THE STANDING SENATE COMMITTEE ON ENERGY, THE ENVIRONMENT AND NATURAL RESOURCES
EVIDENCE
OTTAWA, Thursday, May 3, 2018
The Standing Senate Committee on Energy, the Environment and Natural Resources, to which was referred 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, met this day at 8 a.m. to give consideration to the subject matter of the bill.
Senator Rosa Galvez (Chair) in the chair.
[English]
The Chair: Good morning and welcome to this meeting of the Standing Senate Committee on Energy, the Environment and Natural Resources. My name is Rosa Galvez and I’m a senator from Quebec. I’m the chair of this committee. I will now ask senators around the table to introduce themselves.
Senator Richards: David Richards from New Brunswick.
Senator Cordy: Jane Cordy, Nova Scotia.
[Translation]
Senator Massicotte: Paul Massicotte from Quebec.
Senator Mockler: Percy Mockler from New Brunswick.
[English]
Senator Seidman: Judith Seidman from Montreal, Quebec.
The Chair: I would also like to introduce our clerk, Maxime Fortin, and our Library of Parliament analysts, Sam Banks and Jesse Good.
[Translation]
Today, we are continuing 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 group of experts we will hear from two organizations.
[English]
From the Canadian Independent Petroleum Marketers Association, we welcome Jennifer Stewart, President and Chief Executive Officer; and Allan MacEwen, President, MacEwen Petroleum Incorporated.
From Renewable Industries Canada, we have Jim Grey, Chair; and Andrea Kent, Board Member.
Thank you very much for joining us. I invite you to each proceed with your opening statement, after which senators will have a question and answer period.
Jim Grey, Chair, Renewable Industries Canada: Good morning, Madam Chair and members of the committee. As you have heard, my name is Jim Grey, and I am the chairman of the board of directors at Renewable Industries Canada. And I’m chief executive of an ethanol company, IGPC Ethanol based in southwestern Ontario. I am here with my fellow board member Andrea Kent who is a vice president with Greenfield Global.
On behalf of the 30-plus companies who are members of RI Canada, thank you for having us here today as part of your study on carbon pricing. Our association has a proud 34-year history of promoting the use of renewable fuels. Over the past many years, that has resulted in a generation of roughly $3.5 billion a year in economic activity.
Biofuels are the cleanest and most sustainable source of liquid fuel available to the transportation sector. Ethanol reduces emissions by as much as 62 per cent compared to gasoline. Cellulosic ethanol reduces emissions by 87 per cent, and biodiesel can reduce emissions by as much as 119 per cent compared to petroleum diesel.
Under CEPA regulations in place since 2010, a minimum of 5 per cent ethanol and 2 per cent biodiesel and diesel fuel must be blended into these fuel pools. These required volumes are an unqualified success, building domestic capacity for biofuel production, stimulating economic growth and contributing to greenhouse gas emission reductions to the tune of about 4.5 megatonnes per year. That’s the equivalent of removing roughly a million cars a year off Canada’s roads. IGPC Ethanol is currently undergoing a doubling of its facility. It’s a $120 million-dollar investment and our plant in Aylmer, Ontario will soon be one of the largest in the country.
Biodiesel is also undergoing growth. Hamilton-based BIOX is investing in upgrades to a recently acquired facility in Sombra, Ontario that had been shuttered by its previous owners. There are two key points that we will address regarding your study of carbon pricing.
First, biofuels are a trade-exposed industry. Prices for ethanol and biodiesel are set by Chicago indexes, meaning that Canadian producers are essentially price takers not price makers. Under the proposed output-based system, carbon pricing applies to the biofuel producer. Output-based pricing would increase expenses for Canadian biofuel producers while foreign producers would not be subject to that tax. It should be pointed out that Canada is a significant net importer of U.S. biofuels.
The way to solve this is changing the point of taxation from the producer to the distributor. This change would mean all biofuels, whether imported or produced here, would be subject to carbon pricing when consumers purchase them.
I’ll now turn to my colleague Andrea Kent who will continue the discussion.
Andrea Kent, Board Member, Renewable Industries Canada: Thank you very much and good morning. Being conscious of the time, I’ll quickly build on Jim’s comments. The second issue regarding carbon pricing for our industry is looking at the target in relation to the clean fuel standard the CFS.
Under the current framework, a national benchmark would be calculated for the production of biofuels, which would establish the industry’s average emissions. In order to avoid a carbon tax, a facility would need to be 30 per cent below the national average of emissions for its sector. This target might be reasonable for sectors that do not already have separate policies compelling them to reduce GHG emissions, but biofuel producers will be subject to the clean fuel standard aimed at attaining 30 megatonnes of GHG reductions by 2030. In our view, our producers are already motivated to find every possible efficiency to reduce life cycle emissions of biofuels. The Canadian biofuels industry is already at the cutting edge of emission reduction in our production processes. It’s certainly something we can talk about in more detail in the hour we have together.
I think we can all agree climate change is a phenomenon that needs to be addressed. I think it’s important that it is acknowledged here. It’s certainly central to the committee’s work. Carbon pricing is certainly one policy of several that should be implemented, and in our view, policies that encourage the increased use of biofuels will remain the most effective tool for reducing GHGs. Thank you very much for the opportunity to be here. We look forward to your questions.
Jennifer Stewart, President and Chief Executive Officer, Canadian Independent Petroleum Marketers Association: Good morning Madam Chair and members of the committee, my name is Jennifer Stewart and President of CEO of the Canadian Independent Petroleum Marketers’ Association. CIPMA is a national association that represents independent petroleum marketers, those that sell or distribute gasoline across Canada. CIPMA has 23 full members, including 7-Eleven, Canadian Tire, Couche-Tard,Circle K, Mr. Gas and MacEwen Petroleum. I’m joined here by Alan MacEwen, the President and CEO of MacEwen Petroleum.
The retail gasoline industry is a vital part of day-to-day lives of most people, providing Canadian with fuels to lead their lives. As of December 31, 2016, there were 11,931 retail gasoline sites operated in Canada or 3.3 outlets for every 10,000 people; and 78 per cent of these sites are operated by independent marketers or independent business people. This trend continues to grow.
