Proceedings of the Standing Senate Committee on
Energy, the Environment and Natural Resources
Issue No. 17 - Evidence - November 29, 2016
OTTAWA, Tuesday, November 29, 2016
The Standing Senate Committee on Energy, the Environment and Natural Resources met this day at 5:02 p.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. I represent the province of British Columbia in the Senate, and I am chair of the committee.
I would like to welcome honourable senators, any members of the public with us in the room, and viewers across the country 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 may also 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, Senator Paul Massicotte from New Brunswick.
Senator Massicotte: Good day.
Senator MacDonald: Senator Michael MacDonald, Nova Scotia.
Senator Patterson: Dennis Patterson, senator for Nunavut.
Senator Griffin: Diane Griffin, Prince Edward Island.
Senator Lang: Dan Lang, Yukon
Senator Seidman: Judith Seidman from Montreal, Quebec.
The Chair: Thank you. I would also like to introduce our staff, beginning with the clerk, Maxime Fortin, and our two Library of Parliament analysts, Sam Banks and Marc LeBlanc.
Before I introduce our witnesses, I have a bit of procedural housekeeping to take care of.
The steering committee agreed last week that we would seek the Senate's permission to sit on Tuesday, December 6 and Tuesday, December 13 at 5 p.m., even though the Senate may still be sitting, to hear from witnesses as part of our current study. For both of these meetings, we will have witnesses from outside the National Capital Region.
On December 6, we are scheduled to hear from two witnesses from the Council for Canadian Academies. One of them is travelling from Western Canada. We also have a witness flying in from Calgary, from the In Situ Oil Sands Alliance.
On December 13, we have another witness travelling from Calgary, from the Canada West Foundation. During our second panel, we will hear from Gaz Métro by video conference.
Considering we have witnesses who are travelling long distances to provide the committee with some valuable testimony, the steering committee decided last week to obtain the Senate's permission to sit. It would be a shame to have to cancel our meetings at the very last minute if the Senate sits late and, as a result, we miss the opportunity to hear from these witnesses while incurring the expenses for their travel, accommodation and per diems.
As you know, this request is not common practice for this committee, and we don't take it lightly. We were in a similar situation last week when we cancelled our Tuesday evening meeting. Our witnesses were appearing by video conference, and even cancelling the video conference cost $896.
I intend to give the notice of motion tomorrow and move it on Thursday. I felt it was important to advise the members of the committee of this steering decision. I also want to remind senators that our meeting on Thursday begins at 8:30 a.m. I'm sure you're all happy about that, especially Senator MacDonald.
Senator MacDonald: Not as good as 9, but 8:30 will do.
The Chair: I expect you will bring us all a coffee.
We will consider a revised budget for the committee's upcoming trip to Montreal, which you will soon receive from the clerk.
Are there any questions to that? No? Good.
Colleagues, today marks the twenty-fourth 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 emission reductions.
I am pleased to welcome our witness by video conference from the C.D. Howe Institute, Benjamin Dachis, Associate Director, Research. I hope I didn't ruin your last name too badly. Thank you, sir, for joining us. Please proceed with your opening remarks, and then we'll go to some questions and some answers. The floor is yours, sir.
Benjamin Dachis, Associate Director, Research, C.D. Howe Institute: Great, no worries. I've heard my name pronounced in every possible permutation, so not a problem at all.
Today is a very big day in energy policy with the approvals from the Prime Minister coming out literally as we all sat down. We're all just getting up to speed via our smartphones and other apps to find out what's going on.
I'll try to be brief today so we can get into a conversation about what this all means. Obviously there's a lot going on. I want to keep it high level so that we can have a good conversation.
I will first address some of the core recommendations of the paper that we at the C.D. Howe Institute put out, entitled A Blueprint for Going Green. It has a number of applications, particularly for the federal government's proposal for spending about $2 billion on what it's going to call a low-carbon economy trust to support projects that are going to reduce carbon emissions.
The key thing for you to remember as part of your study is that the single-most important thing that any government can do to transition to a low-carbon economy is to introduce a carbon price.
Then I'm going to get into how to reconcile reducing emissions with the development of Canadian oil and gas. The bottom line is that Canada can have emissions reductions and jobs in the oil and gas sector thanks to pipelines and LNG export facilities as long as we are going to have in place some form of carbon price.
But first we must look at how to transition to low-emissions technology. According to David Popp, the author of our study, who happens to be one of the world's leading experts on emissions reduction support programs, there are five key rules that government should follow to drive innovation towards a low-carbon economy.
The first rule is carbon price. Supporting technology development means not only investing in new technologies but, more importantly, creating the demand for clean technologies throughout the economy. Without policies that reflect the social cost of the damages caused by pollution, newly developed low-emission technologies are just not going to spread throughout the marketplace. There must be demand for low-emission technology. That's critical. Just pushing supply of low-emissions technology through subsidies is not going to be enough.
Second, remember to limit those subsidies for technology adoption. I emphasize "technology adoption.'' When companies are going to be faced with a mandate to provide alternative energy, what they tend to do is focus their efforts on the kinds of technologies that are the closest to the market. That really doesn't change the kind of technology that companies are going to adopt. It doesn't change the incentives for companies to go after new kinds of technologies. These incentives for commercialization just don't provide that kind of incentive that R&D credits would.
The third rule is to use research and development funding to complement private sector activity. Government R&D potentially crowds out private R&D, especially when governments are trying to target applied research topics. Government R&D will be most effective if it focuses on breakthrough technologies that are not yet close to the market. That one-time grant to young firms will be one way to target technologies that would otherwise not be available in the market normally.
