Proceedings of the Standing Senate Committee on
Energy, the Environment and Natural Resources
Issue No. 23 - Evidence - March 30, 2017
OTTAWA, Thursday, March 30, 2017
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.
The Chair: Good morning, colleagues, and welcome to this meeting of the Standing Senate Committee on Energy, the Environment and Natural Resources.
My name is Richard Neufeld. I'm a senator from British Columbia and I'm chair of this committee.
I wish to welcome all of those who are with us in the room and viewers across the country who may be watching on television or online. As a reminder to those watching, these committee hearings are open to the public and also available online at the new Senate website at Sencanada.ca. All other committee-related business can also be found online, including past reports, bills studied and a list of witnesses.
I would now ask senators around the table to introduce themselves, and I'll begin by introducing the deputy chair, Senator Paul Massicotte from Quebec.
Senator Griffin: Diane Griffin, Prince Edward Island.
Senator MacDonald: Michael MacDonald, Nova Scotia.
Senator Galvez: Rosa Galvez, Quebec.
Senator Wetston: Howard Wetston, Ontario.
Senator Black: Doug Black, Alberta.
Senator Mockler: Percy Mockler, New Brunswick.
Senator Seidman: Judith Seidman, from Montreal, Quebec.
The Chair: I'd also like to introduce our staff, beginning with the clerk on my left, Maxime Fortin, and our Library of Parliament analysts, Sam Banks and Jesse Good, to my right.
Colleagues, in March 2016 the Senate mandated our committee to embark on an in-depth study of the effects, challenges and costs of transitioning to a lower-carbon economy. The Government of Canada has pledged to reduce our greenhouse gas emissions 30 per cent below 2005 levels by 2030. This is a huge undertaking.
Our committee has taken a sector-by-sector approach to this study. We will study five sectors of the Canadian economy that are responsible for over 80 per cent of all greenhouse gas emissions. They are electricity, transportation, oil and gas, emission-intensive trade-exposed industries and buildings. Our first interim report on the electricity sector was released on March 7.
Today, for the thirty-eighth meeting of our current study, I'm pleased to welcome, from the Cement Association of Canada, Michael McSweeney, President and Chief Executive Officer; and Adam Auer, Vice-President, Environment and Sustainability. Thank you for joining us today, gentlemen. We look forward to your presentation, and then we'll go to some questions and answers. The floor is yours, sir.
Michael McSweeney, President and Chief Executive Officer, Cement Association of Canada: Good morning, Mr. Chair and honourable senators. I thank you for the opportunity to present today to discuss what our industry considers one of the government's most important files.
The Cement Association of Canada represents all manufacturers of cement across our country. Our industry contributes $82 billion in direct, indirect and induced economic impact and employs directly or indirectly 170,000 Canadians in well-paid, high-skilled jobs.
Our industry has consistently and continues to support strong change and action on climate change, including putting a price on carbon. As of this year, all but one cement facility in Canada — Senator MacDonald — operates in a province that already has a price on carbon, including B.C.'s carbon tax Alberta's Specified Gas Emitters Regulation and Ontario and Quebec's cap-and-trade system, with California.
As Canadian governments have moved towards carbon pricing, many highly regarded think tanks, including the Ecofiscal Commission, which you will hear from next, the Smart Prosperity Initative, the Pembina Institute and EnviroEconomics have all studied the impact of carbon pricing on competitiveness.
The results are consistent. While competitive impacts of carbon pricing are small in the aggregate, certain sectors are at high risk, and the cement sector consistently, around the world, is among the most vulnerable sectors. Cement production is globally recognized, as you say, as an energy-intensive, trade-exposed industry, or as I'll refer to it, EITE. It is therefore imperative that when governments design carbon pricing systems for EITEs like cement, they must be attuned to the reality that our competitors in import and export markets don't have similar pricing systems, and that puts Canadian industry on an unlevel playing field.
We can share a real-world example of what happened in British Columbia. At $30 per tonne, B.C.'s carbon tax doubles the cost of traditional cement kiln fuels, like coal and pet coke, and has resulted in a significant loss of market share to imports both from the U.S. and from Asia. When B.C. introduced the carbon tax in 2008, cement imports into British Columbia from Asia and the U.S. were approximately 6 per cent. It has risen to over a peak of 40 per cent in recent years, which results in plant shutdowns, lost investment for the province and economic opportunities in British Columbia and, perversely, a net increase in global GHG emissions associated with the production and transportation of cement from import markets.
Gratefully, B.C. has recently offered our industry some relief through a five-year, $27 million transition fund, or technology fund, to support our industry's efforts to use more lower-carbon fuels. While welcome, this amount pales against the carbon tax we pay of approximately $20 million a year and the economic losses we continue to suffer from the ongoing leakage to imports. By itself, this funding support from B.C. is not a long-term solution.
Thankfully, other provinces have also recognized this. For example, under the cap-and-trade program here in Ontario and Quebec, EITE sectors are given free allowances up to a performance benchmark, preserving the market incentive to reduce GHGs while providing a measure of protection from compliance measures that disadvantage EITEs against foreign competitors. Further, in Ontario, coal-intensive sectors like cement, steel and others have been promised a $40 million to $60 million tech fund for low-carbon fuels. This is not as a substitute for other competitiveness protection measures but is a complementary measure to Ontario's five-year Climate Change Action Plan, which will accelerate our capacity to meaningfully contribute to Ontario's GHG reduction targets.
These moves are encouraging. Nonetheless, the risks to our sector remain strong. Let me share a few.
A permanent solution to the competitiveness challenges in B.C. remains elusive even as the price is set to rise to $50 per tonne under the federal system.
In Quebec, early thinking on the next phase of their cap-and-trade system proposes emission reductions from process emissions in our sector, and those are mathematically impossible to meet without carbon capture technologies, which are at a minimum a decade or more away from any technological or commercial viability.
In Ontario, the performance benchmark declines at a rate that cannot be sustained beyond the first compliance period. We're asked to reduce 20 per cent in four years.
Finally, while the federal government has effectively derogated the responsibility for carbon pricing and competitiveness to the provinces, they are simultaneously contemplating other regulatory interventions, such as implementing a clean fuel standard for industry, which could disrupt the integrity of provincial approaches and compound competitiveness challenges to industry.
Let me emphasize, though, that carbon pricing can work for EITEs, but only if the provincial and federal governments work together on a coherent, complementary and comprehensive system of pricing, policies and investment that shelter the Canadian economy from the growing pains of moving to a lower-carbon economy while many of our trading partners do not have similar programs.
This brings me to the second crucial component of Canada's transition to a low-carbon economy: We really do need to look at a new approach for infrastructure funding and funding that comes from the federal government to provincial and municipal governments.
In the budget announcement last week, the government reaffirmed its intention to invest deeply in infrastructure, innovation and technology development. These investments are needed and welcome, but they will not deliver on climate mitigation and adaptation objectives unless the decision-making paradigm surrounding those investments evolves explicitly to measure life cycle economic and environmental impacts.
Let me offer one example. Our cement sector recently came together to promote Portland-limestone cement, or as we have all branded it across the country, Contempra. It is an opportunity to reduce greenhouse gases from concrete. When you use Contempra, you reduce the GHG footprint of concrete by 10 per cent. If adopted as a full replacement for all cement sold in Canada, Contempra could yield annual CO2 reductions of almost 1 megatonne at no extra cost to Canadians. While Contempra meets the same performance standards as general-use cement, has been used in Europe for decades and is recognized in the 2010 National Building Code of Canada, it does not enjoy deep market penetration across Canada. This is because the construction industry, codes and standards bodies, and public procurement agencies responsible for planning and commissioning infrastructure projects are risk-averse and do not yet value or incentivize new innovation in low-carbon construction materials and design.
Governments, as the purchasers of some 50 per cent of all concrete produced in Canada, with the stroke of a pen, could make Contempra the default cement used across the majority of projects in Canada. And yet with the exception of British Columbia, our industry's efforts to make this happen have always been rebuffed. With this one technology, we can address about 2 per cent of the emissions gap that this government has identified that Canada needs in order to realize its 2030 target.
Contempra is the lowest of the proverbial low-hanging fruit, but government procurement has yet to show the capacity to adjust, even as climate change is professed as its top policy priority. This kind of thinking must stop.
We have also invested heavily in research through the Massachusetts Institute of Technology and other academic centres to better understand the role that concrete can play in our other low-carbon applications. For example, robust third-party life cycle assessments irrefutably demonstrate the cost and climate benefits of rigid concrete pavements over asphalt pavements. Concrete pavements last between 40 and 50 years, cost less over their life and can improve fuel efficiency by up to 7 per cent. These properties result in savings of roughly 12,000 tonnes of GHGs per lane kilometre over the 50-year life span compared to a comparable asphalt pavement.
For example — and I throw this in for you, Senator Black — a single stretch of 43 kilometres of highway through the Yoho National Park, which incidentally has been identified for repaving, could avoid some 1 million tonnes of CO2 over its 50-year life if it were rehabilitated with concrete rather than asphalt.
Similarly, despite earlier testimony from another sector to our committee, the operational energy needs of a typical building in Canada account not for just 50 per cent but over 90 per cent of the carbon emissions, largely from the heating and cooling demands. Concrete's thermal mass can play a significant role in helping to reduce these operational demands. Today, strategic use of thermal mass has reduced operational energy needs of commercial buildings like Manitoba Hydro Place by over 70 per cent. With stronger building and energy codes, concrete could play a significant role in affordable strategies to meet that much sought after net-zero building target.