As some of you may be aware, Esso divested all of its retail sites in 2016 and Shell has divested all of its sites in Eastern Canada to branded distributors. To this point, independent petroleum marketers are continually operating more sites that were previously operated by refiners.
More and more, CIPMA members represent the core of the Canadian fuelling and convenience store industry. As a sector, we remain innovative and work to be more sustainable. Two years ago, CIPMA in partnership with two other industry associations launched a program called Smart Fuelling to help Canadian find ways to reduce emissions. Smart Fuelling has partnered with a number of municipalities to help spread its message as widely as possible.
With respect to Bill C-74, Part 5, it’s important to highlight the taxes gasoline marketers collect for government right now. To provide perspective, gasoline retailers in 2017 collected $15.8 billion in taxes for governments.
This amount is made up of a federal excise tax, the provincial road tax, QST, GST and HST, municipal taxes where applicable and carbon taxes that were in place in 2017. If all provinces added a carbon tax or a cap and trade program based on the federally mandated amount of $20 per tonne in 2019, we estimate this would add an additional cost of 4.62 cents per litre to the price of gasoline. From a national perspective, every one cent per litre increase in taxes translates into approximately $400 million in additional government revenues.
Based on an increase of 4.62 cents per litre on gasoline due to a carbon price, this would add taxation revenue of $1.8 billion in 2019. This would be more in the case of provinces that currently or in the future impose a rate above the minimum back stop and will continue to increase as the price of carbon increases to $50 per tonne in 2022.
We estimate that in 2022, at a price on carbon of $50 per tonne, this would generate $4.7 billion in taxation revenue each year. With increasing prices at the pumps from taxes, it’s important to note the margins that gasoline retailers must work within, the majority of whom are independent business owners.
In 1991, the average retail gross fuel margin, which is the difference between the posted wholesale rack price and the pump price, minus the taxes, for regular grade gasoline was 6.97 cents per litre. In 2017, that margin was 9.4 cents per litre, representing an average annual increase of 1.3 per cent over 26-year time frame, well below the average inflation rate of 1.76 per cent over the same period.
The Conference Board of Canada predicts that even if carbon taxes were to reach $200 per tonne by 2025, this would only result in a 1.5 per cent reduction in GHG emissions outside the power-generation sector. Asking Canadians to continue to pay more for a product that many need in order to live life presents a financial burden to the average Canadian.
It is the position of CIPMA and its members that there are other ways to reduce emissions such as increasing renewable fuel mandates; working with automakers to achieve higher octane fuels; raising awareness among Canadians about how to improve fuel efficiency; getting older vehicles, the highest emitters currently, off the road; and helping Canadians adjust their driving habits. These efforts will contribute in helping Canada meet its target of reducing 30 megatonnes of GHG emissions by 2030 yet will not unfairly penalize Canadians and apply yet another tax on gasoline. Thank you.
The Chair: Will any other guests be presenting statements?
Ms. Stewart: No. We are open to questions.
Senator Massicotte: Thank you very much for being with us this morning. Basically, if you’re doing the average across Canada as a producer, and you’re getting taxed on 30 per cent — in other words, they’ll basically incentivize it — what does that mean? How much money is that? I’m trying to get a sense of how important that 30 per cent taxation is compared to, say, your resale price of the product. Can you give me a sense of that?
Mr. Grey: Today, I’m selling ethanol at somewhere between $1.30 and $1.50 per gallon, not per litre. The ability to get to a 70-per-cent threshold with the majority of our facilities in Canada would be extraordinarily difficult and very expensive, because as Andrea pointed out, we are already very efficient.
Senator Massicotte: What is that? Let’s say you’re at 100 per cent. You’re the average in Canada. The government wants to tax you a carbon tax to the extent you don’t get to 70 per cent. Let’s say you’re 100 per cent, so therefore you’re going to pay 30 per cent taxation on your CO2, how much money is that relative to your resale price? Is it 5, 3 or 1 per cent?
Mr. Grey: I would characterize it this way: Given the current conditions in our market, it would take us to being “slightly above water” to being “below water” as far as our businesses are concerned.
Senator Massicotte: Is it a big number — 1 per cent?
Mr. Grey: Yes, our margins are very tight in this business. Any additional costs — I’m not trying to avoid the question of giving you an absolute number. It’s difficult to give you a number.
Senator Massicotte: Could you come back with the numbers?
Mr. Grey: At $20 a tonne, it would cost us $20 multiplied by — we produce 120,000 tonnes of carbon dioxide a year right now. Take 30 per cent of that, at $20 a tonne, that’s a big number.
Senator Massicotte: What is that number, do you know?
Mr. Grey: Not off the top of my head.
Senator Massicotte: Could you get back to us with what that exact number would be?
Mr. Grey: The other point, if I may, for the most part, for our industries, our companies and our businesses, it would be almost impossible to get down to the 70 per cent level.
Senator Massicotte: I appreciate that. I recognize that.
While I have you here — and I know a bit about the beneficial impact of what you’re offering to consumers and the country — but as you know, a lot of experts argue to say, “Yes, there is some benefit to biofuels, but there is an indirect cost regarding the cost of producing corn or whatever feedstock,” and therefore some would say that with the use of water and so on the world does not benefit significantly from your alternate product.
I’ll give you the opportunity to respond to those critics. Could you do so?
Ms. Kent: Sure. Sustainability as a backdrop is a very important conversation to have. Looking at the opportunities to grow our sector, it’s something we think about too. But there is a lot of real-world evidence. The North American or Canadian opportunity we have with our agricultural sector, our biomass available here and the fact we do have state-of-the-art operations for producing biofuels and ethanol. That doesn’t support hypotheses when it comes to circumstances that might exist in other parts of the world, whether you’re talking about scarcity of biomass, food scarcity issues or even water use.
It’s important context to remember we all care about sustainability, but it has to be evidence-based when you look at these policies. The evidence is very clear that we have enough biomass here, we have efficient facilities here, we’re not running out of water here and biofuels have an opportunity to grow in the Canadian market, not decline.
