Proceedings of the Standing Senate Committee on
Energy, the Environment and Natural Resources

Issue No. 14 - Evidence - October 27, 2016


OTTAWA, Thursday, October 27, 2016

The Standing Senate Committee on Energy, the Environment and Natural Resources met this day at 8:01 a.m. to study the effects of transitioning to a low carbon economy.

Senator Richard Neufeld (Chair) in the chair.

[English]

The Chair: Welcome to this meeting of the Standing Senate Committee on Energy, the Environment and Natural Resources. My name is Richard Neufeld, and I represent the province of British Columbia in the Senate. I am chair of this committee. I would like to welcome honourable senators, any members of the public with us in the room and viewers all across the country who are watching on television. As a reminder to those watching, these committee hearings are open to the public and also available via webcast on the sen.parl.gc.ca website. You can find more information on the schedule of witnesses on the website under Senate committees.

I would now ask senators around the table to introduce themselves. I will begin by introducing my colleague to my right, the deputy chair, Senator Paul Massicotte, from Quebec.

Senator Lang: Senator Dan, Yukon.

Senator MacDonald: Mike MacDonald, Nova Scotia.

Senator Mockler: Percy Mockler, New Brunswick.

Senator Omidvar: Senator Omidvar from Ontario.

Senator Seidman: Judith Seidman from Quebec.

The Chair: I would also like to introduce our staff, beginning with our clerk, Lynn Gordon, on my far left; our clerk-in-training, Maxime Fortin; and our two Library of Parliament analysts on my right, Sam Banks and Marc LeBlanc.

Today marks the twentieth meeting of our study on the effects of transitioning to a low-carbon economy as required to meet the Government of Canada's announced targets for greenhouse gas emissions reductions. In the first segment of our meeting, I'm pleased to welcome, from the Canadian Vehicle Manufacturers' Association, Mark Nantais, President. Welcome, Mark, to our committee meeting, and thank you for coming. We look forward to your presentation, and then we will go to some questions and answers. The floor is yours, sir.

Mark Nantais, President, Canadian Vehicle Manufacturers' Association: Thank you, chairman, and good morning honourable senators. I'm pleased as the president of CVMA to represent my member companies here, which include Fiat Chrysler Automobiles Canada, Ford Motor Company of Canada and General Motors of Canada Company. Together, these three companies are responsible for approximately 60 per cent of all Canadian vehicle production and, as some of the largest multinational companies around the world, export vehicles to 100 countries across the globe.

The auto manufacturing sector is a key driver for Canada's economy, contributing significantly to our nation's manufacturing GDP, providing some 115,000 direct jobs and some 500,000 direct and indirect jobs right across Canada. It is a highly integrated industry between Canada and the United States, and manufacturing plants on both sides of the border are fiercely competing for capital, investment and new product mandates. More specifically, the U.S. Midwest and southern U.S. states are our competing jurisdictions.

I want to thank you for the invitation and the opportunity to speak to you about what the auto industry is doing as environmental leaders to transition to a low-carbon economy, and in doing so, address the associated issues and public policies or regulations that can facilitate or impede both industry's and consumers' ability to reduce greenhouse gas emissions.

New rapid advancements in technology, changes in consumer preferences and new entrants into the global auto sector are inspiring new products and services and new business models that are part of advancing connected and automated vehicles at unprecedented speed. I mention these technologies as they can potentially lead to significant improvements in road safety, as well as further reductions in vehicle fleet greenhouse gas emissions.

In addition, the auto industry is one of the largest green tech sectors in the world, investing greater than $200 billion in fuel efficiency and green technology, resulting in a historically unprecedented 50 per cent reduction in new vehicle greenhouse gas emissions by 2025. Some $100 billion is being invested in electric vehicle development.

The auto industry has a remarkable track record in energy efficiency manufacturing and in reducing the environmental footprint of new vehicles, from concept through to end of life. In manufacturing, for instance, energy intensity in the auto manufacturing sector has been steadily and significantly decreasing since 1990. Putting it another way, the auto sector has become more energy-efficient and less greenhouse gas emissions-intensive while having amongst the most productive and award-winning quality plants in North America.

As a result of the industry's energy efficiency and reduction in greenhouse gas emissions, auto manufacturing now contributes less than 1 per cent of industrial GHG emissions in Ontario, where it primarily resides. It uses smart manufacturing processes and is highly efficient, emitting less than half of the direct and indirect greenhouse gas emissions per vehicle built when compared to European auto manufacturing.

At all levels in our society, people are making decisions to reduce the carbon footprint in their day-to-day activities, including their personal transportation. In response, the auto industry's pace of technology and innovation is rapidly increasing. Vehicle technology will change more in the next five years than it has in the past 100 years.

The greenhouse gas emissions from the on-road fleet of light-duty vehicles is a relatively small proportion of the total inventory in Canada, at 11 per cent. This percentage is forecast to drop steadily as new vehicles replace the older vehicles in operation. Even greater greenhouse gas emissions can be achieved if older, higher-emitting vehicles — representing about a third of the existing on-road fleet — are retired on an accelerated basis and replaced with new, significantly more fuel-efficient vehicles.

The very stringent passenger car and light-duty emission regulations for the 2017 through 2025 model years have been adopted on a harmonized basis with the United States, creating a single and efficient standard on a North American basis, including California, to the benefit of the environment and consumers. These regulations compel manufacturers to adopt a multi-technology and multi-fuels pathway for compliance in which electric vehicles, plug-in hybrid and battery electric vehicles will become increasingly more prominent during this period of rapid technology deployment.

Through an unprecedented 3 per cent to 5 per cent year-over-year improvement requirement, 2025 model year light-duty vehicles are projected to emit 50 per cent less greenhouse gas emissions compared to a 2008 model year vehicle. If you calculate from the model year 2011, this will result in an estimated cumulative reduction of 266 million tonnes of carbon dioxide equivalent emissions from the light-duty fleet on a national basis.

Some regulators and advocates allude to these standards as business as usual for the industry. I can assure you that this is hardly the case given the attendant technological challenges and costs. I can think of no other product that is required by regulation to reduce greenhouse gas emissions to such an extent.

I should also add that heavy-duty vehicles are also being stringently regulated for the 2014 through 2018 model years and again, even more stringently, for model years 2019 through 2027. Those are now under development.

I would like to speak briefly but more in detail about vehicle electrification. Since 2011, 25 new plug-in electric vehicles have been introduced in Canada across a growing number of vehicle segments. This will increase to 29 for the 2017 model year, some of which will be built right here in Canada.

Beyond cost, battery electric vehicle technology has significant technical challenges with range and vehicle size that need further development before mass consumer acceptance and adoption of these technologies is possible. Battery electric vehicles have certain limitations in Canada's cold weather and under developing recharging infrastructure, making consumers somewhat wary about their purchase.

Their sentiments and concerns, however, cannot be ignored. Plug-in hybrid electric vehicles, on the other hand, under such conditions and circumstances provide an actual, more practical option, in many cases, during the early stage of EV market development. Ultimately, consumers must be able to make a value judgment based on their needs to select the most cost-effective vehicle. Greater success in electric vehicle adoption can be achieved by proactively instituting policies that help increase consumer demand for electric vehicles and enhance recharging infrastructure in the most effective locations and through public education. Similarly, policies supporting plug-in electric vehicle consumer incentives and measures that make electric vehicle use more convenient and less costly have been found to be much more helpful at increasing consumer adoption rates.

We offer the following recommendations and collaborative action that could form a partnership with government: number one, consumer education, as I mentioned; number two, targeted support for electrification of city fleets, taxis, delivery fleets, car sharing, and commercial and government fleets; number three, expanded high-occupancy vehicle lanes or EV fast lanes, access, and free charging and parking; number four, enhanced city and workplace EV recharging infrastructure as a priority, and fast-charging installations along inner city corridors; number five, maintain meaningful consumer incentives, both federal and provincial, to accelerate adoption, as they have done in the United States — federally and with U.S. state incentives; number six, explore green tech opportunities, by which I mean research and development and testing for batteries, electric vehicle components, EV infrastructure and autonomous vehicles; finally, as I've also mentioned, accelerated the retirement of higher-greenhouse-gas-emitting vehicles that are 12 years old and older.

Auto manufacturing is also highly trade-exposed and very sensitive to any cost increase imposed provincially and federally. That is why the design of a pan-Canadian framework for climate change is very important to the competitiveness of Canada's auto manufacturing sector and, ultimately, the achievement of Canada's economic and environmental objectives.

What is needed is a national climate action framework that ensures the sustainability and long-term competitiveness of the automotive industry. It is critical in order to maintain Canada's current manufacturing footprint and to avoid the migration of many thousands of jobs — that is, carbon leakage — to other jurisdictions that have no similar climate policy commitments.

In Canada, the auto industry's competition is not east-west in Canada, but north-south between Canada and the United States. All Canadian jurisdictions must continue to support the national implementation of greenhouse gas regulations to approach emission reductions from both governments and consumers.

