Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue No. 42 - Evidence - May 31, 2018
OTTAWA, Thursday, May 31, 2018
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:33 a.m. to study new and emerging issues for Canadian importers and exporters in North American and global markets.
Senator Carolyn Stewart Olsen (Deputy Chair) in the chair.
The Deputy Chair: Good morning and welcome, colleagues and members of the general public who are following today’s proceedings of the Standing Senate Committee on Banking, Trade and Commerce, either here in the room or listening via the Web.
My name is Carolyn Stewart Olsen. I’m deputy chair of this committee, filling in for Senator Doug Black, the chair.
I’ll ask the other senators who are here to introduce themselves, starting on my left.
Senator Marwah: Sabi Marwah, Ontario.
Senator Wallin: Pamela Wallin, Saskatchewan.
Senator Tannas: Scott Tannas, Alberta.
Senator Dagenais: I am Jean-Guy Dagenais from Quebec.
Senator Maltais: I am Senator Maltais from Quebec. Welcome.
Senator Wetston: Howard Wetston, Ontario.
The Deputy Chair: Today our committee will continue our hearings on new and emerging issues faced by Canadian importers and exporters in relation to their international competitiveness. Some of these issues include the possible withdrawal of the U.S. from the North American Free Trade Agreement, the recent changes to the U.S. federal corporate tax system and rising interest rates in Canada.
The committee is interested in learning about the potential impacts of these developments on Canadian importers and exporters’ competitiveness, as well as the manner in which Canadian importers and exporters and the federal government might respond.
Today I’m pleased to introduce our witnesses, who will focus on carbon pricing.
From the Canadian Fuels Association, Ms. Lisa Stilborn, Vice President of the Ontario Division; and Canada’s Ecofiscal Commission, with Mr. Dale Beugin, Executive Director.
If we can begin with your opening remarks, we’ll follow with a question-and-answer session.
Ms. Stilborn, I understand you have agreed to go first.
Lisa Stilborn, Vice President, Ontario Division, Canadian Fuels Association: Thank you very much, Senator Stewart Olsen.
The Deputy Chair: We’ll follow with questions and answers. Thank you.
Ms. Stilborn: On behalf of the Canadian Fuels Association, our members, I’m very happy to be here.
We represent the industry that produces, distributes and markets petroleum products in Canada, which account for nearly 95 per cent of the transportation fuels that keep people and goods moving.
We also produce asphalt, heating fuels and feedstocks for manufacturing facilities and are strongly integrated with the petrochemical sector. In short, our products supply every sector of our economy and our members are recognized elements of Canada’s critical energy infrastructure.
While the fuel mix is changing, reputable forecasts, including our own National Energy Board, show that demand for our products will remain relatively constant until 2040.
The North American fuel market is highly integrated, with products flowing north and south. While Canada is still a net exporter of petroleum products, our imports from the U.S. are growing.
There are a number of factors at play here, including fewer, larger refineries which enjoy economies of scale — in fact, the average Canadian refinery is about one third the size of the average American refinery — the shift to heavier crude and increased refinery complexity; and, finally — and this goes to the topic at hand here — the regulatory environment, which also contributes significantly to our refinery competitiveness, is adding costs not borne by our competitors.
To be clear, our association and its members support effective, achievable regulations. These must be designed, paced and staged to preserve sector competitiveness. This certainly includes carbon pricing, which is the topic at hand.
First, we support well-designed carbon pricing mechanisms and have a long history of working collaboratively with provincial governments, and now the federal government on designing these systems. In these discussions, we have reinforced the following four points: One is we want to ensure a level playing field with competing jurisdictions. The refining sector is emissions-intensive, trade-exposed; and our main competitors, refineries in the U.S., especially on the Gulf Coast, don’t face any carbon costs. Because we’re energy-intensive and trade-exposed, that’s certainly what we’d like to reinforce here.
Failure to protect facilities from trade exposure will erode their competitiveness, make them vulnerable to closure, and make Canadians increasingly reliant on fuel imports. This is what we call carbon leakage, which would erode the direct economic benefits for the refineries in terms of GDP and jobs in the sector. It would undermine fuel and security of supply, and create the risk of fuel-supply disruptions.
It would put upward pressure on fuel costs as well.
Finally, this would only divert emissions from closed Canadian refineries to refineries elsewhere, doing nothing to reduce global emissions. In our view, that would be a significant policy failure for Canada.
Our second key point here is to set realistic targets. The current federal output-based pricing system — which is a real mouthful, but OPPS we call it for short — proposal calls for all industrial sectors to reduce to 70 per cent of the industry average or pay a penalty. There’s no refinery in the world that comes close to being able to meet that standard. I think there’s a refinery in Norway, and even they’re well off the chart. They’re the highest performing in the world. The targets should be realistic, and reductions need to be paced and staged.
The third point to reinforce this morning is that aligning stringency with existing carbon pricing regimes in Canada is critical. Doing the math, carbon costs for refineries in jurisdictions under the federal backstop are more than double those operating in provinces with pre-existing carbon-pricing regimes. Ontario, Quebec and so on. We feel very strongly that interjurisdictional competitiveness needs to be protected.
Finally, when we set carbon pricing, we need to account for the cumulative impacts of other climate policies, such as the Clean Fuel Standard. In this respect, on this I think my colleague will probably have much more to say.
The federal government should undertake — we ask them to undertake — a comprehensive, transparent review of the cumulative impacts of these two policies on industry competitiveness, as well as costs to consumers and the impact on GDP.
