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

Issue No. 23 - Evidence - March 28, 2017


OTTAWA, Tuesday, March 28, 2017

The Standing Senate Committee on Energy, the Environment and Natural Resources met this day at 5:55 p.m. to study the effects of transitioning to a low carbon economy; and for the consideration of a draft agenda (future business) and a draft budget.

Senator Richard Neufeld (Chair) in the chair.

The Chair: Good evening, colleagues, and welcome to this meeting of the Standing Senate Committee on Energy, the Environment and Natural Resources.

My name is Richard Neufeld, and I am honoured to serve as chair of this committee. I am a senator from British Columbia.

I wish to welcome all 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 on the Senate website at sencanada.ca. All other committee-related business can also be found online, including past reports, bills studied and lists of witnesses.

I would now ask senators around the table to introduce themselves.

Senator Griffin: Diane Griffin, Prince Edward Island.

Senator Galvez: Rosa Galvez, Quebec.

Senator Fraser: Joan Fraser, Quebec.

Senator Dean: Tony Dean, Ontario.

Senator Patterson: Dennis Patterson, Nunavut.

Senator Doyle: Norman Doyle, Newfoundland and Labrador.

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 our clerk, Maxime Fortin, on our left; and our Library of Parliament analysts, Sam Banks and Jesse Good. Welcome, Jesse.

Colleagues, in March 2016, the Senate mandated our committee to embark on an in-depth study on 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 which are responsible for over 80 per cent of all greenhouse gas emissions. They are: electricity, transportation, oil and gas, emission-intensive and trade-exposed industries and buildings.

Our first interim report on the electricity sector was released on March 7.

Today, for the thirty-seventh meeting on our current study, I am pleased to welcome, from the Aluminium Association of Canada, Jean Simard, President and Chief Executive Officer.

Thank you, sir, for joining us today. I'm sorry we're a little bit late. I think they just got a little long-winded over in the chamber.

We'll move forward with your presentation, and then we'll go to some questions from the senators. The floor is yours, sir.

Jean Simard, President and Chief Executive Officer, Aluminium Association of Canada: Thank you, chair. I will go through the document that was passed on to you on arrival and try to keep as much time as possible for the question period.

To begin with, let me say that our industry is a worldwide industry. We are deeply energy intensive and trade exposed.

Canada is in a world of highly competitive aluminum production. In the Middle East they are now producing 5.7 million tonnes a year of aluminum. Canada is producing 3.2 million tonnes a year. We've been in production for 115 years.

Our world has changed over the past 15 years. The carbon footprint of the industry is increasing tremendously around the world because most of the added capacity is based on coal. Other countries that are major producers include Russia, which is hydroelectricity based. Russia is the largest privately "owned'' producer in the world, with 3.8 million tonnes.

Europe has lost a lot of capacity because of increased energy costs and old plants. Now most of the capacity is in the Scandinavian part of Europe, mainly in Norway and Iceland.

[Translation]

For several years now, China has been the central player in our industry. It produces 33 million tons of aluminum, which is more than 50 per cent of global production. There are more than 180 aluminum smelters in China. We have 10 in Canada, nine of them in Quebec and one in Kitimat, British Columbia. The electricity used in China is 90 per cent coal-generated, meaning that Chinese plants have a carbon footprint up to seven times bigger than Canadian smelters. For each ton of aluminum produced in Canada, we emit two tons of CO2 equivalent, while China emits between 14 and 17 tons of CO2 equivalent.

Another very important factor that you could consider in your study is world production costs. If you go to page 8, third paragraph, it says that, between 2010 and 2016, the cost curve dropped due to strong global competition, but is levelling off, so there is less and less of a difference between plants that belong to the first quartile, which are the highest performing and have the lowest costs, and plants of the second and third quartiles. This is due to the addition of very low-cost capacity in China. Since China accounts for 50 per cent of global production, this literally pulls the global cost curve down. Building a smelter in China today costs 25 per cent of what it costs to build one in Canada. The third phase of Aluminerie Alouette, in Sept-Îles, would cost between $6,000 and $8,000 per ton, whereas the same kind of plant in China would cost $1,200 per ton in capital expenditures. As to operating costs, the ratio is the same, the costs in China being 25 per cent of what they are in Canada. Global competition in relation to costs is very high. To keep the industry in Canada going — which has the smallest carbon footprint in the world — we have to remain competitive.

Moving on to page 9, you will see what I refer to as the "plant cemetery,'' plants that have closed since 2007, but most important are the ones in red and in green. You will notice that they are in the Americas. Since 2008, aluminum prices have dropped from $3,000 to $1,200 per ton. Except for a few jumps in price, they have not really rallied, and are now at $1,800 per ton. Some U.S. plants have not been modernized as ours have in Canada. Energy costs were higher before shale gas was discovered. When after a few years prices levelled off at close to $1,400 per ton, the Americans returned to post-World War II production capacity two years ago. They closed 9 out of 15 plants. That can partly explain the protectionist sentiment we are seeing in manufacturing areas in the United States. This situation is obviously caused by the lengthy slump that started in 2008; after so many years, private companies can no longer stay afloat.