Fourth, Canada cannot go it alone. Foreign markets are many times larger than any domestic market for low- emissions technology. On average, increases in foreign demand have about twice the impact on low-emissions innovation as domestic demand. And the ability of Canadian firms to compete in global markets will be the most important factor for developing a Canadian clean energy technology sector, not attempts to build a domestic market here.
Fifth, and finally, a mix of policies works best but remember that the carbon price is the most important thing. When you're combining both R&D subsidies and carbon prices, that will yield the largest economic benefit. Studies have shown that a policy using just the carbon price achieves about 95 per cent of the possible benefits of a combined policy. But if governments are just going to use an R&D subsidy, that only gets them about 11 per cent of the way towards the benefit of a combined policy.
That's how to meet the emissions reduction target, but let's also think about the impact of carbon pricing emissions reduction policies on existing businesses. And we're seeing this today in the announcement of Prime Minister Trudeau calling on Premier Notley's plan to reduce emissions as really being critical to these kinds of pipeline approvals getting the public support they need. Again, the key takeaway here is that carbon price is fully compatible with market access for Canadian oil and gas.
I'll be leaning here on a C.D. Howe Institute paper published earlier this year with a former colleague of mine, Grant Bishop, in which we outline both the uncertain constitutional grounds for blocking pipelines but also the economic costs of blocking pipelines.
Now we saw today that the government decided to approve at least two major pipelines. We are going to see other pipeline decisions in the coming years, such as Energy East, but the key thing we have learned today is that the Kinder Morgan expansion plan, the Trans Mountain expansion to Vancouver has been approved, and the Line 3 proposal to upgrade their pipeline with service to the Midwest United States has been approved, but it looks like the Northern Gateway project, which many had expected to not go ahead at all has now been formally suspended. At least the government will not proceed with it.
What we're going to have to do over the coming days and what I encourage this Senate committee to study is what was the reasoning that the government came up with in approving or rejecting these pipelines. One of the things that we come up with in our study is that rejecting a pipeline on the grounds of reducing greenhouse gases is not only an uncertain way of reducing emissions, but it's also a very bad economic strategy.
We have to remember that a gram of carbon dioxide has the same effect on the atmosphere whether it's emitted from oil extraction or any other activity. There's absolutely no reason to presuppose that each ton of carbon emissions generated by oil production in, say, Alberta, Newfoundland or Saskatchewan is going to yield any less economic value for Canada than, say, cement production in Quebec, steel manufacturing in Hamilton or coal mining in Cape Breton. Any federal ruling against pipelines on greenhouse gas grounds makes that judgment on behalf of Canadians.
If the government were to limit pipelines in a way that they only address the emissions from oil, this is just not going to be an effective strategy because it reduces the economic returns that oil workers and the companies themselves get. And it's a very indirect way of getting companies through these submissions. If we want Canadians to reduce emissions, the Canadian government should put in place emissions pricing to directly target emissions.
We also have to remember that any restriction on pipelines could just mean that oil ends up being shipped by rail, which again has very little net effect on any upstream emissions and actually may be harmful, both in terms of safety risks and the higher cost of transporting oil by rail.
Remember that adding a pipeline will improve the profitability of oil producers and make society as a whole better off without increasing total emissions, as long as we have in place these kinds of carbon prices, carbon policies that limit emissions growth.
We can have a carbon pricing system, greenhouse gas reductions and a profitable oil sector to help drive a growing economy as long as we have pipelines.
I will conclude by saying that the same applies for natural gas export facilities. Also this summer the C.D. Howe Institute published a study entitled Clearing the Air: How Canadian LNG Exports Could Help Meet World Greenhouse Gas Reduction Goals. It addresses one of the big public controversies regarding how liquefied natural gas, or LNG, exports are going to impact global greenhouse gas emissions.
The study shows it's impractical to assess how any individual facility will affect the overall overseas energy market and how they might or might not use Canadian LNG. But LNG from B.C. very much has the potential to reduce global greenhouse gases if it is used to replace coal power abroad.
Now this in turn depends on the destination of those exports. If Canadian LNG serves coal-dependent countries in Asia, it will be very likely that the Canadian LNG will lower greenhouse gas emissions.
We have to remember that B.C.'s LNG industry is particularly well-positioned to support this effort. B.C. has easy ocean access to markets in Asian countries, countries such as China, India, Japan and Taiwan that are heavily dependent on coal-fired power, so they could cut their greenhouse gas emissions significantly by replacing these sources with natural gas from Canada.
However, it's impossible to know where natural gas will go, and thus the life cycle emissions of Canadian gas. We have to remember that Canadian LNG can play a positive role in addressing one of the world's economic and environmental problems if Canadian regulators maintain the focus on controlling emissions within their authority and rely on diplomacy to encourage emissions reductions overseas. We have to remember that this is all done best with a price on emissions. Canada can be a leader in having a price on emissions.
In conclusion, reducing emissions with a price on greenhouse gas is fully compatible with a thriving Canadian oil and gas sector. The right policy mix is approving new pipelines and LNG export facilities and devoting federal support to the right kinds of innovation policies that promote this kind of technology. This kind of policy leads to a focus on transparent price on carbon as the main tool to reduce emissions, not blocking pipelines, having lavish subsidies on low-emission technology or on prescriptive regulations.
With that, I'm happy to take any questions.
The Chair: Okay, thank you very much, sir.