Madam Chair, I’ll leave my comments at that and look forward to your questions and our discussion this morning.
The Deputy Chair: Thank you very much. Mr. Beugin.
Dale Beugin, Executive Director, Canada’s Ecofiscal Commission: Thank you very much for the opportunity to speak to you today. I represent Canada’s Ecofiscal Commission, a panel of senior economists from across the country, supported by a cross-partisan advisory board, with representatives from industry, civil society, and perspectives from across the political spectrum.
Our mandate is to identify policies that make sense for both the environment and the economy, and, really, that means achieving environmental objectives at the lowest cost. We’ve spent extensive time on carbon pricing and found well-designed carbon pricing to be exactly that kind of policy.
I want to spend time today on two main points with respect to carbon pricing and competitiveness.
First, trade and competitiveness implications of domestic carbon pricing. I’ll build on some of the points my colleague has made.
I’ll start by saying we should be clear that competitiveness and leakage, two sides of the same coin, are really important issues in this policy space. They can be addressed through careful policy design.
Competitiveness pressures are created for Canadian firms, through Canadian carbon pricing policy. The issue we’re worried about is exactly that unlevel playing field. If there is more aggressive policy and significantly stronger carbon-pricing policy in Canada than in our trading partners’ jurisdictions, there is concern that production or investment, as well as associated emissions, would simply shift to those jurisdictions with weaker policy.
Yes, the concern is real. Yes, the concern is important. However, good policy, especially policy that provides targeted, temporary and transparent support to those sectors most vulnerable to these pressures, can solve that problem, can address those concerns, without undermining how the carbon-pricing policy works, without undermining the incentives from the carbon-pricing policy to reduce GHG emissions, while doing so at the lowest cost.
Let me unpack that story a little bit. Competitiveness pressures, the effect of asymmetric carbon-pricing policies, really matter only for a small part of the economy. Our analysis at Ecofiscal suggests, as Ms. Stilborn noted, it’s only the sectors that are both emissions-intensive — produce large amounts of GHGs — but also trade-exposed, also engaged in global markets and so can’t pass on the carbon costs through their supply chain. Sectors that meet both of those criteria make up only around 5 per cent of the Canadian economy. That varies across the country. In Saskatchewan and Alberta, it’s more like 18 per cent of the economy. In Ontario and Quebec, less emissions-intensive economies, it’s more like 2 per cent of the economy.
Yes, the issue is significant; yes, it’s important. It’s a narrower, smaller problem. This isn’t about carbon pricing for most of the economy. It’s carbon pricing for some part of the economy.
I would also like to note we should be careful not to conflate competitiveness concerns more broadly, which, as this committee is well aware, stem from a wide range of factors. We should not make carbon pricing bear full responsibility for many other factors, including changes in tax rates, both here and abroad, wage rates, various regulations, exchange rates, and commodity prices. Carbon pricing is one factor — almost always far from the largest factor — among many.
Smart policies on carbon pricing can address these concerns, in particular, the output-based-pricing-system approach adopted by Alberta, in its new carbon pricing policy, in the federal backstop, in the new legislation federally. Also, the cap-and-trade systems in Ontario and Quebec, take exactly this approach. The idea is to provide these output-based allocations, essentially permits that allow emissions for free to these vulnerable sectors, and the net effect is that industry will only pay for the carbon price above a certain threshold. Because, however, there are tradeable credits in this system, there’s always an incentive to do more. There’s always an incentive to reduce emissions because you can always sell off an extra credit to other traders in this market.
The net impact is output-based pricing maintains incentives to reduce GHG emissions by improving performance and protects competitiveness by removing incentives to shift production and investment, as well as emissions, to other jurisdictions.
The Ecofiscal Commission has done some economic modelling. We have shown that, using output-based allocations and output-based pricing, in conjunction with carbon pricing, can significantly reduce the leakage, the shift of emissions to other jurisdictions.
My second main point shifts away from domestic policy and focuses on international efforts. I think it’s important to note that Canada isn’t acting alone. While there are gaps in international carbon pricing, there is also substantial progress.
The World Bank released a new report last week, documenting the spread of carbon-pricing policies across the globe, identifying 51 carbon-pricing policies internationally, subnational, national, cap-and-trade and carbon taxes. That includes a new national system in China by 2020, building on existing city pilot programs, as well as policies in places such as South America, Chile and some American states. Washington, Oregon and New York are all considering new pricing policies, building on existing pricing policies in some of the northeastern states, as part of the Regional Greenhouse Gas Initiativecap-and-trade system.
In other words, the playing field is slowly becoming more level over time. That speaks to the need to ensure this support provided to vulnerable sectors to protect against competitiveness concerns is temporary. It is transitional. As we move towards global climate action, this temporary support becomes less and less necessary over time and should be phased out.
The other aspect of this global move towards carbon pricing policy is the demand for low-carbon goods internationally is increasing. Indeed, Mark Carney, in 2016, called global action on climate policy a $5- to $7-trillion opportunity for capital markets.
I think it’s useful to also reflect on the positive side of competitiveness implications for carbon pricing. In other words, there may also be opportunities. Domestic carbon pricing will drive domestic low-carbon innovation. The low-carbon technologies Canadians, in response to that policy, could produce may present opportunities to feed and meet that global demand for low-carbon technologies, services and expertise.
One final point. I think it’s important to note it’s better to impose our own carbon pricing ourselves, controlling the design and implementation of those policies before it’s imposed on us. As the rest of the world moves toward carbon pricing policies, it is very possible they will begin to consider border measures that will apply their own carbon pricing policies on trade. Recently, French President Macron mused on the idea of a border carbon adjustment for the EU, especially in the face of continuing inaction, federally, in the United States. That kind of policy would impose additional costs on trade from jurisdictions that did not have a carbon-pricing policy.