Canada is spared by two things. First, it has made massive investments to modernize its plants in the past 15 years and is protected by the rate of exchange, a factor over which it has no control. At 30 cents on the dollar, it clearly enjoys some natural protection, which is unrelated to price fluctuations. Production costs in the U.S. are one to one, whereas our costs in Canada are 30 cents per dollar lower for certain inputs.

The good news is that demand is expected to grow for the foreseeable future, with an expected global growth rate of close to 4 per cent annually. Demand is still strong in the Americas, while it is dropping in China, but growing in the rest of Asia excluding China.

Finally, demand is influenced by a factor that brings you all here today, namely, climate change, since aluminum is the key to reducing GHG emissions in major sectors of the economy. Reducing carbon emissions in the transportation sector will in large part involve making vehicles lighter, whether airplanes, cars, trains, buses or trucks. There is very strong demand for aluminum in this sector in particular, and it is expected to grow, regardless of what might happen politically south of the border.

Strategic investments have been made in the transportation sector. For example, Ford has decided to use aluminum for its Ford F-150. That is a production of 800,000 vehicles every year, the vehicle that has had the highest sales in automotive history, year after year. These vehicles are now entirely made of aluminum. They have reduced the vehicle's weight by 350 kilos. This trend will continue and will be used more and more for heavier and heavier vehicles.

We are seeing the same thing in the U.S. in construction, infrastructure that is to be reviewed. Aluminum offers reduced carbon emissions, both in manufacturing at the start of the life cycle and during its use.

If you turn now to page 12, I would like to talk about what our industry has achieved.

[English]

The aluminum smelting capacity between 1990 and 2005 reduced its carbon footprint in absolute terms to an order of 38 per cent in Canada and 66 per cent in intensity. It is the single and by far the largest contribution from any industrial sector in Canada. This has been done not through closures but through modernization. We have focused on a single culprit in terms of greenhouse gas emissions, PFCs or perfluorocarbon emissions from our process.

Today, as I speak, we have reached and remain at the lowest possible technical level of emissions, which is two- tonne equivalent CO2. This is the technological threshold of the electrolysis process. With all the goodwill, all the money and the best scientists in the world, we could never go underneath two-tonne equivalent CO2 in our process. It's like trying to bake a cake without flour.

Another place where we can obtain some reductions is very limited, and it's the use of combustible fuels, fossil fuels, but this is only peripheral to our processes. Basically, when you look at a smelting operation, you look at the energy coming in. The process is hydroelectricity; it's 100 per cent hydro. We are big users of energy but very small consumers because 95 per cent of what comes in goes through the process and becomes aluminum, with alumina.

The other 5 per cent goes into peripheral needs for lighting and heating. We use a bit of fossil fuels for some heating purposes. In fact, if we were to tackle fossil fuel emissions by substitution moving from oil to natural gas, it would only relate to about 1 per cent of overall emissions and the costs would be tremendous. Right now it's unfeasible because wherever there is natural gas available, we're using it. The only place where there is none available is the north shore of Quebec. Should natural gas become available we would certainly be using it if it's at fair market price, but it would only impact 1 per cent of our total emissions.

When we say we've done our job, we're first class worldwide and we've reached a limit of what can be done. Our record is there. We undertook two voluntary reduction agreements with the Province of Quebec years ago. We were the only sector in the history of Quebec to do that, and we went beyond our goal each time.

What I'm trying to say today is that a lot can be done throughout Canada in terms of greenhouse gas reduction. There's a big job to do. There are sectors where it should be focused.

The needs, the requirements and the opportunities are asymmetrical as the country is taking into consideration the type of energy that is used in an area, the concentration of population, and the level of technological advancement in the manufacturing sectors.

We've done our job. The next step for us is twofold: One is a technological breakthrough that does not exist now, which means moving beyond the electrolysis process invented and put into industrial use back in 1888.

It would have to be a new process without the use of carbon anodes. Right now it's on the drawing board everywhere around the world. It's the Holy Grail of the industry, but we're very far from it. It's probably 15 or 20 years down the road. It's a major effort that has to be done. We think that Canada could play a role in that eventually, but it's not something that can be accounted for today in terms of capacity of greenhouse gas reductions.

Another place where we could do something, and we think this is Canada's greatest contribution to the planet's request to reduce greenhouse gas emissions, is to use more Canadian low carbon footprint aluminum to make light- weight vehicles and better buildings. Every time we use charcoal, coal-based aluminum from elsewhere in the world, we're doing the wrong thing in the right way. We're increasing greenhouse gas directly.