We'll go to questions. Senator Massicotte.
Senator Massicotte: Thank you for being with us today. I find this very interesting and I have a lot of questions for you, but I'm particularly interested to hear how you're going to respond to Senator MacDonald and Senator Lang relative to carbon pricing, but I will start with my own questions if you want.
I fully agree with you on carbon pricing. That's how the economy works. We have a market economy. That's how you encourage innovation and that's how you price signal so I'm sold there. But I'm betwixt and between relative to some of your other recommendations whereby the government would have a significant fund that they would try to stimulate further innovation by the not-so-near commercial applications.
We've had this debate starting again around the world relative to the role of governments in relation to innovation and investment. History has not been so kind to us where we've often chosen the wrong technology and we've made significant mistakes with taxpayer money. The attempt is always now to be technology neutral and define your objectives.
How do you square that with market economy, carbon pricing and so on?
Mr. Dachis: The way I square it is as an economist I look at what's called a market failure. There are some parts of the economy that, left alone, don't work very well. Pollution is the classic example, where when we emit greenhouse gases into the atmosphere, there's no one there watching us, and without a price on polluting, people just pollute freely. That's what carbon pricing does. Carbon pricing addresses that very first market failure, market problem.
The other market failures to think about are the market failures of technology. If I have an idea, it doesn't really cost me anything to share it with you. And it doesn't cost you anything, aside from the cost of technology and setting this all up, to hear those specific ideas. There's no market transaction really to support the free market in disseminating these ideas. Patents are one of the solutions that we have come up with to solve this market problem of the government creating this monopoly, for people to take advantage of their technology.
This is the market failure that you have with low-emissions technology, so subsidies to encourage more people to do this long-lived and forward-looking research that doesn't have a market today addresses this market failure of the lack of incentive for people to do research.
Senator Massicotte: Therefore, you recommend investment. A lot of people are saying we should cut off existing subsidies, and they cite some big numbers in the billions of dollars. There was an article two weeks ago in the paper on this issue, and I couldn't find a breakdown of what subsidies they are talking about. What are the subsidies everyone is talking about? A lot of it may be depreciation. I have a problem with excluding that, if that's what they're talking about. Would you agree that we should cut subsidies to the oil and gas sector?
Mr. Dachis: There are a number of different tax policies that you have to look at when it comes to the oil and gas sector. You start from royalty programs that are at the provincial level for the most part, and then you have the federal tax system.
What tends to happen with this talk of very big subsidy numbers is they tend to take all the programs that you see in the provincial and federal level and lump them all together. They don't have a fair baseline in which to compare what companies are paying versus what they should pay.
What companies should pay is a very subjective question. Let's take royalties, for example. When it comes to oil and gas royalties, is the right base what's called a gross revenue charge, where companies pay a fixed percentage based on how much they are producing? That's the traditional model of royalties that we have at the provincial level.
Or is a better model the modern royalty you're seeing around the world now, which is what's called the "cash flow royalty''? You see this in Norway or Australia. It's also what we have in the Canadian oil sands.
To say that one is the appropriate baseline and then draw your conclusion from that is misguided because there are so many different baselines you can use to determine the right number for oil companies to pay.
Senator Massicotte: Are you saying the way they calculate subsidies is to say that here's my baseline and they are paying this much, so the difference is the subsidy? Is that how they argue it?
Mr. Dachis: These estimates of the subsidies are trying to make that calculation, but it's a very difficult calculation to get right, and it's very subjective. You cannot say that one program that operates in one province is a subsidy. There might be a true cost that companies are incurring that a normal tax system would reflect.
I take a lot of these estimates of the overall subsidy given to the oil and gas sector with a great deal of skepticism.
Senator Lang: So that I get it on the record, I'm diametrically opposed to a carbon tax. I was surprised when I read your opening presentation where you talk about the introduction of a carbon price.
Are you putting it forward because you see that there is going to be a carbon tax or a carbon price put into effect over the course of the coming years and you're advocating it? Or are you advocating a carbon price no matter what?
Mr. Dachis: The reason I'm advocating a carbon price is that we, as a society, have made it a clear priority to reduce greenhouse gas emissions. When you have that goal in mind, as economists, we think about the most effective way to do so. Once your goal is to reduce greenhouse gas emissions, by far the most efficient way to do so is through a price on carbon.
Any prescriptive regulations or subsidies to any technology, subsidies for people to start using low-emission vehicles, or subsidies to encourage a specific kind of technology, such as carbon capture and storage, is a very costly way of using society's resources to meet the goal of reducing greenhouse gas emissions.
Senator Lang: The next question I have is in respect to advocating this carbon price you speak of. In view of the changes that are going to take place in the United States, there's not going to be a price put on carbon, at least in the foreseeable future. If Canada goes ahead with what you're proposing, what effect will it have on the economy, as there will be an added cost to everything we do, and how will it affect our ability to trade and our employment situation in Canada if we overprice ourselves?
Mr. Dachis: The first thing to keep in mind is that, sure, there will certainly be less action at the federal level in the United States on putting a price on emissions, but that by no means precludes the states from taking action.
We have to think back to a couple of years ago, when we were seen as having a federal government that was not serious about putting a price on carbon emissions. The provinces led the way in coming up with serious carbon reduction policies, and the federal government, in the last couple years, hasn't really had to do a lot on top of these provincial level initiatives. We are likely to see some state-level initiatives.