Overlaying a sub-national policy on these national regulations, which are aligned across North America, will suboptimize the industry's ability to effectively deploy these technologies and will do so at an increased cost to consumers. A continued harmonized regulatory approach that allows for the leveraging of North American economies of scale provides Canadians with the greatest access to advanced vehicle technologies and their commensurate environmental benefits — that is, both greenhouse gas emissions as well as smog-related emissions. These actions are consistent with the activities and objectives of the Canada-United States Regulatory Cooperation Council and a June 29, 2016, leaders' statement and action plan on the North American Climate, Clean Energy, and Environment Partnership.

In closing, Mr. Chairman, the CVMA remains very interested in open dialogues to address the issues that I've presented this morning, and we'd certainly like to explore any potential options as we go forward. I will be pleased to answer any questions that the honourable senators may have. Thank you.

The Chair: Thank you for that presentation. We'll go to questions, starting with the deputy chair.

Senator Massicotte: Your presentation was comprehensive and good.

To jump a little bit, I see in your supporting document that you calculate that the existing costs of the regulations put in place on your industry — that I note are very important because we talked about pricing carbon, but regulation is another form of getting where you want to get, but it's frankly more expensive than letting the market work. But in your case, you calculate that the existing regulations are costing you $243 to $291 a tonne. That's a cost of the imposition of the regulations.

When you see us having a debate in our country relative to a $10 going up to $50 carbon tax — and we all agree there is a market principle that we should treat everybody equally and let the market decide — what is your comment on the fact you're paying maybe $275 a tonne? Doesn't that seem unfair in a way? We intend to impose additional carbon tax on gasoline, and you would seem to be getting picked on a little bit more than the others. What is your comment on that?

Mr. Nantais: I'm not going to say we are getting picked on, but I will say we are an industry whose products are being regulated to a very large degree in order to reduce greenhouse gas emissions. Not necessarily directly, per se, but those regulations, because they are so stringent, are driving and compelling us to take a multi-technology pathway. The cost of those technologies is such that if you convert the cost to a CO2 equivalent, as we say, it comes up to roughly $300 per tonne for electric vehicles. That is many-fold greater than what the normal option costs are for greenhouse gas credits.

That is what it is. We have to comply with the regulations, and we will use these various technologies to do that. But we want to put in perspective just what the cost of this means. When you put that in perspective and put in the cost of what we put into a vehicle and have to bring to market, we are probably already subsidizing the cost of these vehicles to the tune of $10,000 to $20,000 for plug-in electric hybrid vehicles.

We think we are definitely making our contribution toward the goals of the country in reducing greenhouse gas emissions.

So I'm not going to say we are being picked on, but the regulations are such that they need to be understood. People need to understand that this is not business as usual. The industry is spending — and these are not our estimates by the way; it is the U.S. National Highway Traffic Safety Administration putting these costs or estimates out there.

This is the fact: We're going to do what we need to do. Electric vehicles are only one pathway, but we're going to continue to make significant improvements to internal combustion engines and drivetrains through lightweighting and aerodynamics. They all come with a cost, and these vehicles are more sophisticated. We are working with our petroleum industry colleagues as well because we will need fuels that support these technologies for the internal combustion engine.

It's a big task and a big challenge. There are also challenges with electric vehicles operating here in Canada with cold weather.

Senator Massicotte: You have seven recommendations in your presentation, but I'm being told the Conference Board of Canada made a comment to say that we should always talk about electric cars. But what will be much more important to achieve the 2030 goals in Canada is the imposition of regulations, if you wish, relative to the efficiency of CO2 in existing cars. We are tightening up and making stronger demands. That is much more important than electrification of cars relative to the results of CO2.

The other comment I am getting is that you're saying older cars — 12 years and older. But a lot of people are saying that if you can take any car older than five years old off the road very quickly that will contribute again more to our GHG objectives than even electrification. Can you comment on that? Is that accurate?

Mr. Nantais: We choose 12 years and older because that was a milestone in terms of vehicle emissions, roughly speaking. Whether it's five or 12 years, there is no question that if we accelerate the retirement of those older vehicles then we get the benefit of both reduced greenhouse gas emissions as well as reduced smog-related emissions in terms of improving air quality. We get a double bang for our buck, so to speak.

There is a third bang for our buck as well because many of these new technologies and new vehicles will be equipped with some of the most comprehensive safety technologies.

Turning over the fleet is clearly a significant opportunity to contribute toward our goals. So I would agree with that. It was long-winded, but I would agree with that.

Senator Seidman: I was going to pursue the recommendations and ask you about electrification. I would like to first focus on R&D in general, if I might. You have presented these seven recommendations. I'll look at number six: exploring green tech opportunity. You talk about R&D and testing for various electric components and infrastructure. But I would like to ask you more generally about R&D as well as and other than electrification: What is Canada's role in being an innovator and developing? How many companies do that in Canada, for example? Or is it primarily that we're relying on research and development coming from the U.S., Japan and other countries?

Mr. Nantais: Yes and yes. The companies I represent, which are Fiat Chrysler, Ford and General Motors, all have research and engineering facilities right here in Canada. You often hear about connected or autonomous vehicles. The auto industry is, quite frankly, becoming the new Internet of things.

Because this technology is moving at such an accelerated pace, there is certainly a role for research and development and engineering activities here in Canada at these facilities. We have to look at things like artificial intelligence, software and lightweighting materials, as I mentioned. These are all things where we have capacity and expertise in Canada, and the companies I represent also have very specific partnerships with university networks in Canada. They are pursuing those opportunities, and certainly in Canada we have a role to play.

Senator Seidman: Is the work integrated in any way? Is it coherent? Are companies cooperating and working together? For example, we have heard, and I have heard many witnesses on another committee, about how in the medical field professionals tend to work in silos. As a result, we might not achieve as much as we could. Is that happening in the automotive industry?

Mr. Nantais: Well, you see cooperative research and development take place through the sort of pre-competitive period. That's where you will see partnerships, both companies coming together, in some instances, but also companies coming together with universities.

One thing we need to concentrate on is not so much pure research in the automotive industry, because that is being done, for the most part, elsewhere, but we still have a benefit in Canada. But the commercialization of that technology — how do we bring it to market? That's the key.

I will direct your attention to the Canadian Automotive Partnership Council's most recent report on innovation. That gives a good description of what companies and the industry are doing and where research, development and innovation need to go in the automotive industry in Canada. CVMA and member companies are part of that, as are labour, the Government of Ontario, the federal government and Quebec. It's a very good report. I would recommend this committee take a look at it.

Senator Seidman: Because translation to commercialization is critical, if you had to give us one or two barriers, from your experience, to moving this forward, what would they be?

Mr. Nantais: We have to make sure that regulations can work for you as well as against you. That also applies to the research and development field. We have to ensure that those regulations are conducive to doing that type of activity in Canada.

Second, the SR&ED tax credits are another area where changes were made a while back. I'm not sure those were the best changes to be made because, quite frankly, when it comes to the automotive industry, they don't serve us well. That would be another area we might want to look at.

I did make a presentation to the House of Commons Industry Committee on that very point, which I would be glad to share with you.

Senator Seidman: Can you share it briefly with us now or are you going to send it to us?

Mr. Nantais: I just mentioned a couple of things, for instance.

Senator Seidman: That's fine. If we move to electrification, and many of your recommendations have dealt with aspects of that, in my city of Montreal there has been a huge focus on electrification of cars. We have heard how in cities it's much easier to depend on electric cars than it is in more rural areas where they have much longer distances to travel.

In this work on electrification, are you again working with American counterparts and developing the technology that is necessary to produce cars that would be more attractive to city dwellers and semi-rural dwellers?

Mr. Nantais: Absolutely. There are a number of different facets in your question. We have noticed that there is a great deal of activity in Quebec lately. For the most part, electric vehicles, whether battery electric vehicles primarily or plug-in hybrid electric vehicles, are more conducive to a city setting. That's where the infrastructure is being developed and where it is most effectively deployed.

There is the issue of our geography. If you look at the statistics now, roughly 65 per cent of electric vehicle sales are in, to use your example of Quebec, 15 major urban areas. It's clearly an urban issue.

Thus far electric vehicles tend to be on the small-vehicle side. That is changing, and Fiat Chrysler has a plug-in hybrid electric minivan that is being built in Windsor.

Research and development of these technologies is done on a global basis. Those companies are part of the global network, if you will, of their chain of research and development and supply chains globally. That is being done on a global basis, and we always look for ways in which we can develop one product for a global platform that we can export to all markets.

That's why getting trade agreements is important. That's why ensuring that we have common standards is important. These are all things that can reduce the cost of bringing these vehicles to market in terms of testing and validating them. We are very much on track to develop these vehicles on a global basis.

Senator Lang: I want to pursue the questions that Senator Massicotte started with in respect to the cost and the eventual ability to compete. You have had regulations implemented, and you have certain targets you are required to meet, and obviously you are meeting them, and I think your organizations and the company should be commended for the steps that have been taken.

