THE STANDING SENATE COMMITTEE ON ENERGY, THE ENVIRONMENT AND NATURAL RESOURCES
EVIDENCE
OTTAWA, Tuesday, May 1, 2018
The Standing Senate Committee on Energy, the Environment and Natural Resources met this day at 5 p.m. to give consideration to the subject matter of those elements contained in Part 5 of Bill C-74, An Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018 and other measures.
Senator Rosa Galvez (Chair) in the chair.
[English]
The Chair: Welcome to this meeting of the Standing Senate Committee on Energy, the Environment and Natural Resources. My name is Rosa Galvez, a senator from Quebec and chair of this committee.
I will now ask senators around the table to introduce themselves, starting with Senator Cordy.
Senator Cordy: Jane Cordy, Nova Scotia.
Senator Richards: Dave Richards, New Brunswick.
Senator Patterson: Dennis Patterson, Nunavut.
Senator Seidman: Judith Seidman, Montreal, Quebec.
Senator Wetston: Howard Wetston, Ontario.
The Chair: I would also like to introduce our staff. On my left is our clerk, Maxime Fortin, and our Library of Parliament analysts, Sam Banks and Jesse Good.
Before we hear from the witnesses, I want to inform you that I have to leave shortly. Senator Cordy has kindly agreed to take the chair for the remainder of the meeting. Thank you very much for your understanding.
Today, we are starting our study on the subject matter of Part 5 of Bill C-74, An Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018, and other measures. Part 5 of the bill deals with the greenhouse gas pollution pricing act.
For our first panel, we will hear from officials from two departments.
From Environment and Climate Change Canada, we welcome John Moffet, Associate Assistant Deputy Minister, Environmental Protection Branch, and Philippe Giguère, Manager, Legislative Policy.
From the Department of Finance Canada, we welcome Gervais Coulombe, Director, Sales Tax Division, Tax Policy Branch; Pierre Mercille, Director General (Legislation), Sales Tax Division, Tax Policy Branch; and David Turner, Tax Policy Analyst, Sales Tax Division, Tax Policy Branch.
Thank you very much, gentlemen, for being with us today. I invite each of you to proceed with your opening statement, after which we will go to a question and answer period.
John Moffet, Associate Assistant Deputy Minister, Environmental Protection Branch, Environment and Climate Change Canada: I will provide some general opening remarks, and then I will ask my colleagues to provide you with a brief summary of the two main parts of the legislation related to the carbon charge and the output-based pricing system for large industrial emitters.
This part of the Budget Implementation Act would implement a key component of Canada’s approach to addressing climate change. This part of the bill will be known as the greenhouse gas pollution pricing act. I believe my colleague refers to it as the GGPPA. I have not quite managed to wrap my head around that acronym yet, but I am sure I will.
To start with the overall approach to climate change, on December 9, 2016, Canada’s first ministers adopted the Pan-Canadian Framework on Clean Growth and Climate Change. The key purchase of that framework is to grow the economy while reducing emissions and taking steps to adapt to a changing climate.
The framework includes numerous measures divided into four broad groups of which carbon pricing forms a foundational element. This is because carbon pricing is the most efficient way to reduce emissions. It can reduce emissions at the lowest cost to business and individuals by providing them with flexibility, as compared to other regulatory measures that might prescribe the actions that need to be taken or spending measures that are targeted at certain initiatives.
The Pan-Canadian Framework includes both of those measures. In some cases carbon pricing can’t work or may not work fast enough. In other cases we know from experience that spending measures are needed, for example, to stimulate certain kinds of investments or to enable entrepreneurs and innovators to move their innovations into the marketplace.
Also in late 2016, the government published a document known as the Pan-Canadian Approach to Pricing Carbon Pollution. That document established a national benchmark. It is essentially a statement that the government intends to ensure that carbon pricing will be implemented throughout Canada and applied to a broad set of emissions and actions, while at the same time giving flexibility and guidance to provinces and territories that want to implement their own pricing systems.
The government did this in recognition of the fact that the three provinces of Alberta, British Columbia and Quebec already had different pricing systems in place and Ontario had already announced its intention to join Quebec in a linked cap-and-trade system with California. The benchmark provides the flexibility to provinces and territories to develop their own systems, provided those systems meet certain benchmark criteria.
To complement the benchmark and that flexibility, the federal government also committed to implementing a federal pricing system which provinces and territories can ask the federal government to implement in their jurisdictions or which the federal government will implement in any jurisdiction that decides not to implement its own pricing system that aligns with the federal benchmark.
Yesterday, we released a study of the estimated impacts that carbon pricing would have throughout Canada on GHG emissions and on the economy when fully implemented. The analysis is based on a hypothetical scenario where we looked at the impact of the four existing pricing systems, plus the implementation of the federal system.
Of course, we know that will not actually be the way things play out. Numerous provinces and territories have already announced their intentions to develop their own systems. However, until we see the final design of those systems, including not just the way they will impose pricing but also the way in which they will decide to return revenue, it would not be possible to provide a more detailed analysis.
We have provided an analysis of this scenario which found that carbon pricing applied throughout Canada could reduce greenhouse gas emissions by up to 90 million tonnes in 2022. As the study indicates, that would be the equivalent of taking about 26 million cars off the road for a year or shutting down more than 20 coal plants. Canada doesn’t even have 20 coal-fired electricity generation plants in operation today.
The modelling also projects that the national GDP would continue to grow. Indeed, it predicts the GDP would grow by about 2 per cent per year with or without carbon pricing in place.
In terms of timelines for where this overall initiative is going, in December 2017, Ministers McKenna and Morneau wrote a letter to each of their provincial counterparts providing some timelines. The basic timelines are as follows:
They asked each province to send them information by September 1 about their own carbon pricing plans. After receiving that information the two departments, on behalf of the ministers, will assess that information and determine whether the proposed or actual pricing plan would align with the benchmark that I just referred to. Presuming it does, then we do nothing under the federal pricing system.
If, however, a province asks us to implement the federal pricing system or if we conclude that the province’s actions do not align with the benchmark criteria, the ministers will have the authority under the legislation we are discussing today to issue an order-in-council to add that jurisdiction to a schedule in the act, which would then have the effect of bringing the act into force in that jurisdiction.
The goal is to make those decisions by late fall in order to be able to provide for the federal system to be in place, in effect, wherever it needs to be by January 1, 2019.
In the meantime, we are working actively with all provinces and territories that do not have pricing systems to help them assess their options and make design decisions.
Once jurisdictions have carbon pricing in place, the provinces, territories and federal government have committed to two broad reviews under the Pan-Canadian Framework. One is a review by 2022 to inform where we go with pricing after 2022 because the current criteria and the bill in front of you provide for an increase in carbon prices up to $50 per tonne out to 2022 and then are silent thereafter.
We have committed to a federal-provincial territorial review by 2022 to inform what happens after that. We have also committed to an “interim review.”
Senator Jane Cordy (Acting Chair) in the chair.
The Acting Chair: Speed it up. We have committed 15 minutes to two witnesses from each department. We have already gone up to almost nine minutes, so perhaps you could finish in another minute or so.