On top of that, one thing that's really important with these greenhouse gas policies is the way you design both the tax and what governments do with the revenue is really important for looking at the overall competitiveness of a number of businesses in the province.
If you look at Alberta's policy in particular, they have a set carbon price, but also a rebate to companies based on the amount of production of oil they put out. Companies that have a lower-than-average greenhouse gas profile might do better under this regime than before.
Senator Lang: I want to go back to the question of the principle of going by sector, by regulation versus by carbon price.
We've had numerous witnesses in respect to bringing forward the effects that they have experienced with regulations coming into play where they have to meet certain standards, whether it is in the auto business, fertilizer business, or various other areas of our economy. They have very clearly stated, in most cases, that over the last 10 years they have made some significant changes, in most cases, that have contributed to the decrease in greenhouse gas emissions.
They are not in a position to make more changes necessarily because of technology and their inability to further refine what they do. If you bring in the carbon price, it would seem to me that you're putting a price on each area of the economy where they can do nothing more about it. It's just going to be a further tax and cost of doing business, which in some cases they are very clear, and I don't think we should ignore it, they are saying they may have to scale back or move their businesses elsewhere to be competitive. Isn't that a concern of yours?
Mr. Dachis: Absolutely. You raise an excellent point. There is a number of existing regulations —
Senator Lang: Why wouldn't you say that in your presentation, that that is a concern as an economist? If you are going to put people out of work, you haven't succeeded in what you are trying to do.
Mr. Dachis: When it comes to what the government can do, removing some of the existing regulations, as you see from the previous federal government that has gone into some of the sector-specific policies, and also in a number of provinces. Here in Ontario, a number of very costly policies that are very prescriptive about how governments or businesses are supposed to behave, how they're supposed to use natural gas, these policies are very counterproductive and costly. An optimal policy would be to replace these costly policies with a straight-up and very simple carbon price. You're absolutely right.
Senator Fraser: Good evening. Thank you so much for doing this for us.
I'm picking up in part on one of the points that Senator Massicotte raised, which is your point No. 2, where you say that incentives for commercialization and adoption provide less incentive than R&D subsidies do to develop technologies with longer-term needs.
I would like to expand on that, and I'll explain why. It's my understanding that historically, and still, Canada has been really bad at the innovation phase of research. Over the years we've had some people doing wonderful basic research, and we just don't do a very good job of moving that forward into productive use.
We had a witness last week who told us that, I think it was on average, the oil and gas industry takes 30 years to adopt new technology. I'm interested in what I take here to be your opposite view, and could you explain that?
Mr. Dachis: Pretty much all new energy ideas take a very long time to go from being a patented idea or being an idea in a researcher's head to becoming commercial. That's a universal issue.
Going back to this question of what parts of the value chain — from innovation to commercialization to adoption — make the most sense for governments to put money towards, the evidence around governments putting money towards adoption, towards that consumer, are what I'm focused on and what I think have the greatest concern.
A good example I can point you towards are some of the energy retrofit programs that numerous governments, Liberal and Conservative, have had at the federal level over the last 10 years. What you see is that the vast majority of the money that governments are spending is largely wasted. A lot of it is, first of all, for administration. But most importantly, the estimates are that about half of the money for home retrofit programs go to people who will make these kinds of home retrofits anyway.
The home retrofits are one example. Whether it's subsidies for low-emissions vehicles or home retrofits, the vast majority of the money will go to people who will do this anyway or it will be spent on major government programming. Only a small portion of it is going to go to people where it's moving the dial for them in terms of changing their behaviour.
Senator Fraser: I will have to think about that. Thank you very much.
Senator MacDonald: I don't want to make a liar of Senator Massicotte, so I won't.
I want to go back to your position on carbon tax. Like Senator Lang, I'm a very strong opponent of carbon taxes because I think they don't work. I think they're a problem. They're a drag on the economy and they artificially target different sectors of the economy. In a country like Canada, most of the power is generated and managed at the provincial level.
To impose a carbon tax in a place like Nova Scotia, which produces the highest percentage of its power from coal, and to impose it in Quebec, are two completely different things — what the consumer has to deal with and what the economy has to deal with.
In your assessment, have you reviewed the repeal of the carbon tax in Australia? The Australian carbon tax was considered to be a $9-billion-a-year annual drag on the economy, and that's at the national level alone. That's not including the cost to consumers, to people who are pushing the energy poverty, and the effect on the competitiveness of the businesses.
A carbon tax in Canada is being pushed as a one-size-fits-all type of application. We're a huge country, and our wealth is basically based on carbon. Where the great wealth of Canada has come from in the last half-century is in the ability to produce petroleum.
There seems to me to be an inconsistency with taxing a great source of wealth and making us less competitive, particularly in light of the fact that we cannot operate in isolation of the U.S. the way our economies are integrated and the way our borders are beside each other.
Under the obvious change in the government in the U.S., I think we have to coordinate our policies to make sense and to make sure that we're not impacted negatively when it comes to our economy. When you came up with this proposal, were you considering what was going on in the U.S. and the effect that their environmental decision would have on our economy?
Mr. Dachis: When it comes to Canada's relationship with the United States, obviously that has to come first and foremost for most businesses. Looking at this question of leakage, of Canadian companies deciding not to operate in Canada and maybe going abroad because of higher carbon prices, our previous studies at the institute have shown that about 90 per cent of companies that decide to leave Canada because of higher carbon prices go to the United States.
You're absolutely right that we have to be thinking about what the U.S. is doing. When it comes to what the U.S. is doing, we can think both short and long term.