You can therefore understand our frustration when we see in the 2017 budget that this government is spending some $40 million to support preferential treatment of wood building materials at the expense of other building materials, including concrete, despite a growing view that this may in fact increase GHG emissions and make our buildings more vulnerable to climate change.
Let me be clear: We're not asking governments to mandate concrete roads or buildings. We're simply asking government to take a sector-neutral approach to planning, using tools that focus on cost-effective solutions to the challenge of transitioning to a low-carbon and climate-resilient economy.
We believe that the federal government should mandate the use of life-cycle cost analysis and life-cycle environmental assessment for all federally funded infrastructure projects, including investments channelled through the provinces and municipalities. By using a life-cycle approach for all infrastructure decisions, the federal government will be able to understand and optimize opportunities to build infrastructure at the least cost over its lifetime while at the same time invest in infrastructure that produces the lowest carbon footprint.
Most important, these tools help apply a level of data and science-driven discipline to decisions that demand robust, transparent and long-term thinking that will ultimately protect the taxpayer's investment. Therefore, one of our asks to you when you pose your questions in your ultimate report is that the federal government look at using full life-cycle screens for all federally funded infrastructure projects.
I could go on but time is short, so I will leave it there and look forward to your questions. Thank you.
The Chair: Thank you. Very interesting.
Colleagues, because we have a full house and everybody has a question, I'm going to revert to letting each of you ask one question and then we'll go to a second round. Sometimes it's hard for me to equally allot time to everyone. I will start first with Senator Massicotte — one question, one answer — and then we'll go to the next one.
Senator Massicotte: I understand the point you make with the cost relative to carbon. You made a note that in Quebec, your credit hasn't cost you anything. I know your industry is building a big plant in northeast Quebec, and I'm being told a significant reason why it's there are the low energy costs. Give me a sense of that. When I look at your product, let's say your retail price is $100. Give me the components of that cost. How much is energy, how much is raw materials and how much is the carbon tax, percentage-wise, you're paying in B.C., for instance?
Mr. McSweeney: I'll take them in reverse order. In B.C., our carbon tax is approximately $20 million a year.
Senator Massicotte: Give me a percentage of your sales, then. Give me a sense of proportion.
Mr. McSweeney: Adam, do you have that often top of your head?
Adam Auer, Vice-President, Environment and Sustainability, Cement Association of Canada: I can't break it down to all the components you're looking at, but I would say energy is roughly 40 to 50 per cent of our costs. In terms of the percentage of the carbon tax and other things like labour and other components, I don't have that, but I can get that for you.
Mr. McSweeney: We typically don't get involved in any pricing discussions or how it has affected the price of the product.
The Chair: Maybe what you can do is go away and come back with the answers so we have a sense of that.
Mr. McSweeney: Some approximation, okay.
Senator Black: Tremendous presentation, and thank you for that. Can you please tell us how great the risk is that the concrete industry will disappear from Canada.
Mr. McSweeney: Cement is a powder. We take limestone, put it in a kiln, heat it up to 1,450 degrees Celsius and it turns into almost like a molten lava. It cools quickly and turns into something almost steel-like called clinker. That's ground up. At the end of the day, cement is like a baby powder. Cement can travel the world because it's very light.
Concrete, on the other hand, is 7 to 10 per cent cement, sand, aggregate and water and can only travel approximately 100 to 150 kilometres once the water has been put into the mixture. Cement is the glue that holds the sand, aggregate and water together.
There will always be a local concrete industry, because concrete can't travel very far. Cement, on the other hand, will fall prey to imports into Canada. We have over 40 per cent imports into British Columbia. Today, we have about 10 per cent imports into Alberta, 10 per cent into Ontario and 5 per cent into Quebec.
But if, as we see, our trading partners do not pursue a carbon pricing system equivalent to Canada, our plants will face enormous cost pressures here and may not be able to compete, so there is a risk that if the carbon pricing system here gets too onerous when our trading partners don't have it, it could affect the 15 or 16 plants we have here in Canada.
Senator Griffin: I agree with Senator Black — great presentation. I never did realize the difference between cement and concrete. I call it all the same thing, so that's good to know.
In your presentation, you've touched on the economic and regulatory instruments that Canada has had at its disposal in terms of things that can be done. You've given us some really good suggestions regarding government procurement and full life-cycle analysis, which some of us also call full-cost accounting. What do you see as the biggest barrier to effecting these changes? Is it simply risk aversion, or is it inertia?
Mr. McSweeney: I believe it's inertia. I believe most of the infrastructure built today is primarily provincial, and mostly municipal when you look at waste water treatment facilities, public transit, et cetera. I'm sure in all of your communities, when you're driving down the street, you say, "Wow, I think that road was just repaved five years ago; why are they doing it again?'' It's inertia. They tend to use the same material over and over again. They tend to go to the drawer and say, "We're going to repave Yonge Street.'' They go to the drawer, pull out the plan, put it on the table and go out for bid.
Our industry is constantly asking governments to install, or put in place, a system of alternate design and alternate bid. On life-cycle costing alone, concrete will always win. Sometimes it will win at first cost, but it will always win at life-cycle cost because concrete lasts 40 to 50 years in a pavement, whereas asphalt lasts 7 to 12 years as a pavement. So if we have alternate design and alternate bid, then the decision-makers, whether on municipal councils or provincial legislatures or federally, can choose the building material that's going to give them the biggest bang for the buck over the longest period of time.
I think you have all seen what has happened at the city of Toronto with their Auditor General report, the provincial government and their Auditor General report, when they talked about collusion with one industry in the paving business. When you have more competition, the pencils are going to get sharpened and the taxpayers win.
Senator Lang: Thank you for your presentation. I would say that you're probably a poster child for perhaps what the government shouldn't do.
In your opening remarks, you said it, and I want to refer to British Columbia here; a $30 per tonne of B.C. carbon tax doubles the cost of traditional cement, kiln fuels, et cetera, and has resulted in a significant loss of market share to imports from the U.S. and Asia. Then you go on and say it resulted in plant shutdowns, lost investment and economic opportunities. Earlier, you said the cost to the cement industry was $20 million. Further, you go on and say that in British Columbia, the price is set to rise to $50 per tonne under the federal system. If I read that properly, by 2020 or whatever date has been established, you will actually be losing about $35 million.
Could you provide us, if you don't have it now, how many plant shutdowns actually occurred? How many jobs were lost in British Columbia during this period of time, so we have an understanding of what the real implications are to people who need this type of industry for jobs?
Mr. McSweeney: Very quickly, we can provide a very detailed report, but we had three cement plants in British Columbia — one in Kamloops, one in Delta and one in Richmond. The one in Kamloops just closed because it's no longer economically viable. I would say when imports rose to 40 or 42 per cent from Asia and the U.S., that's almost one in two tonnes of cement coming from offshore, and they pay no carbon tax; right? The carbon tax in B.C. is applied to the fuels that you use to make your product. So the cement comes in from Asia to Seattle, is put on a truck and brought into the Lower Mainland.
That causes shutdowns — and we can get exact times — I would say between three and six months at the cement plants in British Columbia. Whenever you have a shutdown, your employees get laid off, the indirect employees no longer have work, and it's the trickle down into the communities that get affected. We'll get you the exact shutdowns over the last eight years and the length of time.
Senator Wetston: Thank you for your presentation. I want to talk to you a little bit about market structure. I want to understand the place that you're at with respect to this industry. This is not a facetious question, but is there a concrete association of Canada as well?
Mr. McSweeney: Not really, no.
Senator Wetston: But there's something?
Mr. McSweeney: We have a loose-knit group of what we call theCanadian Concrete Masonry Producers Association. We get together twice a year. The six cement companies in Canada are vertically integrated and are the largest concrete producers.
Senator Wetston: That wasn't my question, chair. I was just wondering about that. But it's information. I hope it was useful.
The Chair: Good information. Thank you.
Senator Wetston: No, I'm not done yet, but I can do it on round two if you prefer. We talk about other products used in this industry. We talked about wood, for example. We've had presentations from forest products industries and other industries.
Can you give me a sense of how your sector compares to the other competitive products you compete with in building materials and construction, for example, as opposed to roads and paving, which you talked about, and the relationship between that and the GHG emissions that would be associated with those other competitive products? Do you have any sense of that? Can you share that with us?
Mr. Auer: On a quantity basis, I think concrete is used, in terms of volume, more than twice the amount of all other construction materials combined. That would include buildings, roads and other infrastructure.
The reason that Michael raised the operational energy issue when it comes to buildings is that's where the lion's share of GHGs are in buildings, and the role of materials and reducing that energy use has to be factored into the overall carbon contribution that any material is contributing to the life of that structure. You can look at some of the research. I think we shared, as part of the package that we distributed, some briefs from MIT. You can see that concrete compares very favourably on a carbon footprint basis when you take that life-cycle view.
Senator Seidman: Thank you, Mr. McSweeney, for a really good presentation. I feel the same way as my colleagues do around the table; it helped me understand things that I didn't understand before you spoke.
