in Ontario, Quebec and the Western Climate Initiative, we added in the self-ratcheting feature. That feature is now kicking into place and removing those credits. We have put out analyses that discuss how those credits are being pulled out of the system. That was put out about a month ago. The concern about unused allowances is really a concern that our emissions fell faster than we anticipated when we set up the program.
By having that self-ratcheting mechanism and a floor price of about $15 right now for an allowance, which has remained consistent at $15 an allowance, we are very confident that the right price signals are being sent and that we are seeing reductions even with those unused allowances being available in the market.
Senator Wetston: I want to explore the basic framework. When the EU decided to adopt the cap-and-trade program or system, obviously they stumbled a bit and, potentially today, they have probably corrected some of the challenges. In California, you examined that system and implemented a system to address those kinds of issues.
As part of your relationship with Quebec and Ontario, have Quebec and Ontario experienced any of those kinds of issues? I realize that Ontario was a later adopter and Quebec joined in 2014. Could you share with us some of the issues associated with the relationships you have with Quebec and Ontario?
I guess the second part of that question might be: Do you have other relationships similar to those with Quebec and Ontario with other states in the U.S. or other countries. I know Nova Scotia is potentially looking at this as well.
Ms. Sahota: Sure. When we look at the design features in the California program, they are basically structured after design features in the Western Climate Initiative. Back in 2008, when the Western states were very active in the space, the Canadian province and some observer states from Mexico got together. They had a 2.5-year public process to look at design features for what would look like a good emissions trading system. Some basic tenets came out of that.
One of those was the self-ratcheting mechanism. Another was using real data to set your caps, which was one of the issues in the EU. They didn’t have the bottom-up recorded data to help set their caps. They relied on top-down estimates, which led to inaccuracies in how many permits were in their program.
We also added a floor price. In the EU program there is no floor price and in the RGGI program the floor price is very low. We wanted to ensure that we did not have the same issues by making sure we used the most reasonable and best available data recorded by our industries that would be covered by the programs. That’s a shared feature. The self-ratcheting mechanism and having a floor price is a shared feature. Those were basic design features that came out of the Western Climate Initiative public process.
After that, each of the jurisdictions had to bring that overall planning guide home and do their own rule making processes, understand what features would be best for them, and what would make sense in the context of their economies, their politics and their landscapes.
Those three features have persisted across all three programs. From the perspective that you saw issues in the EU ETS, some issues in RGGI and these massive program corrections where they pulled out millions of allowances, we’re not seeing that in these three programs because from the very beginning we added specific features to avoid those issues later on. In fact, you’re seeing some of these things that we’ve added in our programs being propagated, implemented in the EU and considered in RGGI at this time.
In terms of other engagements, the state of Oregon, to the north of us, was contemplating legislation over the last two years on a cap-and-trade system. They have a different structure for their legislative session. They have a short session of five weeks and a longer session next year. The short session didn’t give them enough time to discuss all of the details for an ETS. As a result of the active discussion, next year, they have an office that is set up in part of the governor’s office structure and an office that is specially set up in the legislative structure to look at bringing back legislation to help develop a program that would be able to secure all the votes and signatures needed to start a cap-and-trade program in 2021 which would be linked with California, Quebec, Ontario, and other states and regions.
Mexico announced about two or three weeks ago that they secured legislation on a mandate for an emissions trading system. We have a bilateral agreement with them. We have been in discussions with them for over three years. There have been monthly and weekly calls, working through the design features of a program. They have also made statements that they are looking to design a program now that would allow for linkage with the existing program of the Western Climate Initiative.
We are seeing these efforts in other regions. There is a significant amount of time and effort that goes into understanding what it means for your local landscape when you embark on this kind of effort.
Senator Massicotte: Thank you for being with us this morning. It is early morning for you, particularly. We talk among ourselves about the fact that the United States as a government has not adopted any price on carbon, but then there are states like California and so on. A lot of people who are concerned ask how we can be competitive when we put a price on carbon and our major competitor, which is the United States, does not. Therefore, there is a pricing unfairness.”