If Canada wants to do the right thing, first of all it has to treat the industry based on its record. We've done our job. The best we could do is behind us. This is what the Quebec government realized in the first phase of the greenhouse gas reduction plan up to 2020. We have free allocations as an EITE, which also factors in what we've done in terms of achievements in the past.

Now what we are trying to get is to maintain those conditions for post-2020, but at the same time doing everything we can as an industry to phase in more use of aluminum in the solution that we believe the Canadian and provincial governments should look into.

I'll finish with this: The biggest challenge for governments from our perspective in terms of policy-making is to do the hard thing, not the easiest thing. The easiest thing has been done. It's cherry-picking; it's getting the low-hanging fruit. That's done through regulation, through getting industry to meet some goals.

The tough thing is left to do. It is to get voters, citizens, taxpayers — they're all the same individuals — to do the right thing on a daily basis, while offering them valid alternatives to shift and change behaviour and get them to keep those new behaviours all along.

If we don't provide, as a country, alternative ways of transportation in largely densified cities, we're missing the boat.

If we do it but we do it with the wrong alternatives, if we use conventional buses and conventional trains instead of using new lightweight more efficient technology, again we're missing the boat.

I invite you to factor in those ways of doing things differently when looking at the future because this is what we're talking about. We cannot do things the way we used to do them if we don't want to achieve the same results that bring us together today.

We have to act differently. Thank you.

[Translation]

Senator Massicotte: Thank you for your presentation, Mr. Simard. I think it is quite clear. To help us understand your industry, if the sale price is $1, what are the costs? I imagine that capital cost allowances and energy costs account for a large part.

Mr. Simard: I think you are asking about aluminum production and not the construction of a plant. For operations, the main inputs are energy, which accounts for 24 per cent to 30 per cent of the cost of an aluminum ingot. Next is the aluminum or bauxite. Rio Tinto has a plant in Saguenay where it turns bauxite into aluminum. The other companies purchase bauxite on the market; it is practically a raw materials market. So the cost of bauxite is the second input, followed by labour costs and then other, much more peripheral costs.

Senator Massicotte: What is the percentage for bauxite?

Mr. Simard: It is about 18 per cent or 20 per cent, but it is the same cost for everyone. The Chinese, Canadians, everyone pays the same price for bauxite. Transportation is not a factor because shipping by sea costs next to nothing. There are a lot of fleets.

Senator Massicotte: I guess the two costs that represent an important factor are energy costs —

Mr. Simard: Yes.

Senator Massicotte: — and construction? You said that construction costs are 75 per cent lower in China. Is that correct?

Mr. Simard: Yes, but I would just add something. Depending on the location, the most important variable for us in terms of being competitive is the cost of labour. If I build a plant, my labour costs are very high compared to those in China, and my operating costs are also very high because we have labour conditions to uphold. The average salary in operations in our field is about $100,000 per year, not including overtime. That is the average salary.

Senator Massicotte: I think you have confidential contracts with Hydro Quebec?

Mr. Simard: They are no longer confidential. All the contracts are public now.

Senator Massicotte: But are your costs not lower as compared to the international competition?

Mr. Simard: No, not any more. I said earlier that the costs in China are so low that they are in the first quartile. Energy costs for new Chinese plants are in the first quartile as compared to costs elsewhere in the world, and completely to the left.

Senator Massicotte: And your costs?

Mr. Simard: We are in the first third of the second quartile. I am referring to the most recent contracts that include autoproduction. One of our members, Rio Tinto, produces about 90 per cent of its own energy. Two other members, Alouette and Alcoa, purchase directly from Hydro Quebec and account for about 30 per cent of bidding. That represents one billion dollars in energy purchases by two companies.

Senator Massicotte: Were they paying 3 cents or 4 cents per kilowatt hour?

Mr. Simard: It depends on the plant. It ranges from 3 cents to 4 cents per kilowatt hour.

Senator Massicotte: Are costs lower in China?

Mr. Simard: Yes, because they are subsidized. There is state intervention in China on all inputs.

Senator Massicotte: I guess they use a lot of coal?

Mr. Simard: They use only coal in China, or nearly; 90 per cent coal and 10 per cent hydroelectric power, for 180 plants. Right now, plants are being built with an average output of 800,000 tons per year. By comparison, Alouette, the largest plant in the Americas, produces 600,000 tons.

Senator Massicotte: Our competitive advantage is that we use hydroelectric power, which is clean energy, with lower CO2 emissions than China, the U.S. or even elsewhere.

Mr. Simard: Yes.

Senator Massicotte: If everyone in the world could agree to impose a $100 carbon tax, you would be happy and that would benefit you.

Mr. Simard: If there were a price on carbon, of course we would be at the top of the class, but that is not the way the world is now. The two jurisdictions with the lowest carbon footprint in the world are Europe and Canada, and these are the two aluminum-producing jurisdictions where there is a capping and exchange system.