Hopefully that’s useful. We can certainly provide more data as well, because it’s something we track very carefully.
Senator Massicotte: Ms. Stewart, you heard the recommendation of the 30 per cent taxation. They are saying it should not be at the production level; it should be at the distribution level. That would compensate for the competitive nature of the American market. Would you agree with that? In other words, don’t tax the producer; tax direct people like you.
Ms. Stewart: I don’t think I can directly answer that without looking into that further. Alan might have a perspective.
Allan MacEwen, President, MacEwen Petroleum Incorporated: We are taxed.
Senator Massicotte: They are saying maybe not enough.
Mr. MacEwen: Just to be clear, the ethanol is blended into gasoline. That product is taxed: federal excise tax, provincial road tax, and now cap and trade. The governments are collecting on the ethanol portion.
Senator Massicotte: They are saying that when you tax the producer level, if you’re trade-exposed, there you are disadvantaged, because it’s coming in from the American producer. Meanwhile, if you tax higher up the chain, everybody gets taxed at the same level. Yes, it’s another form of excise tax, but it would level the playing field.
Ms. Stewart: I believe Andrea is speaking to the Canadian clean fuel standard. Under that, our members would not be obligated parties unless they are importing into Canada, so it’s not cross-provincial. Then our suppliers have that cost. That will funnel through the supply chain.
Senator Massicotte: Not the American producer.
Ms. Stewart: Right.
Senator Cordy: I was going to ask about the taxation going from the producer to the distributor. I’m new to the committee. Could you explain to me what “trade-exposed industry” exactly means?
Mr. Grey: Again, Canada is a net importer of a significant amount of U.S. ethanol. In fact, we are the single largest port of entry for U.S. product. Under this scenario, Canadian domestic producers will be taxed based on carbon output, and that would be another cost to us.
The American product coming in will not be subject to that cost, so they would have an unfair advantage from that perspective in making our product uncompetitive in the market.
Senator Cordy: Would that means you’re bringing more in than we are producing in Canada?
Mr. Grey: It would mean that our facilities would likely be potentially so negatively impacted that we may not be able to operate.
Ms. Kent: Trade exposure and competitiveness are inextricably linked; you can’t separate them out. Further to what Jim is saying, it’s not only that you have that trade exposure and imbalance in terms of being able to compete with foreign product, but it disadvantages the domestic industry in terms of how it can continually reinvest profits, because we’re losing them. It takes money away from initiatives we would have for research and development; reducing our footprint, from a CI standpoint; and looking at bringing in world-class technologies. Those are options a Canadian producer would no longer be able to pursue because of the competitive disadvantage created by the trade exposure. There is the opportunity cost as well as the direct cost.
Senator Cordy: Will this legislation hurt you? We heard from a witness the other evening who said the regulations are what they’re really concerned about. It’s framework legislation. They are quite concerned about the regulations and would like to have an opportunity to see them before they become part of the bill.
Would you feel the same way?
Mr. Grey: Yes, on the surface, as we see it today it would be very detrimental to our industry. It’s ironic and it’s a point made in a previous meeting: It’s very counter-intuitive but the whole point of this regulation is to lower GHG emissions.
In our particular industry, the more natural gas we burn is better because it means we’re making more ethanol which means net-net we are contributing more to GHG reductions. It’s a very counter-intuitive argument.
The Chair: I think you are right. It’s not evident to understand what is going on. This is because of our trade agreements with our neighbour, the United States. I can understand more your side of the equation and how you calculate things but for oil and gas it’s a little more confusing.
Just to put it in simple terms, I live three kilometres away from Valero in Saint-Romuald in Levis, but the retail prices of gas I pay at the pump are much higher than in Montreal or Toronto. I don’t understand why. Most people don’t understand why. When you say we will apply a carbon tax, you say, “Okay there is another tax,” and it’s more. But we don’t understand how the price is set at the end. Can you please explain that?
Ms. Stewart: I think there are significant misperceptions about how gasoline pricing is set. You spoke of Toronto and Montreal; There are terminals in both of those cities. It’s much closer to transport fuel to those outlets. Often, in more rural settings, they are independent operators. Here you’re factoring in freight cost and also their supply arrangements.
Kent Marketing just did a study commissioned by the Ontario Government as to why pump prices were significantly higher in northern Ontario, because they are. What they found is they are not making any more margins than those fuel operators in larger urban areas. They simply have additional freight costs. They don’t necessarily have the buying power of larger retail fuel outlets, some with multiple sites in city centres. They don’t have the volume.
We can certainly provide information that can shed more light on why gas prices vary from region to region, and some research-based, third-party evidence to point to the fact this isn’t price gouging, as is often depicted in the media.
The Chair: We are producers of oil here in Canada. Our research is huge. Again, why compare with the United States or Europe? Sometimes gas can be, without the taxes —
Ms. Stewart: Right, because the wholesale price for gasoline is set in New York or Chicago. It’s a wholesale market. It’s a global market. We are buyers of that price. That is not set in Canada despite the fact that we do have refineries in Canada.
We also operate in supply orbits specific to regions. While we have refiner capabilities in Alberta, that fuel is not coming to Ontario. We’re very much a supply-specific environment in Ontario and supply is very short. If one refiner has any sort of maintenance issue or there is the depressurization of the pipeline, that affects the supply market. While I think common thought is that we have a lot of production here in Canada, that’s not necessarily the case. It’s a lot more fragile than people perceive it to be.
The Chair: What you are saying is that we should be independent or we should try to seek independence from the market that is set in the States? Is this possible? Can we do it?
Ms. Stewart: I’ll let Alan speak to that.
Mr. MacEwen: That’s a much larger issue. The producers of petroleum, like Suncor and Syncrude, are public corporations. They have to produce and sell and make a profit. I don’t know about what the royalties are or the subsidies, but the prices are based on international prices for the product, and then there are taxes on top of that. The main difference between Canada and the United States is Canada already taxes petroleum at much higher rates.