At the conclusion of your statement, you state that overlying sub-national policies on these national regulations, which are aligned across North America, will suboptimize the industry's ability to effectively deploy these technologies and will do so at an increased cost to the consumers.

I would like to interpret that and put on the record that the message you're bringing to us is that between the provincial and federal jurisdictions and perhaps, in some cases, municipal as well, the fact is there is a movement to bring in either a carbon tax over and above these regulations, and second in some of the provinces a carbon tax or cap and trade or some other program that will increase costs. Is this going to cause your industry to put you in a less favourable position to compete with our southern neighbours, whether Mexico or the United States? If so, what will the effect on your industry be?

Mr. Nantais: Senator, if I may separate the question into two elements. The first is on the product side, and we will talk about sub-national standards.

We have pushed hard to harmonize vehicle emissions and safety standards to be harmonized on a North American basis, primarily between Canada and the United States, because we leverage the larger North American market. The markets are integrated. We have the same public policies and geography. We can reduce the costs of bringing those vehicles to market, and ultimately make those products more affordable for consumers. That means consumers have greater access, broader, faster, than if a province was to institute its own policies or regulations for vehicles.

The same would hold true with fuels, by the way. If they were to do that, which some provinces have attempted to do in the past, it would totally undermine that, because there are so many benefits for both government and industry.

If the government were to do that on an individual jurisdiction, provincial basis, first off, it would make no difference in terms of the vehicles that come to the market because the market is not large enough in that jurisdiction to make or drive changes in vehicle design. That won't happen. The size of Canada's market is insufficient to drive significant changes to vehicle design. We need the broader and larger markets to do that.

It's important that we stay the path, and that we stay true to harmonization for both safety and emissions standards for the reasons I've mentioned. Certainly, the Regulatory Cooperation Council has looked for ways to remove differences in regulations, and we have made progress on the vehicle and safety side. I will hold up Environment and Climate Change Canada as a model for a department that has fully embraced the issue of harmonization and has fully harmonized both light- and heavy-duty vehicle emissions standards, which are fuel-neutral, by the way, so all vehicles, regardless of whether they run on gas or diesel, must meet those standards on a North American basis. There is real benefit to that.

The second element of your question has to do with whether Canada introduces a carbon tax or cap and trade. We're facing both right now, and in our industry, from a manufacturing perspective, anything that adds cost to doing business in Canada detracts from our ability to compete, primarily with the mid- and southern U.S. states. For instance, in Ontario, cap and trade will bring certain additional costs that our competing plants in those U.S. states don't have or will not incur. They don't have the policies or the costs associated with that.

Electricity is one of those costs that falls under cap and trade, and our manufacturing plants — and I'm talking now not just about the three companies I represent but all five manufacturers who produce in Ontario — will incur electricity costs that are much higher than those in competing jurisdictions. In our case, it's two to three times higher. That is a very significant cost that starts to add to the bottom-line costs of doing business in Ontario.

Then you add, potentially, another carbon tax. Certainly, all indications are that the federal government will look at that, and if there are existing equivalent policies in place, that policy at the provincial level will prevail, and they won't have to incur the additional carbon tax.

Our supply chains go deep, and whether it's extracting minerals and ore for steel, right through up to our assembly plants, every step of the way is going to incur new costs. And then we have transportation costs on top of that.

What is really so critical here is that we are an industry that is highly trade-exposed. In other words, we export about 97 per cent of everything we make here in Canada, but we're low in terms of energy intensity. As I mentioned, we're less than 1 per cent of Ontario's GHG emissions, and the cap-and-trade program, right now, fails to recognize that sufficiently. We're continuing to work with the Ontario government to find ways that will ensure that we are operating on an equal basis, if you will, and that our competitiveness is not impeded by those additional costs. That is going to be a tough challenge.

What we really need now is clarity beyond the 2020 period, and we don't have that.

Senator Lang: I want to pursue the projected costs. Let's discount a federal carbon tax, but let's talk about cap and trade. What is the financial implication to your industry that you've calculated so far?

Mr. Nantais: It's actually unknown. We have some confidential numbers, and I can certainly look into how those might be shared.

Senator Lang: Can you do that?

Mr. Nantais: I will look into that.

Senator Lang: It would seem to me that our committee and the general public should be aware of the long-term consequences of these programs, number one. And number two, going from that, if we continue down this path, can you see the possibility of closures or movement of various plants because of costs that have been incurred through these various programs?

Mr. Nantais: Yes. In the long term, in our investment cycles, decisions are being made now to plan for 10 years from now. The first compliance period, for instance, in the cap-and-trade program in Ontario ends in 2020. We're probably okay for that first period, but without that clarity and knowing what the cost of carbon will be beyond that period of time, and we do also know that electricity rates are expected to go higher again, how we get around this will be more than a challenge.

These companies are multinationals, and we use, for instance, natural gas to do two things. One is to heat the plants, which we're required to do by law, and the other is to dry paint and precondition the temperature of the air that goes into our paint shops. Those are costs under the cap-and-trade program that our competing plants, say in Texas, don't have. They don't have the cold weather to deal with or temperatures in which they have to precondition the air in the paint shops.

We have electricity on top of that. We are big users of electricity, and we are what we call "flat." In other words, we maximize plant utilization and try to get 90 per cent plus in terms of utilization. That cost of electricity is one for which we can't go to off-peak hours because we run three shifts 24 hours a day. What we call the global adjustment factor, which is huge, is something we can't handle and can't adjust to.

Senator Patterson: I was very impressed with the presentation, and I understand that the industry supports 550,000 jobs all across the country. That's very important and very impressive.

I'm looking at your recommendations. We are, of course, a committee of Parliament that will make recommendations to the federal government. I'm wondering if we should look at the retirement of older vehicles, which are bad greenhouse gas emitters. You recommend that should be done, so what role would the federal government have in such a program?

Mr. Nantais: The federal government could, like other governments have done previously, provide an incentive to retire your older vehicle. For instance, right now in the province of British Columbia, they have an incentive to scrap your older vehicle. What's really interesting with that program is that they now have married it up with their electric vehicle incentive. So if you're an individual who wants to get rid of an older vehicle that emits a larger amount of greenhouse gas and smog-related emissions, you can retire that vehicle, get the retirement-for-scrap incentive, and you can get the EV incentive if you go directly from your old conventional vehicle to a new electric vehicle. That has really driven the sales volume of electric vehicles in British Columbia.

It has a role. We've done this before where we've accelerated both governments and companies, for that matter, and given the volume of these older vehicles out on the roads, it represents a real opportunity, as I said, to reduce greenhouse gas emissions, as well as smog-related emissions.

Senator Patterson: Do you think the federal government should be doing this, or provinces? You talked about these sub-national policies. Were you warning us that we should try to find consistency?

Mr. Nantais: I think what we're saying is we want the government to maintain its role in the regulation of vehicle standards, both for emissions and safety, and that the government should look for ways and opportunities to work with provinces to provide incentives — not just to retire older vehicles, but to provide, certainly, when it comes to plug-in hybrid electric and battery electric vehicles, incentives that will help consumers afford the more sophisticated technologies and ultimately increase the sale of these vehicles.

Electric vehicles right now are less than 1 per cent of all sales. In the state of California, which has been at this game for more than 25 years, it's still less than 2 per cent.

Consumers can see the technology is evolving and improving in electric vehicles, but there is still a cautionary note when it comes to consumers and their willingness to purchase these vehicles given, perhaps, where they live in Canada, with some of the limitations that exist in cold weather, like range anxiety, et cetera. So if we want to drive those sales further, they're going to need those incentives, and they will need governments, federally and provincially — and, ultimately, municipally, I think, in terms of infrastructure — to work together and look for synergies and opportunities.

Senator Patterson: This may be a bit off our topic of the costs of going green, but you've pointed out how trade-exposed the vehicle manufacturing sector is in Canada, and I think vehicle production contributes to Canada's trade surplus.

Mr. Nantais: Yes, absolutely.

Senator Patterson: Which is important. I'm wondering if you would have any brief comments on the implications for the manufacturing sector of the European free trade agreement and the Trans-Pacific Partnership. Have you been engaged, and are you hopeful that these deals will go through?

Mr. Nantais: The short answer is yes, particularly the agreement with the European Union. We have been very supportive of that. Just one minute before nine o'clock, I understand they're going to go ahead with ratification. That was this morning. We are pleased about that. We are supportive of it.

The CETA was different in the sense that it was negotiated and recognized in the integration of our industry, and that's really critical.

There is also recognition of the fact that the U.S., ultimately, will come along, so when we talk about our integrated industry, hopefully there will be provisions that allow what we call accumulation of content. That would allow us to get content on the same basis as the North America basis, as we have now. That's a very good aspect of this agreement.

When it comes to other free trade agreements, like the TPP, for instance, we're very supportive of all trade agreements, but the TPP came up short with respect to autos. Depending on what goes forward in the United States, what the new administration may or may not do, the government can provide some indication of what they are willing to do to address some issues that really ultimately resulted in some significant disparities between the tariff reduction schedules between Canada and the United States, which put us at a disadvantage.