In other words, Canadian carbon pricing is a sort of insurance against those kinds of international threats.
Overall, there are many advantages to carbon pricing. It works based on extensive experience and economic research; it costs less than other approaches; it’s the lowest-cost way to achieve the national targets we’ve set for ourselves; and it’s the best way to drive innovation. Competitiveness concerns are real but they are not a reason to not price carbon because we can address these concerns with smart policy. Indeed, there may also be competitive advantages to moving forward with carbon pricing, given the direction of the rest of the world.
Thank you very much.
The Deputy Chair: Thank you both. If I may, just a point of clarification. I probably missed or misunderstood.
Mr. Beugin, you mentioned the carbon tax should be phased out after everything was settled. Did I mishear that?
Mr. Beugin: Yes. To be clear, the output-based pricing dimension should be phased out and shifted towards full carbon pricing, as in pricing all emissions. The output-based support should be phased out. The carbon pricing should be maintained.
The Deputy Chair: Thank you very much. We’ll begin with questions.
Senator Wallin: Can you tell me, Mr. Beugin, what Canada’s Ecofiscal Commission is?
Mr. Beugin: Absolutely. We’re an entirely independent organization. We’re funded by about seven family foundations as well as a few corporations. The commissioners, who are the authors of our report and the decision makers for the commission, are all independent economists. They’re either academics, former senior government officials or leaders of think tanks. They are economists.
Senator Wallin: How and when did you come together?
Mr. Beugin: We were formed approximately five years ago. It’s a relatively new organization. We initially had a six-year mandate from those funders to explore all policies that make sense for our environment and economy. In practice, that has meant policies that put a price on environmental externalities, including carbon pricing, but also water pricing, congestion pricing or other issues like that.
Senator Wallin: We’ll go to Ms. Stilborn. You’ve said some very tough things and put some constraints on how this carbon pricing should proceed. Do you think the government is headed in the right direction from all you have heard?
Ms. Stilborn: Thank you for the question, Senator Wallin. We’ve had some good discussions with Environment and Climate Change Canada. We think they appreciate and understand the impacts on some of the emissions-intensive, trade-exposed, or EITE, sectors. They have said to us that there’s some flexibility with respect to whether we have to hit the 70 per cent of average sectoral performance, but we don’t have details yet.
I think we’re common among EITE sectors; we submitted data to demonstrate where we are on the curve in terms of performance. We’re in the process of submitting additional data that talks about our emissions intensities, our energy use and so on. That process is ongoing. We’re having discussions and I think we feel like we’re still at an early stage.
I’m looking at you because you obviously represent Saskatchewan.
Senator Wallin: Yes, and that’s what I was about to ask you.
Ms. Stilborn: I think that ECCC, or Environment and Climate Change Canada, is quite seized with the fact that businesses located in Saskatchewan and New Brunswick are facing a particular degree of uncertainty at this very moment because it’s not clear they will have their own carbon pricing regimes. Of course, if they don’t, they will be subject to the federal backstop.
I think there’s a lot of understanding that companies from that jurisdiction are in a very difficult place in terms of uncertainty.
Senator Wallin: Do you give any credence to what the premier and his predecessor have said on this issue, that they are actually engaged in carbon-reducing strategies but they’re not getting any credit for that because they’re not doing it exactly the way the federal government wants them to?
Ms. Stilborn: I think all governments are making good progress on the file. I think that’s probably more a determination for Environment and Climate Change Canada to make. We’re certainly working with the Government of Saskatchewan and the federal government.
Senator Wallin: Mr. Beugin, do you have a comment?
Mr. Beugin: Thank you for the question, senator. In broad strokes, I think the government is on the right path. It’s combining carbon pricing with output-based pricing that drives emissions reductions at the lowest cost while also providing that protection and support for vulnerable sectors.
One of the first principles of carbon pricing is to apply a consistent carbon price as broadly across as large a number of emissions as possible; that includes all sectors and regions. That ensures effectiveness in terms of driving additional extra emissions reductions across the entire inventory to ensure we have sufficient reductions to achieve the targets, but also in terms of cost effectiveness and minimizing the costs. That consistent carbon pricing across all regions and sectors means we aren’t leaving any potential low-cost emissions reductions unrealized. There is economic value in having a consistent carbon price across the country.
Senator Wetston: Chair, I would add in the Energy Committee’s examination of the pre-study of Bill C-74, we are in the process of completing our draft report for National Finance on this very topic. I’m mentioning that for the benefit of the committee and the public, because I think the committee, as you know, has been spending a great deal of time in the detail issues of carbon pricing in Canada.
The Energy Committee is focused on the details. I hope your appearance today — which I appreciate — will focus on the competitive relationships and issue of what we are examining today.
Both of you might be able to provide a bit more detail on the question I want to ask.
Ms. Stilborn, there’s a lot of discussion of the 70 per cent issue in committee, as you can imagine, which is very high and perhaps the highest.
I wonder about the matter you’re describing. We had witnesses in Energy who were very concerned, in industries like chemicals, cement, biofuels and road and air transportation. They felt they would be disproportionately impacted by carbon pricing along the lines that you’ve been discussing, particularly with our neighbours to the south. That they were hampered to some extent by not having the technical or economical solutions to deal with emissions reductions in a way that other sectors might.