Mr. Moffet: I will leave you with the proper brief introduction to the act which is that the act provides for the establishment of a pricing system that has two components: a charge on fuel and an output-based pricing system for large industrial emitters.
I will turn to my colleague from Finance to describe the main details of the fuel charge provisions.
[Translation]
Pierre Mercille, Director General (Legislation), Sales Tax Division, Tax Policy Branch, Department of Finance Canada: Good evening.
As previously stated, Part 5 of the bill implements the Greenhouse Gas Pollution Pricing Act. Part 1 contains the provisions that implement the charge on fossil fuels, which is part of the carbon pricing system. Under Part 1, the charge on fossil fuels applies to 22 different kinds of fuels. There are the more common fuels such as gasoline and heating fuels, as well as natural gas. There are also less common fuels, such as methanol and petroleum coke.
The fuel charge rates are in Schedule 2 of the bill, on page 546. The charges range from $10 to $50 per tonne of CO2 equivalent. To facilitate administration and compliance, the rates are expressed in standard commercial units. All the rates are in schedule 2, but I will give you a few examples.
For gasoline, at $10 per tonne, the charge would be $2.21 per litre, and at $50 per tonne, in 2022, the charge would be $11.05 per litre. For natural gas, at $10 per tonne, the charge would be $1.96 per cubic metre, and at $50 per tonne, in 2022, the charge would be $9.79 per cubic meter.
[English]
Part 1 of the GGPPA provides that the charge is applied to fuels that are produced, delivered or used in a listed province. It also applies to fuels that are brought into a listed province from another place in Canada and to fuels that are imported into Canada at a place in a listed province.
A listed province is essentially a province listed on Part 1 of Schedule 1 for the fuel charge part. It will apply if the jurisdiction requests that the federal system apply it in its jurisdiction, or if they do not have a carbon pricing system in place in 2018 that it meets the national benchmark.
The Governor-in-Council is authorized to add a province to Part 1 of Schedule 1, which would mean that the fuel charge would start to apply in that jurisdiction.
Generally, in the most typical cases, the fuel charge is paid by fuel distributors registered for the purpose of Part 1 of the GGPPA. Registered distributors are most commonly persons that produce fuels or sell fuel at the wholesale level. Typically, these would be large corporations.
A registered distributor would be responsible for paying the charge in respect to the fuel that they delivered to another person and in respect to the fuel that they consume and use directly.
Part 1 also provides specific circumstances where the fuel charge is not applicable when the fuel is delivered to certain persons who provide an exemption certificate.
In these cases, when a registered distributor delivers fuel to a certain person who provides an exemption certificate, the registered distributor does not have to pay the charge in respect to that fuel. Therefore, the fuel charge is not embedded in the selling price of the distributor.
The type of person that can use exemption certificates are, for example, other registered distributors in respect to the same time of fuel; farmers in respect to certain fuel and in certain circumstances; and persons subjected to the output-based pricing systems under Part 2 of the legislation, which will be described shortly.
The exemption certificate is a certification that the purchaser provides to the vendor and that relieves the distributor from paying the charge under Part 1.
What is an exemption certificate? Essentially, it is a certification that a person will provide. In the case of the operator of a covered facility under the output-based pricing system, the person would certify essentially that they are registered with the CRA under the output-based pricing system and that the fuel is for use at a covered facility under the output-based pricing system.
What is important here is that if those conditions are met, the emissions from that fuel will be priced under Part 2 of the legislation and not under the fuel charge under Part 1.
I want to mention quickly that there are specific rules for determining the charge applicable to enter jurisdictional air, marine, rail and road carriers. Some of those carriers are also entitled to use exemption certificates. Basically, when they do that, the charge is not paid by the distributor that delivered it to them, but they will have to self-assess the charge directly based on their fuel use.
You want me to go quickly, I see, so I will skip some parts.
I’ll mention that some persons are required to register for the system, like a fuel producer or someone who operates a natural gas distribution system. There are many administrative and compliance rules in this legislation to ensure that the act is being complied with.
I will cut it short here and let my colleague explain the output-based pricing system.
The Acting Chair: Mr. Giguère and Mr. Coulombe, are you here to answer questions, or do you have something to say?
Philippe Giguère, Manager, Legislative Policy, Environment and Climate Change Canada: I can provide a quick overview of Part 2 of the legislation.
[Translation]
Part 2 establishes the output-based pricing system for pollution caused by greenhouse gas emissions from industrial facilities. The objective of Part 2 is to minimize the risk of carbon leaks from industries affected by trade, while sending a price signal that encourages those industries to reduce their greenhouse gas emissions.
It should be noted that Part 2 is primarily enabling. It establishes the powers and obligations related to the output-based pricing system, but regulations will have to be developed in order to implement this part. Further, the government has already begun consultations on the proposed regulations framework for the implementation of the output-based pricing system in Part 2.
The output-based pricing system will apply to facilities that meet three criteria. First, the facilities must be located in a province or territory where the federal system applies. Those facilities are listed in Schedule 1 of the act. Second, these facilities must also have emissions above a certain threshold, which will be established in the regulations. Finally, they must conduct activities that will also be spelled out in the regulations.
The regulated facilities are designated as covered facilities in Part 2. The output-based pricing system will complement the carbon price. In other words, the fuels used by facilities subject to the output-based system will not be subject to the carbon price set out in Part 1.
The annual emissions limit for a covered facility will be based on an emissions intensity standard for the facility’s industrial activity. These standards will also be defined in the regulations. With a view to publishing emissions intensity standards in the fall of 2018, the department has also begun discussing these standards with stakeholders. For example, a standard could be established to allow emissions equivalent to one tonne of CO2 per production unit for a specific regulated activity. In this example, a facility that conducts a regulated activity would have an annual limit of one tonne of CO2 multiplied by the number of units produced by the facility in that specific year. This criterion will encourage facilities to be as efficient as possible in their production; in other words, they will be encouraged to reduce their emissions per unit of production.
Clause 174 of the bill requires the regulated facilities to pay compensation for emissions in excess of their annual limit. If, on the other hand, the facility’s emissions fall below their annual limit, they will receive surplus credits.
Quickly, with regard to compensation, it is a key part of the system. Compensation for excess emissions can be paid in three ways. First, facilities will be able to submit the surplus credits they have earned or acquired. Second, facilities will be able to apply surplus credits from approved projects that prevent emissions or eliminate greenhouse gases in the atmosphere. Third, facilities can pay compensation as set out in Schedule 3 of the bill. As stated before, the price is $10 per tonne CO2 equivalent in 2018, increasing in $10-increments until it reaches $50 in 2022. I think we can stop here.
[English]
The Acting Chair: Thank you very much. This has been a good opening and a good overview of Part 5 of Bill C-74. It’s a good way to start our study of the bill.
Senator Wetston: I want to ask you about cap and trade and carbon tax. We have Ontario and Quebec in the cap-and-trade system, two of the largest provinces in the country representing a fairly significant number of issues associated with greenhouse gas, obviously.
How are you managing those systems within the context of this bill? What might happen as we move forward if, for example, the government needs to implement this legislation? How will it work in Ontario? How will it work in Quebec?
I don’t need to tell you that cap and trade is the regime that has been adopted in Europe, as well as in California. I am trying to understand how this will work in Canada.