Senator Omidvar: Forgive me for asking a question that may have been asked and answered earlier. I am new to this committee for today, replacing Senator McCoy, but I, like other Canadians, understand and appreciate the role that your industry plays in our economy.

My question is around your recommendation around incentives — that the government should provide consumer incentives. Beyond incentives, I wonder if you would comment on the federal government modelling behaviour for others to follow. I'm talking about a significant capacity in procurement and setting standards for how the government itself does business. Do you know if the Government of Canada holds itself to the same standards that it wants to propose to others, and whether it uses that tool of procurement to advance its energy objectives?

Mr. Nantais: Canada's having signed the climate change agreement in Paris and ratified it has sent a signal to all departments regarding their objectives around reducing greenhouse gas emissions. When it comes to the purchase of new vehicles for their fleets and so forth, our understanding is that they're very open to purchasing vehicles that significantly reduce greenhouse gas emissions, whether they're improved internal combustion engine vehicles or electric vehicles. They, too, have criteria, though. We're a big country, and vehicles operate in many different environments. They have to make sure that those vehicles meet all of the requirements for safety as well as utility.

Our view is that the federal government is certainly able and willing, and they have undertaken through procurement policies to purchase vehicles and other energy-efficient equipment to contribute to achieving their targets. Could they do more? Yes.

The Chair: We're at the end of the questions, but I have a few. Then we'll go to some quick second round ones, noting the clock.

The target we're told has to be met is the reduction of 30 per cent of 2005 levels by 2030. Is the auto industry in line to meet the targets that are set out? After 2030, they get a lot more stringent, but we'll just work until 2030.

Mr. Nantais: The 2030 target is a country target, just as subsequent yearly targets are. We do believe, however, that we are making a significant contribution toward that target. As I mentioned, light-duty vehicle transportation, which is cars and light-duty trucks, is only 11 per cent of the total inventory.

The most recent information and data that we have at Environment Canada show that by virtue of just the emission regulations that we've put in place to date, for instance, between 2011 and 2014, passenger car emissions have been reduced by 8.2 per cent, and light-duty trucks have been reduced by 7.8 per cent. In fact, we're ahead of the game in terms of the regulations.

We can see those reductions continuing through to 2025 and beyond by virtue of the new technologies that are coming to market.

I don't think it's our role, to be quite frank, to meet that specific 30 per cent reduction target, or the target that has been set for Canada as a country, but we do see a role in contributing to that target by virtue of what we're doing with our products and through our production facilities.

The Chair: I appreciate that. I'm not trying to single you out, but I'm asking everyone who comes before us if they are on target to meet the 30 per cent reduction. I appreciate what you say, but somebody else has to pick up more, then, someplace else. I know it's a simplified way of doing it, but it's a way of actually trying to judge whether we're going to meet that target.

That target is 291 megatonnes, over 2005 levels, by 2030 that we have to reduce, and I've often said even if you took the oil and gas industry totally out — and that would affect you immensely — but if you took it totally out, you're not going to meet 291 megatonnes.

Mr. Nantais: As I mentioned earlier, though, if you look at 2008 to 2025, these vehicles and new technologies will deliver a 226-megatonne reduction. That's getting pretty close from our sector.

The Chair: Okay. That was the question I was going to ask you. I'm maybe just a bit confused because it's early in the morning —

Mr. Nantais: It's probably me.

The Chair: — but you do say that you could reduce by 266 megatonnes by 2025. This is from page 6. So my first question was, are you on target to meet a 30 per cent reduction? Then later you said you could even surpass that. Which is it?

Mr. Nantais: I can't honestly speak to whether we'll achieve that 30 per cent reduction, but that equates to 290 million tonnes, I think you said. From our sector, we're looking at 266. But in terms of the standards that apply to these vehicles, we're actually coming in better than what they require. I can put it in those terms.

The Chair: Okay.

I have another question: Where are your products made? Where do you get your steel, aluminum, glass, plastics — all of those kinds of things for manufacturing? Is that within Canada or is that abroad?

Mr. Nantais: That's in Canada, but also some things are acquired from abroad. We operate under a just-on-time delivery system at our plants, and our suppliers tend to gravitate toward the assembly plants that act as anchors. We do purchase in Canada steel, glass and many components that go into our vehicles. However, because we're global companies and we need to keep our costs down, we've also developed global supply chains. There's no question some of those materials and component parts come from the United States and elsewhere.

The key thing here is that they have to come to us just in time, so a lot of it is focused on what we can get in Canada or close to the Canadian border.

The Chair: Is there a percentage that you could work out and provide to the clerk? I'm not going to ask you to do it here, but is there a percentage of your major products that you use to build vehicles that are actually made in Canada, versus what is imported?

Mr. Nantais: It may be a bit difficult to get that. Some of it may be a bit business-sensitive. We operate under NAFTA terms. Under NAFTA, when it comes to content levels, roughly 62.5 per cent is the percentage we must source within North America, and that's the key driver here.

The Chair: So 62 per cent you source within North America, and the balance is sourced worldwide?

Mr. Nantais: Could be elsewhere.

The Chair: All right.

Mr. Nantais: Roughly speaking.

Senator Mockler: Thank you for a well-documented presentation, but I have a few questions on harmonization with the U.S., and especially the Buy America Act, does it have an impact presently on R&D with Canada?

Mr. Nantais: I don't think so. I come from a position of very little information, but I don't believe so, not from an R&D perspective.

Senator Mockler: We hear about the research being done on driverless cars; will that reduce emissions?

Mr. Nantais: Could you repeat that?

Senator Mockler: Cars with no drivers.

Mr. Nantais: Oh, autonomous cars.

Senator Mockler: Yes.

Mr. Nantais: We are at an incredible time in the auto industry. Whether it's the development of connected cars where cars are communicating between cars, which we call V to V, or they're communicating with the infrastructure, so traffic lights and signals, they have a role in reducing traffic congestion, and ultimately even some safety benefits.

Autonomous vehicles, of course driverless vehicles, appear to be the end game in many respects, and they are being developed. We know how to do it. The cost remains a problem, and infrastructure to support it remains an issue, and things like cybersecurity definitely have to be addressed and are being addressed as we go forward.

These are the types of developments and evolution in our industry that are creating new business models, and companies that are going to be part of that game in the future are changing their business models to adapt. Whether it's ride-sharing or autonomous vehicles, certainly the companies I represent are planning on playing in that game as we go forward.

It could be under a new business model where vehicle sales would still be important to a company, but there may be benefit in providing new services that relate to some of these things, such as ride-sharing. Our industry is going to be changing on all fronts as we go forward.

Senator Massicotte: We worry about making sure that we compete and that we're not imposing regulations and taxes as compared to the United States. Is the cost of producing a vehicle in Canada today pretty much the same, very competitive compared to the United States? We would take cars off the road, but those cars are often going to Africa and being run into the ground, which as world citizens doesn't help us at all with GHGs. Can you comment on those two things?

Mr. Nantais: Certainly with respect to our competitiveness with the United States and the cost of building a vehicle in Canada, Canada is one of the most expensive jurisdictions in which to produce a vehicle. As I mentioned earlier, some of these new additional costs that may come forward are not going to help that situation; but we have other positive aspects of doing business here, whether it's our infrastructure or skilled labour and improved labour agreements; we are still able to manage, and we look forward to new investments.

With respect to older vehicles taken off the road and going to other markets, I'm not sure we can stop that, but we can save those vehicles that remain in Canada, and 90 per cent of the new vehicle is recycled. We're about to make a new announcement with the vehicle recycling industry adding new standards to make sure they're managed properly from an environmental perspective.

Senator Lang: I want to go back to the question of targets you've indicated that you've met and you will be meeting, as per Senator Neufeld's question. Are you going to be able to extend your targets and meet better targets in Ontario because of programs such as cap and trade or carbon tax, or do you feel you're limited to what you've already committed yourself to through the regulations?

Mr. Nantais: Regarding Ontario's cap-and-trade program, we have every intention of working with the Ontario government to get where we need to go. Since 1990 we have made year-over-year improvements to the energy efficiency of our plants, so much of the low-hanging fruit is gone.

Now we have to concentrate on what we can do. Generally you can make significant additional reductions through new plant investments. So you have a new investment where you have completely replaced old technology with new technology. That's where an opportunity lies.

But we've done a lot of the initial work to get us where we are, which is why we're less than 1 per cent, but policies that will support new investment federally and provincially not only provide jobs and economic benefit but will also bring new technology to make additional environmental improvements.

The Chair: Thank you very much, Mr. Nantais. That was very interesting. If there are requests for extra documentation, if you could provide them to the clerk, she will make sure that all of us get it.

Welcome to the second portion of this meeting of the Standing Senate Committee on Energy, the Environment and Natural Resources. We are completing our study on the effect of transitioning to a low-carbon economy.

From Fertilizer Canada, I'm pleased to welcome Garth Whyte, President and Chief Executive Officer; and Clyde Graham, Senior Vice President.