I can’t remember whether you addressed that issue or not when you were before the committee. Can you provide any additional information or thoughts? It is a competitive issue, obviously, and I know you’ve mentioned it. A bit more insight would be of some help.
Mr. Beugin: One of the advantages of carbon pricing, as opposed to other possible tools to reduce GHG emissions, such as regulations or subsidies, is it doesn’t presuppose the response to policy. It doesn’t presuppose what specific actions industry or businesses might take in response to the carbon price. That is a feature and not a bug because it doesn’t require government to have detailed knowledge of the sector or technical expertise. It sets the price right and lets the market respond. It’s also important because there are changes over time. The best, lowest-cost way to reduce GHG emissions in a given sector — and therefore, to avoid paying the carbon price — might not yet exist. They might be either in development or coming in the future.
The carbon price also creates incentives precisely for that technological change. It creates incentives because there is not only a carbon price today but an expectation of a carbon price in the future for low-carbon innovation and for the development of new, clever and innovative technologies that will reduce more emissions at a lower cost. What is available today will not necessarily be the same subset of options available in the future.
That’s one of the reasons why the stringency of carbon pricing increases steadily over time.
While we aren’t immediately going to $50 or $100 per tonne, we are starting low at $10 per tonne this year and increasing gradually. That is to give a chance for some of those new innovations to develop and come into play, but also for firms to adjust gradually and make their choices about when they reduce emissions based on when technology stocks seem to turn over and when old equipment is ready to be replaced.
Ms. Stilborn: Currently we are aligned with other sectors that you mentioned, such as chemicals and cement in the sense that the current 70 per cent proposal cannot be achieved technically by any refinery globally, let alone in Canada. There is no technology available.
To support what Mr. Beugin has said, targets have to be achievable. Let’s say it stays at 70 per cent. The companies would be paying a penalty and not reinvesting that money into research and innovation to try to develop technologically achievable solutions to meet targets. It is key to setting realistic targets in pacing and staging.
Senator Wetston: The design is key.
Ms. Stilborn: Yes; exactly.
Senator Wetston: Is it both of your points of view that because of this — I call it the transitional phase — that special consideration is necessary to effectively implement the backstop approach the government has adopted? I’m not talking about cap-and-trade versus carbon tax and different provinces adopting different programs. If that is the case, can you elaborate on what those special considerations might be? I am still thinking about exporting and importing and cross-border competition against provinces, countries or states that don’t have a carbon pricing regime.
Are there any thoughts about what that might be?
Mr. Beugin: Let me finish one final thought on the first question. I should be clear we shouldn’t think of the 70 per cent threshold as a fixed, immutable target. Unlike a regulation that would require specific outcomes, this isn’t a regulation. This is a carbon pricing policy precisely because it has flexibility. Firms have options to either achieve that intensity threshold through their own actions and emissions reductions or through other compliance options by paying the price, purchasing assets or buying additional credits.
It is not necessarily appropriate to think of that 70 per cent as being an immutable threshold sectors can or cannot achieve. That is not the point. The point is to lower their average costs while maintaining the incentive. That threshold really just defines how much we are lowering the average cost. How much support we are providing and how much incentive to output we are giving them.
That is the bridge to your second question, I think. That transition can be measured in how much support we are providing to these vulnerable sectors by defining the size of the threshold. How much support is needed, as I noted in my remarks, will change over time. As more and more countries become part of the carbon pricing clubs emerging and become active in reducing their own GHG emissions, the international playing field becomes more level and there is less of a need for transitional support. As a result, that subsidized output that is that transitional support should be phased out over time because it is not needed anymore, because new technologies are available and the playing field is level.
Senator Wetston: Or more importantly, less competitive disadvantage?
Mr. Beugin: Exactly.
The Deputy Chair: Ms. Stilborn, do you have anything to add to that?
Ms. Stilborn: Yes. It is all about transitional assistance. I agree with my colleague here that over time other jurisdictions, including the U.S., will likely adopt some type of carbon pricing. We know in the U.S. right now there are states like California that do have carbon pricing.
For our sector, we don’t compete with California. We compete with the U.S. Gulf coast states, in particular Texas, Louisiana and so on, where there is no carbon price. It is all about protecting competitiveness. The terminology “transitional allowances” is appropriate. Some people occasionally refer to it as free allowances. It sounds like it is free but it is just to maintain a level playing field as far as competitiveness to allow us to continue to innovate, produce cleaner fuels and have cleaner facilities while, at the same time, allow us to remain competitive and keep jobs in Canada.
The Deputy Chair: Thank you so much. We will move on, if you don’t mind.
Senator Marwah: To expand the point further, Mr. Beugin, you mentioned there is a global move toward the low-carbon world and carbon pricing policies, hence we are moving to a level playing field globally.
On that backdrop, where does Canada fit in? I don’t think it is appropriate for us to do nothing. Are the standards being proposed in both of your judgments too aggressive, or are they not flexible enough? Are they taking us to the top of the pack in terms of global standards?
Where do we fit in? What is the issue comparatively that puts us at a comparative disadvantage? There are fuel and chemical companies in other jurisdictions that would be similarly affected because they have the same problems as us. What is the competitiveness issue across jurisdictions?
Mr. Beugin: If I haven’t got this quite correct, feel free to correct me.
The way I think of our contribution as a country, it has been defined by the targets and by our commitment under the Paris Agreement. If we are to achieve that target of 30 per cent reductions below 2005 levels by 2030, then we need sufficiently stringent policy to do so. That is, a carbon price high enough to do so, regulations stringent enough or some combination of those two things.