Mr. Moffet or others, perhaps you can help me with that.
Mr. Moffet: To reiterate the observation that Canada already has different pricing systems in place, we have a straight carbon tax in British Columbia and we have a system in Alberta that is very similar to the one we just described. The federal system combines a levy and an output-based pricing system, and then we have cap and trade in Ontario and Quebec.
The benchmark document I described says that we want provinces and territories to develop a pricing system. It could be any one of these pricing systems. We may see a further proliferation of different systems. We may see province X develop a tax and then province Y develop a hybrid system like the federal system. Indeed, Nova Scotia has announced that it will develop a cap-and-trade system.
We have also said that our system will not apply in any jurisdiction that has its own pricing system. As long as Ontario and Quebec retain their current cap-and-trade systems, and as long as their caps continue to decline along the trajectory they’ve outlined in their regulations, there will be no need for the federal system to apply.
If, however, they stand down or eliminate their pricing system, then there would be no pricing system in that jurisdiction and the federal government would have the authority, under this act, to apply this system in that jurisdiction.
No doubt there would have to be a period under the provincial system to wind down that system because significant investments and credits will have been made available, for example, in the province of Ontario. No doubt, people who have purchased those credits will want to talk to the premier about how to get the value out of those credits.
Our job will not be to wind down the provincial system. That will be for the provincial government. Once the provincial system no longer applies, as I said, this bill will provide the federal government with the authority to step in and impose a federal pricing system.
Senator Wetston: I have a quick second question. I don’t understand why the federal government didn’t pick a cap-and-trade system. Ontario was out in front and Quebec was out in front. They did the deal with California. Europe has gone cap and trade. I still don’t understand the justification.
I understand cost certainty versus environmental certainty. You would all agree with me that most scholars would say that a cap-and-trade system would give greater environmental certainty than the other system. It will also create better flexibility for firms in that system, rather than the pricing system which governments will impose.
I am just giving you my thoughts about what others have written about this. Maybe you might briefly tell me why they chose the carbon pricing system versus cap and trade.
Mr. Moffet: Your description of the merits of cap and trade suggested that it provides the most environmental predictability. That’s correct. I would take issue with the assertion that it’s the most flexible system.
An output-based pricing system provides more flexibility in terms of industrial investment and economic growth because there is no limit on total emissions. There’s a limit on emissions intensity.
These are important policy trade-offs. I will not take a position as to which is better, but I just want to be clear that there are trade-offs.
The question is probably better answered by the minister, but one of the fundamental reasons, I think I can safely say, for not choosing a cap-and-trade system was the desire to respect the fact that provinces already had a pricing system in place and then to give further flexibility to provinces to develop their own pricing system. In the absence of knowing what the population of activities or emissions would be, it was impossible to establish a cap.
Senator Wetston: What about Europe?
Mr. Moffet: The difference is that Europe imposed one Europe wide. We said we would impose a system that only applies in jurisdictions that have not acted. Until we know where that is, we don’t know how large the cap should be.
Senator Patterson: Mr. Moffet, I come from the region with the highest cost of living in the country, Nunavut. When our premier signed the Pan-Canadian Framework, he was told by the Prime Minister that the unique circumstances of Nunavut would be considered.
Nunavut has no roads. It has no alternative energy. I hear you say today that carbon pricing is the most efficient way to reduce emissions with the lowest cost to individual consumers by providing them with flexibility. I assume you mean flexibility to choose alternate energy instead of fossil fuels. My constituents don’t have any choice.
I am gladdened to see in Part 1 that the schedule listing provinces talks about provinces and areas that would be listed. It doesn’t mention territories.
Is there a special regime being developed for the territories? By the way, there was to be a joint study on the impacts of carbon pricing in Nunavut by the feds and the territorial government. To my knowledge it has not been completed and certainly has not been released.
Where are we at here? Are we an area that might be listed? What does that mean in the schedule?
Mr. Moffet: There are a number of questions there. I’ll try to go through them quickly.
Legally the term province means province or territory, so the act provides authority to list a territory in the schedule by using the word province. That’s a legislative term of art.
The study you referred to has been completed. We did the study jointly with the territory of Nunavut. We did three studies with each of the territories, and basically did the study jointly with the territories.
The Yukon government has made that study public. The Nunavut government has that study and is using it to think about pricing options. We have been in regular contact with officials in the government of Nunavut to identify considerations. Indeed, the premier of Nunavut will be meeting with various ministers and the Prime Minister this Thursday.
The last point was to remind members that the Pan-Canadian Framework included, in addition to a commitment to pricing across Canada, various measures to enable jurisdictions and households to reduce their production of greenhouse gas emissions and thereby reduce their exposure to carbon pricing.
Included in the Pan-Canadian Framework is the LCEF, the Low Carbon Economy Fund, that has earmarked funds for each jurisdiction. I apologize, but I can’t remember if Nunavut has already signed its agreement or if it’s in the process of signing its agreement. Basically it identified a number of ways in which it wanted to spend that money, and that arrangement has been put in place.
In addition, the Pan-Canadian Framework includes a suite of programs designed to help fund remote communities, including communities in the territories, to adopt renewable energy as an alternative to diesel, recognizing that no remote community in the North, at least in the short term, will ever be 100 per cent free of reliance on diesel because of the need of a backup system. Significant investments will be made over the next few years in remote communities, including in Nunavut.
The final point I would make is that the Pan-Canadian Framework explicitly commits the federal government to recognizing the unique circumstances of Nunavut. That is one of the issues on the agenda for the discussion with the Prime Minister this week.
Senator Patterson: Mr. Giguère, I hate these acronyms but I have to use them. I want to know how you calculate the OBS for mines.
The reason I ask is that I am concerned that the OBS levels set up by federal officials are based on the output of mining companies located in southern Canada. None of them face the costly barriers of northern mines which are severely handicapped by lack of transportation infrastructure, remoteness, climate, energy and access to the North American hydro grid.
Is your OBS level set up for southern companies? Will it heavily penalize northern mines in remote locations? There are three of them in my region. We are very concerned about it.
Mr. Moffet: I can answer that question. We’re at the very start of establishing the OBS. You are correct in saying that we have proposed, as a starting point for discussions, a single OBS for mining activities. We have described a conceptual starting point for all the output-based standards.
I am getting a little technical here. At 70 per cent of the national average weighted emissions intensity, an average facility would then essentially pay a price on 30 per cent of its emissions but not on 70 per cent of its emissions.
Of course, some facilities are less efficient than average and some are more efficient than average. As I say, we are at the early stages of these consultations. The explicit purpose of the consultations is to invite industry to provide us with information about the competitiveness implications of using that default starting point and thereby make a case, where appropriate, that we should move off that starting point.
I can assure you that we received sizable input from the Mining Association of Canada and from numerous mines including mines in the North. No decisions have been made about what that standard will be or whether it will be regionally differentiated.
Senator Richards: We have had the worst flooding in New Brunswick since 1972. There’s almost no real industry anymore in New Brunswick. There is no eastern pipeline. A few mills are left. There is almost no heavy industry. Tell us what we should cut back on or pay for.