For the companies that have been thinking the most about reducing their emissions in the United States, the only real policy that's been in place in the United States to reduce emissions is at the federal level, what is called the clean power plant. The clean power plant is really just a way of targeting emissions reductions in the coal power sector, whereas Canada doesn't have a lot of coal power. Across most of the United States, that is by far their largest source of power.
Do you know what companies did there to get off of coal? They moved to natural gas in droves. That's potentially going to create a big opportunity for Canada's oil and gas and particularly the natural gas sector.
You also have to remember that investments in power plants are a multi-decade sort of thing. Companies may think: Sure, there is going to be a Trump administration, but four or eight years from now, will there be an administration that's much more serious about reducing emissions?
When it comes to U.S. investments in new power plants, I would be surprised to see a lot of new coal power plants being built. I very much expect to see a lot of natural gas power plants over the next couple of decades.
That creates a real opportunity for Canada's natural gas sector but also makes me think that maybe things aren't going to be so bad after all, when companies are thinking about the long-term application of carbon pricing policies or carbon reduction policies of some kind.
Senator MacDonald: I want to put on the record that I understand the importance of cleaning up the air and doing things as cleanly as possible, but there are limits to growth. You talk about new power plants. I don't think we should be building large coal-fired power plants either, and we should be moving more towards the natural gas sector. In fact, we're not doing enough of it in this country. I hope our committee will study that in the future.
It's the premature closing of power plants, of stranding assets and costing billions of dollars in stranded assets and debt that's going back on to the taxpayers and ratepayers and the people who are paying for power in the country. You see what's happening in Ontario. They've overpaid by $38 billion. It's just unbelievable that this would be allowed to occur. It's by prematurely shutting down workable assets that have a 20- or 25-year life frame.
What's happening in Europe today is that Germany has been one of the leaders when it comes to green power. They're firing up the coal-fired plants again after shutting them down for 10 years or so, because they're going into energy poverty and losing their competitive edge. People are pressed by the economics of trying to pay for the power to heat their homes. Germany is doing this, after all the efforts and subsidies. So we have to be cognizant, I believe. I guess this is more of a statement than a question, but I have a lot of time for the C.D. Howe Institute, and I was a little surprised by your presentation here today. I think the C.D. Howe Institute has to take this all into account when it's making these recommendations.
Mr. Dachis: Absolutely. Your example is a perfect one of why a carbon price is a better approach than, say, what we have in Ontario or, most recently, in Alberta, of the government, independent of what the carbon price was, unilaterally deciding to shut down a power plant. If you have a carbon price, it's up to the energy market to say, "With this carbon price, this coal plant is still valuable. We're still going to go with it, and we're going to find other more efficient ways to reduce emissions.''
You're bang on about these kinds of industry-specific regulations that say "no more coal power,'' because remember, that is outside of this carbon pricing policy. That's the approach we need to fight back against.
Senator Seidman: Thank you for your presentation.
You put forward five rules that governments should follow to drive innovation, and we've had questions about one, two and partially about three. I'd like to ask you about Rule No. 4, where you say, "Don't go it alone.''
The point you make, if I understand correctly, is: "The ability of Canadian firms to compete in global markets will be most important for developing a Canadian clean energy technology sector, not attempts to build the market here.'' Could you tell me what you mean by that? What are the policy implications?
In your third rule, you make reference to focusing on breakthrough technology. I'm wondering if that is connected to how Canadian firms are going to be able to compete in global markets.
Mr. Dachis: On your first point on policy issue No. 4 about not going at it alone, we have to remember there is a big world out there, and we in Canada are just a very small part of it. A couple of different studies have shown just how much bigger the effect of increase in international markets is.
Let's look at wind energy. If you look at effective domestic policy changes, it's about one twelfth the size of any sort of change in foreign markets.
We have to remember that if you look at some of the other studies, foreign markets, on average, in clean energy are 30 times larger than our domestic market. That's where the real entrepreneurs in Canada, the real cost-effective leaders, are going to be aiming their efforts.
If you want more information, this is all in the study we put out earlier this year. It's entitled A Blueprint for Going Green: The Best Policy Mix for Promoting Low-Emissions Technology. That came out in July 2016. We have a lot of videos and infographics that will help explain this in a very reader friendly form.
Senator Seidman: One of the things we were told by Sustainable Development Technology Canada last week is that we have a serious problem going from an idea through all its phases, as was just made mention of in the question from Senator Fraser. So we have a serious problem going from an idea, through all its phases, to commercialization, and then the kind of take-up in the global markets becomes nearly impossible.
Not to be too pessimistic about this, because I understand the necessity to compete in the global market, but I'm trying very hard to understand, from a practical policy point of view, what you're saying here, and I don't really know if I understand.
Mr. Dachis: If the government is going to figure out where it's going to spend money on clean technology, you have a whole range of options of where you throw your money. Do you put the money in at the very start, at the innovation end? Do you try to put it in commercialization, or try to connect innovators with potential buyers, or do you put the money in the buyers' hands and say, "Go out and buy that new technology''?
What we're saying at the institute and what the economic literature says is that the best place for the government to put its money is the real front end. It's the kind of research that private businesses just don't have enough incentive to go after; the kind of fundamental research that could be real game changers; the kind of research that a company knows may not pay off for 15 or 20 years and says, "Why are we going to do that? We have shareholders that we have to go to in our next quarterly meeting to say we made a profit in this quarter and next year and the year after. Why are we going to invest in something that will take 20 years to pay off?''