To address the difference in pricing, you mentioned retail pricing in Saint-Romuald versus Montreal and Toronto. It’s a little off topic, but it’s hyper-competitive. I don’t know about Saint-Romuald, but in Montreal and Toronto you’re dealing with tax, competitive issues and volume issues and it’s not as simple. It’s very complex.
The Chair: I know it’s very complex but we need to understand; we will never find a solution if we don’t understand. My point with respect to Saint-Romuald is that the reason it’s expensive is because it doesn’t come from Saint-Romuald. The gas in my car, it doesn’t come from Saint-Romuald. It probably comes from the States.
Mr. MacEwen: No. In that market your gasoline would very rarely come from the States. A lot of that market is supplied by the Valero refinery there. Some is imported from Europe, but largely it’s right from that refinery. All the other terminals or companies pick up there.
The Chair: Thank you. It comes farther than I thought.
Mr. MacEwen: You don’t always know. You could be buying gasoline in Toronto. You don’t know where it comes from.
[Translation]
Senator Dupuis: First I have a very technical, very specific question for Ms. Stewart. You said among other things that one of the ways of reducing emissions would be to eliminate old cars. Have you established an expiry date for vehicles from the perspective of their excessive pollution?
[English]
Ms. Stewart: Absolutely. We work with Dennis DesRosiers, who is an automotive consultant. I can provide you with some data he provided to us. For vehicles on the road post-2010, there is at least a minimum of a 10 per cent increase in engine efficiency of the internal combustion engines. Vehicles below the year 2000 are polluting far more significantly than some of the newer vehicles.
We have seen in the U.S., there are some programs that have a cash-for-clunkers synopsis. I would love to get you some data so I will follow up on the emissions that can get taken off the road through providing some sort of relief or tax incentive for getting out of older vehicles.
I know that in meetings with Natural Resources Canada, this has been brought to the table, say look at transitioning some of the fleet. In terms of actually contributing to greenhouse gas emissions, older vehicles are a significant contributor.
[Translation]
Senator Dupuis: I have another question. If I understood correctly, the facilities of the members of your association — I’m thinking of those you gave as examples, such as Couche-Tard, Canadian Tire and others — are not necessarily located within a single province. You have facilities in several provinces, correct? With regard to the price, and the amount of the tax that accumulates, are there significant differences among your members? Does carbon pricing add to what you are already paying, or to the differences you have to absorb regarding the provincial tax, which necessarily varies from one province to another?
[English]
Ms. Stewart: I think it depends on how it is passed down. We are interested to see the legislation. Through a cap-and-trade program, that can obviously get passed down through the pumps, but if it’s a direct carbon tax on the price, that will be a direct consumer cost. If it’s a direct carbon tax, from my understanding that will not affect our purchase at the terminal in terms of the cost, but it will add an additional cost to the consumer who fills up their tank.
As you see here, so much of that cost is already taxes and we’re operating on a very small retail margin that has not kept pace with inflation.
Senator Seidman: Thank you very much for your presentations. I am trying to understand, Ms. Stewart, your presentation to us about the marketers — what you call your independent marketers.
You said Esso divested all its retail sites in 2016, and Shell has divested all of its sites in Eastern Canada. What kind alignment is there among this vast market of independent retailers?
Mr. MacEwen: I’ll try and answer. For example, when Imperial Oil or Esso sells their sites, with that goes 20-year supply arrangements. The large purchasers of the those sites from Imperial Oil were 7-Eleven, Couche-Tard and Wilson’s. From a consumer’s point of view, you can pull into an Esso in Halifax that’s no longer owned by Imperial Oil but by Wilson’s or Couche Tard. From a consumer’s point of view, it’s seamless.
It’s the same thing with Shell. Shell sold retail assets to Sobey’s in Quebec and the Maritimes, and the consumer would not know the difference, but their supply arrangements would go along with that.
Does that answer your question?
Senator Seidman: That goes some way to helping me understand. I’m trying to understand what the influence is of the industry. They sell off all their retail outlets, but what kind alignment, then, is there among all these independents, or is there one? We often hear that.
To pursue the conversation you were having with our chair, we all wonder how the prices are set. You see the price of a barrel of oil go up, and within seconds, the prices are up at all the pumps. When they go down, it takes days for the prices to go down at the pumps. I’m just expressing to you the usual frustration I’m sure you hear all the time.
I’m trying to understand what alignment there is.
Mr. MacEwen: There is no alignment, first of all. Everybody is competing. As I mentioned, it’s hyper-competitive. The prices are set based on New York Harbor, and the Canadian producers and refiners set the wholesale prices daily. The daily price I pay the various suppliers is set based on what various products trade for on New York Harbor, plus the exchange rate. The exchange rate is as critical to what we pay as the price of crude.
That sets our buying price. In Canada, that changes normally every night at midnight. If there is a price decrease, net, considering crude and the dollar exchange, my cost goes down or up at midnight, whichever.
I would argue that we’re slow to go down. We can argue that we’re slow to go up, too, because it is so competitive.
But there is no alignment, Couche-Tard runs their own business, and we all run our own businesses. Price is one of several items we compete over, and it’s obviously the highest profile.
Senator Seidman: I understand what you’re saying.
We heard from the Canadian Fuels Association on Tuesday. They were presenting for the industry. I’m trying to understand the impact of the carbon tax or various different provincial solutions to these issues, because there will be different solutions in every province, seemingly.
The point he was trying to make was there is a need to align stringency with existing carbon pricing regimes in Canada. He was very concerned that if there is no alignment and consistency in the dynamics of fuel markets across the country, we would end up with interjurisdictional distortions within our country. Then there would be a lot of issues about competitiveness in individual provinces and across the border as well.
Is there some similar issue with your independent retailers?
Ms. Stewart: There is a mishmash — a carbon tax versus cap and trade. From our perspective, we have members who are obligated parties under the cap-and-trade regime, and it is immensely complicated and burdensome. If the government is going ahead with a tax, having one national, holistic price on carbon makes more sense than a mishmash of various regulations, absolutely.
Senator Seidman: That creates issues.