You did say that research demonstrates the benefits of the use of concrete in, for example, pavement and commercial buildings. Then you go on to make recommendations where you conclude about applying a level of data and science-driven discipline to decision-making. Where is the industry with the use of science, research and development, and how far do you think you can go in new development and new technology over the next X number of years?
Mr. McSweeney: Sure. I'll start by saying concrete, second to water, is the largest commodity in the world. For every man, woman and child in the world, 3,000 pounds of concrete is used each and every year. That gives you the scope of the concrete industry.
We are heavily engaged in research on buildings and pavements. We've partnered with our sister organization in the U.S. and we are using the Massachusetts Institute of Technology, which has done a lot of work. We have partnered with the University of Sherbrooke, the University of Toronto on sustainability, and the University of Waterloo on pavements.
We've just engaged the International Institute for Sustainable Development out of Manitoba to a landmark study on the greenhouse gas benefits of all three major building products — wood, steel and concrete — because sometimes we get apples to oranges. When we're in this debate, it needs to be apples to apples.
There is a place for all building materials in society. We're just asking governments not to pick winners and losers in the economy. Wherever you have a timber mill, you will have a sand pit, an aggregate pit and concrete facility. So, if you are constantly robbing Peter to pay Paul, you are going to unemploy certain people in those communities at certain times, but, if we move to a data and science fact base, you take the emotion out of it and get good decisions. You employ, as Senator Griffin said, cost-based accounting. That should be done for the life-cycle cost, as well as building new infrastructure and buildings that have the lowest carbon footprint.
We all love to go to Europe. What do we see in Europe, lower rise, all-concrete buildings that have been there for 200 or 300 years. When we came to Canada, we built Montreal out of wood. It burned to the ground. Then they said, "We're going to build it out of concrete,'' and we built it out of concrete. Now we're going full circle, and they're saying, "Let's build it out of cross-laminated timber.''
Let's do the lowest carbon footprint analysis and the life-cycle cost analysis and let the best building product win and let the professionals decide, the engineers who have to sign their name away, at the end of the day, on the safety of the building. Let's not get politicians involved in building codes and energy codes, other than setting the broad strategic framework.
Senator Galvez: You already answered a couple of things that I had in mind. There is one very easy way, as you said, in which we senators can help, which is to push the government to do the full-cycle screens for at least all of the federally funded. I think that's a low-hanging fruit and easy to do.
I am an engineer, so when you say not to leave that to the politicians, maybe, as an engineer, I can help you. I think the big thing at the centre of this is the code, the building code, because it's heterogeneously applied, and a basic rule is not there. You're right that we are very much behind compared to Europe in the application of a good building code. So if we have to start developing and discussing the building code again, do you have some advice on how to approach this?
Mr. McSweeney: I sit as an observer on the Canadian Commission on Building and Fire Codes, and I've been there now for four or five years. I really believe that we should merge the building code and the energy code together. The building code looks at the structure of a building and if it is safe. The energy code looks at the energy of a building and if it is efficient. We need to merge these two together, and we need to spend more time talking about energy efficiency because, as I said in my remarks, the GHGs are as a result of 90 per cent of the energy over the lifetime of the building. There is an awful lot that can be done if you design the building properly, with smart technologies right from day one, that will lower that 90 per cent GHGs embodied energy down to something much less.
Senator Dean: These are always such rich learning experiences, so thank you. You've mentioned the opportunity of large infrastructure investments to incent changes in technology and the nature of materials, and you've mentioned Portland-limestone cement or Contempra as an alternative or modified product. Could you tell us some more about that? I'm kind of interested in: If there was such a switch in government licensing or whatever is required, does the industry have the ability and current technology to rapidly adapt to a shift towards Contempra? Would there be higher end-user costs as a result of the shift to Contempra. Why is it that we're stalled in Canada on that shift where others have moved towards it? Wrapped up in that, I guess, is who opposes the shift to Contempra? Is that a stakeholder issue? Just a little bit more around why we haven't gone there and our ability to go there quickly.
Mr. McSweeney: I'll start by saying that, in Europe, Portland-limestone cement is used in a concentration of 35 per cent in the recipe of cement. In Canada, it is used at 15 per cent. To get to that 15 per cent took us five to seven years, even though Europe is doing this as we speak and has been doing it for a long time.
Again, it's just government inertia. You must go through CSA. CSA committees only meet once a year. It's a laborious process. In the United States, they looked at Europe, they looked at Canada, and in two years they were able to go from zero to 15 per cent at the standards bodies in the U.S. So we need to just pick up the pace.
I think that most people agree that climate change is an issue. As I mentioned in my remarks, if we used Contempra right across Canada, we could reduce one megatonne at 15 per cent. If we took that to 30 per cent, which is less than what Europe has, we could probably reduce by 2 megatonnes. This is low-hanging fruit.
Remember that the government has a plan; we're looking for 44 megatonnes, at the end of the day. If our industry, through Contempra, which will be at no cost — our industry took a decision that, even though this is a green product, we're not going to put a price premium on it, so it's the same price as general-use cement — if we increased it to 30 per cent and asked codes and standards bodies to take climate change seriously, then we could reduce 2 megatonnes with the stroke of a pen and no cost to the Canadian taxpayer. I can't imagine a stakeholder that would be opposed to this.
The Chair: Just as a clarification, when you say 44 tonnes, could you expand on what you mean by 44 tonnes?
Mr. Auer: The government has modelled the impact of its policies on future reductions and, with the introduction of the Pan-Canadian Framework on Clean Growth and Climate Change, has determined that there are still 44 megatonnes left that have not been addressed with policies already announced. So that's the gap that we're referring to, to the 2030 target.
Senator Mockler: There's no doubt that you follow very closely. In the information, you have given us a lot of food for thought. You're following very closely what has happened in the last week — this week, as a matter of fact — with the United States, with the new Trump administration and the opinions that they have on climate change.
Do you believe that Canadian governments must adjust their emission-reduction goals in light of the new U.S. administration and where they're going or where they want to bring the world?
Mr. McSweeney: What I'm seeing from my 10 years in this position is that sub-national governments, started by British Columbia, led the way on climate change, followed by Alberta, with the Specified Gas Emitters Regulation, and then Quebec, with cap-and-trade linked to California, and now Ontario.
I think what we see is that sub-national governments are the ones that are taking the leadership on climate change, and I think we will see that also in the United States. We have the Western Climate Initiative, as you've heard before. We have RGGI in the Midwest. I think we'll see states like New York, Washington and Oregon move on climate change and leave the federal government in the U.S. to do whatever it's going to do. We've had a good track record of sub-national governments in Canada leading the way on climate change. You can have a federal government that doesn't take action as quickly as many would like, but I have faith it's the sub-national governments that will lead the way. Was that a good political answer?
Senator MacDonald: Good morning, Michael. Good to see you. I can't believe we first met in 1976; that's over 40 years ago.
Mr. McSweeney: Forty-one years.
Senator MacDonald: Great presentation. When you look at the use of concrete, the opportunities concrete provides not only in building materials but in road construction, it would seem that one of the most important things any government could do would be to strongly encourage us to switch to concrete in almost all of these areas. The value of concrete in road construction over asphalt has long been established. We know that. Is it completely a cost factor? What's the relative cost of building a kilometre of asphalt as opposed to concrete?
Mr. McSweeney: I don't have the exact cost. Adam, do you know?
Mr. Auer: It depends on jurisdiction. In some jurisdictions, the initial cost for concrete is lower than asphalt, and in other jurisdictions it might be slightly higher; but with the price of bitumen increasing the way it has recently, the gap on either side is small when it comes to initial cost. The real benefit is on the life-cycle cost.
Mr. McSweeney: Evidence has shown from Ontario east that concrete can win at first cost. With the 400 series of highways in and around Toronto, concrete bidding has won the last 10 major bids from the province. We lost by just a razor's edge on Highway 104 in Nova Scotia last year, but we believe the calculations were done wrong. We've now hired engineers to go in and work with procurement agencies in the provinces to make sure they're doing the life-cycle cost assessment correctly.
As Adam says, it's a factor of bitumen. When oil was at $105 a barrel, bitumen was very close to that. When oil fell to $50 a barrel, bitumen stayed up at close to $100 a barrel. We always thought there was a price correlation between oil and bitumen. We soon found out that when oil fell, bitumen didn't fall, but there was pressure to drive that price down. So it's significantly more expensive out West.
Cement and concrete are very local products. It's where you get your limestone, aggregate and sand from, so it varies across the country. We are winning, I would say, Ontario east fairly easily, and we're starting to crack the market in the West.
The Chair: Before we start on a second round, one part of our mandate is costs. Further to Senator Lang's question, I want to make sure that you folks will come back to us with what the costs were for jobs, economic activity in the closure of the one plant in British Columbia, at $30 a tonne. I want you to tell us how the other two are managing to stay operating even though one closed. There must be some reason.
What would happen at $50 a tonne — not at $30 a tonne — in 2022, which is mandated by the government, to the other 13 plants that are across Canada? The number of jobs, the economic activity and what that cost is to society as a whole.