Could you tell us your experience with that same issue? Obviously, it’s the same. Earlier in your presentation you referred to the vulnerability of those who are high intensity emitters but trade exposed. Can you tell us your experience and how we should manage that issue in your opinion?
Ms. Sahota: In the California program, the Quebec and Ontario programs, and in the EU, we have mechanisms that identify which of our industries are high emissions intensive and high trade exposed. Whether it’s domestic or international, that exposure exists.
Once you identify the industries, you can actually look at how efficient they are, and you can reward the most efficient by giving them some amount of free allowances to make sure that the price of carbon doesn’t make them less competitive with other similar industries or similar companies domestically or internationally.
For example, I’ll take the cement sector in California. Being a port city, we are highly vulnerable to imports from China. When we have increased growth and housing, we can’t produce enough cement in the state of California. We import a lot during that time. When we have a normal period of growth for housing in California, there are opportunities for the Chinese cement companies to come in and take over some of the market share in California for cement.
As we worked with the cement sector, we understood what their trade exposure was, how much of a cost could be passed through and where they could remain competitive with Chinese imports because there is a cost to shipping that material and bringing it over. There is a whole study on the technical analyses we did for several years. Once we understood the technical analyses, their trade exposure and how much cost they could bear, we compensated them to ensure they remain competitive by giving them free allowances each year. Nobody gets enough free allowances to fully comply with the program, but they get enough to ensure, as they face a carbon cost in California, that they are not at a disadvantage with cement coming in from China. We have done that for all of our major industrial sectors.
Senator Massicotte: You made a comment earlier that in California you will have an excess. You’re ahead of your objectives relative to CO2 reduction. We hear comments in Ontario and Quebec that our high emitters, given we’re combined with the California market, will buy credits predominantly from California because you have more capacity to overachieve your objectives. Therefore, the cost of the credits will be lower. Quebec companies or Ontario companies will simply buy credits in California, which means that they are not reducing CO2 that economically Canadian money is going to the U.S., and that they are not having any impact in Canada on climate change.
Can you comment on that? Is that a valid concern? What can we do about it?
Ms. Sahota: I appreciate the question. That question came up in California when we linked with Quebec.
In California, we have legislation that says when we are preparing to link with another jurisdiction they must be as stringent as California, which means that you’re looking at similar opportunities to reduce emissions and similar costs to reduce emissions in your jurisdictions. Then you don’t have this issue where you’re flooding a different jurisdiction with your credits.
Having done those tests in California with Quebec and Ontario, we are not seeing a big differential where we expect to see large flows of permits from California going to Ontario or Quebec, or large flows of permits coming from Quebec and Ontario to California. Because it’s a linked market, there is only one cost throughout the entire program. That cost in Quebec, California and Ontario before we linked was approximately the same cost. We’re not seeing this big cost differential where one jurisdiction may be sending money to buy permits from another one. We’re very similar in the context of what opportunities remain for reducing emissions and the cost of those opportunities. There is no evidence in what we have seen to date that says there is money flying in one direction while the credits are flowing in the opposite direction.
Over time, depending on the types of industries and the price of allowances, we might see some of those patterns, but at this time we are not seeing those.
The Deputy Chair: If there are no more questions, I want first to apologize for this abbreviated session. We had some technical difficulties. Ms. Sahota, we thank you for spending your time and thank the people in California in your group for getting up this morning to speak to us. We really appreciate it.
Before we leave I want to say to my colleagues that we’ve heard from all the scheduled witnesses for the study. At our next meeting, we should review our draft report. It will be sent to you, ideally, on Monday night or Tuesday morning at the latest.
We’re working on a very short timeline here. As a reminder, our deadline to report back to the Senate is next Thursday, May 31. I will now adjourn the meeting. Thank you all for your participation.
(The committee adjourned.)