Garth Whyte, President and Chief Executive Officer, Fertilizer Canada: Thank you and good morning, Mr. Chair and committee members. It's a pleasure to be here. My colleague is Clyde Graham, our senior vice-president.

We have been doing a lot of different presentations, and the agenda has been changing quite a bit, so we apologize for not giving you what I'm going to read today. We have given you our annual report, which discusses who we are, what we do and the issues that are important to our industry. It is translated, and you have a copy there.

We represent an industry whose members include manufacturers of nitrogen, phosphate, potash and sulfur and sell fertilizer to farmers and homeowners. Fertilizer keeps soils, one of the world's most precious natural resources, productive, accounting for roughly 50 per cent of food grown. To feed the projected world population of 9 billion by 2050, we must increase crop yields by 70 per cent.

Fertilizer is essential to intensifying crop production sustainably, and it is important that we position Canada's agricultural economy to meet this important challenge. Saskatchewan is the world's largest supplier of potash, accounting for 46 per cent of global trade. Alberta holds the largest concentration of nitrogen fertilizer production facilities in North America, a process which adds value to the province's natural gas. Additionally, Canada is home to the world's largest fertilizer company and the world's largest agri-retailer. These and all of our member's contributions are vital to sustainably increasing crop production.

Over the past year, the greenhouse gas regulatory landscape has changed, and as the government develops a strategy to address climate change, we urge collaboration with leading industries, such as ours. We also ask the committee to consider the following recommendations: First, promote climate-smart agricultural practices for sustainable food production. Second, set achievable sector-specific industry emissions reduction targets. And finally, create an industry energy efficiency program that is accessible to our industry.

Feeding the world with climate-smart agriculture, as defined by the United Nations, is a priority for Fertilizer Canada. Climate change makes the challenge of feeding more people on less land all the more urgent, as it threatens productivity and forces quicker adaptation of farming systems. A reduction in emissions cannot come at the cost of reduced output of food. Instead, farmers must get more out of the inputs and resources they use. At COP21, and again next week at COP22, we will share how our industry can help the government achieve reductions in greenhouse gas emissions from agricultural sources using 4R Nutrient Stewardship, which means using the right fertilizer source at the right rate, the right time and in the right place.

4R Nutrient Stewardship is a science-based system for nutrient management, which improves agriculture productivity while reducing environmental impacts. Fertilizer Canada has made extensive efforts over several years to continuously improve this program, working with governments, NGOs, universities and other stakeholders to develop research and metrics and to promote global adoption. Research funded by the Government of Canada, and matched by our sector, further validates the benefits of 4R Nutrient Stewardship practices.

Emission reductions can further be achieved when farmers are involved. The world-leading Nitrous Oxide Emission Reduction Protocol, or NERP, employs the 4R principles to generate saleable offset credits. The NERP was developed in Canada and, with government support and broader adoption, will make Canada a leader in climate-smart agriculture. The NERP is currently operating under Alberta's emissions reduction regime, and expansion to other jurisdictions will result in significant greenhouse gas emissions reductions — for example, by one to two megatonnes annually in Western Canada alone.

Fertilizer Canada asks the committee to recommend that NERP, like offset protocols to reduce farm-based greenhouse gas emissions, be implemented to help Canada meet its emissions targets.

The committee should also consider that economically or scientifically unattainable greenhouse gas targets will negatively impact the competitiveness of Canada's fertilizer industry and increase the rate of carbon leakage. Nitrogen fertilizer manufacturing, in particular, is one of the most energy-intensive, trade-exposed sectors globally. Our industry has worked with federal and provincial governments for more than a decade to benchmark our performance, which has concluded that Canadian facilities perform in the top quartile for energy efficiency and greenhouse gas emissions. We're in the top 25 per cent in the world. There is no commercial step-change technology in development that will replace existing production systems.

Reduction targets exceeding achievable levels will erode our global competitiveness with no tangible reductions in greenhouse gas emissions worldwide. We recommend that government policies be science-based, achievable and sector-specific, balancing environmental goals with the realities of our industry. We have already expended significant effort developing an achievable, science-based performance standard with Environment and Climate Change Canada and are in favour of its application across Canada.

Lastly, we encourage the government to pursue an industry energy efficiency program. The fertilizer industry supports the goals of the $2 billion, two-year, federal-provincial fund to reduce greenhouse gas emissions. However, we believe that a significant opportunity exists to expand the benefits that can be achieved. Energy-intensive trade-exposed sectors are competing globally with industries that are not subject to equivalent targets or climate change policies, and we are therefore at high risk for decreased investment and carbon leakage.

We recommend that the government establish an energy-efficient program for the staffing and execution of efficiency studies and projects to support energy-intensive trade-exposed sectors as they work to access remaining emissions reduction opportunities and remain competitiveness.

Fertilizer Canada stands ready to work with the government. It is important to ensure we get it right.

To conclude, I want to thank the committee for this opportunity to present our views. In summary, our recommendations are to promote climate-smart agricultural practices for sustainable food production, to set achievable sector-specific industry emissions reduction targets, and to create an industry energy efficiency program that is accessible to our industry.

We welcome the opportunity to continue the dialogue, and Clyde and I will be pleased to answer your questions. Thank you, Mr. Chair.

The Chair: Thank you, sir. We'll begin with Senator Massicotte.

Senator Massicotte: Thank you, Mr. Whyte, for your presentation. It was very interesting. You put a lot of emphasis on dialogue and discussion, which are nice words, and obviously that's very important, but you know our goals: a 30 per cent reduction by 2030, and so on. I appreciate the dialogue and all that stuff, but give us a sense of whether your share is getting there. In other words, if we average it out among all industries, you have to achieve 30 per cent. Will you achieve 30 per cent, or are you saying somebody else should do the heavy lifting because you have special circumstances? Everybody argues that, frankly, so give us a sense of what kind of performance we can expect from your sector by 2030.

Mr. Whyte: To the chagrin of my colleague, I will use an analogy. About two months ago I visited a farm in southern Ontario, and environmentally, they are the standard. This family does everything right: They use zero-till, use ground cover, rotate their crops and recycle their equipment. They are the environmental model. But if they were in an industry subject to these targets, they would not meet them because they made their environmental changes in the 1990s. That's how our industry feels. Our industry made a lot of changes in the late 1990s. Why? Not just out of the goodness of our heart, but because gas prices were through the roof. They had to make changes.

Now, if the standard goes to 2005, or whatever the benchmark year is, we will not be able to continue to reduce carbon from our nitrogen manufacturing sector side. We won't be able to do it because it's science. What we do is we pull hydrogen out of natural gas, and then we also pull nitrogen out of air, to make ammonia. That's how we make fertilizer. It's a science-based program.

They have done a lot of the heavy-lifting already, but it's not being recognized. So that's why we're saying we should have a sector-specific strategy, because what can happen if we don't meet our targets is we can be displaced by coal-fed industry in China, or somewhere else, and the world target will go up.

Having said that, we have been working very closely with the science community and with all governments, including Alberta. We have memorandums of understanding with five provinces on this 4R procedure that we have, which applies to fertilizer to make sure it goes to the crop and not into the atmosphere or the ground. It can have a major impact. It's being recognized by the United Nations and by the FAO. If we implement that, it will be a major offset that, yes, will help make those targets.

It's a long-winded answer, but my colleague, Clyde, is going to COP22. He is the intervenor on behalf of the fertilizer industry, globally. He will be presenting some of those targets.

Senator Massicotte: Given that argument, I don't know if you were here for the previous gentleman who basically argued some of the same — "We have done so much; we should be excluded." If you're the Prime Minister of Canada and you have the choice that everybody thinks they should be excluded because they are prettier or stronger than the other guy, what do you do? How do you get to your goal?

Mr. Whyte: From all talk, from my perspective I'm kind of frustrated, because things are done in isolation: "Let's look only at environment here, agriculture policy here, transportation policy here." No one is looking from a holistic point of view.

From our sector, part of the goal — people forget about people starving, and we have to increase production. Fertilizer is necessary. That's a given, because that's the only way; we have a limited amount of soil in the world to produce food. That's one dilemma.

The other is we're working closely with the government, and we will reduce targets through these new applications like the NERP, which can reduce nitrous oxide, which is 100 times worse than carbon, by one to two megatonnes alone in Western Canada. We want to work closely with them to apply that.

The environment has been silent on that. They say it's an agriculture issue.

So just to put a target out there, I think we need to also look at the offsets. The offsets aren't discussed. Even in Ontario, from my perspective, we talk a lot about the target, and we're there — we'll do what we can — but we don't talk about the offsets, which are just as significant. I think we can get there.

So, as prime minister I would try to look at the whole picture, not just a target we will push out in one year. I should mention I walk and bike to work, so this is not an issue where we're not in favour of this; we stridently are in favour of it.

Senator MacDonald: In your presentation, you said our committee ". . . should also consider that economically or scientifically unattainable greenhouse gas targets will negatively impact the competitiveness of Canada's fertilizer industry . . ." and of course any other industry. You've seen what the government signed in Paris. You know they signed stuff in Kyoto that apparently no government had any intention of meeting and was unattainable.