[English]

Senator Wetston: I don't want to put words in your mouth, but I want to pursue your belief. I'm getting the impression that you feel the industry has been quite innovative, has modernized its production processes, and you don't have much further to go in modernization. That's a bit of a surprise to me, given the advancements in technology, processes, procedures, and the whole scientific methodologies that are being used today. I'd like to understand that a bit more, if I might.

As my second question, we understand that in B.C. and Quebec we have excellent hydroelectric generation, which is a tremendous advantage from the point of view of the environment. Can you also tell me what the history is as to why the industry has located only in B.C. and in Quebec? Of course we know many of the firms. Many of them are very well-established firms.

Mr. Simard: If I may, I'll start with the second one. I testified in front of the USITC in September and I was asked the same question. Basically, what I told our American neighbours is that we were blessed by nature with very large volumes of water. Science and technology have enabled human societies to harness those large volumes of water through hydroelectricity. While we were blessed with this capacity we have one problem: We don't have critical mass. We don't have markets. We are not enough people. We have done like many other countries in the world. In order to harness this, we use the same strategy that you use when you develop a shopping centre. Basically, we're talking about what we call stranded energy capacity, which means a large volume of available energy without any regional market to use it or to sell it.

What you do is that you find an anchor client, a very large user, to take in the energy with long term contracts at the fair market price, an advantageous price. You locate them there, and then you are able to develop this capacity in order to sustain smaller retail markets, which are your distribution.

Basically, what Quebec did years and years ago was to locate large industry users next to the hydroelectric power. This enabled financing through international markets to be able to get those long distribution lines all the way to the retail market and the commercial institutional market.

This model is what was used in the Middle East. The Middle East driver for aluminum is diversification of the oil rent by using stranded natural gas capacity that is offshore, for which there is no regional market. What you do is that you bring it onshore and you make aluminum. By making aluminum, you're exporting energy that is not exportable otherwise because aluminum is energy. Every time you remelt an ingot of aluminum or one tonne of aluminum cans, you only need 5 per cent of the energy that was required at the beginning, and that is an ever-repeatable process. We're exporting energy while creating wealth in the local economy.

This is the model in the Middle East. All of the countries that are exporting aluminum are exporting stranded energy capacity. China has a different model. It's a model to sustain its economy. It's urbanization like India, but when you're exporting this is the model.

To go back to the first question on modernization and why we can't go further, the furthest we have ever reached was very recently with the AP60 pilot plant in the Saguenay, which is due for industrial scale-up. This is the most advanced electrolysis-based technological process. It uses 40 per cent less energy to produce the same tonne of aluminum, thereby reducing emissions consequently. If we want to go further than that we have to use what we call an inert anode. It doesn't exist, so the only way to use less energy and not make any emissions is to use an anode that doesn't use carbon. That's what I call the Holy Grail. This is years away from us. It's a major undertaking. It's like carbon sequestration, the same type of big game-changer requiring lots of money, lots of dedicated research and capacity.

If we do this then we rethink completely the way we make aluminum. The challenge right now is to remain as efficient as we can be with the processes and the technology that we have in our plants.

Remember that whenever you make an investment to expend capacity, you are in the billions of dollars. Phase three of Alouette is about $2.5 billion to $3 billion. It's not a new plant. It's not a greenfield; it's a brownfield. If you're going to do that you have to scale down to 25 years ahead and say, "Do I do this investment today with the best available technology,'' and ask, "What does it mean?'' I hope that answers your question.

Senator Fraser: Thank you very much for being here, Mr. Simard. I'd like to get a better grasp on basic market numbers. We produce 3.2 million tonnes. How much does Canada use? How much aluminum?

Mr. Simard: It is 500,000 tonnes, approximately. Approximately 90 per cent of what we produce is exported. That's why I said that we're very highly trade exposed.

Senator Fraser: I didn't know whether we were talking imports because I had no idea what the national demand was. Where do we sell?

Mr. Simard: About 80 per cent of what we produce goes to the U.S. market. We represent about 57 per cent of all aluminum imported into the U.S. The rest comes from Russia and the Middle East.

Senator Fraser: And soon maybe from China. You say they are still building.

Mr. Simard: They are still building in China. If you want to talk about China, it's a different story and it has huge impacts. Just to keep the focus on the U.S., there are three key sources of imports. Canada is the largest one by far, then the Middle East, and then Russia.

When you look at everything that is produced in Canada and the U.S. in one year, and when you look at everything that is processed in one year, there is now a deficit of 3 million tonnes of aluminum in North America, which means that 3 million tonnes are coming from the Middle East and Russia. It's the equivalent of our total annual production.