Senator Massicotte: Take Quebec, because that's the newest plant, and it is being heavily subsidized, directly and indirectly, by the provincial government, and it has cheap hydro costs. With energy at 30 or 40 per cent total costs, in this case I gather it's largely hydro, with zero emissions. Even if Quebec put a price on carbon, which they are doing so re the cap-and-trade, how much will it affect you? Let's presume a market force of $20 or $30 a tonne. In Quebec, how significant is that versus if your sale price is $100? What component will the carbon tax be, or the carbon price be in Quebec?
Mr. McSweeney: You think about that part of the question, Adam. I will start by saying that in Quebec, we have free allocations, so that helps us be competitive in Quebec.
Senator Massicotte: Presume it's $20 or $30. I know it's zero today, but you're speculating about the future. That's what we are worried about.
Mr. McSweeney: We have two emissions in cement, as do some of the other sectors. We have process emissions, which are 60 per cent of our emissions. When we take that limestone and put it in the kiln and heat it to 1450 degrees, we're causing a chemical reaction that drives off the CO2. At this point in time, that's the only way to make cement. We cannot reduce that 60 per cent.
Quebec civil servants have recently approached our industry, and I assume other industries, saying that we're now going to look at, in the second compliance period, which is post-2020, including the cap-and-trade on process emissions. If they include the cap-and-trade on the process emissions, I would find it hard to believe that a cement facility could survive, because the costs would be astronomical.
Senator Massicotte: Give me a sense of first the price.
Mr. Auer: It depends on the pricing system and how it's applied. For example, in British Columbia, where they apply a $30-per-tonne price on fuels, and we're just talking about that 40 per cent of emissions that Michael mentioned, not the process emissions, we can see costs of upwards of $10 per tonne.
Keep in mind this is a commodity that wins contracts based on differences in dollars and sometimes less per tonne. Although the dollar amount may seem small, 10 per cent or less, its significance in terms of the capacity to win a bid is very high just because it's a high-volume, low-margin commodity we're talking about. Dollars per tonne matter. That can tip the balance in favour of another producer in another jurisdiction.
That's the reason why Quebec, Ontario and Alberta are designing systems that shelter energy-intensive, trade- exposed sectors from the lion's share of those costs. There's still a compliance obligation that requires EITEs to continue to improve and reduce their emissions, but as long as that's happening, there is, in theory, no cost associated with the tax.
Senator Galvez: What you are explaining today is very interesting, and the public, the citizens, doesn't know about this. I can tell you that even engineering students in civil engineering that are going to construct the roads and buildings don't know.
I'm very happy that you are talking about all the research that you are doing. You have chairs around Canada; it is very interesting. But are you implicated in training the undergraduates and telling them about these life-cycles?
Mr. McSweeney: We started a few years ago with seminar series, and we're just on our third year of seminar series where we've hired an engineering company called RDH Consulting out of Waterloo, and we're putting together 20 or 30 seminars across the country. We will be targeting engineering students, engineers and architects to hear from other engineers about life-cycle cost assessment, lowest carbon footprint, et cetera. We do pride ourselves in trying to get to the end user who will make the material decisions and design the buildings and pavements of the future.
Senator Wetston: I just want to mention, being an Ontario senator, that you mentioned some other provinces. This isn't a competition, although there is a notion of competition from time to time. The government in Ontario did shut down the coal plants a number of years ago in an effort to reduce GHG emissions, a bold step, and created the Feed-In Tariff, another bold step toward that goal of clean air and reducing greenhouse gas emissions. I only state that for the record, not to get into any other discussions.
I just am following up a little bit from Senator Galvez, but I'd like to talk a little more about the technology. I'm getting the impression — and I'd like you to share with us — where do you feel, if any, there might be technological advances in the industry to support a low-carbon economy. You talked a little bit about it, and you just talked about process emissions, for example, and research. Where are the opportunities? Are there opportunities besides the Portland-limestone cement?
Mr. McSweeney: I read the transcript of the chair's question to a couple of industries, saying, "You say to us 'we can't do anything. We've done enough. We've been leaders.'''
Our industry has never said that. We have been supporting carbon pricing for over a decade, and we work with governments to design to carbon pricing systems that will work for both the environment and the competitiveness of our industry.
It is difficult at this point in time to try to reduce the process emissions, although through a firm in Halifax called Carbon Cure, we're looking at taking the CO2 off the stack and injecting that CO2 into precast panels, masonry blocks and ready-mix cement. That's new and innovative. There is another company — Solidia — that one of our companies is working for that is looking at similar technologies.
St. Mary's Cement has partnered with Pond Technologies to take the GHGs off the smokestack, feed it to algae, grow the algae, press the algae, get biodiesel and then feed the algae back as a feedstock to reduce further emissions in a closed-loop system.
Wwe are on the cusp of a lot of these innovations. A lot of them are supported by Sustainable Technology Development Canada, the Ontario centres of excellence, and another tech fund will be set up by the Ontario government, and in Alberta as well.
We're working our way slowly, but there are lots of things we could do today to reduce that 40 per cent combustion emissions. Most of our plants are in metropolitan areas. Again, if we could get over government inertia, we could take biosolids, which are greenhouse gas neutral, dry them and use the biosolids as a fuel to replace coal. But, boy, trying to get governments to do that.
There is so much waste going into landfill today. Even though we subscribe to the theory of "reduce, reuse and recycle,'' there are still materials that have a calorific value that are going into landfill. We are going to make cement 24 hours a day, 365-year days a year, come hell or high water. We need a fuel. Anything that has a calorific value that goes into a landfill can be used at cement kilns and produce less GHGs than coal. Coal and pet coke are the worst, so anything we take would be fewer greenhouse gas emissions or other harmful emissions. But trying to get governments to move on that? There is not a lot of nimbyism, because if you say you will do it at the CRH plant in Mississauga at Ford and Lakeshore, the city council there might get concerned about that.
I always say to governments: Climate change is not for the faint of heart. Government will have to impose regulations. Provincial governments will have to increase tipping fees. In British Columbia, we are taking biosolids and solid waste to Cash Creek, which is 600 kilometres away from Vancouver. Think of the greenhouse gases created by the truck driving 600 kilometres up and 600 kilometres back, when we could take that material today and use it as a fuel to replace coal.
I'm evangelical. I am preaching this to governments right across the country. Hopefully, some day they will get it.
Mr. Auer: The World Business Council for Sustainable Development has an initiative called the Cement Sustainability Initiative. They developed a technology road map for the cement industry that shows all the different technologies we have access to or hope to have access to that will make up our contribution to the global effort to reduce GHGs. If I understand correctly, they will soon be doing technology papers on each one of those technologies to give everyone a sense of how close we are to being able to implement them and what the promise is in terms of reductions.
Senator Lang: I'd like to pursue a question that Senator Massicotte referred to earlier and goes back to the question of cost and the question of carbon tax versus cap-and-trade. You mentioned the cap-and-trade program for Ontario and Quebec. I'm trying to understand this. We talk about free credits, the sale of credits and the transfer of credits. Can you tell me, to cut to the chase here, at the end of the day, does that mean that this industry, at least at this time because of the way they are designed in Quebec and Ontario, are actually not paying a carbon tax when it all comes down in the wash?
Mr. McSweeney: That they're not paying a price on carbon?
Senator Lang: Yes, at the end of the day.
Mr. McSweeney: At the end of the day —
Mr. Auer: I will give you the Ontario example, because they have established an economy-wide benchmark reduction. Everything is documented for all to see. They have an industry benchmark that they have set for our sector that's based on a historical average. Therefore, by mathematics, some of our facilities will be above that benchmark and some will be below. There are facilities that will have a net compliance obligation, even with free allocations, unless they can reduce below the benchmark within that first four-year compliance period. There are other industries that will start below that benchmark and therefore have surplus credits that they can sell or hold for future compliance obligation. Depending on their prediction for where they will be at the end of the compliance period, they may save those, recognizing that there will be more pressure as the benchmark lowers over time, or they may be confident that they can continue to meet that benchmark and therefore put those allowances to market to sell.
Mr. McSweeney: To the first part of your question on carbon tax versus cap-and-trade, our industry, as an energy- intensive trade-exposed industry, supports cap-and-trade, because it works for energy-intensive trade-exposed industries. I'm sure you'll hear about it from your next speaker.
We have to make sure governments are judicious in what they classify as energy-intensive trade-exposed industries. Not everyone can be in that field. There probably should be only five or six industries in that field.
With the cap-and-trade, you will get the reductions because the first word is "cap.'' The Ontario government will, in the first compliance period, have a reduction of approximately 20 per cent of GHGs because they capped it. Every year, we have to go down like this. In a carbon tax, you don't have that. We've seen in some carbon tax jurisdictions that the goals they set out a decade ago — they will not be able to meet their 2020 targets.
In my mind, if we are really committed to reducing GHGs, government has to have that carrot and stick. The stick is the cap: this is what you're going to reduce and this is where we will be in 2030. The carrot in cap-and-trade jurisdictions are the free allowances, which also decline over time, but they allow companies that are better to do better and companies that need to do more do more over time.
The Chair: Thank you, gentlemen, for a very interesting presentation, some good questions and some very good answers.
For the second segment, I am pleased to welcome, from Canada's Ecofiscal Commission, Chris Ragan, Chair. Sir, we look forward to your presentation, and, from there, we'll go to some questions and answers. The floor is yours, sir.
Chris Ragan, Chair, Canada's Ecofiscal Commission: Thank you very much. If I understand the ground rules, I've got something like seven minutes. Is that right? "Something like'' is a nice term.