What is your opinion of the target that was set in Paris? Do you think they are honestly attainable without wrecking Canada's economy?

Mr. Whyte: I'm going to pass the baton to Clyde, but I do believe you have to set targets.

Senator MacDonald: Are they attainable?

Clyde Graham, Senior Vice President, Fertilizer Canada: They are ambitious targets. But climate change is a serious problem, so we should be ambitious. But because we set a target for the country, we as Canadians are all going to have to contribute in different ways; consumers, homeowners, managers of buildings, industry and farmers are all going to have to contribute.

There will have to be differences in the way they contribute. You can't have a 30 per cent target that applies the same to everyone. Different parts of the economy and society are going to contribute differently.

We're familiar with our own sector. I don't know how attainable that target is, but certainly we are prepared to do what we can to assist that.

We're very bound by the current engineering, the science and the chemistry of the products that we make, and that really means there are severe limits on what we can do to contribute on the industrial side. So we thought, "What are things that we can actually do?" We can help our customers who are farmers in Canada and around the world to be more efficient in their fertilizer use so that they can grow more crops with the same amount of fertilizer and reduce the emissions from nitrogen fertilizer when it's applied in the ground.

If fertilizer is not applied properly, it can convert to nitrous oxide. Nitrous oxide is one of the major greenhouse gases, and it's 300 times more potent than CO2 as a greenhouse gas. The amounts of N2O released in the field for fertilizer applications are very small, but because it's an important greenhouse gas, we want to do everything we can to reduce that.

Our strategy is to do what we can. It's going to be very limited on the industrial side. We want to play a leadership role in Canada and around the world in reducing emissions when nitrogen fertilizer is applied.

The challenge, as noted, is that we're en route to have 9.6 billion people on the planet by 2050. It is going to be an enormous challenge to produce enough food for everyone and for everyone to not have not only a diet but a healthy diet to get that kind of population growth. We are going to have to use fertilizer do it, but we want to do it as environmentally and sustainably as we can.

Senator MacDonald: You mentioned nitrous oxide. I'm not an expert in this. You talk about it being 300 times more powerful. CO2 is also a nutrient. Nitrous oxide is not, is it?

Mr. Graham: No, CO2 is not a plant nutrient.

Senator MacDonald: Carbon dioxide is not a plant nutrient?

Mr. Graham: No.

Senator MacDonald: So we have 78 parts per million of carbon dioxide in the atmosphere. If it dropped to 34 parts per million, all the plant life on the Earth would disappear.

Mr. Graham: Carbon dioxide is essential to plants. They breathe it, but it's not taken up through the roots.

Senator MacDonald: I understand that. What I'm saying is that carbon dioxide and nitrous oxide are two different things.

Mr. Graham: Yes, absolutely. Carbon dioxide is essential to life on the planet, as is oxygen. Absolutely.

Senator MacDonald: I just think that is sometimes forgotten in the discussion about carbon in general.

The second question I was going to ask is in regard to carbon tax. You mentioned it should be science-based, achievable and sector-specific. In Nova Scotia, we've got a real problem with this carbon tax being applied. In terms of the coal-fired plants and emission controls in Nova Scotia, the governments of Nova Scotia over the past decade have all done a good job at transitioning, or appearing to transition.

We're basically going to be double-taxed now. We are one of the most taxed jurisdictions in the country. Now we will be double-taxed.

I want to know your opinion and principle of a carbon tax that applies to everything. I have no problem saying that I do not believe in this carbon tax. I think it's a mistake, economically. I don't think it will achieve much. It seems like it will be pushed on us. It's like everybody needs to wear shoes, so the government is going to give everybody size 8 shoes to wear. I know we all need shoes. "They don't fit you well, but you all must wear size 8 shoes."

How can we take this carbon tax and make it work if it's not going to be applied sector-specifically? I think it has to be.

Mr. Graham: We haven't seen the details of what the federal government is proposing. The way we look at it is that there are different approaches to incentivizing or applying penalties for industry to encourage them to reduce emissions. There are cap and trade, carbon taxes, targets and regulations that apply to the automotive sector, for example.

But we don't know how the federal government intends to deliver the promises that it's made regarding carbon tax. All we can do is look at how it would apply to our sector. If you look at some of the work the federal and provincial environment ministers have done, I think they have reached consensus that there needs to be special treatment for energy emission-intensive, trade-exposed industries. We think that's an important concept that would have to be applied in any system, whether it's cap and trade or a carbon tax, but I think some of the other key factors are how the government would structure equivalency agreements to recognize provincial strategies, which it has said it would do, and the details are going to be critical.

Senator MacDonald: I certainly don't criticize you for not having the answers about what the government is doing, because I don't think the government has the answers, quite frankly. Thank you.

Senator Fraser: Good morning, gentlemen. I have questions that I'll put all together, because they are based to some extent on ignorance.

On page 8 I was interested in a number of things. You say that Canadian production facilities perform in the top quartile for energy efficiency and greenhouse gas emissions, and that there is no commercial step-change technology in development that will replace existing production systems.

First of all, what is a step-change technology? That doesn't mean anything to me.

Mr. Graham: Sure.

Senator Fraser: Second, if such a change would help and be desirable, why is the industry not trying to develop it? This sounds accusatory; it's not meant to be. I'm learning.

Why stop at the top quartile? We are a giant in this field. Why shouldn't we be in the top 10 or even 5 per cent? The industry is globally very significant, and this is not a poor country.

Mr. Graham: Regarding the quartile issue, we're being very modest. We're right at the top of all countries in terms of the efficiency of our nitrogen fertilizer plants, and our potash facilities are the most efficient in the world. There are not a lot of other producers of potash in the world.

The potash industry invested around $8 billion in refurbishment and expansion in the latest technology, but even so, our industries have been investing in de-bottlenecking and other investments in the facilities, but you don't get a lot of reduction in greenhouse gas from those.

Our ability to go further is extremely limited. If you look at that quartile, we would be at the very leading edge of that quartile, particularly for the vintage of our plants, which are from the 1990s and before. The difference between a plant built 20 years ago and one built today is not dramatic in efficiency. That's one of the issues. These plants last for decades. We are severely restricted in what we can do.

In terms of the step change, the fundamental chemistry that we operate in is a process almost 100 years old; it's Haber-Bosch. The two scientists who worked to get it each got a Nobel Prize. The kind of step change we would need to revolutionize the nitrogen production industry would be of the calibre of a Nobel Prize. The World Bank has said they would like to have a prize for coming up with a better way to make nitrogen fertilizer, and the prize already exists; it's the Nobel Prize.

Mr. Whyte: It's interesting. The scientists in the 1900s got together and said that we're going to have mass starvation if we don't come up with a new technology other than guano and manure, because we're running out; we are going to have mass starvation in the early 1900s. They did this in the 1800s, sorry.

They had to come up with a process that would take nitrogen out of the air, because 70 per cent of the air is nitrogen. To do that, you have to heat it at 1,500 degrees. You have to use a fuel to heat it, which is gas; it's not wind power. You also need hydrogen. It's a science-based product. Nitrogen is in everything, but you need it. Plants need it to grow.

Back to science, we have increased fertilizer. There is a study that shows in 1980 where on a corn crop they have doubled productivity but increased fertilizer application by 5 per cent. That's huge environmentally and for feeding the world. It's a major thing, and Canada is a world leader in a world product.

Bill Gates said, "I love fertilizer. It's a magical ingredient; it will help feed the world." We're a major player.

Where can we help? Part of it is transportation. How do you get 25 million tonnes of fertilizer from Saskatchewan to 80 countries around the world? You have to use a railway, and then you have to use a ship. The turn-around at the port is three days. The turn-around for wheat and a lot of other products can be up to 12 days.

This is what I meant by a holistic view of environmental impact. There are going to be carbon emissions when we do things, but everywhere else they have been making changes, and we're looking to make changes. We have been testing it with sciences across North America, joint projects with Canada and the United States and with the International Plant Nutrition Institute around the world. We have discovered, by crop, region and climate, the best way to apply fertilizer. It will have less environmental impact in the water and air, and higher productivity.

We want our Canadian government to promote and recognize it. Back to Senator MacDonald's question, maybe we can't work on the nitrogen side, but we can work on application fertilizer. Not only that, we can set an example worldwide.

We may meet the Canadian target on reducing carbon emissions from our nitrogen manufacturing plants, which are 1 per cent of the market, but we may increase the world targets because we'll go down to the less-than-best-in-class companies, because they are going to need nitrogen and will go elsewhere.

The irony is we may meet Ontario's target or Alberta's target by just reducing production, but we're going to hurt the world target because it will go to China, which is coal-fed, or some other place, because they need the nitrogen. It's a little more granular and sophisticated than just setting a target.

Senator Lang: The previous witness stated that their industry had a clear understanding by sector and by regulation of what was expected of them and what they could achieve. That was obviously harmonized with the United States.