The next question should be: Why don't we ramp up and go and get that market? It's just on the other side. In a $1,600 a tonne market right now with 18 weeks of accumulated inventories around the world, which is twice what it should be, not one sound investor will put a penny in an expansion. We need a different market signal. We need to reduce inventories to about eight weeks. We need to have a strong and robust market signal above $2,000 a tonne for quite a while for someone to justify putting billions of dollars into a plant expansion when the Middle East and Russia can ship in at the actual price.

Senator Fraser: What Canada has is lots of lovely, clean and relatively cheap hydro. We don't have bauxite and all that other stuff.

Is there a country out there that does have the raw materials and energy sources or is it all dependent on international shipping?

Mr. Simard: Very briefly, bauxite is the most available mineral or quasi-mineral on the earth's crust. It's 8 per cent of the earth's crust.

Concentrations of bauxite for industrial purposes are in the tropical areas of the planet. We're talking about bauxite from Trinidad, Malaysia, Brazil, Oceania and Australia. Everybody imports because most of the time you have the bauxite but you don't have the energy, and bauxite can travel easily. There is no problem.

Senator Fraser: For example, I was an Alcan baby. I grew up in Guyana, which actually has waterfalls and all those good things in the interior. I fail to see why somebody hasn't said, "Oh, let's put a nice smelter into Guyana,'' apart from the political difficulties.

Mr. Simard: That's a big part of it because what goes with the political difficulties is the policy-making in order to have a stable supply of energy. You probably also know that an aluminum smelter doesn't get shut off and turned back on. It cannot work like that because your potline will seize. To restart a plant it's $100 million, so when you stop a plant, it's because you're stuck.

I'll give you one last example. South Africa has both but they are closing because they get interruptions in the power. They get power outages because the government plays politics and sometimes wants to make sure that the people get electricity by cutting off supply to the industry, and the pot seizes. You need very good, long-term provisibility in terms of your energy supply.

Senator Fraser: We have that.

Senator Lang: I would like to go to the question of carbon pricing and its implications, as opposed to other countries such as the United States, which obviously is not going in that direction, China and others.

There are a total of 10 aluminum plants in Canada: one in British Columbia and nine in Quebec. Quebec has a cap- and-trade regime. British Columbia has a carbon tax. Does the carbon tax in British Columbia or the cap-and-trade regime in Quebec apply to your industry?

Mr. Simard: Yes, senator.

Senator Lang: What are the associated costs associated with it? If it is applying, how long has it been applying and what has it done to your ability to compete with other countries and organizations?

Mr. Simard: To go back to the beginning of your intervention, in the U.S., as in Canada, our assessment is that carbon pricing policies up to now have always been borne and supported by subnational governments everywhere. The national policy-making are demanding because of the all the asymmetrical aspects of any of those countries. The initiatives, be it the Western Climate Initiative in the west of the U.S. to which we are linked through our cap-and-trade system in Quebec with California, or the RGGI system in the eastern U.S., it's all borne by states.

We have been part of the cap and trade in Quebec and part of the carbon tax in B.C. for the Kitimat operation. As an energy-intensive, trade-exposed industry we have free allocations, which means we have credits that cover our emissions. There is an accounting. It's a three-year cycle for the cap and trade. You have to use your credits against your emissions, but if you're better than what you got, which means if you are able to manage and reduce your emissions, you can play your credits on the market.

Our assessment as an industry when we look at cap and trade versus a tax, cap and trade is the most incentivizing type of carbon pricing policy for an industry because you can earn something out of improving the way you operate. It incentivizes the whole organization. When you plan expansions you plan expansions to be a winner on the cap-and- trade market. If there is a tax, there is a tax. It applies.

This is where we come from. We have been involved and supporting carbon pricing both in B.C. and in Quebec ever since its beginning. We still do but we do so to the extent of one of our recommendations that governments recognize the capacity of our sector to deliver in the context of the national policy framework.

Senator Lang: I want to get this clear. I'm just a boy from the country.

Once we get through the smoke and mirrors of the cap and trade, the credits and various things, is it strictly neutral? Do you make some money out of it because your emissions are lower? Are your low electricity and costs of making your product such that you get credits back and make some money out of it?

Mr. Simard: Under cap and trade in Quebec all energy-intensive, trade-exposed sectors were granted a certain amount of credits. As we move through time the number of credits reduces. It's not a permit to pollute. It's an enabling policy to incentivize reductions.

The reason we were granted the allocations per smelting operator was also partly in recognition of the investments we made to reduce our carbon footprint before the system came into force. That was negotiated.

In a world where we're trying to decarbonize but where only some areas of the world have carbon pricing, this is a protection for us against areas of the world that produce with a high carbon footprint but do not have carbon pricing.

If you have a system of cap and trade, you have allocations for industrial sectors that are trade exposed. This brings to a neutral level the impact of other players in a commodity market that don't have the costs and emit more.

If you take away those carbon allocations we face Chinese producers. They have lower costs and they emit more. We would be penalized because we would be buying credits to produce aluminum that has a lower footprint than anything else in the world.