Ms. Stewart: Yes.
Senator Richards: Thank you for being here. I asked this question before to another group, and I don’t think there is any definitive answer. There was an article in the Calgary Herald a few weeks ago and one in The Globe and Mail about us losing our best tech students to the south because of the lack of research in petroleum exploration. Does that worry you at all? It certainly bothers me.
Mr. MacEwen: For what we do, it does not really affect us. It affects us the same as it affects any other Canadian citizen, but specific to what our job is in the industry, it’s not a direct influence. However, if you were a refiner or producer, that’s where losing those jobs could be more relevant.
Senator Richards: It’s a lot of brain power going south.
Mr. MacEwen: We don’t like that any more than any other Canadian citizen.
The Chair: A retailer, the corner store, the Couche Tard, how many products do they sell? You gave some examples for very broad products, but at the retailer, how many are there — ten, five?
Mr. MacEwen: Gasoline?
The Chair: Yes.
Mr. MacEwen: There are basically four products. There are three grades of gasoline, typically 87, 89 and 91 octane, and then there is diesel fuel. A typical station would have a maximum of four products.
The Chair: The ratio at which it will impact the carbon tax is not necessarily what was given by — I don’t remember who gave a very broad —
Ms. Stewart: That included those products. That was commissioned by Kent Group Ltd., petroleum analysts. They took into account three grades of gasoline and the diesel fuel. That was all-encompassing.
Senator Mockler: Renewable Industries Canada says, and you mentioned, that your industry will be hit twice with a carbon price and be subject to upcoming current fuel standards. The question is: Are you being consulted on what the current fuel standards will look like going forward? Are you being heard?
What is your preferred option, carbon pricing or regulations? Give us examples of the impact this will have on the consumer.
Mr. Grey: To your first point, yes, Andrea and I are very much involved in the CFS process. We are members of the multi-stakeholder team, as well as the technical working group. We also have more specialized people on our team involved in the sub-working groups, who are dealing with established critical issues.
Yes, the consultations are ongoing. They are very open. We are being listened to.
As far as the second point, without really understanding or having a clear window to see what the outcome of these processes will be, it’s difficult to really underline what the impact will be to us at the end of the day. In our particular case, being largely based in Ontario, number one, we are subject to cap and trade. What we are hoping to achieve through the CFS process is monetizing, frankly, the benefits we bring to our goals under the CFS process to reduce GHG emissions within the transportation sector.
Hopefully that will balance our playing field here domestically.
It doesn’t necessarily solve the fact we are exposed to trade from the United States. Yes, we are emitters of GHG in our processes but we are also contributing to GHG emission reductions and we should see credit for that.
Ms. Kent: Your question focuses on the consultation process and whether parties are being heard. I agree that parties are being heard. There is a lot of expertise and there are a lot of smart people from ECCC around the table. I think there should be some focus on the timeline, not on the mandate, not on the consultation process writ large but on the timeline we’re facing right now. A lot of people around the table, ourselves included, are starting to get concerned that time may be running out. Regulations should not be forfeited for the CFS.
Senator Patterson: Thank you for being here.
There are four provinces that have implemented a carbon pricing system. I’m wondering if you could tell us whether those carbon pricing systems have reduced the sales volume from your operators in those provinces? Carbon pricing is designed to divert people away from fossil fuels.
Ms. Stewart: It’s incentivized behaviour. We do have some statistics on this. In British Columbia, they have lowered emissions, but I can get you specific sales volumes if that is something you’re looking for. Quebec and Ontario cap and trade is relatively new so I could check with our petroleum analysts to get perspective on that.
Mr. MacEwen: In our business, the answer would be no.
Senator Patterson: It has not worked to disincentivize people. I live in Nunavut and I don’t know how people are going to convert to riding a bike to work in mid winter or other alternatives, but you’re telling me you believe the carbon pricing systems haven’t disincentivized people from buying gas.
Mr. MacEwen: That’s my answer. Now when gasoline is retailing for, let’s say, $1 a litre versus $1.40 a litre, you will see some cut back on the type of vehicles that are bought, the driving habits. A lot of the driving is it’s in today’s life is mandatory. It is people driving to work. Some of it we call elasticity. When you get that change, you see some elasticity and reduction. The additional five cents a litre that it costs between the cap and trade and the HST will not make a difference on its own. We’ve seen crude go up quite a bit in the last two months so that has created higher pricing.
Ms. Stewart: Senator, to provide some more insight, the difference between a carbon tax and the cap and trade is that carbon tax consumers know they are paying that tax but for the cap and trade, that number is not posted anywhere on the pump. While it lets industry participate in the cap and trade program, consumers don’t understand why that price of gasoline has gone up. They think its big oil when, in fact, 78 per cent of sites are independent business owners. It's not increasing the price to gouge consumers, it’s taxation.
Senator Patterson: You’ve talked about other ways of reducing emissions, including getting older cars off the road. You mentioned adjusting driving habits. Could you give an example of how Canadians could adjust their driving habits?
Ms. Stewart: We worked with the City of North Vancouver and have implemented a program called Smart Fuelling. I encourage everyone to check out the website, smartfuelling.ca. We put labels on all pumps in the city that encouraged people to commute with fellow people in their neighbourhoods, to turn off the air conditioning, take off the roof racks, to find transportation alternatives to work when they can.
We understand there is a climate change issue and we do want to lower greenhouse gas emissions. There are ways to incentivize behaviour through transit and other means. In Ontario, they have increased their ethanol mandate to 10- per cent, effective in 2020. We are in favour of renewable fuel increases, in terms of the percentages mandated by the provinces. There are other ways. I will follow up with the data from Dennis DesRosiers to show how just how much those older vehicles contribute to greenhouse gas emissions. I think you will be quite surprised to see that data in correlation to what a carbon tax could do to lower those same emissions.
The Chair: Thank you very much for sending that information.
Ms. Stewart: If I can speak for another moment, I will supply you the supply study, which should provide perspective on the supply orbits in Canada and how the price of gasoline is set.