We have had a new government for a year, and previous to that, we had a government that was committed to sector-by-sector regulation in order to achieve various targets. Prior to the change of philosophy or ideology and practicality, were you, as an industry, in discussions with the federal government, and did you have some understanding of what was expected of your industry in respect to meeting these targets set by the previous government? Because the targets are no different at the end of the day; it's just how we get there. Can you update us as to where you were then?

Mr. Graham: Yes, we have been in extensive discussions with the federal government on essentially benchmarking and looking at what we could achieve, but that work was not completed. We had made extensive progress, and I would say it was a substantial agreement, but it was not concluded before the federal election.

Senator Lang: But you said you made substantial agreements. Did you have agreements that you could reach certain targets via certain steps you could take within your sector without a carbon tax or cap and trade?

Mr. Graham: I think the process we were going through was to determine what was achievable for our industry.

Mr. Whyte: If I may, I would add that we continued that process with the same people with the new regime. The principles that we're putting on the table here remain the same; it didn't matter which government or which jurisdiction. But also, we were benchmarked. I think we're way ahead of the curve because we've been working for several years saying, "How do we compare to other countries and other plants?" That's where we're able to look you in the eye and say, "Yes, we are in the top 10 per cent." That's pretty good. It would be great if all our industries were there, but going back to that farmer analogy, she is not under any targets, but it's possible that she would be penalized because she was ahead of the game, and I don't think that's fair.

Having said that, regarding this NERP and the 4R technology, we're in lock-step and have memorandums of understanding with five different provinces and different parties agreeing that we need to do this and work together, and we're working with conservation groups and farming communities. We're trying to bring people together and see how we can do our bit to improve on the environment.

Senator Lang: Do you have any projections on the cost to your industry with the cap and trade that is being implemented in Ontario, or what a carbon tax would do? Do you have any projected costs for what it's going to do to your industry if and when they're implemented, and if you're not exempted?

Mr. Graham: I think we would want to see the full design and operation of the various regimes before we'd comment on any cost.

I think it's difficult for a trade association to determine that, because each company in the association is going to have different strategies for compliance.

Senator Lang: It's going to be an additional cost, though.

Mr. Graham: Yes. Anything we're looking at is a stretch for our industry. We will do our best to improve our emissions, but we're very limited in that. Then, if we can't meet it, there are always compliance opportunities, whether that's through offsets or if, as in Alberta, they have a technology fund to contribute to. We'll have to comply in those other ways.

Senator Mockler: I was looking at the statistics you shared with us, Mr. Whyte, and for the 12,000 jobs that you have, you have $12 billion in sales. Every job you have produces a $1 million in sales for you. That's pretty good if you look at the industry worldwide and Canada-wide. It's certainly a good performance.

But you touched on the subject of how we look at emissions. I'll give you a statistic: Canada's annual emissions of CO2 are about 14 tonnes per capita, which is in the same range as the Russian Federation and the United States of America and exceeded substantially only by countries like Kuwait and Qatar. Then, if you look at annual emissions, take the following: Sri Lanka's are 0.7 of a tonne; Romania's are 4 tonnes per capita; in Hungary, it is 5 tonnes; the U.K.'s are 7 tonnes; and Canada's are 14 tonnes.

But you've hit on a sensitive point that I would like to ask you about. I agree with you when you talk about your 4Rs. I am from New Brunswick, and I was looking at the agreement you have with my province, and I think it's laudable. But of the world's fertilizer production, what percentage of the fertilizer produced comes from areas with coal-fired energy, and how do you compare yourself?

Mr. Graham: Some fuels other than natural gas are used in emerging economies. I think in China, for example, fuels like naphtha and coal are used. China is probably on the road to converting its industry: The new plants coming online in China are, I believe, fired by natural gas.

Mr. Whyte: But in Canada, there are no coal-fired plants.

Mr. Graham: In North America, there are none.

Mr. Whyte: But as to your comment on 14 tonnes per capita, this is what we have to fix. We agree. That's why we want it to be sector-specific, because we have measured carbon output per capita in our area, and we're the leader. We would be your best-in-class.

Senator Mockler: If you look at Canadian industry.

Mr. Whyte: Yes, if you look at Canadian industry, and I think that's the point. The question is, do you penalize your best-in-class to displace it elsewhere?

One of the things that struck me in our industry is that this is an aligned industry. I've worked in many different sectors, but I've never seen one that is in agreement on what they can do and how they can help with the environment worldwide. They're world players. We ship to 80 countries around the world, and we have, as we said in our report, some of the world leaders in the fertilizer industry. They're looking worldwide and they're investing worldwide. In a decade, if there's $200 billion to be invested, this is going elsewhere, and not because they don't believe in the environment. If they've seen that they can't work with certain governments, that they're afraid or there is uncertainty, that helps.

We want to be seen as part of the solution. We really do, and by and large we have been. We're working very closely with Alberta and Ontario. But that's part of the whole mix, isn't it?

Senator Mockler: What regions of Canada would be the most effective when we look at the objectives that you want to obtain?

Mr. Whyte: There are four, really, for our nitrogen manufacturing facilities. They would be Ontario, Manitoba, Saskatchewan and Alberta.

Senator Mockler: I'll talk about New Brunswick. When they closed the Sussex potash plant, what impact did that have on your industry?

Mr. Whyte: It's quite funny. I talked to the CEO, and maybe I shouldn't say this —

Senator Mockler: If they want to come back to New Brunswick, you can say it.

Mr. Whyte: It was one of the hardest things he had to do. It wasn't so much the impact on him; it was the impact on the people that really bothered him and the company. I've talked to others, like outplacement people, and they said they've never seen it done so properly. Instead of sending an email, he personally went there and met with every employee and offered to transfer 100 jobs back into Saskatchewan. It was really done very well, and to the point about New Brunswickers, they were trying to console the leadership when they closed the plant, too.

It was just very inefficient. Potash mine costs have declined, and it was a very hard to mine to do, but they're still keeping the mine going in case the product comes back. But it was a tough decision, I think, on behalf of our membership.

Senator Patterson: The federal government announced its intent to develop regulations to reduce greenhouse gas emissions from the production of chemicals and nitrogen fertilizers in May of 2015. Could you talk about those regulations? Have you been consulted, and do you have any comments on them?

Mr. Graham: Those regulations were never brought forward.

Senator Patterson: Nothing happened?

Mr. Graham: No. The regulations did not go to the Canada Gazette.

Senator Patterson: Were you consulted on the development of those regulations?

Mr. Graham: We have had extensive consultations with all the governments in jurisdictions in which we operate. We're very collaborative, and, yes, we've had a decade of, frankly, very positive discussions with the federal environment department and other departments on our industrial emissions.

Senator Patterson: Could you enlighten us a bit? Why weren't the regulations developed, and was that a good thing? Why weren't they implemented?

Mr. Graham: I think you'd have to ask the previous government about that.

These issues are complex. They were done over a long period of time. Elections intervene.

Senator Patterson: What is it about the process that produces carbon? We've recently gone to pulp mills, aluminum smelters and even coal-fired generating plants that have all managed to impressively reduce their carbon output. But you say there is a real challenge. Could you enlighten us a bit as to why there's no step change?

Mr. Graham: Sure. I'll tell a little story, if I may have the indulgence of the committee.

Right now, 78 per cent of the air we breathe is nitrogen. It's in the form of N2, which is two atoms of nitrogen tied together. It's a very tight bond, and it doesn't react with anything else. Plants can't use it.

There is a tiny amount of nitrogen that is released on a continual basis when you have lightning, for example. It creates these bonds and creates some ammonia. We're also breathing ammonia right now; it's in the atmosphere in a small amount. But it is the ammonia, which is NH3, an atom of nitrogen with three atoms of hydrogen, that can be used by the plant and can be converted into other forms of nitrogen that can be used by the plant.

Nitrogen is one of the major plant foods in the soil. There is nitrogen, phosphorous and potassium. Fertilizer is food for plants.

The revolution that occurred close to 100 years ago in our industry was that scientists figured out how to break that bond and convert that to ammonia, so we can make fertilizer and grow crops. We need hydrogen to mix with the N2 in the air to make the ammonia, and the best source we have available is the hydrogen in natural gas, which is methane. Through intensive heat and other processes, we take the nitrogen out of the natural gas and combine it with the nitrogen from the air, and that creates ammonia.

Some farmers use ammonia directly as a fertilizer, but it's also converted into products like urea and ammonia nitrite.

Senator Patterson: Where does the carbon come from?

Mr. Graham: Methane, of course, has carbon. When we break the methane down, there is a release of carbon, just as when you burn natural gas in your furnace in your home, carbon is released. When we take the hydrogen out, instead of burning, we put it into the ammonia. That's where the carbon goes.

We also have to the use natural gas. We burn the natural gas to create the intense heat required to make that reaction occur.

The natural laws of chemistry are very rigid, so the amounts of natural gas and nitrogen required are fixed. We call them fixed-process emissions.