The Chair: Seven to ten, whatever.
Mr. Ragan: I like this; I just got an extra three. Thank you very much; and thank you for asking me to speak with you today.
Let me begin, actually, by noticing an article in The Hill Times from Senator Neufeld, and I'd like to quote from it because I think it's a good way to introduce to you what the Ecofiscal Commission is.
. . . I believe we should do what is reasonable to fight climate change, but whether we reach our targets or not, climate change is still happening. The atmosphere has no borders. It's one thing to be a good global citizen and do our best to reduce our emissions, but it's another thing to do it at the expense of totally destroying our economy and putting Canadians in the poorhouse.
I couldn't agree more. I know that exactly what unites the members of the Ecofiscal Commission, who are all economists, is the strong belief that it is possible to reduce greenhouse gas emissions and do it in a way that actually improves economic outcomes at the same time, as long as you are prepared to put some considerable thought into how you design your climate policies. That is really what the Ecofiscal Commission is all about. We are a completely independent body. We receive no money from governments of any kind. We are funded mostly, about 90 per cent, from family foundations and about 10 per cent from a couple of corporations. We have no dogs in any fights. Our one position, really, is that we can actually do better in terms of environmental outcomes and economic outcomes with better policy, so we have been here for three years issuing reports. If you do not know that much about the Ecofiscal Commission, I encourage you to go to www.ecofiscal.ca. Everything we have written, whether major reports or slightly shorter reports, blogs, op-eds, videos or Google Hangouts is there.
You've got my presentation. Let me just take you through those slides. Am I correct that you have the presentation? Okay. I think there are many people around this table who know probably better than I, from personal experience, what business competitiveness is all about. Let me just say that there are many things that influence any business's ability to compete successfully in its business environment — corporate tax rates, pension regulations, labour market policies, the ability to attract and retain good workers, which brings you into things like the quality of local schools and residential real estate prices. There are many things. The cost of carbon emissions adds one more thing to the mix.
So when we talk about competitiveness and when we connect the ideas of carbon pricing and business competitiveness, the competitiveness we're talking about actually is a very special kind of competitiveness. It's to what extent does a carbon price in this jurisdiction put our businesses at a competitive disadvantage relative to their rivals from other jurisdictions with a different carbon price? I want to emphasize that point. If we lived in a world — and we do not — where there was a common carbon price around the world, then I would not have anything to say about the carbon competitiveness issue because it would disappear. It's all about having a $30 per tonne price in B.C., but you don't have any price in Washington state, for example. If you are producing cement, some of your rivals are coming from across the border from northern Washington or Oregon. That's the issue.
The real problem with the competitiveness challenge is that, if you care about the economic costs or economic prosperity more generally, you need to care about the economic costs of achieving emissions reductions. What you don't want to do, in our view, is achieve emissions reductions by having our businesses close down or shrink, lose in the marketplace, lose market share to their rivals from low carbon priced jurisdictions. We certainly don't want them to shut down operations and move across the border to some jurisdiction where there is a lower or no carbon price. That is the concept of leakage.
So the challenge here is to say: How can we actually put a price on carbon that actually sends a very powerful economic incentive for households and small businesses and large businesses alike? How can we create that incentive to reduce emissions but, at the same time, not damage the competitiveness of Canada's business sector?
If you flip to the next page, this one — I'm sorry, that one doesn't have a page number on it; I guess it's 4 — the scale of the challenge, what we did is we went province by province and tried to identify what fraction of the economy, as measured by GDP, is coming from firms that are particularly challenged when you put a carbon price in place. We assumed, for the modelling that is behind this figure, a $30 per tonne carbon price, which is exactly the price today in place in B.C. It will be the price in place in 2018 in Alberta. That price won't be achieved in Ontario and Quebec for a few more years. But, at a $30 per tonne carbon price, what we did is identified those sectors that were particularly emissions-intensive — I will show you some diagrams about that in a bit — but also trade exposed. These are the ones that have to think about competing against their rivals from some other jurisdiction.
For Canada as a whole, that number is actually pretty small. It's about 5 per cent of the Canadian economy. Five per cent of the Canadian economy today, as measured by GDP, is $100 billion. That's a big number, but 5 per cent of the Canadian economy is, you might call, it "carbon exposed.'' They are particularly vulnerable to a carbon price because of their emissions intensity and the extent to which they are competing with rivals from outside their jurisdiction. Five per cent. That is actually not a big problem from a policy-making point of view. It's a problem if you're in the 5 per cent. I don't want to minimize that problem, but, from a policy perspective, you can deal with 5 per cent
The problem is that the 5 per cent is not evenly spread across the country. If you look at those different provinces, you see that, in Ontario and Quebec, the number is something like 1.5 per cent of GDP. It's an easier problem for the premier of Ontario than it is for Canada as a whole, but, in Alberta and Saskatchewan, it's 18 per cent, so it is a much bigger problem for the premier of Saskatchewan and the premier of Alberta to deal with the competitiveness issue.
If you go to the next page, you'll see some bubble charts that are kind of geeky, but at Ecofiscal we do geeky, and we do it without apology. Let me just explain what is in this figure. On the vertical axis, we are measuring the cost if you are paying a $30 per tonne carbon price on your emissions and that cost as a share of that sector's GDP. That's on the vertical axis. For people with a math background, it's a logged scale. If you don't know what that is, don't worry about it.
The horizontal axis is measuring the extent to which this sector is trade exposed. To what extent is it competing with firms from outside its jurisdiction?
Every sector here has two circles. There is a blue circle, which is the share of that sector's provincial GDP and a red circle, which is the share of that province's greenhouse gas emissions.
The first thing I want to draw your attention to in Alberta is what happens in every developed economy in the world. Whether it's Alberta or New Zealand or France, every developed economy has a big blue circle in the lower left- hand corner because developed economies overwhelmingly are economies that are based on services. It's about 70 per cent in Canada's case. The service sector is very emissions un-intensive and a big chunk of services is aimed at the domestic economy. So think about education, health care, financial services, et cetera. That's a huge part of our economy. Every developed economy has that big circle to the lower left, and the lower left is not the problem.
The problem is the upper right. Take a look at the upper right and you will see what I like to call the usual suspects. You'll see cement, fertilizer producing, refineries, steel. In Alberta, you also find the things that make Alberta unique. You see the oil sands, conventional oil and gas bitumen upgrading, but 18 per cent of the Alberta economy is in the upper right. These are the challenging sectors. These are the ones you have to think carefully about when designing a carbon pricing policy.
Flip to the next page and you'll see Ontario, and you'll notice there's a lot less activity in the upper right. If you're in the fertilizer, cement or steel sectors, it's not a pleasant place to be because you're very emissions-intensive and therefore you face the carbon cost. But for Ontario as a whole, there's much less activity in the upper right then there is in Alberta.
If you flip to the next page, you see Nova Scotia. Nova Scotia also doesn't have a lot of activity in the upper right, but I want to draw your attention to one particular sector in Nova Scotia, and then I'm going to flip back to Alberta. Look at the paper industry in Nova Scotia. The paper industry has about a 10 per cent carbon cost as a share of its GDP, and it's very trade exposed, which is not surprising. It's selling into global markets. If you go back to Ontario and look at paper, you see that paper is considerably lower in terms of its carbon cost. It's about 2 per cent. Why is that? The technology in Nova Scotia paper is roughly the same as the technology in Ontario paper, but the power source is different. The electricity that is used in Ontario is largely clean, but the electricity that's used in Nova Scotia is about 50 per cent based on coal-fired plants. It's the carbon within the electricity that is actually making paper production more carbon-intensive in Nova Scotia than it is in Ontario. That's just a little bit of colour commentary on how to understand these bubble charts.
Now, the next picture shows a face that we see quite often these days. I tried to find one that didn't look too Trump- ish. There has been a lot of discussion since November 8 about how President Trump, and the U.S. in a Trump world, changes the argument for Canada to do carbon pricing.
I want to make the distinction here between the political rhetoric and the facts on the ground. The political rhetoric has changed. Today, for people who don't like the idea of carbon pricing, the arrival of Donald Trump has put a lot of wind in their sails. It's easy to say the United States isn't going to go ahead with carbon pricing, Donald Trump is gutting the EPA, and therefore we should not do carbon pricing in this country. That's a position that you have probably heard. I have certainly heard it a lot. That has changed and I think made more challenging the political discourse on carbon pricing. I fully admit that.
I think the facts on the ground haven't actually changed that much. On November 7, when we didn't know who would be the U.S. President, it was true that the United States was not anywhere near a nationwide carbon price. Today, they are nowhere nearer a nationwide carbon price. There was not going to be, in any imminent period, a carbon price in the United States. There were policies that were driving emissions reductions from the Clean Power Plan through the EPA, and some of those may change in the near future, but carbon pricing wasn't on the horizon in the United States.
Precisely because of that, Ecofiscal Commission has been saying for the past three years that any jurisdiction in this country that is going to carbon price has to take the competitiveness issue seriously. If there was going to be an equivalent carbon price in the United States two years ago or last year, then the competitiveness issue was much less important, at least for those firms whose rivals were in the United States. But that wasn't going to be true, so it's exactly why we underline the importance of the competitiveness problem.