We’re a shining example of where industry has died and investment has dried up completely. In the bigger picture, will this happen in Alberta with Kinder or in Ontario with the steel industry because of the implemented things you are putting in practice in the next few years.
How devastating will it be for world-wide investment or for people coming in? Do you look at that or have a table for it? Anyone can answer.
Mr. Moffet: The study we released models the economic impacts and suggests that GDP will continue to grow at the same rate, with or without the carbon pricing system that we have described.
In addition, the Province of New Brunswick has asked for the output-based pricing we are proposing to implement under this system to be implemented in that province. It is explicitly designed to avoid adverse competitiveness impacts. We are in extensive discussions with the province, with the pulp and paper sector, with the large refinery in New Brunswick and with a couple of other industries.
We are exchanging information about the competitiveness impacts of setting the output-based standard at the proposed level. We are also discussing whether there is another more appropriate level that would continue to have the kind of incentive we want to put in place to reduce emissions while avoiding competitiveness concerns and carbon leakage which would flow from shutting down industry.
The goal is not to shut down industry. The goal is to encourage industry to become more efficient.
Senator Richards: That would be nice. An eastern pipeline might help. Most of our weather during the wintertime doesn’t come from the north or the west. It comes from the south. It comes from the great industrial south, where none of these practices are now put in place.
If we’re talking about a globalized environmental handicap, we’re getting it from the south. We are not where all these measures will be put in place in Ontario and in Hamilton.
How are you going to rectify that? I don’t think we can. It’s great to say this is good for Canada, but most of our environment is shared with the United States. They don’t seem to share your complete concern over all this at the moment.
Mr. Moffet: I think that’s primarily a statement, but I think the government’s position is that we would not be in any position to press any other country, including our neighbour to the south, to take action unless we take action ourselves.
Senator Seidman: Last week the Parliamentary Budget Officer produced a report that said the government’s carbon pricing plan would cause the GDP to drop, costing Canadians $10 billion. Some estimates have been as much as $35 billion.
This differs from what you’re presenting today, so what would you tell us about this kind of estimate that would obviously hurt Canadians if, as a Parliamentary Budget Officer said, it took 0.5 per cent out of the economy?
Mr. Moffet: The Parliamentary Budget Officer’s estimate was based on a scenario which is completely different from both the scenario we modelled and what’s actually occurring in Canada.
They based their scenario on an assumption that there would be a straight carbon tax across Canada, no output-based pricing system under the federal system, and no cap and trade in Ontario, Quebec or in Nova Scotia. They modelled the highest possible financial impact, whereas we modelled something we think is closer to what will occur. That’s the main reason for the difference.
In addition, they took a scenario that had been developed by a third party organization, Ecofiscal, but the main author of that scenario just published an article in Maclean'srepudiating the Parliamentary Budget Officer’s estimate arguing that their methodology was flawed.
I don’t want to cast aspersions on their model. They just made assumptions that we think do not reflect reality. The modelling may be perfectly good, but it’s not a model of anything that will actually occur in Canada. We think what we modelled is closer to what will actually occur.
In conclusion, with the way we have designed the system and other provinces have designed the system, the impacts will be much lower. None of those models account for the possible economic benefits of putting in place carbon pricing in terms of innovation or ability to attract investment.
Senator Seidman: Are you saying the PBO’s model was the worst possible scenario and yours is the best possible scenario, or something of that sort?
Mr. Moffet: I don’t know if our ours is the best possible scenario. We tried to make ours as realistic as possible, whereas theirs, as I say, assumed that Ontario and Quebec don’t have cap-and-trade systems, which they do.
Senator Seidman: Clearly there is a discrepancy here. What about estimates being made on how much this will actually cost the average Canadian family?
You say gasoline prices will go up by about 11 cents a litre and the cost of heating a home will increase by over $200. However, overall the impact will be on all kinds of things such as the clothes we buy. This will affect all other kinds of things.
Has there been any estimate made on the part of the government of what this will cost per year for the average Canadian family?
Mr. Moffet: First of all, 80 to 85 per cent of the Canadian population is already living and purchasing in jurisdictions that have carbon pricing, so we’re just adding on the margins of what is already in place in Canada.
Second, it is actually not feasible at the moment to provide an accurate estimate of the impact of what the average family in Canada will face by the full application of carbon pricing throughout Canada for a couple of reasons.
I go back to sort of where I started. The federal government has chosen to provide flexibility to the provinces to design their own system. Until they design their own system, we won’t know exactly what the cost of that system will be.
Second, in any event, we also said that all revenues whether from our system or their system will stay in the jurisdiction. The impact on a household will fundamentally depend on how those revenues are spent.
Are they spent in changing taxes which will have an impact on the household? Are they given back to the household as they are in Alberta for most low-income households? Are they allocated to energy efficient subsidies as they are in Ontario, for example?
The impact depends on some decisions that have not yet been made. As those decisions are made, the government has made a commitment that it will provide more information.
[Translation]
Senator Massicotte: Thank you for being here today. We are considering a very detailed bill for the implementation of a concept that I support, which is the introduction of carbon pricing. I need to know how it will work, though. I am referring in particular to the industries affected by trade. Your minister has clearly stated in the past that she was very sensitive to that. Major companies in Canada compete with American companies that are not subject to carbon pricing. This unfairness must be compensated by our taxation system to ensure that it is a fair and equitable as possible. Is it Part 2 of the bill that deals with companies? There is a part that pertains to industries, but all industries, not just those that are exposed to unfair competition from products that cost less. I am trying to understand. How will the situation help companies affected by trade?
[English]
Mr. Moffet: The way we’ve designed the system, there will be no overlap between the fuel charge and the output-based pricing system, so no double pricing.
We said that the output-based pricing system would apply to industries that meet a certain emissions threshold. We have a discussion paper that is being talked about with industry that proposes a threshold.
We’ve also proposed that smaller facilities can opt into the system. We have not required that smaller facilities be part of the system. We thought about that because we know that small businesses compete as well as large businesses.
The participation in the output-based pricing system relieves a facility of exposure to carbon pricing. On the other hand, it will require significant monitoring and reporting so that by the end of year we will know what was produced, what were the emissions, and do you owe or do we owe you.
The charge system is simply that the facility doesn’t pay anything. The supplier of the fuel pays the charge and then just includes that price in the price they charge for fuel, so there is no administrative burden on the small facility.
[Translation]
Senator Massicotte: So if I understand correctly, you lump all the industries together. You use the industry average to say that 70% of CO2 is not taxed, but the other 30% is subject to carbon pricing. You lump them all together. All industries are equal, not just those exposed to competitors from the U.S. who are not subject to carbon pricing.
[English]
Mr. Moffet: The starting point for thinking about the system was: How do we identify facilities that are actually trade exposed? How do we avoid a situation where we are not providing the benefit to a facility that does compete?
There are a couple of jurisdictions that have developed some pretty complicated criteria. We met with leading economists in those jurisdictions. Essentially, there are no criteria that we can develop and implement in a transparent way to guarantee that we could, in a fairly rapid and transparent way, identify and apply the output-based pricing system only to facilities that are significantly competitively exposed.