That's where government can put its money, through funding research development at universities, funding through these kinds of early-stage technologies.
Senator Seidman: You're saying we should invest in basic research, which is quite different from the approach that's being taken. My understanding is that more and more money has gone into the applied research phase, partnerships between industry and the universities. Are you proposing something other than that?
Mr. Dachis: Absolutely. You have to go back to the fundamental problem that governments need to address. The fundamental problem is that businesses and people often don't have the right incentive to share their ideas and do that fundamental research when the payoff is going to be so far down the road.
Senator Patterson: Thank you, Mr. Dachis, for being here.
I'm a senator for Nunavut. All 25 of our communities, sadly, rely on aging diesel generators to produce power. That's true of a lot of remote communities in Northern Canada and in the provinces.
This afternoon, a community is in some crisis because three of the five generators in that community are down. They're only operating on two. They're rotating power to 30 per cent of the community every hour. Fortunately, it's only minus eight with the wind chill. Of course, the wind doesn't always blow there, and the sun doesn't always shine, especially at this time of year. No one I know in Nunavut has an electric car, either, by the way.
You're a strong advocate of a price on carbon and on emissions. How will it help Nunavut to add to the cost of those diesel emissions that are being pumped into the air by our electrical generators and all the heating in our homes? How will it help Nunavut to add a cost to those carbon emissions?
The object is to change behaviour, to get people to use alternate energies and, of course, to reduce emissions, but how will that tax help us to do so in Nunavut?
Mr. Dachis: My heart goes out to those people who are facing this terrible hardship, being without electricity for more than two thirds of the time. I can't even imagine that. It's heartbreaking to hear that. Hopefully this will get resolved quickly.
One thing we always have to keep in mind is that there are a lot of ways we can make sure that low-income folks are not made worse off through these kinds of carbon pricing policies. When it comes to how to make sure that low- income folks are left better off or no worse off after carbon pricing, there are a lot of examples of rebate programs you can see in Alberta or around the world. Other studies and think tanks have shown it would take less than 10 per cent of total carbon pricing revenue going back to low-income folks to balance off their average price increase from carbon pricing. What you have done there is you've created the incentive for them to find ways to reduce their emissions or reduce their reliance on diesel.
That specific community might not have any real option to go off diesel. Others might be able to increase their reliance on other kinds of technology or reduce their emissions footprint, but at the same time make them no worse off, especially low-income folks. There are many ways to deal with the more direct problem of emission reductions through carbon pricing, but also at the same time make sure people get that money back through the tax system.
Senator Patterson: Considering the position taken by the Premier of Nunavut that Nunavut should be exempt from this kind of tax — and I think it's a position that was shared by the Premier of the Northwest Territories and at least the former Premier of Yukon — would you say that their request to Canada would be another way of shielding a region already burdened by an extremely high cost of living from further cost increases as an alternative to getting a subsidy from somewhere, which would probably be the federal treasury?
Mr. Dachis: I will admit I have not looked into the specifics of issues related to carbon pricing in the North. That said, there are a number of policies that governments can put in place to make sure that we as a society are not paying more at the end of the day because of carbon pricing. There are ways we can do so through rebates from revenues from this carbon pricing. There are ways to address that problem if the government does go ahead and requires these provinces or territories to put a price on emissions.
Senator Patterson: On another subject, I was impressed when you talked about how LNG from B.C. has the potential to reduce global greenhouse gases, replacing coal power abroad. If I understand it right, B.C. producers of natural gas or any producers of natural gas won't get any credit for reduction of emissions but will pay for emissions used in the production of natural gas.
Is that analysis correct? Is it a flaw in the carbon pricing system that, say, natural gas producers can't get credit for reducing emissions for their product reducing emissions abroad?
Mr. Dachis: It's not a flaw. It is an argument for the world as a whole taking efforts to reduce their emissions. What will happen is once countries in Asia realize that — and this is the entire idea of the Paris agreement — countries big and small will have to take part in reducing emissions. Once these countries are committed to getting off coal, they will look at Canadian LNG and think this is a pretty good source of power for us to get off of coal power.
The real solution is through global negotiations and agreements to reduce emissions. Canadian LNG will do very well under such a system.
Senator Griffin: Thank you for your appearance here today. I always like hearing from the C.D. Howe Institute and reading their documents.
I'm looking at your recommendation No. 5. I agree with you that a mix of policies is best in order to be effective on anything this large. Generally, a big tool kit with a lot of different options is a good thing. Obviously, you put one tool ahead of the others in terms of its effectiveness and carbon pricing is a major economic instrument. But what price per tonne of carbon do you believe is necessary for Canada to achieve its emission targets?
Mr. Dachis: This is the million-dollar question and there are a number of different ways to estimate this and it really does depend on the design and other complementary policies. You can start off with a policy that really looks at individual Canadian provinces working on their own, not linking to any other jurisdiction and guess what? That price will be pretty darn high.
When Canada and Canadian provinces link in particular with some U.S. states, what you're going to see is that the price of reducing emissions in Canada is going to fall quite dramatically because there are easier opportunities to reduce emissions in, say, California and there will certainly be more once other U.S. states get on board with carbon pricing and that can dramatically reduce the price of emissions.
There is a cost to that and the cost is that we in Canada end up paying for emissions reductions in the United States and the politics of that are a bit scary if you're the premier of Ontario with emissions pricing dollars going to the United States even though it is actually the best economic outcome looking at Canada specifically and especially the world as a whole.