This is also part of the thinking that we have the right carbon footprint. We should not penalize our industrial sectors for their performance in a world where they are exposed to trade.

The Chair: I'm going to have to put you on second round, senator, to get the others in. Keep your thought, and I'll call you back later.

[Translation]

Senator Galvez: Thank you, Mr. Simard. That is interesting.

[English]

When I was listening to what you were saying I couldn't stop making a parallel with a presentation by the steel industry. Your industry and the steel industry say that we have a low carbon product and the policy in Canada should push so that we use this low carbon product. The effort is not made by the industry; the effort is made by the producers of the electricity, in this case Hydro-Québec.

You are saying that for the aluminum, as my colleague asked, the innovation is not there and that you have done enough. I really want to know what the aluminum industry is doing to bring down the footprint. The way you present it, it is the electricity. Do you understand?

Mr. Simard: Yes. Let me take you back page 13. From 1990 to 2015, we increased twofold our production capacity in Quebec. At the same time we reduced our carbon footprint by 38 per cent in absolute terms and 66 per cent in intensity.

What does this mean? It means that over and above the factor that we're hydro based, we had process emissions mainly in PFCs, perfluorocarbons.

What did we do? We pulled down the Soderberg potlines that were there, as an example, an old technology that was very largely emitting PFCs, and we modernized the plant. At what cost? It was billions of dollars.

This has brought us down to two, not hydroelectricity. The process improvements bring us to two. It's not a free gain for us. We invested billions of dollars, which they didn't do in the States. They're not doing it in China. We did it. We focused on this.

Senator Galvez: That's clear. Thank you very much because that really clarifies the point.

Mr. Trudeau said in the news that he was talking with China to open the market and allow free circulation and everything. There have already been some experiments with bringing Chinese workers to work in mines.

What is your position on that?

Mr. Simard: To me, there are two parts to the question. Before coming here, I spent two hours at Global Affairs Canada in the context of the China-Canada consultation.

China is responsible for disruption of world markets in aluminum and in steel. It's very clear.

We have been working for the past two years with our U.S. association and European association counterparts to establish what I call a containment policy on the Chinese overcapacity issue. This basically means sharing a common agenda on bringing China or forcing China to the table as often as possible at each and every venue that is offered to us, be it the WTO or the World Customs Organization, be it bilateral or be it the G20, to get them to police the way they manage their industry. It's creating havoc on the market. From our point of view it's affecting our capacity to grow in producing some of the most responsibly produced aluminum in the world while they're taking over markets progressively.

We are not affected by China in Canada because once again we're not a market. We don't import aluminum. We don't need aluminum from China. We barely consume what we should be consuming on a per capita basis.

The threat is not here. The threat as a net exporter of aluminum is everywhere in our markets. It's in the U.S. It's in Europe through CETA. It's everywhere. This is our position: We want to protect our foreign export markets everywhere against China's overcapacity.

The Chair: I'm going to have to move on to Senator Griffin.

Senator Griffin: My question has been answered. Thank you.

[Translation]

Senator Mockler: Thank you, Mr. Simard, for your very detailed, specific and accurate presentation. You also said that the state plays a role with respect to inputs in China. Can you tell us more about this and about the impact on greenhouse gases?

Mr. Simard: Of course. The aluminum industry in China really took off about 15 years ago, following a decision by the communist party in its five-year plan to focus on urbanization in China. They shifted to a forced economy by migrating part of the Chinese population, which was at the heart of China, to the new cities that were to be built. This provided employment, created a market and created manufacturing capacity. Steel and aluminum plants were built, which are needed to build cities. That was in southeastern China. Now there are plants in China that are 15 or 20 years old and that are run-down and produce so much smog that airports have to be shut down for three days because there is zero visibility. These plants are kept open and new ones are being built in northern China, near Mongolia, because there are stranded coal reserves and because it is also a means of occupying the land. They use Han people to occupy the land and set up plants in remote regions, which is an indirect method of political occupation.

That was not done in a normal market, but in a controlled one. The land was given to the developer, who has a 90- year lease. Energy-related costs are funded. A coal mine is made available to a producer. Their debt is funded, and there are a lot of plants in China that operate at a deficit. So China has an enormous debt financing bubble. All the analysts are trying to figure out how long it can last.

I am from another generation, but have you ever read Tintin in the Land of the Soviets? There were papier mâché cities, models. We often see the same thing now in China, what are known as "zombie plants.'' These plants operate, produce metal for which there is no market. The way it works is that the governor of the state where the plant is located is assessed on his contribution to GDP. So he has no interest in closing the plant. So if Jean Simard wants to close his plant, his steel or aluminum smelter — people in the steel business will tell you the exact same thing —, he will get a call from the governor who will say that he has to keep his plant running and send the metal he produces to a certain warehouse, and not change anything because the plant has 3,000 employees and he does not want them to be unemployed the next day.