We took the criteria that California and Alberta are using and classified Canadian industry against those criteria. Then we looked at the simple threshold approach we are using and developed a Venn diagram, and there is almost a perfect overlap.
If we used a large threshold of about 50 kilotonnes, we were satisfied we were getting most of the competitively exposed industries as long as we excluded facilities that we know are not competing like large hospitals and waste sites. The regulations will explicitly exclude them.
Senator Mockler: I live as next door neighbour a thousand feet from the U.S. I can assure you I know where Canadians will go to tank their vehicles. I also know the lineup almost comes directly to our side.
Senator Massicotte: Because they can save money. That is why.
Senator Mockler: What you are asking parliamentarians to consider and vote for, is it revenue neutral or is it a revenue generator for governments?
Mr. Moffet: This federal system will be subject to requirements in the law to return all direct revenue to the jurisdiction from which the revenue was generated.
The federal government will not see any revenue from the system. It’s not being introduced for the purpose of raising revenue or spending revenue on the part of the federal government.
Senator Mockler: Does the federal government have the constitutional authority to impose what we call the backstop, and I know you know what the backstop is, on provinces or territories that do not meet the federal standard?
Mr. Moffet: The government is confident that it has full legal authority to develop this law and to implement it in any jurisdiction in Canada.
[Translation]
Senator Dupuis: Thank you, gentlemen. Senator Seidman asked whether you have considered the cost per capita or cost per household. You said it is not possible to give the cost per family because the impact will vary depending on what the provinces choose. In the case of Saskatchewan, which is challenging the constitutionality of the legislation, have you been able to extrapolate the costs for that province or, theoretically, is it clear that the bill will apply directly?
[English]
Mr. Moffet: Until now, we have done three types of analyses. One is the set of studies that we did with the three territories, where we worked with them to estimate the impacts of carbon pricing in those territories.
As I explained, we did those studies for the territorial governments. Essentially, we were acting as consultants and providing our modelling expertise on the part of Environment Canada and Finance Canada.
We also worked with all of the other non-pricing provinces to provide whatever modelling they asked us to provide to help them make decisions about carbon pricing. That analysis has ranged widely, depending on the request made by the province. That information was done on behalf of the provincial government.
We are interacting with officials in the government of Saskatchewan and are sharing information. Also, as I explained in another committee this morning, we have also done some scenarios and some modelling, some of which was reported in the document that we released yesterday about the overall impact of carbon pricing.
Until an individual province decides exactly what it will do or wants us to do and how it will use the revenue, then we are unable to provide a precise estimate of the impact on households.
[Translation]
Senator Dupuis: I have a supplementary question. There are over 600 Indian reserves in Canada. Are they included in your calculations? Do they fall under provincial jurisdiction or are they covered by a provincial system such as Ontario’s or Quebec’s?
[English]
Mr. Moffet: I will start. Maybe my colleagues can elaborate.
The four existing pricing systems take different approaches. The two systems out west in British Columbia and Alberta that impose a direct charge don’t apply the charge on First Nations land or to card-carrying, I think the term is, First Nations because by law they can’t. There may have been another policy reason not to do so but legally they can’t, so it wasn’t even an option.
The cap-and-trade systems in Ontario and Quebec don’t impose a direct price on individuals. Instead, they impose a price further upstream and then that price gets filtered down in the price of commodities. The issue of whether or not the price is imposed directly on First Nations doesn’t arise in those jurisdictions and they have not made any exemptions.
I will turn it over to my colleagues to describe how our system will work.
[Translation]
Mr. Mercille: As I said before, the carbon price will primarily be paid by distributors and wholesalers. That is when the carbon price is paid and absorbed into the price of their products.
[English]
The Acting Chair: We have three people on the second round and five minutes left, so judge yourselves accordingly.
Our panel is leaving here and going to the agriculture committee, so time is important and we should try to stick to it.
Senator Wetston: I need to follow up on the line of questioning that a number have pursued here on the charges.
If you had a cap-and-trade system versus what we have here, and you have clauses 40 and 41 dealing with the charges to fuel and combustible waste, is it your suggestion that regardless of which method you use consumers will pay anyway?
Mr. Mercille: One type of fuel is essentially waste that is comprised of tires and shingles. When this is burned it produces emissions, and Part 1 of the legislation basically puts a price on those emissions.
Depending on where those tires and shingles were burned by an output-based pricing system facility, they would be priced under the Part 2 system that was explained before.
Mr. Moffet: If I may, in both cases whoever pays the price and whatever price they pay there are no limitations in the act in terms of their ability to pass that cost on to the final consumer. That is the way we assume the system will work.
It is in that way that the price will be disseminated throughout the economy, while we only impose the actual registration and payment obligations on as few entities as possible for administrative simplicity.
Senator Seidman: Of the provinces and territories that have already indicated their carbon pricing plans, which ones meet the standards of the federally administered carbon pricing system?
Mr. Moffet: The four provinces with existing systems are in place. As long as those systems remain unchanged, they meet the benchmark.
While many of the other provinces have been in touch with officials, and while some of them have made public announcements about their intentions, none have made a formal statement about the final design of their systems. I want to be cautious about saying they will or won’t or do or don’t align.
Senator Seidman: As far as you know right now, there are four provinces with current systems that align with the federal government’s plans. Is that what you are saying?
Mr. Moffet: Those four do, right.
Senator Massicotte: I want to understand how you do the policing. You even have different temperatures. How do you know people report X number of litres? How do you make sure that people pay the tax or pay the carbon price they are supposed to pay?
Mr. Moffet: There are two different systems. On the output-based pricing system we will require reporting and third party verification of the reporting. We will have authority to monitor and enforce, but we will be relying primarily on third party verification by accredited verifiers who will be independent of the facility that is reporting. We will be building on the existing system that CRA uses for enforcing the charge.
Mr. Mercille: In respect of the fuel charge, it is like many other statutes administered by the CRA. Essentially, it is a system of self-assessment by those fuel producers. CRA is provided all the modern tools to audit and verify compliance with the legislation that exists under other acts that CRA administers.
Senator Massicotte: You can measure how much is consumed after the fact.
Mr. Mercille: Criteria are used. The main place where the fuel will be subjected to the fuel charge is at the time of delivery. When a large producer of fuel delivers to another person who is not entitled to present an exemption certificate, the records about delivery for those companies are easy to audit because they will be attached to the payments. CRA is good at tracking payments.
The other thing is about the fuel use. That may be a bit different but it is not different from the gas tax. If someone produces fuel and consumes it, they will be subjected to the gas tax.
Senator Patterson: You’ve made this sound very complex to me, but I have a very simple question.
If we buy fuel products in Nunavut from other provinces where a carbon price is already built into the cost of the fuel, will we have to pay the carbon price again for the fuel delivered to the North?
Gervais Coulombe, Director, Sales Tax Division, Tax Policy Branch, Department of Finance Canada: Usually, under the existing provincial systems, fuel products that are exported out of the province, that are removed from the province and delivered to the North, are not subject to the provincial government pricing schemes for the simple reason that there are no associated emissions with the burning of that fuel happening in the province of origin.
The system that we are putting in place will ensure that the price will apply in the province of destination and the revenues will be returned to that province of destination for recycling measures as explained by my colleagues. That is the shortcut.