Senator Griffin: Okay, thank you.
The Chair: My first question was going to be similar to Senator Griffin's. As an economist, have you not thought this a little bit about how much of a carbon price would have to be in place to change habits in Canada to reduce emissions?
I'm surprised that you don't have something in your mind. We heard some other numbers from other people and economists. Can you try that again for me, please, or have you not thought it through?
Mr. Dachis: I can give you the specific numbers if you really want. They range from close to $200 over the long term if you rely on only pricing to being over the long term. Again, it depends on what the end policy link is and how much we integrate with California, for example. If you want to get in touch with someone on this personally, there is a guy named Dave Sawyer. He is with a group called EnviroEconomics and he does all the modelling. He will give you the exact numbers of the best estimates. That's a much better approach than me saying something on the record that will not necessarily be the most accurate reflection of what he has done.
The Chair: Okay; thank you.
We have some numbers from Environment Canada in regard to climate change. The figures extrapolate out to 2030 what they expect emissions to increase by. Their numbers say to meet the target that has been set in place — and it's not just by this government, it was the previous government that actually set those numbers in place — there must be a 30 per cent reduction from 2005 by 2030. That was set by the Conservative government and followed by the Liberal government, but they say we're going to have to reduce 291 megatonnes by 2030 to reach that target and after that it gets tougher.
So 291 megatonnes, even if you did away completely with the oil and gas industry Canada wide doesn't even get to 291 megatonnes. You're still some 50-some megatonnes short. Even if you changed all the transportation habits that we have today with fossil fuel vehicles, all vehicles, we would only get about half of that.
What do you say to those numbers that the public is facing, that business is facing, and we get business actually a little bit afraid about what's going to take place so that they can actually stay competitive in a world market or even within Canada? What do you say to those numbers? Do you think it's easy to meet these numbers or will it be really tough? That's what we're trying to figure out.
Mr. Dachis: It's a matter of how we design the policy. We in Canada, acting on our own, have a harder time reducing our baseline emissions than some other parts of the world and in particular a lot of the United States. It's going to be pretty darn simple — and we're already seeing this in the United States — for them to get off coal power and replace it with natural gas. That's happening in droves and it was happening well before a carbon price was put in place because of the low cost of natural gas. Linkages with the United States, as well as broader international linkages, will drop that emissions cost. If we link with the United States and around the world, eventually, we don't have to have all emissions reductions happen in Canada. We can get an equivalent amount in the United States.
One of the things to remember is that when it comes to our oil and gas sector, we have to remember the vast majority of emissions from the life cycle of consuming oil come from the end consumer.
Our oil sands production or conventional oil is only a fraction — 10 or 15 per cent — of the overall life cycle of emissions. So trying to strangle Canada's oil and gas sector as the way to reduce emissions is a very ineffective way of dealing with the root cause, which is, at the end of the day, consumers. It is people who are using oil and gas that is probably going to be one of the major contributors of greenhouse gases. Guess where a lot of our customers are? It's going to be in the United States. Dealing with a lot of the U.S. emissions is going to be the most cost-effective way of reducing our emissions as opposed to focusing only on Canadian emissions. We have to think about international linkages.
The Chair: Well, we certainly do. Trade-exposed industry, for one — I'll use Alcan — we visited their plant in British Columbia, and they just spent $5 billion modernizing a 50-year-old plant. They have reduced their greenhouse gases by 50 per cent, but they say if you tax their process emissions, they will become uncompetitive in the world.
Here is a company that's just finished investing $5 billion saying, "Look out, because you might make us very uncompetitive in the world.''
How do we square that? I'm not against reducing carbon. We should be doing everything we can, but in a rational way. The fertilizer industry said that you're going to pass all of those costs on to Canadians, a lot of Canadian farmers, and where does that cost go? It goes down to the consumer, Fred and Martha, who, at the end of the day, are the ones who are going to pay a big part of the bill.
How do we look after those people? I'm not just talking about low-income people. I'm talking about the average person as well. Low-income, of course, but the average person that uses natural gas or fuel to get from point A to point B, or natural gas to heat their house and their water, at $200 a tonne, you're looking at quite an increase.
That's the number we got before. I don't know how you change habits that fast or adapt that fast, the average person, to the capital costs that's going to take.
Mr. Dachis: What we need to do is separate the issue of people paying for price of emissions, but also what you do with the revenue. If you want to deal with emissions reduction, the best way to do that is with carbon pricing. But then what you can do, to make sure that everyone is left whole after the fact, they can get that money back through rebate.
When it comes to a business, you still have a carbon price. Everyone pays the same carbon price, but what you can do for that company is say, "Okay, this is the emissions intensity that you have today in 2016. We're going to make sure you get a credit for that same amount. If you happen to reduce your emissions below that, good for you, but we're still going to give you that emissions credit.'' That carbon price will still create that incentive to reduce the emissions, but you have given them back that rebate so their bottom line stays the same.
You can do the same thing with individuals to make sure they still have that upfront incentive to reduce emissions, but in certain areas where we as a society feel that we need to give money back to make sure a certain set of people aren't left worse off because of carbon pricing, we can give them that money back.
The Chair: So you're talking about a revenue-neutral carbon tax? Is that what you're saying?
Mr. Dachis: Absolutely.
The Chair: Where does the money come from that you talked about earlier to go to investment into upfront costs that you said government should be taking on the riskier part? That just comes out of government revenue?