So I think competitive was always going to be important. It always meant we had to pay attention to these exposed sectors. It always meant we had to design policies in a way that was going to deal with that competitiveness. I don't believe the arrival of Donald Trump has fundamentally changed those facts.
The next chart, page 9, with some modelling results from one of our recent reports, shows that it matters whether Canada puts a carbon price in place unilaterally. On the left-hand side, you see the actual emissions reductions and the emissions reductions that happen for the wrong reason, or for the poor reason that Canadian business shrinks and jumps across the forty-ninth parallel and sets up in the U.S. On the left-hand chart, you see that's what happens if every Canadian province — that's what we mean by Canada acting alone — acts in concert but the U.S. doesn't. Yes, we get emissions reductions, but the green area is a whole bunch of our emissions reductions happen because our businesses close down and we cross the border. Not the goal.
On the right-hand side, you see what happens if Canada and United States act together. Of course, emissions reductions go up, but also the green area, which is the leakage, gets dramatically reduced. This says you can deal with the competitiveness issue.
On this slide, it says one way to deal with the competitiveness issue is to convince the United States to have a carbon price. I wouldn't put all of our eggs in that basket, but let's try. Let's continue talking to whoever wants to listen to us, either in the United States or elsewhere, but I would not put very many eggs in that basket.
The alternative, if you go to the next slide, is what you do with some fraction of the revenues. Here you get back to some of the things that Michael and Adam were talking about.
We wrote a report that was directed at revenue recycling. The entire report was aimed at jurisdictions that said you've got a carbon price in place or you're thinking about putting a carbon price in place. The carbon price is the best way and lowest-cost way to reduce emissions. It's better than a command and control regulatory approach. That's great; that was our first carbon pricing report. This second report said, "Now, what are you going to do with the revenues? Because you're going to generate some revenues, a pretty big chunk of revenues, different in different provinces and different over time as the carbon price rises. These revenues are going to be large enough that you, as a government, need to put some serious thought into what you're going to do with the revenues.''
The environmental benefits come from the carbon price driving emissions reductions over time. The economic benefits — remember, the Ecofiscal Commission is about both — from carbon pricing come largely from what you do with the revenues. If you use the revenues to drive down corporate income taxes, and corporate income taxes are the most growth retarding tax ever invented by man, if you can reduce corporate income taxes, you can provide a stimulus to growth. If you reduce personal income taxes, you can also provide a stimulus to growth, although not as much as with corporate income taxes.
If you happen to come from a jurisdiction where infrastructure is a real challenge, you can use that revenue to finance the infrastructure. Or you can use that revenue to reduce government debt, if you come from a jurisdiction where government debt is a problem, and we have a few of those jurisdictions. Different provinces are going to face different situations, but with careful recycling of the revenues, you can generate different types of economic benefits.
Michael was talking about one of the ways you can use the revenues when he talked about free allocations. When Quebec gives a free permit in a cap-and-trade system to a cement firm, or when Ontario gives a free permit to a steel- producing firm, that is, effectively, the use of revenue. When you give a free permit to a firm, that permit has market value. There's no such thing as a free lunch. When you give a "free'' permit to someone that has a $15 value, it is identical to giving them $15 in an envelope. Hopefully we don't do it with an envelope in a dark room, but we are giving cash value to a firm. That cash value is going straight to the firm's bottom line, which means it is protecting that firm's competitiveness and its profitability. If you give that cash value — that free permit — to a firm conditional on remaining in this jurisdiction and remaining in production, you are dealing head-on with the competitiveness issue.
So there are two things going on here; we have two goals that we need to achieve. One is to reduce emissions in a cost-effective way, and the second is to prevent our firms from shrinking or maybe leaving the sector altogether and leaving the jurisdiction.
Two objectives require two instruments. The first instrument is the carbon price, which is the best way to reduce emissions, but if you provide cash value, whether in the form of a free permit in a cap-and-trade system or what in Alberta is called an output-based allocation, which is effectively an output subsidy, you're giving cash value to a firm as long as they remain in the jurisdiction, they remain producing and they keep hiring your workers. If they do not do that, they don't get the cash value. That is a way you can deal directly with the competitiveness problem.
What this chart shows on page 10 is called transitional support for industry. We have five different ways of recycling the revenue in this chart, and you see them described on the bottom. Four of them look roughly the same in terms of emissions reductions and leakage, but one of them looks different. That is the one where we're giving transition support specifically to the emissions-intensive sector.
On the last slide, I will say that these kinds of measures should satisfy the 3 Ts: they should be targeted, transparent and temporary. They should be targeted to the sectors that need them, and that's really the energy-intensive and trade- exposed sectors. Those are the upper right areas in our bubble charts.
They should be transparent. As a general rule, we at Ecofiscal Commission are in favour of transparent policy. I suppose not everybody is, but we are, so you should be explaining to the people why you are providing these free permits, or whatever form it takes, to these emissions intensive sectors. It really is a function of the carbon price in our jurisdiction relative to the carbon price in the competing jurisdiction.
That's also why it should be temporary. If we are ahead of the other jurisdiction in carbon pricing, meaning that we have a higher carbon price, then we need to put these policies in place. But if they catch up to us, these policies can drop off, and that's why they should be temporary.
Let me stop right there. Thank you very much. I apologize, as I probably went over time. Thank you.
The Chair: Thank you very much. That was an interesting presentation. It was similar to what some members do; they double their time. You actually did that very well, 10 minutes or 15 minutes. I'm just joking around a little bit.
Senator Massicotte: I really appreciated your presentation. Your organization does very good work and it's very enlightening. I hope we heed your advice on the government side to make sure this is as detailed.
The solution you're effectively proposing for heavily trade-exposed firms is to help them temporarily. Temporarily, I presume, relates to when the competition catches up regarding the carbon tax. Is there another solution whereby, as opposed to helping them directly, we impose some sort of import tax to compensate for that difference in costs so they do not steal our employees and the market share?
Mr. Ragan: That's a great question. In this world, they're often referred to as border carbon adjustments, or BCAs.
Keep in mind, first of all: Could this happen? Yes and no, depending on how we advance our policy. Provinces cannot do that. Provinces, by my understanding of the Constitution, are not able to put tariffs on the import of anything, either from another Canadian province — although we have some interesting exceptions to that — or across the 49th parallel. For example, B.C. cannot put a tariff on the import of American or Chinese products. Only the federal government can do that.
The current pan-Canadian framework is very much that the federal government is, I suppose, insisting that a carbon price happens in every province but also expressing a very clear preference for the provinces to do it. What they're saying is we need a carbon price in place by January 2018 of $10 a tonne and it's going to rise at a particular rate, but we want the provinces to do their own policies and only if a province doesn't do a policy in their jurisdiction would the feds step in.
My sense is that the feds very much don't want to be the ones actually doing the carbon pricing, and I think there's good reason for that. One reason is to prevent a federal-provincial bun fight, which periodically happens in this country on different issues. The other is to let the provinces keep the revenue anyway. Even if the feds do it, the promise in the pan-Canadian framework is that the revenues would be kept within the province. The province may be best suited to deal with the competitiveness problem precisely by designing these kinds of either free allocation of permits or output-based allocations. The province is probably best suited to do it, so that's one thing.
But the feds could support the provinces by saying, "Fine. We will put on a set of border carbon adjustments,'' which are tariffs at the border based on carbon content. This is an idea that sounds great on paper, but when you start thinking about what a border carbon adjustment is, it is much more complicated than a tariff. In order to set the rate on imported roof shingles, you need to know what the supply chain of those imported roof shingles looks like. You have to know what the supply chain of every imported product looks like so that you can then set the appropriate carbon tariff. That's not impossible, but man, that's a lot of work.
I'm not absolutely certain about this, but my economic instinct is that a better policy is to let the provinces deal with the competitiveness issue the way that Ontario, Quebec and Alberta are dealing with this, and keep the feds out of it. Let the provinces deal with that, and remember that once the United States and other jurisdictions catch up — some jurisdictions are ahead of Canada in terms of carbon pricing and some are behind — then this issue disappears and there's no need for either the competitiveness measures or the border carbon adjustments.
Senator Galvez: Thank you very much. You have put complex information in a very simple way.
In your green diagrams —
Mr. Ragan: Did you like those?
Senator Galvez: I adored them. They talk to me a lot. It's a professional thing.
Mr. Ragan: What kind of professional thing?
Senator Galvez: I am an engineer, so I love logs.
Mr. Ragan: Now we're talking. This is great.
Senator Galvez: There is a line in the Y-axis that determines when a company or an industry becomes an EITE, and EITEs are the ones that have the highest emissions.
Those are the ones we need to tackle. So would you put a horizontal line at the value that identifies the EITE industries in each province?
Mr. Ragan: Great question. This is a question about where the threshold is beyond which we recognize there is a problem and below which we don't worry about. The way I said that suggested there will be some subjectivity in the establishment of the threshold. The threshold we used to establish the figure on — there is no threshold in the bubble charts — but to establish the graph on page 4, the threshold we used to identify those sectors at risk was exactly the same threshold proposed by the Waxman-Markey legislation in the United States. There is a judgment call.