Ms. Kent: What works in Ontario, where I live, will not work in Nunavut. But what Ms. Stewart is saying is so important. Government is up against a big, ambitious and complex problem, and a lot of what is being discussed are important theories that need to be worked out for the Canadian market. We should not lose sight of opportunities that will be practical and immediate. We can look at opportunities that are here, using vehicles on the road today and products that are already in the marketplace.
The Chair: Out of curiosity, you are producing biofuels and they have the retail pumps. Can we think that one day, just for the transport issue, you will supply more and more to the retailers?
Ms. Stewart: Would it be helpful to discuss how we actually pick up the petroleum and then integrate the renewable fuels?
The Chair: Yes.
Mr. MacEwen: That’s actually fairly simple. For the ethanol producers, I don’t know how many plants there are in Ontario, but there are five or six, and those plants supply the terminals which are essentially Shell, Imperial Oil, Suncor, Valero, terminal/refiners. There are a couple of independents who are also suppliers. The ethanol goes from those plants to the terminals, the terminals supply us and the terminals blend whatever percentage is necessary to meet the mandate.
The Chair: That is very helpful.
Ms. Kent: In Ottawa specifically, when you drive on Hunt Club to the airport and you see those white cylinders to the left, that’s the Ottawa terminal. A MacEwen’s truck would go there and fill up, they would mix their renewable fuel at the terminal then drive to the gas stations.
The Chair: What is the difficulty of sending biofuel instead of diesel to Nunavut?
Mr. Grey: It’s transportation. It’s getting the product from where it’s produced. In our particular case, Ontario and Quebec is the concentration of our biofuels producers because that’s where the raw material is grown. The transportation cost of getting that product to Nunavut would be significant.
The Chair: Wouldn’t it be a good idea if the subsidy government gives for diesel could be passed on to biofuels?
Ms. Kent: Looking at ways to incentivize is the question here. Could the government subsidize the logistics that would be required?
I think it depends on how you approach the goal. That would be my answer. If you were looking at what is Canada capable of nationally in terms of reducing GHG reductions, looking at fuel supply and fuel use, it probably would be the most immediate and effective way to go to where the driving habits are the most concentrated. That will continue to focus on markets in Ontario and Eastern Ontario rather than trying to penetrate in much more isolated markets.
Mr. Grey: As an example that is somewhat unrelated, but as we said earlier, Canada has a 5 per cent ethanol management. Up until a recent announcement, Ontario has a 5 per cent ethanol mandate, but the GTA blends somewhere around 7 per cent to 8 per cent. That’s the concentration of the driving, and that establishes an average across the province.
The Chair: Thank you very much. That was so interesting to understand.
Senator Wetston: Sorry I was late. I probably missed your presentation and a number of answers to questions. Cut me off if I’m repeating.
Full disclosure: I was at the Competition Bureau from 1986 to 1993. It was a very interesting time in this industry. I participated in a number of mergers, such as Texaco and Imperial Oil. Mr. MacEwen, I think you were around then. I was hoping you would be a bit more positive about that. I participated in a lot of gasoline pricing inquiries over the years. No need to tell you about that.
When I mention conscious parallelism you will know what I mean quickly. Then I trust your competition policy terms. Why am I mentioning that? This is about carbon pricing. It was always my opinion that part of the reason for the escalation in the gasoline price was less to do with conspiratorial behaviour and more to do conscious parallelism as we know it. It also had to with refinery and pipeline capacity. It has been my point of view that refinery capacity has been a challenge in this country, certainly in certain parts, and pipeline capacity at certain times. Today, we are dealing with a pipeline capacity from a different perspective.
Without refinery or pipeline capacity, we will not see reductions in gasoline prices. We will see an imposition of a carbon tax, however that happens — cap and trade or with respect to the taxes we just talked about.
That’s well and good. You can have a point of view, good or bad, but at the end of day, when we think about consumers and what they have to pay, I think the independents have done a great job in this country. I’m very supportive of them, because they have been a competitive variable, which has assisted over the years and should be congratulated, Mr. MacEwen, because it’s important for consumers.
Here is the bottom line: What do you view, whether it’s a cap-and-trade regime or a carbon tax regime — I would prefer to have one for the country, but that’s not the way we’re going; welcome to Canada — what is the bottom-line competitive impact — I’m talking about competitive impact — of a carbon tax or cap and trade on your business?
Mr. MacEwen: Are you talking to me as a retailer?
Senator Wetston: Whomever.
Mr. MacEwen: Essentially, if everybody is the same, there is no impact — as long as it’s level. It’s a different issue for the ethanol producers.
On cap and trade versus carbon tax, we would prefer not to be collecting any tax, but that’s life. We much prefer a carbon tax as opposed to cap and trade, because carbon is simple. Cap and trade, from our perspective, is complex, burdensome and expensive. It’s as expense for governments to collect cap and trade and to calculate it as it is for us, whereas a carbon tax is so many cents a litre. That’s simple.
I’m not sure if that answers your question, but basically, if it’s level across the industry, it doesn’t have an effect.
Senator Wetston: I think about the industry in terms of upstream and downstream. You are downstream, obviously, and I understand what you do. There is ethanol component — I’m Ontario senator, so I think I can understand the cap and trade. I believe Quebec has had cap and trade since 2013. Ontario has been more recent. Whatever — you can check that fact.
It’s clear to me, though, that cap and trade gives you greater environmental certainty, and that’s what this is all about, as opposed to explaining as a carbon tax. Consumers will understand that’s about education. I’m not proposing one or the other, but being an Ontario senator, I would like to say that what’s been put in place is reasonable. Otherwise we’re spending a lot of time and effort on a program that is not so reasonable. I think you get a sense of where I’m going.
Ms. Stewart: From a distributor perspective, if one of our member companies is bringing gasoline from Quebec into Ontario, they are obligated party under the cap-and-trade program. They are not refining the product. They don’t have the same capability to generate offset credits to have projects, buy those credits and participate in the auctions. They are simply a payer, and that translates into an increase in their product they are bringing across the border, and some of their competitors are not adding onto their product price.