There may be minor exceptions to what I said. The details would require the review of individual regimes, but for bulk shipments or deliveries of fuel like the ones probably heading to Nunavut, I am not aware of duplication of the Quebec or the Ontario cap-and-trade systems.
The Acting Chair: Thank you very much to the panel for starting off our hearing. Good luck at your next hearing this evening.
Thank you very much to the senators.
Welcome to the second portion of this meeting. From the Canadian Fuels Association, we welcome Peter Boag, President and Chief Executive Officer, and Lisa Stilborn, Vice President, Ontario Division.
Mr. Boag will speak and then both panellists will answer the questions. Go ahead, Mr. Boag.
Peter Boag, President and Chief Executive Officer, Canadian Fuels Association: Certainly I see some familiar faces. This has been a process over several years now where we have been engaged on this file, including some time spent in Sarnia which a number of you able to visit last year.
We very much appreciate the opportunity to appear once again before you, in particular as you examine Part 5 of Bill C-74, which deals with the proposed federal carbon pricing backstop as well as the fuel levy.
For those who aren’t aware of who we are, we represent the industry that produces, distributes and markets petroleum products in Canada. That is nearly 95 per cent of the transportation fuels that keep people and goods moving in the country. We also produce asphalt, heating fuels and feedstocks for the petrochemical sector.
In short, our products support every sector of our economy and our members are recognized as elements of Canada’s critical energy infrastructure. While the fuel mix is changing reputable forecasts, including our own National Energy Board, show that demand for our products will remain relatively constant until at least 2040.
Going back to the legislation, in particular the federal carbon pricing backstop component, we support well-designed carbon pricing mechanisms. We have a long history of working collaboratively with provincial governments, and now the federal government, on designing these systems. In all of our discussions, we have reinforced the following four points.
Our first point is to ensure a level playing field with competing jurisdictions. Our sector is an industrial sector. It is energy intensive and it is trade exposed. Our main competitors, essentially refineries in the U.S. especially along the U.S. Gulf Coast, don’t face any carbon costs at this time. Failure to fully protect facilities from trade exposure will erode their competitiveness, make them vulnerable to closure and make Canadians increasingly reliant on imported fuel.
This is a classic case of carbon leakage that will lead to the erosion of the direct economic benefits, GDP and jobs from the refining sector. It will undermine the security of fuel supply and will create some risk of fuel disruptions. It will put upward pressure on fuel costs. In the end, it will only divert emissions from closed Canadian refineries to refineries elsewhere, doing nothing to reduce global emissions. This outcome would be a significant policy failure for Canada.
Our second point is to set realistic targets. The current federal output-based pricing system, as has been presented by Environment and Climate Change Canada, calls for all industrial sectors to reduce to 70 per cent of their industry average or else pay the carbon price. From our sector, no refinery in the world can come close to meeting that reduction target.
We have done extensive benchmarking of our global peers, particularly in the developed world through the OECD. We are urging the government, in its consultations, to set targets that are realistic and reductions that are paced and staged over time to make them achievable.
Our third point is the need to work to align stringency with existing carbon pricing regimes in Canada. We heard from the previous witnesses about a number of different systems that are already in place in Canada.
Regarding carbon costs for refineries in jurisdictions that might be covered under the federal backstop, where there is no current system or governments have no intent to introduce their own system provincially, we need to ensure that there is some degree of alignment and consistency that reflects the dynamics of the fuel markets across Canada so that we don’t end up with interjurisdictional distortions within our own country. Competitiveness between provinces needs to be protected, not just competitiveness with our neighbours south of the border or elsewhere.
Our fourth point is that we need to recognize that the carbon pricing regime as foreseen by the federal carbon backstop is not the only climate policy being established and put in place by the provinces or the federal government.
We need to account for the cumulative impacts of other climate policies, for example the proposed federal clean fuel standard, when considering the impacts of carbon policy in Canada. Our view is the government should make a comprehensive, transparent review of the cumulative impacts of these two policies on industry competitiveness, cost to consumers and the overall health of the economy.
We distributed in advance of this meeting some materials that explain some of these concepts and issues in more detail. With that, I will leave it to questions. Thank you.
Senator Mockler: You said it so well when you spoke about competitiveness. If we look at the Canadian capacity for refining products and what has happened with the new President of the United States and what he believes climate change is all about, can you give us your best snapshot of what could happen or will happen to the competitiveness that will be eroded in the provinces and territories vis-à-vis the U.S.?
Mr. Boag: Right now Canada is self-sufficient on an overall basis for its petroleum fuel needs. The total refinery capacity in Canada exceeds our domestic consumption.
At present, we are a net exporter to the United States of petroleum products. It differs regionally, seasonally and by product, but on an overall basis we refine in Canada today more than we consume and that excess is exported on a net basis principally to the U.S. We compete for our own domestic market as well as the export markets in the U.S. with U.S. refineries.
The costs that are imposed on Canadian refineries but are not imposed on our counterparts in the U.S. create competitive challenges and distortions. That is not to say we shouldn’t proceed necessarily with carbon price in Canada, but it is about the stringency that regulations ask for, the pace with which that continues forward, and the price assigned to a tonne of carbon.
The rationale behind carbon pricing is that it gives flexibility to decide that it’s less costly for me to reduce emissions given my circumstances or that with a set carbon price it’s better for me to buy permits because there is some other place that can reduce those emissions at less cost. It really is about driving toward the least cost solution, but it imposes a cost, as we look at our competitors in the U.S., that might not be similar.
We did some analysis last year. Several of the presentation slides in the deck that we have provided talk about the analysis and look at what is the potential threat to Canadian refinery viability over time in the context of not just carbon policy but the cumulative environmental compliance costs of a number of policy scenarios going forward for the next 15 to 20 years.
It clearly indicated that a number of Canadian refineries were vulnerable to closure under that scenario. Whether it’s three or five, it depends on the degree to which policy advances and to which costs are imposed on Canadian refineries that aren’t imposed on our competitors.
Senator Mockler: At the Finance Committee we have the same challenge trying to get the precise cost and revenue factors on the project program of carbon pricing. I don’t want to mention others, but they know where I stand coming from Atlantic Canada and with what happened to Energy East. That was also a nation-building project.
I will respect it if you don’t answer my question to you. When I look at Trans Mountain and at what the government is considering or might do, would the revenues of the carbon pricing project that they want to put in place across Canada not be a vehicle to be used to put taxpayers’ money into Trans Mountain?
Mr. Boag: It’s difficult to say. You have to remember, as the previous witnesses have described, that the federal carbon pricing backstop will only be in place in jurisdictions that have decided to defer to the federal government or have decided for whatever reason not to put their own system in place.
Right now we have carbon pricing systems in place in Quebec, in Ontario, in Alberta and in British Columbia. As we heard from the previous witnesses the government has confirmed, at least at this point, that those carbon pricing systems comply with the framework that the government has proposed.
Additional revenues would be collected certainly from our sector. There are two provincial jurisdictions in Canada that have not yet put carbon pricing systems in place. Those are the Province of New Brunswick and the Province of Saskatchewan.
Those governments are still communicating with the federal government around their intentions. It’s possible that in the end the federal carbon backstop won’t apply to any of those jurisdictions that are relative specifically to our industry.