The interesting thing, though, let me say, about the threshold is that as the carbon price rises — so when we do the modelling at $30, $50 and$70 per tonne — the sectors that are the problem sectors basically don't change. The cement industry is an emissions-intensive sector and it pretty much will always be an emissions-intensive sector. It's very difficult to make a sector that's on the lower left and make them a problem case, because the fact is their emissions are very low. So even you double or triple the carbon price, it's not that big a deal.
The log axes are deceptive in the bubble charts. For the service sector for Alberta, for example, the carbon revenues as a share of GDP is 1 per cent. This is almost enough to be ignored — 1 per cent.
The sectors that are the challenging sectors don't change much. It is pretty robust to the carbon price.
Senator Lang: First of all, if I were going to the university — I believe it's McGill that you are associated with; is that correct?
Mr. Ragan: I want to know how to answer that question. Where are you going with that? It hasn't been a great week at McGill.
Senator Lang: You would be pleased to know that if I were going to the university, I would sign up for your course.
Mr. Ragan: Thank you. I appreciate that. I hope I'll still be teaching.
Senator Lang: That being said, I don't necessarily agree with everything you've said, but we'll move from there.
The real concern for all of us around this table, and you have touched on it, is the consequences of moving in this area of a carbon economy where basically, as the chair has stated in the article in The Hill Times, we could shut down the whole economy in this drive to become a carbon-free economy, in contrast to other economies around the world.
My concern is this: We're trying to understand what the real consequences are. Sometimes we get the smoke and mirror talk, which sometimes I don't understand, but I do understand jobs and I understand the ramifications to the Canadian who is trying to make a living and find a job. You have to be unemployed to appreciate what it feels like to be unemployed and you can't meet your mortgage. That being said — that's the real aspect we're dealing with.
As an organization and think tank, have you taken it upon yourself to review the actual consequences of the current jurisdictions that have carbon tax and cap-and-trade and review what the actual consequences have been in the implementation of those particular policies? What I refer to is that the previous witness here indicated there were cement shutdowns in British Columbia, for example. That's jobs. That's people.
That being said, it would seem to me that we have to have a hard look at what we're actually doing now before we proceed further down this path that some people refer to as drinking the Kool-Aid — before we make those decisions that will put people out of work and put our economy in jeopardy.
My other question — second, I want to know —
The Chair: We need to move along.
Senator Lang: You gave him 15 minutes.
The Chair: He's our guest. We're losing time.
Mr. Ragan: Pretty tough group.
Senator Lang: The other aspect that concerns me is that as we move these policies and discuss this for ever and a day, have you ever done or looked at the consequences of these policies and the fact that businesses are not moving into Canada? It's not that we're losing businesses, but businesses are not moving here because we're not attractive and not competitive to be able to provide the environment for them to bring their investments and create the jobs here in Canada.
Mr. Ragan: Great questions. I don't agree with the entire premise, but I agree with most of the premise. We need to be careful about supercharging the rhetoric. I don't think there is a danger of shutting down the entire economy. For Canada's point of view, the number of sectors that are a challenging case is about 5 per cent. It's super important when you're in that 5 per cent, because a plant shutdown feels like the economy has shut down for those people who are shut down.
That's my first point. And it's exactly why we did the analysis we did — to identify how big this problem is and go after it.
There has been some work done on B.C. B.C. is the economy that has the longest-standing carbon price. It started in 2008, so we've not yet got 10 years. I'm a macro economist. I find it's very difficult to test hypotheses in a rigorous and credible way with only eight years of data — very difficult.
But the evidence at this point for B.C. suggests that B.C.'s carbon price has reduced per capita fuel use. Their tax applies to six different fossil fuels, so it only covers the emissions that come from the use of fossil fuels. Reduction in per capita fuel use means a reduction in per capita emissions from fuel, and it has reduced per capita emissions by between 5 and 15 per cent, at a time when the province is growing.
A lot of people say B.C.'s policies haven't worked because their emissions have started growing again in the last two years — and they have — but B.C.'s economy is growing by roughly 1 per cent a year in body count, so you can't look at aggregates; you have to look at per capita. The per capita emissions there have fallen.
In Alberta, Quebec and Ontario, frankly, it is way too early to look at the data and ask if it's worked or see which sectors have been hurt. I honestly believe it's too early. WhenI look particularly at Alberta, Alberta's policy is designed quite well. It's a broad-based carbon tax. They have taken seriously the impact on low-income households. We've written reports on the household impact. They have taken that seriously and are giving cash rebates to low-income households. Also, they've taken seriously the competitiveness issue, and they have output-based allocations. The policies are designed well.
One comment about the cement in B.C.: I know the cement sector says this — so you probably now know what I'm about to say. We have done some work to try to the figure out exactly to what extent the carbon price in B.C. has been responsible for the increase in imports and the reduction in exports in B.C. cement, relative to other provinces in Canada but also relative to other things that have been happening. We've had big swings in the Canada-U.S. exchange rate, and those have a big impact on imports and exports. When we looked at the data — and we do not yet have a published paper on this — it was pretty difficult to find a systematic impact of B.C.'s carbon price on B.C. cement production. That doesn't mean it wasn't there. It means that when you look at the data in a systematic way, it's pretty hard to find it.
The last comment I will make is because you made a comment about whether we are bringing investment into the country, whether business is coming into the country. To me, foreign investment is an extremely complicated thing. I'm a member of Minister Morneau's Advisory Council on Economic Growth. One of the reports that we wrote is about attracting FDI, foreign direct investment. There is kind of nothing easy about trying to attract FDI because whether it comes in or not is a function of many things. Policy certainty is one of them. I think, in the carbon pricing discussions, federally or provincially, certainty about policy is very important. So I would encourage them to — and I do whenever I speak to them — whether you have a cap-and-trade system or a carbon-tax system or whether using these kinds of cash rebates or not, have predictable policy over time. It's very helpful, both for your businesses that exist currently in the jurisdictions, because they're making long-run planning decisions, and also to attract foreign firms into the sector.
I agree with all of your concerns, just not all of your premises.
The Chair: Thank you. I'm going to ask the questioners to be a little more succinct and also, if I could be so kind, to ask our guest to be the same. That last question took nine minutes, by the way. I have seven questioners, and we have to be out of here in 20 minutes, to put that into context with everybody.
Mr. Ragan: I apologize; I will speed up.
Senator Black: Thank you, Mr. Ragan, for your presentation, and thank you for the contribution that you are making, not only to the Ecofiscal Commission but to Canada. I'm a senator from Alberta, so the graph that you present is relatively interesting. I represent many of what you've referred to as the "usual suspects.''
I can tell you from carbon pricing in Alberta — and we support the initiative of carbon pricing — that it has put Alberta at a competitive disadvantage, and incoming investment to Alberta has stopped, as evidenced most recently yesterday by the Synovus-ConocoPhillips announcement. This is a continual story. The theory we love; the practice we dislike. My question to you is really very straightforward. Is it your evidence that Canada can achieve its Paris obligations without damaging our economy, and, if so, how?
Mr. Ragan: Great question. My honest answer is maybe and if we do it carefully.
One of the things you will notice in Ecofiscal is that we do not endorse any set of targets. We try not to talk about targets because I think there is too much debate about whether particular targets are appropriate or not.
Senator Black: You may not, but Canada does.
Mr. Ragan: And I understand that. I'm not convinced that a country like Canada should have the same target as a country like France, for example. The problem is that the scientific consensus is that, globally, we need to reduce emissions by something like 80 per cent by something like 2050, and you can quibble about those numbers for sure. It does not follow, in my view, that, even if we agreed perfectly that the globe needs to reduce emissions by 80 per cent by 2050, that every jurisdiction in the globe should be reducing emissions by exactly that amount. That's the kind of thinking that has led into those targets.
I do not endorse or reject Canada's targets. Our starting point is that Canada, and, more to the point, Canadian provinces, have established targets. They have established targets, and we have taken them at face value and have said, "All right, if you want to achieve targets, then you have different ways to do it. You can either use command-and- control regulations or some form of carbon pricing. Let's run a horse race between these two things and see what's best.'' Carbon pricing is considerably better than a regulatory approach, but we don't, and I won't, endorse a particular set of targets.
So, to your question, can Canada achieve the 2030 targets without damaging the economy? I would say yes, but you have to design these policies very carefully. It's not just the carbon pricing you have to design carefully, but you also have to recycle those revenues in the way that is best for the economy.
The final point I will make is that — and this is something I am worried about and perhaps you share this concern — you have to put more faith — I hate to use that term — you have to trust a carbon price to do what it can do and put in fewer of the non-pricing policies around the edges. One of my concerns is that Canadian governments across this country will put a carbon price in place. They then won't trust it to do its thing. They will then put a whole bunch of other policies in place — subsidies for this, regulations for that — and those will be very costly. The carbon price will be far less costly. The other policies will be more costly.
Senator Wetston: Thanks, Chris, for coming today and for your presentation. My colleagues here have heard me speak a little bit about the urban agenda. We talk a lot about the federal government and the provincial government. We don't talk a lot about cities. A lot happens in cities with respect to greenhouse gas emissions. You've talked about carbon price and cap-and-trade. From a microeconomic perspective — recognizing you're a macroeconomist — what kinds of incentives would you design, think about, beyond that of the carbon price or cap-and-trade to support greenhouse gas reductions?
Mr. Ragan: Specifically in cities?
Senator Wetston: A lot happens in cities, Chris.