The trick in terms of competitiveness is to achieve those emissions reductions but through true emissions reductions, not emissions reductions that are simply displaced emissions moving from Canada to, for example, the United States.
To avoid that outcome, I think that is the policy approach the government has taken and is using. It is particularly material for Canada given the integration of the Canadian and U.S. markets. I don’t think of it so much in terms of fairness. I think of it in terms of, first, achieving the objective and avoiding that leakage risk. That leakage risk exists as long as there are integrated markets with asymmetric carbon prices that are higher in Canada than in trading partners that matter.
Senator Marwah: Ms. Stilborn, any thoughts?
Ms. Stilborn: Absolutely. Thank you, Senator Marwah, for the question.
We have done quite a bit of work in the association to look at where we stand on a curve globally. We measured ourselves by a Canada-wide benchmark system against OECD countries. That is how we have determined, with the current proposal, we are still hopeful we will be able to work out the details and achieve something more flexible. The current proposal would demand of Canadian refineries they far and away exceed other standards achieved elsewhere in the world in terms of reducing GHG emissions.
Senator Marwah: I would like more information if you could send it to me afterward.
Ms. Stilborn: Absolutely.
The Deputy Chair: If you don’t mind, send it through the clerk.
Ms. Stilborn: Absolutely.
Senator Marwah: Ms. Stilborn, I was struck by your comment about interjurisdictional competitiveness across Canada. Is that a catch-up issue whereby provinces that don’t have a standard obviously have a longer way to go than provinces that have started? Or is it something deeper than that?
Ms. Stilborn: That is an excellent question, Senator Marwah. I didn’t delve into that in my opening remarks. You’re looking at this issue from an international perspective, but as Mr. Beugin has touched on, it is just as important there be interjurisdictional competitiveness within Canada. I think there are two parts to this. One is with respect to the jurisdictions that don’t currently have carbon pricing; Saskatchewan and New Brunswick in particular might have to step up and get to the federal benchmark standard right away.
If you look at jurisdictions like Ontario, for example, the current proposal would price carbon at about twice the level of what carbon is priced at in Ontario and this is fairly similar in Quebec. It’s not identical, but fairly similar.
When you have a fuel supply market where fuel moves freely not just internationally but between provinces, you are creating some discrepancies in terms of competitiveness within Canada.
Senator Marwah: Isn’t that just a catch up until we all get to the same place?
Ms. Stilborn: It will be quite a while. There is a fair bit of uncertainty about how and when the federal backstop would influence the carbon pricing regimes in jurisdictions like Ontario, Quebec, Alberta, British Columbia, for example. We have been told for the moment those jurisdictions will not be subject to the backstop. At some point there will be an adjudication process to see where, from an equity perspective, they stand on the curve. There is uncertainty.
At some point, there could be a level of catch up. This is an excellent question for you to direct to the folks from Environment and Climate Change Canada.
The Deputy Chair: You might have to tighten up your responses a bit so we can get through the two rounds now. This is very interesting.
Senator Tkachuk: Carbon pricing always befuddles me.
Which produces most of the CO2? Is it automobiles? Is it coal-fired power plants? Where is the greatest danger to the environment?
Mr. Beugin: There are emissions all through the economy. Big sources are transportation, combustion fuel in vehicles; power production.
Senator Tkachuk: When you say “big,” are you talking 20 per cent, 40 per cent, 50 per cent? Who produces?
Mr. Beugin: I don’t have the figures at my fingertips.
Ms. Stilborn: I think transportation is the largest and the next is personal transportation and then freight transportation. I don’t have the exact number with me either but I can get it to you after this meeting.
Senator Tkachuk: That is variable?
Ms. Stilborn: That is variable.
Senator Tkachuk: If you move by train there would be a lot less CO2 than moving with trucks.
Ms. Stilborn: Yes and truck transportation. Freight and personal transportation are the only segments where the GHG emissions are still going up. That is because of factors like our economic dependence on moving freight by truck, for example. Also, the fact more people are driving further distances and there is more density. There are more people living in cities but more urban sprawl, and so on.
Mr. Beugin: Wherever we are combusting fossil fuels, and wherever we are using industrial processes that make emissions: cement manufacturing, chemical manufacturing, agriculture and, finally, forestry.
Senator Tkachuk: The carbon is priced by the user of that carbon. When a person is buying fuel for a truck or car there is a tax of some kind, is that what we are talking about here?
Mr. Beugin: The fuel distributor pays the carbon price and passes it on to those who buy their fuel.
Senator Tkachuk: A tax is a tax is a tax. When governments impose a tax, they get sticky fingers. They should be revenue neutral. Otherwise, you are hurting the economy by taxing if you don’t make it revenue neutral. Canadians are a carbon sink, in reality. We capture more CO2 in Canada than we produce. By imposing a carbon tax that isn’t revenue neutral, you are actually hurting the economy and making us less competitive in the world.
Shouldn’t I get a tax credit for everything I pay in my gas tank? Shouldn’t I get a tax credit on my income tax to make it revenue neutral?
Mr. Beugin: There is more than one way to recycle revenue to use it.
Senator Tkachuk: To me you pay it, I should get it back. That is how you make it revenue neutral. Do we have a revenue-neutral carbon tax program in Canada or just a tax?
Mr. Beugin: B.C.’s started out as revenue neutral.
Senator Tkachuk: That is what I mean. They have sticky fingers. This is a big problem. The governments themselves are using it as a tax to create revenue so they can spend it on something else.