The previous witnesses also confirmed that from a federal government perspective the federal carbon pricing backstop is intended to be revenue neutral for the federal government. They have made a commitment to provincial governments that any money collected through that revenue stream will be returned to the province from which it was collected.
The amount of revenue is highly speculative at this time.
Senator Wetston: You described in your first bullet a policy failure. How do you correct the policy failure? What is your recommendation?
Mr. Boag: There is a risk of policy failure. From our perspective it really comes down to the stringency of expectations, the stringency of the requirement and the pace with which government proceeds and links to the carbon price.
When we see, as acknowledged by the previous witnesses, a start point of an expectation that facilities would need to reduce to 70 per cent of their current emissions or pay the price starting in January 2019, that’s a huge challenge for our industry.
In the developed world or an OECD basis we have very extensive and comprehensive benchmarking of refinery GHG emissions performance. When you compare Canadian refinery performance to our global or OECD peers, we’re about in the middle of the pack.
For emissions performance facilities in Canada, some would be in the top 10 per cent. We have some in the middle and we have some in the bottom half that are working to improve their emissions performance. The challenge for us is that the difference between top and bottom is actually not that significant. The gradient of that curve of performance from the bottom to the top is actually not that steep.
A 70 per cent reduction takes you way below that curve to a level of emissions performance that no refinery in the world is achieving today or could possibly achieve in the foreseeable future. From our perspective, that ask is way too high.
Senator Wetston: I understand. What is your number? If it is not 70, what is it? Is it 50, 60 or 40?
Mr. Boag: No, no. It’s going up the other way. If you get to 90 per cent, it takes you into the top decile performance in the world. Is top decile performance something we should expect of Canadian refiners relative to their peers? Maybe, but when?
Is that January 2019, or is that something we move to over time? I don’t have a set answer, but these are the issues that we’re in discussion with Environment and Climate Change Canada about arriving at the right level.
Senator Wetston: In summary, if it was 90 per cent you are saying that you wouldn’t pay a penalty until you reached that point as opposed to 70 per cent. Is that what you are saying?
Mr. Boag: The expectation is that all refineries would reduce to 90 per cent of the sector average.
Some are there already, so they would pay nothing. Those who are not there would either have to reduce emissions or pay a corresponding amount based on the carbon tax.
I am not saying that 90 per cent is necessarily the right spot, but you’re now getting into a range that is actually on the curve of where refineries are globally today.
Senator Seidman: Yes, Mr. Boag, indeed we have seen you several times before.
I was going to ask you about the 70 per cent but my colleague has already done that, so I would like to ask you about item No. 4.
Item No. 4 accounts for the cumulative impact of other climate policies such as the clean fuel standard. Is it only the clean fuel standard or other climate policies?
Mr. Boag: We have other climate policies beyond only the federal climate policies. We have renewable fuel standards that already exist in certain provinces. Governments are dealing with electricity issues in terms of electricity emissions that add to the cost of electricity. We’re industrial consumers of electricity.
The clean fuel standard, as it is proposed today, will apply to industrial fuels. That becomes just another cost that needs to be somehow managed. There is a cumulative aspect of this.
To date, we’ve seen from the federal government that much of the analysis in the work on these issues has been done in silos. There has not been a whole of government or a whole within the Department of Environment and Climate Change Canada to really assess.
That’s beginning to happen now, but up until now it has not been happening.
Senator Seidman: I asked the previous witnesses about the cost and if they had calculated the cost to Canadians. In fact, you say the federal government should undertake a comprehensive transparent review of the cumulative impacts of these two policies on industry competitiveness, cost to consumers and the GDP.
It sounded to me, if I understood what I heard correctly from department witnesses, that they will make an attempt not to download the costs at source to the individual corporations, but they will expect that the cost will be downloaded to the consumer.
Mr. Boag: Ultimately, the way the federal system works is that it’s a hybrid system like the one that has been put in place in Alberta. It is very similar to the Alberta price, unlike in Ontario and Quebec where its cap and trade and where refiners have a cap they must pay by permit for all emissions when the fuel is consumed by consumers.
How individual companies decide to deal with that extra cost is their decision. I do know that at least one of our members posts publicly on a website in the province of Quebec after each auction the price of the permits they had to pay. The amount on a per litre basis that is embedded in the price due to the auction price is posted on the website.
Not everyone does that. Do they pass it all on? That’s their decision. They’re individual companies that have costs imposed on them. I think you can probably imagine how they actually respond and what most of that is.
Senator Seidman: Of course, but the government hasn’t undertaken that analysis yet.
Mr. Boag: The government hasn’t undertaken that. Whereas under a carbon tax system it’s ultimately paid by the end user in a visible, transparent way.
Senator Patterson: It’s great to see you again. This output-based system that you have spoken about seems to be a very critical aspect of determining the impact on your industry. Mr. Moffet, the ADM, told us that they were at the very early stages of consultation with the mining industry.
Could you tell me how your consultations are going with the feds? Who are you consulting with? Are these junior officials, or are there political people involved? Could you tell us about that process?
Mr. Boag: To their credit, Environment and Climate Change Canada has put in place a very extensive consultation mechanism. There are many different levels in terms of multi-sectoral and multi-stakeholder, down to individual sectors examining the proposal and trying to understand the implications for sectors like ours that are energy intensive and trade exposed.
They are very much in a data analysis mode. They’re asking companies and sectors to provide large amounts of operational, emissions and economic data. We’ve just gone through a process of establishing non-disclosure agreements because of the kind of information they want to assess the degree of trade exposure and how that implicates or impacts their expectations around stringency. A lot of it is company confidential information.
There is a very extensive consultation exercise. Certainly we have been well engaged with Environment and Climate Change Canada for some time. We certainly made our views known at the ministerial level. We made our views known publicly. You’ll see some of my commentaries in the package around our concerns and issues.
That said, an output-based pricing system is a system that can take into account the challenges and respond to the challenges of the energy-intensive, trade-exposed sectors. From our perspective, it’s far superior than a straight carbon tax like they have in British Columbia, where there is no provision to take into account the trade impacts on exposed sectors.
Senator Patterson: I would think we’re now studying a bill that will be passed in months. I am not really sure what is the federal timetable for consultations, but it’s a budget bill and they don’t slow down when it comes to budget bills.
Mr. Boag: They haven’t just begun. It was late 2017 when the government tabled its regulatory framework. For us, the issues really come down to the details of the regulatory requirements.
This legislation is largely enabling legislation. The details in terms of how it actually impacts the industry or impacts citizens come down to the regulations.
Senator Patterson: When will we know where you’re at? Will we know what has been finalized before we pass this bill?
Mr. Boag: No, that is not normally the case. Legislation comes first. Then that is the authorization and the enablement of government to move forward with the regulations.
Clearly, they’re involved and engaged in consultations right now about the regulations; but you will remember from the witnesses earlier that the timetable is to have the federal carbon backstop, the fuel levy and all the regulatory requirements in place for January 1, 2019. That’s eight months from now. That’s not a long time, particularly when you go through the regulatory process of Gazette Part I, formal consultations, responding to information received through the consultation process and then to Gazette Part II. Eight months is not a long time.