Mr. Dachis: Remember how I said that an R&D subsidy only gets you about 10 per cent of the way? Ten per cent of overall climate or carbon pricing revenues won't be a heck of a lot. You can get the vast majority of the revenues that governments get and send it back to people and businesses through corporate tax reductions, personal income tax reductions and any industry-specific output rebates that you need.
Senator Massicotte: I want to talk about LNG. Specifically, I want to talk about the decision by the government two months ago to allow LNG to be processed in the Vancouver area for export. You make the point in your presentation that if this LNG is bought by China in a replacement coal plant, it's all very good. We didn't hear many good arguments in the press and the public relative to that project. Do you have the details on it?
I understand natural gas is approximately half as polluting as coal. In this case, you have to compress it. Apparently, that takes quite a bit of energy and natural gas, so therefore it's less efficient. Do you have any specific numbers? How much better off are we, from a world sense, if we export compressed natural gas to replace a coal plant?
Mr. Dachis: I have numbers. This is, again, in our paper that I'm referencing today. It's called Clearing the Air: How Canadian LNG Exports Could Help Meet World Greenhouse Gas Reduction Goals.
The authors estimate that having countries like China rely on LNG could reduce their emissions by about 20, 25 per cent. Over the course of a couple of decades, these coal power plants being replaced by LNG is a pretty sizable chunk.
Senator Massicotte: You made a comment about being in favour of federal money being spent on basic research and not the commercialization stuff. That's a criticism. The federal government spends quite a bit with funding universities for that research. Are you saying it's not good enough? You want it to be more? Or you want to change the program?
Mr. Dachis: I would say this comment is far more of a criticism of the Ontario provincial government, which is that the revenues that they are planning to get from their cap and trade program, pretty much every single dollar they plan to collect is going to go back in terms of a technology adoption, so subsidies for everything from people getting low- emissions vehicles to home and apartment retrofits. That's a government policy that is wasteful. It makes the overall program of carbon pricing far less effective because it's the government picking and choosing where it wants emissions reductions to happen, independent of the carbon price.
With that level of massive subsidies of technology adoption, it amounts to a bad program crowding out the good program. It would also be a self-fulfilling death spiral of these emission reduction subsidies, leading companies and individuals to reduce their emissions not because of the carbon price but because of the subsidies.
Guess what, the carbon price becomes lower and there's less revenue. So it becomes a death spiral of these programs not having any effect. Neither of them works together.
Senator Lang: Quite a conversation, as we try to figure out how we can tax the people without them realizing they are being taxed at the end of the day because somebody's going to pay for this.
I'm not going to go back into the question of the carbon tax and Canada, because we have already discussed that. I want to go back to the exemption that Senator Patterson referred to for the North. Your response was that you could levy the carbon tax and then figure out a way to give the money back. That doesn't seem like the C.D. Howe way of doing business. I thought the C.D. Howe way of doing business would be not to tax, and then people could decide how to spend their own money.
That being said, the other argument for the exemption for the North would be this: Our energy, for the most part, is trucked in or shipped in and the carbon tax is already paid in some other jurisdiction in one manner or another. Wouldn't it make sense to put an exemption in place for an identified area, such as Nunavut, Northwest Territories and Yukon, so that you wouldn't have to set up that costly administrative bureaucracy to make sure that people got the money back that they already spent?
Mr. Dachis: That is an interesting administrative question. If the people of Nunavut buy their fuel from distributors in, say, Ontario and it's shipped up there, who pays for this? At the end of the day, the question of the technical administrative part of adding a carbon price on fuels is an important one, and will there be a rebate for people in Nunavut to buy something from Ontario? That's a great question. These are administrative details that have been dealt with in the past.
One thing we have to focus on is that this kind of revenue, whether it's collected in Ontario for people, say, using this in Nunavut, we have to remember what the most efficient way of dealing with something is. If we're focused on low-income people who we want to support and we want to make sure they are not paying too much, we do it through the tax system.
Senator Lang: No, the point I'm making is that the tax or the cap and trade or whatever charge has been levied has already been put on the product — in this case oil and gas because it has to be shipped in — it isn't produced in any shape or manner in places like Nunavut, Yukon or Northwest Territories. It's already been paid.
Why would we administer an additional carbon tax in the North on a product that already has that tax, that's already been administered?
Senator Patterson: Hear, hear.
Senator Lang: I want to follow this through. Would it not make more sense to exempt us, and then it would be cleaner and you wouldn't have to set up this program to figure out who you could give the money back to?
Mr. Dachis: It would be very unlikely to see these kinds of taxes administered twice. It would not be on the retailer in Ontario and then again on the end consumer in Nunavut. That's actually a pretty simple administrative issue to solve. Whoever is the final retailer, they require the end buyer to pay that carbon tax based on the assumed emissions intensity of that fuel. So it would really only be levied once.
Senator Fraser: I have a small supplementary question. Would the parallel there be with the GST, the way the GST is collected?
Mr. Dachis: Yes, there is a parallel there, because what the fuel distributor would have to say is that this is gasoline or this is diesel. When you burn them, they have a certain amount of emissions. That's a fairly easily understood number. When that gets sold to the end consumer, the person who will burn that fuel in their vehicle or in their generator will be the person who will pay that tax.
The Chair: Thank you very much, Mr. Dachis, for that interesting conversation. We appreciate very much your taking time out of your busy schedule to do that for us.
Mr. Dachis: Thank you for having me.
The Chair: If there's any information you want to give to us, you can provide it to the clerk and it will be distributed to all of us. Thank you very much.
(The committee adjourned.)