Mr. Beugin: The point of the carbon price isn’t the revenue generation, the point is the incentive. It is incumbent for governments to use revenue wisely from carbon taxes and other tax instruments as well.
Yes, there are better and worse ways to use revenue. That is true of all tax instruments.
Senator Tkachuk: The reason I am focusing on this is if a government takes $2 from me and gives it back to me, that gives me incentive to save money on the $2 because I would like to spend it on something else. But if a government takes the money and spends it, they are spending it on stuff that produces carbon. Everything produces carbon; no matter what they buy or use it for, they are producing carbon. Is that factored into the equation on capturing CO2? Really that is what they are doing. They are just taking the money I could have spent on my gas and are spending it on themselves. Maybe they are buying more stuff that produces carbon, which is what they are usually doing.
Mr. Beugin: There are lots of economists who agree with you that would prefer revenue neutral approaches to carbon pricing.
The Deputy Chair: Senator Tkachuk, second round.
Senator Tkachuk: Are you pushing that? You never mentioned it once. I want to know. That is the most important thing of all. Otherwise there is no point to it.
Mr. Beugin: Canada’s Ecofiscal Commission has been clear saying there is more than one way to recycle revenue and each way has different trade offs. Using revenue to cut taxes has lots of advantages. Using revenue for other things can have trade offs and other advantages. There is good reason to give provinces flexibility to choose and let them customize their own approach to revenue recycling. Whether that is revenue neutral should be up to them as it is under the pan-Canadian framework.
Senator Dagenais: My first question is for Ms. Stilborn. I’d like to thank the witnesses for their presentations.
Many argue that the government’s greenhouse gas reduction targets tend to be unachievable. Past results have even shown this to be true. Often, the sense is that politicians set targets to satisfy the environmental lobby, without regard for the competitiveness of our businesses. Most industry stakeholders we have heard from told us that they weren’t consulted on the carbon tax, and that strikes me as wrong.
In your view, what would be a realistic target for Canada?
Ms. Stilborn: That’s a big question. Thank you, Senator Dagenais.
There are a lot of discussions about target setting. To be frank, there are different jurisdictions in Canada and to some extent internationally where there is a bit of one upping; jurisdictions wanting to do better and having higher targets. We are sensitive to the fact governments feel pressure because of the Paris Agreement and previous agreements around reducing greenhouse gases.
Setting realistic targets is something we talk about a lot, namely setting realistic achievable targets. We need to understand what are the compliance pathways to reducing greenhouse gases. It requires solid economic analysis. For example, take the Clean Fuel Standard which fits into carbon pricing because it adds to the cost. It is part of the costs of carbon policies. It may not be carbon pricing but it does add to the cost of carbon policies.
For example, the government wanted to achieve a 30 megatonne reduction and they want to apply the Clean Fuel Standard to all sectors.
We are working with the government to try to better understand how it would propose we comply. We want to be able to comply with the regulation and ideally not have to pay our way out, whether it is carbon price or the clean fuel standard. The objective, at the end of the day, should be achievable real reductions and greenhouse gases and not paying penalties which don’t generate GHG reductions.
Senator Dagenais: This question is for Mr. Beugin. If I understood correctly, you come from the school of thought that holds countries like Canada should tax products from countries that aren’t making efforts to address greenhouse gas emissions. Do you have an idea of the negative economic impact it would have on consumers if Canada were to impose such a tax on products from China or the United States, for example?
Right now, Mr. Trump is saying that he wants to impose tariffs on our aluminum. What would happen if the situation were reversed? I think it would have an impact on consumers, who are already affected by the carbon tax.
Mr. Beugin: To be clear, the Ecofiscal Commission is not in favour of a border carbon adjustment which is the kind of instrument you are describing. In my comments I noted other countries have mused publicly about imposing such a policy.
The commission has not recommended such an approach for Canada and instead proposed this output-based approach as a way to address those competitive concerns. Those are two options with the same objective, the border carbon adjustment and the output-based approach.
One of the reasons the commission has advocated for using output-based pricing as a tool to ameliorate competitive concerns is exactly the point you are making, namely, there are costs to putting up trade barriers. There are also administrative complexities in terms of measuring the carbon embedded in traded goods. It is a tricky challenge and simpler to solve this problem through the output-based approach than through the border adjustment.
Senator Maltais: I’d like to pick up on two points raised by Senator Marwah and Senator Tkachuk. I will start with you, Ms. Stilborn. You come from Ontario, so you know the province’s carbon pricing scheme. It’s a replica of Quebec’s, which is based on California’s.
Ms. Stilborn: Yes.
Senator Maltais: How does Ontario’s carbon exchange work? What does the Government of Ontario do with the money it collects through the carbon exchange?
Ms. Stilborn: In Ontario, the carbon exchange is regulated by law, and the money collected is reinvested in programs in an effort to reduce greenhouse gas emissions.
Senator Maltais: I’ll give you a real-life example involving Quebec. One of Quebec’s two refineries is right across from the National Assembly.
Ms. Stilborn: Yes.
Senator Maltais: It was painless because Quebec opted to reinvest the carbon tax revenues in research, whether to achieve advancements in refining, transportation or farm equipment. Those are three areas in which Quebec chose to reinvest the money.
I hear the environmental activists and economists yelling, but this is the only place in the world with a refinery across from its legislature. Don’t bother looking elsewhere because there are no others, and it was done properly, without outcry or friction. However, the Quebec City refinery is at a disadvantage vis-à-vis the one in Saint John, New Brunswick, which isn’t subject to a carbon tax.