Senator Patterson: We will not know the impact on your industry until this is all finalized.
Mr. Boag: We will not know that level of detail because that 70 per cent stringency, or whatever that stringency gets to, isn’t in the legislation. That will be in the regulations.
As the witnesses indicated earlier today, that stringency may differ by sectors. I heard John Moffet say it may differ even regionally.
[Translation]
Senator Dupuis: Thank you both for being here. I am interested in the third point you raised in your presentation, what you referred to as the differences in the various provincial legal systems. On page 3 you said: “Inter-jurisdictional competitiveness must be protected.”
You have companies that have activities in various provinces. Right now, four provinces have different systems: Ontario, Quebec, Alberta and British Columbia. Could you explain exactly what you mean? I understand the idea of a single national standard, under the federal system, but we are not really in that kind of scenario, not only in this sector, but in many other sectors of activity in Canada.
Based on your experience in the provinces that already have a system, can you tell us how that intergovernmental competitiveness can be preserved or protected?
[English]
Mr. Boag: Thank you for your question. I guess Quebec has the longest running climate policy in Canada. They had a carbon levy years ago and that was converted to a cap-and-trade system.
Quebec clearly understood the challenges around energy-intensive, trade-exposed sectors in setting their stringency originally. They have continued to modify that over time. They have responded well to that challenge. They understand what’s doable, what they can do to keep our industry of refiners in Quebec competitive.
B.C. was the next in line and brought in their carbon tax. It’s a much different system because it does not have the ability to respond to the challenges around energy-intensive, trade-exposed sectors.
You could ask my colleagues in the cement industry to understand what happened. They went through a wrenching period when they lost a significant market share because of the cost impacts and the inability to pass it on to consumers since their competitors didn’t have the same costs.
Alberta was in there with a relatively modest system that has now evolved to a system very much like that being proposed by the federal government in terms of an OBS system for large emitters and a carbon levy. It’s essentialy a carbon tax for fuels at the retail level.
Ontario brought in cap and trade very much aligned with Quebec in its design. In fact, they’re now auction partners through the Western Climate Initiative aligned with Ontario, Quebec and California. The stringency in Ontario is a little higher than it is in Quebec, but it’s within workable range.
We have three very different systems, if you count Ontario and Quebec as a similar system. There are different levels of stringency and two quite different systems on the West Coast.
When it comes down to the actual costs on refiners, I would say they’re not there. They’re not hugely different and they are not what I would call massively distorting competitiveness among refiners in Quebec, Ontario and Alberta. This is also recognizing that the markets within which those companies compete are different.
Quebec and Ontario are much more trade exposed because they are adjacent to tidewater. We see a lot of imports of fuel into Ontario and Quebec. Out west the central provinces of Manitoba, Saskatchewan and Alberta are less exposed to fuel imports from other jurisdictions. Their competitive dynamics are different.
That’s why the research we did in terms of looking at the cumulative impacts focused on the most vulnerable refineries in Canada being those in Ontario and east. They’re much more exposed to what we call the Atlantic Basin market. We have seen large amounts of fuel coming off the Gulf Coast and up the Atlantic Seaboard into Canada. The Canadian market is not a monolith. There are regional differences.
The problem with the federal backstop at 70 per cent is that it’s so far over the top compared to what’s in place in Ontario, Quebec and Alberta. If left at that, it would really cause issues. In particular, the province of New Brunswick adjacent to Quebec is Canada’s largest refinery. Much of its output goes to the United States.
This kind of stringency is very much problematic and creates distortions within the eastern part of Canada, as well as huge issues with respect to competitiveness in what is their core market, the United States.
The Acting Chair: Thank you very much, Mr. Boag and Ms. Stilborn, for your presentation. More important, I think, are the questions, the answers and the dialogue.
Senator Mockler: Do you feel that your industry has been fairly consulted or not consulted? Do you feel that you should be back at the table to pinpoint exactly what could happen when you look at the regions of Canada?
Mr. Boag: To this point we haven’t seen the end result, but I believe it has been very much a productive and open dialogue. The proof is in the pudding, to use that cliché. We’ve certainly seen a genuine interest through all levels in Environment and Climate Change Canada and within other federal organizations like Natural Resources Canada to engage us, to hear our views and to understand the analysis.
We are pressing them to do some of their own work. We haven’t talked so much about other elements of the climate agenda because they’re not part of this bill, but we have concerns about the clean fuel standard with respect to the cumulative impacts. We’re urging Environment and Climate Change Canada to do some of their own compliance modelling to understand what are the compliance pathways, the cost impacts and the implications for consumers and businesses.
We would like to see more of that and we are continuing to press, but I would say it categorizes to this point as genuine consultation, and I hope it stays that way.
Senator Patterson: I have to confess, having seen the size of this bill and the detail in its schedules, I am feeling it’s an immensely complicated labyrinth to digest, at least for a layperson like me.
Do you share the same concern about understanding the detail in this bill, the schedules and the issues around fuel being delivered between jurisdictions? This is a concern of mine in Nunavut.
Mr. Boag: I would say no, only because this is the world that we live in day in and day out. This is our business, so clearly we understand the implications. Yes, we will have some questions and we will pose those questions, but this is what we live and breathe every day. There’s a lot in there, but we can understand it.
Senator Patterson: I am glad to hear that. I appreciate that you have given us some very short opening remarks that address some key issues.
Are you ready to tell this committee what should change in this bill, how it could be improved and how it might be amended?
Mr. Boag: I come back to my earlier comments that for us this is enabling legislation. The impact on industry and on Canadians will really be driven by the regulations that emanate from this legislation.
We don’t have any specific issues, problems or recommendations with the legislation. We made some observations early on. Many of those were more questions on how the government might tweak things around the legislation.
We don’t have any big issues with the legislation. It really comes down to how they intend to move forward in using the powers contained in the legislation through regulations.
Senator Patterson: I guess the question is: If the real devil is in the details here, as parliamentarians all we can do is perhaps pass the enabling legislation.
How are we to find out the fairness of the application to sectors like yours and the mining industry, which I am concerned about?
What will be the way of accounting to the public for the results of intense consultations, as you have described them, where you may end up quite far apart from the judgments of bureaucrats who may not have ever had to meet a payroll in their lives?
Where do parliamentarians fit into the process of working out these detailed complexities?
Mr. Boag: I hear you. I am not sure I have an entirely satisfactory answer. Regulatory-making powers are provided to the government through this legislation. The formal opportunity is pretty minimal when it comes to the regulating powers, as I understand how the government works.
I would suggest that we’ll be following the process. We will be looking quite closely, ultimately, when the draft regulations are proposed in Canada Gazette, Part I. We will be preparing our detailed response to that. I would be happy to come back to the committee at the time to give our views on the regulations and what we are recommending to the government in terms of potential amendments to those regulations before they are finalized.
Senator Patterson: That’s where I was going. Thank you for that answer.
Mr. Boag: I would be happy to come back again.
The Acting Chair: Thank you again. It has been very productive. It has been a great start to our study on this particular section of the bill. Perhaps we’ll see you again when we’re looking at the regulations.
(The committee adjourned.)