So even if China, and ultimately communist party headquarters, says that it will have a capping and exchange policy, control greenhouse gas emissions and close plants to control capacity, that is not what is happening.

In closing, I can tell you that I visited an aluminum plant in China last summer, Nanshan Aluminium. It is a plant similar to Arvida, in Saguenay, which is a city that was completely built around Alcoa aluminum at the time. The city is now part of world heritage. Arvida had a population of about 7,000; in Nanshan, the population is 170,000. It is in the middle of the desert. Thirty years ago, there was nothing there. An industrial textile producer became one of the largest aluminum producers in China overnight, and is now one of China's billionaires. He built the kindergarten, elementary school and high school and the University of Nanshan, which all belong to the plant. You buy a little Nanshan suit as a child, and try not to grow too much because you will wear the same suit until you join the plant. Once you have finished your career at the plant, you live out your days at the Nanshan retirement home. I am not exaggerating; I saw this. The plant is perfectly modern. They produce 850,000 tons of airplane and car parts every year. It is all integrated. That is the way it is in China. That is the model.

[English]

Senator Mockler: President Trump just signed an executive order in respect to the Obama environmental policies that were there prior. Will that have an impact on your industry and especially an impact on the industries that are in the U.S.?

Mr. Simard: To me, there are two risk areas. On this one the risk area is the fact that with coal production being deregulated in terms of environmental impacts, it might kick off a resurgence of the use of stranded coal capacity that is close to formerly existing aluminum smelting operations in the U.S. They might want to restart some plants because the cost has gone down in terms of regulatory framework.

Another aspect of the question to watch is the impact of stopping the progression of the CAFE standard in the U.S The CAFE standard is the fuel economy standard for car fleets. This is what pulled Ford into doing the Ford F-150 in aluminum. You have to reach by 2025 a certain level of reduction in order to do that. You either substitute the type of fuel, lightweight it or use a different transmission, but you have to reconfigure your supply chain.

What they have announced is that the next phase that was supposed to come into force under the government of Obama has been put on ice. There's less progression in terms of aluminum intensity in the next generation of cars.

The Chair: We're going to go to second round, but first I'm going to take the opportunity to ask you a number of questions, if I could, please.

You keep saying the F-150. The F-150, the F-250 and the F-350 are all aluminum bodies. It is not the whole vehicle, but the body is aluminum, correct?

Mr. Simard: The F-150 is the one that has been totally redesigned with aluminum. The two others will get into the same type of design undertaking. They have been using aluminum but not to the extent of the F-150. The F-150 is 800,000 units per year.

The Chair: We had the opportunity to visit Kitimat. They are hydroelectric; you know that. They've reduced their energy consumption by 33 per cent per tonne, overall emissions by 50 per cent and GHG emissions intensity by 50 per cent. They now say they make the lowest carbon footprint aluminum in the world.

How many of the plants in Quebec are of the same quality as the one in British Columbia. In fact a $5 billion investment just fired it up, shut the old one down and fired the new one up. Can you tell me that?

Mr. Simard: Each plant in Quebec has been benchmarked using internationally recognized standards in terms of carbon footprint. Each plant is at 2-tonne equivalent CO2. It's all the same.

The difference is that Kitimat hadn't been modernized for 20 years.

The Chair: For 50 years.

Mr. Simard: Or 50 years. It ramped up using the best available technology when it was refurbished.

In Quebec, it was done gradually or incrementally. Basically, the fleet of plants is at about the same level in Canada. There are no more Soderbergs. We're all at a 2-onne equivalent CO2.

The Chair: We've heard from the aluminum industry that there is no place else you can save or reduce any GHGs. We've heard the same thing from the steel industry in Canada. We've heard basically the same thing from the forest industry in Canada.

Can you tell me where you think that Canada by 2030 is going to actually find another million tonnes of greenhouse gases? Where will Canada actually find that? It's absolutely almost impossible but can you tell me where they can find that? If you're saying you can't deliver, somebody has to deliver.

Mr. Simard: If I may, some industrial sectors — not all; there's still some hanging fruits — have done a fair share or a great share of greenhouse gas reductions.

In sectors such as ours the only way to go further, as I mentioned before, is a game-changer. It's not even a technological breakthrough. It's a real game-changer such as moving on to a non-carbon way of producing, and it's not there.

If we put that aside, what's left is going down the food chain. You have to get closer to individual consumer behaviour.

We're working with sustainable prosperity. We're working with the Canadian ecofiscality. I believe and we believe in the ecofiscal approach. You use taxes to discourage the wrong behaviour and you use taxes to encourage the right behaviour.

As long as people don't have a real price signal to do things right, they have no incentive to do it and it's not happening. People are going to keep buying oversized vehicles for the wrong reasons. They will not take the bus for the right reasons: because there aren't enough of them or they are not there at the right frequency. This is where governments have to get into policy-making.