Mr. Beugin, I don’t think harmonized carbon pricing is the way to go. Instead, a modulation is in order to take into account the provinces that have made an effort. As Senator Tkachuk said, a tax is a tax is a tax because, at the end of the line, consumers are the ones who pay. All levels of government will pass the tax on to consumers.
The Deputy Chair: Please get to your question, senator.
Senator Maltais: My question?
The Deputy Chair: Yes, please.
Senator Maltais: I asked Ms. Stilborn my question, and she answered it.
Senator Tannas: I am looking forward to seeing the documents as a follow up to Senator Marwah’s question.
Is there weighting that goes with that, like Monaco versus China? Monaco could be No. 1, but there are how ever many countries in the world. I suspect it needs to be weighted in some way. Right?
Ms. Stilborn: Yes.
Senator Tannas: Thank you. It would be nice if Canada was in the middle of Europe. We could all hold hands and do everything together. The reality is most people’s jobs and lives are tied to the United States.
You have just provided us with evidence of an absurdity, the idea you are being forced to pay a tax because you can’t meet a target that there is nobody in the world meeting, much less the United States. You will become uncompetitive. That will increase, and people will lose their jobs and it will increase the amount of refined fuel coming into Canada.
Is there any kind of a common sense panel that would recognize that absurdity and provide a sensible redress? Or are we just going to light ourselves on fire in a whole bunch of sectors for some kind of a moral victory that will please everyone in Europe while we hand all this money and transfer jobs to the United States?
Ms. Stilborn: Senator Tannas, to reinforce, we are hopeful some of the points we are making here today are being well listened to by the folks at Environment and Climate Change Canada and Natural Resources and other ministries in the government.
To answer your question about whether there is a panel per se, there are obviously sectoral and broader consultations with other stakeholders. There is a group of industry representatives that meets. The meetings are not that frequent, but it is designed to meet with senior officials at EC3 to look at the combined competitive impacts, particularly for EITE sectors with both the clean fuel standard and the carbon pricing backstop. There is some of that consideration.
Senator Tannas: That is into a large bureaucracy where no one is really in charge of making a decision that says, “This is stupid and we have to fix it.” You go to 100 meetings where you don’t know if you are talking to the right person or not. Is that fair to say?
Ms. Stilborn: I think our sector and others are talking to as many people at the political and officials level as we can. I think a lot of these issues are well understood. What you are saying really supports the need for a robust competitiveness analysis.
Senator Tannas: Maybe we should have a ministry of common sense, where a minister and a bunch of bureaucrats would be seized with the idea of dealing with things like this, that just don’t make sense and need to be fixed. Thank you.
Senator Ringuette: That was an interesting discussion.
We’ve witnessed in the last few decades quite a change with regard to the environmental issue of oil in Western Canada. Correct me — I may be wrong — but I believe a few months ago, the Government of Canada announced billions of dollars in co-operation with the private sector regarding innovation and energy. Both of you have mentioned quite a number of times the innovation needs we have in order to deal with environmental and carbon pricing issues.
Have you looked at what will be the input of this innovation energy hub — I think it was announced for Calgary, either Calgary or Edmonton — with regard to this grand scenario of meeting our targets? Your heads are nodding. Please go ahead.
Mr. Beugin: I’m not sufficiently familiar with the details of the specific investment you’re talking about. Perhaps Ms. Stilborn has more to say.
I will note the economics literature is very clear. The best way to encourage low-carbon innovation and innovation in terms of new technologies and processes that reduce GHG emissions at lower cost and in greater scope is by carbon pricing, which is the best way to do that. It is the lowest-cost and most effective way to reduce GHG emissions. It’s not the money itself. It’s not the revenue generated that is most important. It’s actually changing the incentive and producing GHG emissions more expensive. This has powerful implications for the innovative forces in our economy over time.
Senator Ringuette: What I’m personally analyzing is some of the effects of this fiscal income is going to be invested in the innovation sector to improve the overall situation in certain industries like oil refineries and extracting mechanisms and so forth. Ms. Stilborn, your comments?
Ms. Stilborn: I can speak for companies. All our companies are involved in innovating. I’m sure some of them have partnerships with government. It’s about trying to leverage some of those resources that are part of some of the carbon funds that exist in different jurisdictions, particularly with existing carbon pricing regimes. Some of them may not be using those revenues.
The innovation piece is key. I think companies have been innovating, whether they get government resources or not, to reduce greenhouse gas emissions for a bunch of different reasons. It’s good for the environment, as we know. Reducing our energy consumption is also a cost-effective way of doing business.
From an innovation perspective, refineries operate and look differently now than they did 5, 10, 15 or 20 years ago. A lot of facilities do regular what they call turnarounds. They shut down for a period of time and replace new equipment and do capital investments. You’ve alluded to this, Dale, in terms of capital investment cycles. That is when companies innovate and install more efficient equipment.
I would encourage you. I know CAPP has appeared. I think Tim McMillan appeared before your committee a few weeks ago, but it might be the kind of questions you might want to direct upstream in a specific context. There’s a lot of stuff going on out there.
There’s an initiative we’re aware of and just starting to find ways to get a little more engaged with, and we know some of our members are involved. It is called the Clean Resource Innovation Network that the industry is involved with. There are folks we can put you in touch with in terms of whether you may want to have presentations from those people.
Senator Ringuette: Thank you.
Senator Wallin: Thank you. I want to come back to the point I was discussing at the beginning about — and I think you said, Mr. Beugin, in answer to Senator Tkachuk, that provinces might want to customize their own approaches inside a framework. Am I interpreting you correctly?