That's the challenge that we're facing. It's also a great story for the world that we've been able to feed a growing population and improve diets using fertilizer through this process. But to get more efficient is extremely difficult.

Senator Patterson: We've talked a bit about costs today, and I guess that's fundamentally what our study is about. You've explained some of the challenges for the industry.

I understand the price of potash has dropped. Can you give us a general picture of how fertilizer prices are doing in the world and how healthy the industry is in light of the world commodity markets?

Mr. Graham: Sure. First of all, we are extremely limited in what we can talk about regarding price because we're an association of competitors. Generally, though, we've had a very slow economic recovery in the world. In areas like China and India, which are major consumers of fertilizer, their economies are growing slower, so demand for fertilizer has not been as strong as it has been in the past. That's for both potash and nitrogen, which are our major exports, but also for phosphates.

We are in a cyclical industry like many other natural resource-based sectors, and we're optimistic there will be improvement over time. Plus, in developing countries, improving their agriculture to feed more people with better diets is a long-term trend that will emerge.

Right now demand for fertilizer is somewhat subdued, but we expect that to improve in the medium and longer term.

Mr. Whyte: If I could add, our members think long term. They don't think one year or two years; they think 10 or 20 years. Over the long term, it looks very good. But right now we have a lot of capacity in nitrogen manufacturing worldwide that's being built up. We're an energy-intensive, trade-exposed industry, because people are building plants. So how do you compete?

They don't think in terms of Alberta or Ontario. They think in terms of world markets and where they should put their investments. We're talking hundreds of millions — billions — of dollars and where they should be put for a 40-year-horizon type of thing. That's a challenge as well.

So even though we had set targets and we have to get it done within a year, some of these other decisions are long term. They're ramping up because one fact is demographics, a growing population. If you want a growing middle class, they need to eat well. That means enhancing food production.

Senator Patterson: We've heard about alternate feed stocks for fertilizer production such as syngas or renewable natural gas. Is any research being undertaken in that direction?

Mr. Whyte: I'm sure there is, but these are boutique approaches. Go and visit these plants. They're huge. Yes, some R&D is going on, but there's no killer application.

The Chair: I have a couple of questions, and then we have one second round question.

If the carbon tax were applied to your industry at $50 a tonne, what would that cost the average farmer on a per-hectare basis if in fact you kept producing and all those sorts of things? What would be the result to the farmer? There is a cost to the farmer and then to the general public, whatever that farmer produces. What would be the cost to the farmer? Would it increase his costs by 10 per cent per acre or what?

Mr. Graham: First of all, we don't know the design of the proposal for a —

The Chair: No, let's say it's $50 a tonne; the government designs it at $50 a tonne today. What would that relate to in cost?

Mr. Whyte: I guess you would have to ask what the exchange rate is, because they would be buying their fertilizer from the United States. I'm not being facetious. If it's $50 a tonne as of today, they will go to other markets to get their fertilizer, and their costs would be increased by then. Potash is different, but in terms of nitrogen, it would be very difficult.

The Chair: Okay. To be perfectly frank, we're not here to kill the agricultural industry. I'm sure we all understand and know that fully. But if it were $50 a tonne, you can say they'd go someplace else, but if you still produced and if it were $50 a tonne, how much would that increase the farmers' costs? Just give me some sense of it, without saying "everybody will go away" or the composition of it. It's $50 a tonne.

Mr. Graham: It's very difficult to talk about. You're asking us to talk about the price of our products.

The design of the tax does matter dramatically, but I would say that because we are such a trade-exposed industry, it would be unlikely —

The Chair: I'm not trying to put you on the spot. If you would like to go back home and think about $50 a tonne, that'd be fine. I know you're trade-exposed. We understand that kind of thing — "or they'll go someplace else." But if you got hit with $50 a tonne and you still produced nitrogen here in Canada, how would that affect the farmer's cost — what they pay now, all in real time, today.

Mr. Whyte: Because we sell in bulk, you would really have to go to the people who are working directly with the farmer on input costs. They would have a better answer for you. We are manufacturing on a large scale.

The Chair: Who would have a better idea?

Mr. Whyte: The distributors and the salespeople of the product who bring it right down to the farmer.

Mr. Graham: The best answer might be that as we learn more about the design of the carbon price, we can give you some better answers.

The price of fertilizer depends on the demand by farmers. One way I would put it is that farmers, when they go to committee, will often say it's very difficult for them to pass on increases in the cost of production to their customers, which is the food industry, grain companies and things like that.

In general, it is very difficult for us to pass on increases in the cost of production to our customers, because they have competitive options to buy their products.

The Chair: I fully understand all of that. I'm just trying to get a cost. If it's $50 a tonne, regardless of what the middle or third person sells it for, there's an increase to the farmer. What would that relate to from what you're producing today? I don't know why that would be difficult to find out.

Taking all those external things and leaving them out, I appreciate that. If you got hit with $50 a tonne, from what you're telling us, there would be no production in Canada.

Mr. Whyte: Maybe, maybe not.

Mr. Graham: No, not necessarily. To be clear, our industry is invested in the long term in Canada, and the plants that we have here have decades of life left in them. We're not in any way suggesting that our plants will shut down. It is the same thing with potash. The mines there have reserves of 100 to 200 years — that kind of thing.

If governments make bad decisions about cap and trade or carbon pricing, it will affect the ability of our plants in Canada to go back to their headquarters and say, "We want to make incremental improvements in our facilities, expansions and things like that." That's more likely the impact if bad decisions are taken.

The Chair: I'll leave that question, then.

Senator Massicotte: I know you can't predict what the farmer is going to do, but what would increase your own costs? In other words, is it 5 per cent, 2 per cent, 1 per cent? How would a $50 carbon tax increase the costs?

Mr. Graham: We would like to —

Senator Massicotte: Maybe you don't know, but maybe you would like to get back to us.

Mr. Graham: That's what we would like to do. We will come back and provide some information on that.

We operated on a consensus basis in our industry, and this has not been in the public realm for that long. We'd like to go back and talk to our members about how we want to respond to that.

The Chair: I'm fine that that.

Earlier on, you said that in the 1990s you made all kinds of changes in the industry, and it was driven by the price of gas. What did you do? What kind of things did you do in the 1990s?

I've been involved in the oil and gas industry pretty well all my life, and the prices of natural gas didn't go up until the 2000s. What did you do in the 1990s, when the prices were about the same as they are today, that reduced your emissions tremendously?

Mr. Graham: I wouldn't say it was a "tremendous" reduction, but we did what we could.

The Chair: Okay. What drove that?

Mr. Graham: I haven't looked lately, but I think natural gas prices are in the magnitude of around $3 per MMBtu. Natural gas prices reached peaks of $9 or $10 —

The Chair: In the 2000s.

Mr. Graham: Yes. But in the 1990s there was a big jump as well.

The kinds of things people did were, for instance, engineers went through the plants and said, "Is this valve leaking? We'll replace it. Can we de-bottleneck the plant if we make a small change, use more efficient compressors?" and that kind of thing. It's the same thing someone might do with a car that's not running well. You take it into the shop and say you want a complete tune-up so that it runs as efficiently as possible.

Incremental improvements were made to improve energy efficiency.

The Chair: I grew up on a farm, but I would say most of the population who didn't grow up on a farm don't know what products you use to make fertilizers that actually increase the yields and that will feed the world into the future.

Do you folks do any outreach to the public? Perhaps it would be done on TV or something like that — advertising. Has your industry contemplated trying to educate the public a little bit more? Because there are people out there who say to keep it all in the ground; "we don't want any of it." But we need it because there's nothing else to replace it that we know of today. Do you do some of that educational process?

Mr. Whyte: Yes, we do.

The Chair: I haven't seen it. I wonder why. Maybe I'm just not watching the right channels.

Mr. Whyte: There are a lot of competitors out there on so many other issues, but, yes, we're going to do more.

We're also in schools. We have a program called Nutrients For Life where we work with high school students and have learning gardens. Also, the movie The Martian was important. He needed fertilizer. He had everything else, but you need fertilizer to grow food.

You're right; it's down to basics. This is not just a dilemma of our industry but the dilemma of agriculture and restaurants. People don't know where their food comes from. McDonald's was advertising real eggs. We have a challenge.

The Chair: That's very good.

Senator Lang: I have a quick question. I want to go back to the question of the sector regulations that Senator Patterson referred to. Did you have agreement with the past government in respect to what regulations would be promulgated so you could carry on with your business and meet the targets they asked you to meet? Did you have agreement?

Mr. Graham: No. I wouldn't say it was agreement. We had a mutual understanding of our industry and what it could do. Regulatory processes are long, and nothing is final until the minister —

Senator Lang: No, I understand that. I wanted to know if you had a clear understanding with them that this is what could be done and would be done, and you could live with it?

Mr. Graham: Yes.

The Chair: Thank you, gentlemen. That was very informative. Please get back to the clerk with whatever information is requested.

Mr. Graham: We've taken note of the questions.

The Chair: She will make sure it gets around to everybody.

(The committee adjourned.)