Land use is the same thing. It contributes to greenhouse gas emissions. If the government in Quebec subsidizes an access to the highway, it's quantitatively demonstrated that it increases traffic. With new buildings being built outside of the main city it means more circulation will happen and there will be more greenhouse gas emissions.

We have to be coherent and consistent in the way we develop policies as a country, as provinces and as municipalities. It's going to be hard. What is left to be done is the hardest because it falls on the individual's shoulders. The individual votes and the industry does not vote, so that was easy to do.

The Chair: I'll leave you with one thing. You're saying it's all up to the individual. The government's target today is 219 million tonnes by 2030. If you shut down the whole transportation industry, my friend, you would only get an estimated 170 million tonnes. We can put everybody back on walking or bicycles but it's not going to actually meet the target. What I wanted to get out here was that this is a huge task.

You're confirming that industry can't play anymore or very little and everything has to be up to the individual. The individuals out there, whom I call Fred and Martha, are really going to get it in the pocketbook. They are really going to have to pay is what you're telling me. I'll leave you with that.

Senator Lang: I want to clarify something for the record, following what the chair just said. I think it's fairly clear and unequivocal that the major industries in Canada feel that in one way or the other they have to be recognized from the point of view of what I would call an exemption or a neutralization of any type of tax. Let's call it an exemption when it all comes out in the wash.

That being said, if you don't get those exemptions or that neutral credit versus costs at the end of the day, what is the position going to be for our industry versus that in the United States if some of these other plants in the United States start up again?

Mr. Simard: If we don't get the exemption, senator, it means that we will move along the cost curve that you have on page 18. We're going to find ourselves in the third quartile eventually. What happens when you are the third quartile? It is the beginning of progressive disinvestment. Your modern plants are not modern anymore, investments are done elsewhere in the world because the costs are lower, and one day you announce a plant closure. It's inevitable. It's the law of economics. It's the law of the market.

Let's make an abstraction. We followed the regime to get as lean as possible because we believed it was the way of the future. We have no fat left. We're barebones in terms of carbon emissions. Then someone says, "Okay, we're all getting together and we're going to follow a big regime to get lean.'' We say, "Sorry, we have just undergone that for 10 years. We don't have any capacity to lose weight. We lost all the excess.''

You should recognize that. This should be taken into consideration where it is demonstrated. Don't take the word for granted or anything. All the civil servants in Quebec and Canada have the figures. It's all there.

I know it's hard. It's not a matter of being punished for anything but it will be very hard. I don't know if it will be reachable but we have to think outside of the box. We're going to have to make investments. In Quebec, 40 per cent of emissions are in transport and 80 per cent of those emissions are in Montreal.

Senator Lang: Shut down Montreal.

Mr. Simard: No.

The Chair: I have to stop it there.

Senator Galvez: I agree in the sense that I know it's going to be very tough for the citizens individually, but what if we don't do anything? I think it will be more expensive if we do nothing.

As you mentioned, the big sectors putting carbon out in the atmosphere are energy and transport, but the third one is the cities, industry and housing. Your material is used by the construction industry more and more because aluminum is so versatile. That's true. I am a civil engineer. I have seen aluminum used now incredibly in construction, but there is not only aluminum. There is concrete, wood and steel.

The building code is an old building code. It is poor in efficiency and poor in material usage. If there is a table where we can put together all these industries that contribute to construction, is it in your opinion a good idea, a good stimulus, or a horizontal transversal that can incentivize?

Mr. Simard: I get the question.

We say all politics is local. All emissions are local also. The problem is universal but the sources are local. When you look at the national building code it's very good example. It is called optimization, optimizing the choice of materials. If you use the right material at the right place for the right reason, you can make tremendous headway. We have been working on notions like this for years.

One of the problems that we have with the national building code is that in Quebec it's not applied all over and in the same way. It varies from one municipality to another. The mayor decides if he applies it and which parts because he wants to attract builders to build a condo more cheaply than a neighbouring municipality can. Contractors can go shopping from one municipality to another to make their developments. You then end up with buildings that are not energy efficient but they are there for 50 years. They suck in energy and they push out carbon. That's one of the problems. That's policy-making.

The Chair: Thank you very much, sir. I appreciate your presentation and the questions that we had. Thank you for being here and thank you for waiting a while for us to actually get here.

To the rest, we're going to go in camera. I would like to get our budget passed for our next part of the trip. I'll ask all of you just to stay here while the witness leaves and we'll get on with it.

(The committee continued in camera.)

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(The committee resumed in public.)

The Chair: Could I have a motion to approve the budget, please?

Senator Massicotte: I have read the budget. I propose a motion to accept the budget as presented.

The Chair: All agreed?

Hon. Senators: Agreed.

(The committee adjourned.)