If so, that’s certainly what my province is trying to do. They’ve got a plan that they say will cut 188 million tonnes. They’ve put forward their own Prairie Resilience plan. Are you looking at anything else other than the federal plan and assessing that? Do you have a response to Mr. Moe, who said this idea of a carbon tax is kind of a seductive plan for think tanks but we need something a little more flexible for real life?
Mr. Beugin: The Pan-Canadian Framework gives flexibility to provinces in two very important ways, and that is the dimensions of customization, to which I was referring.
Number one, they can choose whether they want to price carbon through different instruments, through cap-and-trade, carbon tax or hybrid instruments similar to Alberta. That flexibility is important.
Perhaps even more importantly, they have flexibility in terms of what they do with the revenue generated from those systems. That is the most important dimension, I think, of flexibility because contexts vary across provinces. Different approaches to revenue recycling might make sense in different regions for different governments.
I think that limited flexibility, not infinite flexibility, is an appropriate approach. While there are other means of reducing GHG emissions other than carbon pricing — specifically, subsidies and regulations — those other approaches also have downsides in terms of higher costs and requiring more information from government potentially about choosing specific sectors or technologies which deserve support or merit regulations.
Senator Wallin: Have you actually looked at the Saskatchewan situation? If you have, what is your assessment?
Mr. Beugin: I have looked at the Saskatchewan Prairie Resilience plan. I think it is not going to meet the standards specified under the Pan-Canadian Framework.
Senator Wallin: I’m not asking that. Obviously, that’s why the feds and the province are fighting. It’s not meeting the standards the feds want.
The question is: Is it a reasonable approach? It’s certainly different. I know you want something more consistent. Is it going to accomplish goals?
Mr. Beugin: I think one of the most interesting things about the Saskatchewan plan is, frankly, the carbon pricing policy that is buried in there under a different name. However, that carbon pricing policy applies only to large emitters. It applies only to a subset of the economy.
A better approach, whether it’s part of the PCF or independently, is to apply consistent incentives and consistent prices across all emissions in the economy. That’s how we make sure there are consistent incentives but also make sure we drive whatever low-cost abatement opportunities are available. By exempting smaller emitters, by exempting households and vehicles, you’re leaving a very large part of the economy uncovered by policy. That will increase costs and/or reduce the effectiveness of the policy.
Senator Wallin: I won’t continue the debate, but when you look at a farm family and a farming operation, they get hit in about three different directions. They too buy gas at the pumps or groceries in the store. They’ve been targeted for a reason. I’ll leave it at that. Thank you.
Senator Tkachuk: Has B.C. reduced their emissions?
Mr. Beugin: The best economic analysis says that in the absence of B.C.’s tax, emissions will be 5 to 15 per cent higher than they would otherwise have been.
Senator Tkachuk: What does that mean?
Mr. Beugin: It means emissions would be higher if they hadn’t priced carbon. They have reduced emissions relative to where they would have been without the policy.
Senator Tkachuk: They didn’t really reduce the amount of emissions.
Mr. Beugin: In absolute terms, emissions have slightly risen over time. They would have risen much more rapidly without a carbon pricing policy.
Senator Tkachuk: You know that for sure?
Mr. Beugin: The statistics, economic analysis and data say that, yes.
Senator Tkachuk: I think it’s really important if we’re going to promote carbon pricing as an effective way to reduce, we must attach the fact that it must be revenue neutral.
I’m going to go back to that, because a lot of people have a lot of choices when you have a lot of money. For the ordinary working man or woman, they’re going to get up in the morning and drive to work. They don’t have a choice about that. There ain’t no high-speed train in Hague, Saskatchewan, or in Saskatoon. There’s a car you get into and drive to work in. Then you fulfill your day and go to the gas station and pay for gas that costs way too much; and you’re being taxed for that amount. You have no way to get that money back. Then you go to a grocery store and you’re paying more for your groceries.
This is a burden on the great majority of people who don’t have choices. People who have lots of money have lots of choices and they don’t care about the extra money. Actually, I would bet that if you did that analysis, you would find people with high incomes kept on travelling as much as they did, and probably travelled more. They don’t care. The people who suffer are the ones at the bottom of the scale.
If you don’t make them revenue neutral and provide rebates for those people, then they have no choices to make.
The Deputy Chair: Thank you, Senator Tkachuk.
Senator Tkachuk: I think he should answer, because they seem to be promoting the fact it doesn’t really matter; the government can use the money for whatever, and they do.
Mr. Beugin: Number one, the point about fairness is really important. Governments absolutely should be making sure carbon pricing policies aren’t regressive and imposing disproportionate costs on low-income households.
Most provinces are. Alberta is providing rebates, so cheques in the mail, similar to HST cheques, to the bottom 60 per cent of households. B.C. provides cheques to rural households but also to low-income households.
Absolutely, the revenue should be used to address fairness concerns. I think you can take that argument even further in terms of using revenue to cut taxes, rather than spending. I think that argument should be made to the provinces. There’s a lot of merit to the argument that provinces should be using these revenues to cut taxes rather than other spending.
Ms. Stilborn: Senator Stewart Olsen, we can share with the committee one of our president’s — Peter Boag — recent commentaries highlights the fact that transportation costs, for example, are fixed costs for a lot of folks.
The Deputy Chair: Thank you. That would be great.
Thank you both for coming. I did allow questions to go on a bit longer than I would normally because people are very concerned about this and it’s very complex. I thank you for your questioning and your frank answers. They were most appreciated.