I can’t speak to the industrial emitters and their capabilities from an environmental perspective. Our members have to pay the price of cap and trade and pass that on, and participate in these auctions. I’ve spent days going through materials on government consultations. It’s complex and difficult to wrap your head around how it works.
Mr. Grey: To add to that, Jennifer mentioned paying the tax or the auction price upfront and pass it on. We are in a similar boat in that we pay the tax or the auction price, but we have no ability to pass it on, and that’s one of the significant issues we’re facing in our industry.
Ms. Kent: Regardless of what mechanism you pick, whether focused on price or emissions, business and policy-makers may have different priorities there. But we have experienced in cap and trade jurisdictions that, for our product, which reduces GHG benefits, the central underpinning of the policy — it’s very difficult to monetize those benefits back to the producer under a cap-and-trade system. Design tweaks are needed often.
The Chair: Thank you very much. We have time for two small second-round questions.
Senator Massicotte: I have a quick question. Mr. Grey or Ms. Kent, you talked earlier about Canada and Ontario having 5 per cent ethanol. I think your suggestion was maybe we should go up to 7. I think the engines of most cars today can go up to 10 per cent. Am I correct in saying you’d like to see the percentage go up? Also, what is the delay? There is an issue with the department where they are trying to measure the intensity of the CO2 as opposed to simply the volume. Where is that at, and what’s the problem there?
Ms. Kent: I could speculate on the holdup. There is a lot happening right now. Some focus and prioritization would be necessary to make sure market-ready ideas and here-and-now solutions don’t get backlogged. I can’t speak for what the holdup is, unfortunately. I agree there is one.
Looking at the other part of the question, I think engines can go up to E15 in modern vehicles. Looking at the infrastructure here, we can do higher-level blends. It’s something that is going to have an immediate real impact on GHG reduction. Looking at the timeline of the CFS and the holistic approach to carbon pricing, I don’t think that needs to delay, looking at increase mandates.
Hopefully that’s an answer for you.
Senator Massicotte: Thank you.
[Translation]
Senator Dupuis: Earlier, Ms. Stewart, you spoke of the program you put in place called Smart Fuelling. The government is imposing a carbon pricing system. You tell us that this is a problem for your industry. In addition, people complain about the increase in the cost of gas, but citizens don’t seem very sensitive to the fact that they are directly responsible for this large consumption of gas and thus for keeping prices high.
I understand that, as you said, Mr. MacEwen, many people who drive do so because they have to get to work. They live far from the downtown areas and their workplaces. How can your Smart Fuelling program convince people to reduce their gas consumption? Again today, I heard on the news that the biggest cars are the ones that are selling. The small cars don’t sell and the sale of electric cars is relatively low. People don’t seem to be very influenced by the messages, whether they come from industry or government. The vehicles that sell are the multi-cylinder ones.
As soon as there is a price increase, smaller cars sell for three months, and immediately after people go back to the very large vehicles. In your experience — and we understand that it is not in your interest to have people stop consuming gas — what could really convince people to reduce their gas consumption?
[English]
Ms. Stewart: From our perspective, it comes down to consumer awareness, which is what we’re trying to do. Like I said, we do believe in climate change. We believe it’s a significant issue and we do understand that people need to adjust their driving habits.
That’s what we’re trying to achieve with Smart Fuelling. We have partnered with a number of municipalities so far, including Terrace, B.C., Surrey, North Vancouver and South Vancouver, as well as a number of our members who have proactively adopted the program in Ontario.
Canadian Tire, which operates the sites on Highway 401 through their OnRoute stations, display the Smart Fuelling program on their on-site televisions.
I think it’s really an effort in education to get people away from thinking that the price is up because they are being gouged by big oil, and this is on us to do, right? Really, how do we educate on the proper market so people understand gasoline pricing and hopefully adapt their behaviours to drive a little less or be smarter about where they have to go?
You are correct in saying that I think the Ford F-150 is the highest-selling vehicle. It is difficult on gasoline, but I think government needs to take consumer behaviour into consideration. How do we take consumer behaviour into consideration coupled with public education? It’s also a very important sector in the Canadian economy and one I think we need to be very careful as to how we regulate so that we don’t cripple it to the detriment of Canadians.
The Chair: Thank you very much for this interesting conversation.
Welcome back for the second portion of this meeting of the Standing Senate Committee on Energy, the Environment and Natural Resources. We’re continuing our study on Part 5 of Bill C-74.
[Translation]
From the Cement Association of Canada, we now welcome Mr. Adam Auer, Vice-President, Environment and Sustainability; from the Chemistry Industry Association of Canada, Ms. Isabelle Des Chênes, Executive Vice-President, and Ms. Shannon Watt, Director, Environment and Health Policy.
[English]
Thank you for joining us. I invite you to proceed with your opening statements, and then we will have a period of questions and answers.
Adam Auer, Vice President, Environment and Sustainability, Cement Association of Canada: Good morning, Madam Chair and senators. Thank you for the opportunity to address you today.
Allow me to begin noting that the Canadian cement industry has, for over a decade, consistently championed strong action on climate change, including putting a price on carbon. Let me put that statement in context, because I think it may offer confidence that carbon pricing can deliver on its promise to reduce greenhouse gas emissions while protecting the competitiveness of Canadian industry.
The Cement Association of Canada represents all manufacturers of cement in Canada. Our industry contributes $76 billion in direct, indirect and induced economic impact and employs, directly and indirectly, almost 160,000 Canadians, mainly in highly skilled, well-paying jobs.
As Canadian governments have moved towards carbon pricing, many well-regarded think tanks, including Canada’s Ecofiscal Commission, have studied the impact of carbon pricing on competitiveness. The results are consistent. While the competitive impacts of carbon pricing are quite small in aggregate, certain sectors are at high risk and the cement sector is consistently among the most vulnerable.
Cement is, in fact, recognized globally as an energy-intensive, trade-exposed sector, or EITE. As the Canadian cement industry has championed carbon pricing as the foundational element of good climate policy, the details matter.