Mr. Ragan: Okay, then I guess I will answer this as these complementary policies.
We've got a report coming out in the next two months, and it is directed at jurisdictions with carbon pricing. We recognize that a carbon price is probably the single best policy to reduce emissions over time, but there are some parts of the economy where pricing is difficult. It's difficult to put a carbon price into agriculture. It is difficult to address some problems with a carbon price. So what we're doing in this report — and this will be a not fully satisfactory answer for you — is that we are developing a framework for governments to identify the good policies and identify the bad policies. By good and bad, I basically mean high-cost versus low-cost, because our focus is on cost-effective climate policies.
An example of a good policy, a low-cost policy, might be a well-designed methane regulation. We do a case study in our report that looks at the federal methane regulations and analyzes them and says, "Actually, these are pretty good.'' It would have been very hard to do with a carbon price. But you can actually do it with a well-designed regulation, and the cost is pretty low. An example of a policy that ends up being very expensive is something like an EV subsidy. We do a case study of, I think, Quebec's EV subsidy. It generates some other benefits about which you can have a debate, but the cost per tonne of emissions reduction is very high. So those are just two examples of case studies that we do.
The third one is the coal phaseout in Alberta, where we show that most of the coal emissions reduction would have come from the carbon price. The value added, if you like, of the coal phaseout is actually pretty small, but what that translates into is a fairly costly policy.
There are lots of different types of non-pricing policies that you can imagine adding around your carbon price, and what our report is going to do is to help you think through which ones are good and which ones are bad.
The Chair: Moving on. We do have to be out of here at 10 o'clock. There is no leeway.
Mr. Ragan: Is that clock right? It says it's 11 to 9, so we have an extra hour.
The Chair: You can add one more hour to it because no one is tall enough to get up there and change it. Add an hour to that, and you've got it.
Senator MacDonald: I look at the chart here for Nova Scotia. You referred to the paper mill. I'm very familiar with that paper mill.
It's one of the highest quality and most efficient paper mills in the world, but their power rates are $50 million to $60 million a year; that is what they're up against, all the time. I look at this and it looks good compared to other provinces, but I see a snapshot of the contraction and collapse of the Nova Scotia economy. As someone who grew up in industrial Cape Breton when we were a net contributor to the tax base, it really frightens me that we're so low when it comes to industry.
The question I have is one you raised yourself. You're a member of the federal finance minister's Advisory Council on Economic Growth. Can you tell us how that relationship operates? Do you respond to requests from the finance minister to report on certain things, or do you initiate things yourself? Are they listening to you?
Mr. Ragan: Those are interesting questions; I wasn't expecting those.
The answer to the first one is we decided as a group of 14 that our mandate was clear: Come up with ways to improve the growth of per capita incomes across the income distribution. That was a pretty clear mandate for the committee. We, as a group of 14, at our first meeting or two, decided how we wanted to think about the world and how we wanted to think about what the determinants of growth were.
Aan economist's approach to thinking about growth is that there is capital, labour, technology and innovation, and there is the amount of competition in the market environment and trade for big bins. Then we started coming up with ideas, and it was almost exclusively, or maybe exclusively, driven by us. We came up with ideas and talked with people at finance and other departments as well. We asked them for information and for their views, and we get their views back and forth, but it's very much coming from the council. That's the first answer.
The second question was: Are they listening? Well, our first set of announcements were made in October, and all three were announced by the government: the infrastructure bank, increasing immigration with some policies around that, and creating a foreign direct investment agency to attract FDI. All three of those things were announced in short order by the government right after our announcement, and they are progressing on those three things. We then made, I think, five more recommendations, two thirds of which showed up in some form in the budget that came out on March 22. So I would say yes, they appear to be listening.
Senator MacDonald: Did you recommend anything on carbon taxes?
Mr. Ragan: We did not talk about the carbon tax at all.
Senator Seidman: Thank you very much. I too would register to take your course immediately.
Mr. Ragan: Thank you.
Senator Seidman: I'm very visual, and I must say I really appreciate your graphs.
I do want to ask you, though, about your report, which has a little more explanation of revenue recycling: the Choose Wisely options and trade-offs of recycling carbon pricing revenues. You have a comparison of priorities among five Canadian provinces, and they are quite different if you look at the categories that you presented to us today and how they're distributed in terms of priorities for provinces. I would really appreciate if you could give a bit of an explanation about developing those priorities and their changing evolution.
Mr. Ragan: It's a great question. When we were writing this report, we weren't going to do that part of it. We were going to talk about the various revenue recycling options and the pros and cons, and then we decided we really needed to take a position on what various provinces could do, but we didn't want to make a clear recommendation that Alberta should lower its corporate income tax rate and Quebec should invest in infrastructure. What we said is, "Look, let's illustrate the framework that we have just developed and do it for five provinces.''
This was actually a fascinating discussion among the 12 commissioners because we got into some fights on this issue. We were trying to be governments, and we were trying to say,''Well, hold on: If you plop yourself down in Vancouver and you're thinking about what to do in B.C., what would you do?'' So you look at the tax rates, the state of infrastructure, public debt and how aggressive the emissions targets were. You try to look at the whole picture and say if we were governments, this is the way we would do it. We identified high, medium and low priorities.
It was our sense as economists, given the economic and environmental context of that province, where we would tilt or suggest the governments go. Alberta, at the time, had approximately no government debt, so it would be difficult to say, "Use the revenues to reduce government debt.'' It didn't exist. Quebec had a fair amount of government debt at the time, as it does today, so using that to reduce government debt was a higher priority. Infrastructure is a bigger problem in Quebec than in Alberta and B.C. so it got more points. It was that kind of horse-trading discussion among the commissioners that got heated.
Was that an appropriate answer?
Senator Seidman: That's a good beginning, but that's all the time I have.
Senator Patterson: Thanks, Mr. Ragan, for the presentation.
I'd like you to turn your thoughts to the remote, cold jurisdiction where I live: Nunavut. It has a small population scattered in tiny communities. It has no manufacturing industry. There is high unemployment, high social housing, high income support, a big public sector, fledgling mining sector, fledgling home ownership and a desperately cold climate — I think it's about 20 below today, in the southern part, where I live. There is no hydro, wind is intermittent, solar is limited half the year and there is no clear alternative to the diesel that we use to power our communities. Our premiers agreed to carbon pricing in the Vancouver Declaration framework, and it will clearly raise the cost of living.
You talk about smart revenue recycling. How do you recycle the revenue in a smart way? I don't think anyone in Nunavut wants to see investment in technology if the price of everything consumed goes up. Do you just give it back to the household? Do you give it back in income tax? Have you cast your mind to those problems in remote, diesel- dependent areas?
Mr. Ragan: Let me say that the list of problems that you just laid out is a huge set of challenges for many northern communities. First of all, let's not think about how to solve all those problems with a carbon price or even just with revenue recycling. I think there are many things, and I'm by no means an expert on economic development in Canada's North. I am not.
However, what I would suggest is that if you have a carbon price, and if the federal government is going to insist that there is a carbon price in place in every part of the country, including the territories, which include many Northern communities, then I think the key thing in what you mentioned was that there are very few alternatives to diesel. What I would do is give a bigger chunk of the revenue — all of the revenue, perhaps — straight back to those communities, so that's revenue recycling that is going right to the people.
But at the same time, let's bring in some resources from elsewhere, from outside the carbon price, and actually bring power to many of these communities so we can get them off diesel. Now, you can't do that instantly and you certainly can't do that for free, but it strikes me that if we care about economic development in northern communities, then we should be getting them on a clean electricity grid. It may be bringing power from the south, if I can call it that, or maybe bringing power from rooftop solar, which is getting cheaper. But I think electrifying these northern communities, it seems to me, is an essential part of the plan.
The Chair: Thank you. There are some people that have some second questions, but I think we've run out of time. That was a very thoughtful presentation. It was interesting, and there were some very good questions and some very good answers.
I will talk to you offline with some questions that I have, because I certainly have some, based on some of your comments, but one I might put on the record right here. You did say that Canada could meet its Paris targets. You're not going to endorse anything, but generally speaking. That's $50 a tonne by 2022, I believe.
Mr. Ragan: Oh, no, no, no. I didn't say that. The question was: Could Canada meet its 2030 targets without doing serious damage to the economy? I think that was the question. And I said, "Yes, if they design their carbon prices across the country well.''
There's disagreement about what carbon price would be necessary to get to our 2030 targets, but it's a number probably between $150 and$200 a tonne. To put $150 a tonne into perspective, that is 35 cents a litre of gasoline. If we did that today — and nobody that I know is suggesting going instantly to $150 a tonne — but 35 cents per litre today would put us still below the price of gasoline we were paying in the summer of 2014.
The Chair: Not where I live, but anyhow.
Mr. Ragan: That statement is approximately correct, but anyway, we can discuss it. Was it 2012? Did I get my year wrong?
Senator Seidman: No.
Mr. Ragan: My point is that's not a change in the price of gasoline that is massively out of our experience. All of the studies I've seen that have modelled this have suggested a gently increasing carbon price to numbers like that, which can achieve the 2030 targets. Then, how you recycle the revenues is crucial.
The Chair: Thank you. Appreciate it very much. We will adjourn.
Mr. Ragan: Thank you.
(The committee adjourned.)