When governments design carbon pricing systems, they must be attuned to the reality that our competitors in import and export markets don’t have similar pricing systems. Failure to consider EITE competitiveness puts Canadian industry on an unlevel playing field and leads to carbon leakage. That is the displacement of emissions and their associated economic activities in investments to markets without the same carbon pricing pressures.
We can share with you a real-world example. At $30 per tonne, British Columbia’s carbon tax doubles the cost of fossil fuels used in B.C. cement kilns and has resulted in significant loss in market share to imports from the U.S. and Asia.
When B.C. introduced their carbon tax in 2008, cement imports in the province climbed from less than 6 per cent to a peak of over 40 per cent, resulting in plant shutdowns and lost investment in economic opportunities in B.C and, perversely, a net increase in global GHG emissions associated with the production and transportation of cement from import markets.
The B.C. cement industry is a case study in carbon leakage. Thankfully, the federal government appears to have learned from the B.C. example.
While we are in the early stages of consultation on the details of the federal treatment of EITE sectors under the Greenhouse Gas Pollution Pricing Act, the proposed output-based pricing system regulatory framework adopts, in principle, a proven approach to mitigating leakage that we hope once finalized will mirror three essential EITE measures found in the Alberta, Ontario and Quebec pricing systems.
First, these systems use a production-weighted or output-based pricing model that only charges EITE sectors for emissions above an un-discounted carbon intensity benchmark. As long as the initial benchmark is realistic, this approach maintains a consistent and predictable market incentive to reduce GHGs, allows industry continued flexibility in the face of various market cycles and secures a measure of protection from compliance costs that would significantly disadvantage EITEs against foreign competitors.
Second, all of the provincial systems distinguished between combustion-related emissions, emissions from the fuels used to heat our kilns and process emissions, which are irreducible emissions from the chemical reaction at the heart of the cement manufacturing process.
Third, all of these systems recycle a portion of their carbon pricing revenues to accelerate low-carbon capital investment at EITE facilities. Together, these measures can be effective in ensuring carbon pricing supports an ambitious yet considered transition toward a low-carbon economy, including for the most vulnerable sectors of the Canadian economy.
Let me offer two final thoughts as I conclude. We acknowledge, as the federal government itself has acknowledged that carbon pricing alone will not achieve Canada’s Paris targets. Complementary measures are needed. These, whether the clean fuel standard or others, must be assessed together with carbon pricing for their aggregate competitiveness impacts in order to avoid undermining the integrity of the carbon pricing system.
Second, as a major purchaser of goods and services, the Government of Canada must help boost the low-carbon market signal that carbon pricing sends by aligning procurement, especially procurement of infrastructure with climate objectives, using cradle to cradle life-cycle assessment to pull low carbon innovations include low-carbon cement into the market. Thank you, and I look forward to your questions.
The Chair: Thank you.
[Translation]
Isabelle Des Chênes, Executive Vice-President, Chemistry Industry Association of Canada: Thank you very much, Madam Chair.
[English]
Thank you, members of the committee. We appreciate the opportunity to appear here before you on behalf of the Chemistry Industry Association of Canada. I’m joined by Shannon Watt, our director of environment and health policy, and we’ll be happy to take your questions together.
Canada’s chemistry industry is a vital component of the Canadian economy. It’s the fourth-largest manufacturing sector, with just over $53 billion in annual shipments. We export 75 per cent of our production, making us the nation’s second-largest manufacturing exporter behind the auto sector. We are directly responsible for 87,000 jobs and indirectly responsible for 525,000 jobs. More than 95 per cent of all manufactured products rely on chemistry. Advances in key sectors such as green buildings, sustainable transportation, clean energy and sustainable agriculture would be impossible without chemistry.
Globally, chemistry is a $5 trillion industry with annual growth rates nearly double global GDP growth in each of the past 10 years. Analysts forecast a tripling in demand for chemicals over the next 20 years. Canada’s abundant low-carbon resources such as natural gas and natural gas liquids, hydro electricity and biomass, enable chemistry products that are 80 per cent less GHG intensive than those from some European or Asian markets, which rely on crude, crude oil or coal as feedstock.
Making products in Canada is good for the global environment.
CIAC and its members support efforts to reduce global carbon emissions and have worked collaboratively with both provincial and federal officials to ensure carbon policies and pricing mechanisms improve environmental performance, avoid double regulation and maintain Canada’s competitiveness.
With respect to the federal carbon backstop, we shared the following position with government officials: Canada should support a carbon policy that recognizes emission-intensive trade-exposed sectors and encourage investments in the Canadian chemistry sector. Given the incredible investments in innovations and technologies to improve performance to date around air emissions and climate change, Canada’s proposed output-based allocation process should focus on benchmarking Canadian chemistry operations and performance against global competitors.
Government needs to provide a comprehensive analysis of cumulative impacts of the suite of climate change policies, including the proposed clean fuel standard.
Finally, we encourage the government to leverage the funds collected through specific carbon pricing schemes to participate in public-private partnership programs to mitigate the high capital costs associated with low-carbon technology, equipment or infrastructure replacement, new builds or retrofits.
As it was acknowledged in this committee’s report on decarbonizing heavy industry, Canada has a low-carbon energy advantage. For this reason, securing investments in Canadian chemistry will improve global greenhouse gas emissions, as well as positively contribute to Canada’s low-carbon economy.
We are supportive of carbon pricing and supportive of climate change policy that recognizes the competition the chemistry industry faces from non-carbon priced jurisdictions. We do not want to pay twice for the carbon we emit. We want policies that support the industry in securing investments in the latest technology.
Madam Chair, members of the committee, in the interest of time we’ll stop here and take your questions.
The Chair: Thank you very much. We will start with questions.
[Translation]
Senator Massicotte: Thank you for being here this morning.
[English]
It is a subject of great interest. It is a little complicated. What you’re saying is that, as you know, the plan basically says we are going to benchmark at 70 per cent of the Canadian average and therefore you are going to be subject to a CO2 carbon tax on 30 per cent. You’re both trying to sensitize us to say it could be non-competitive compared to the Americans or imports that don’t have any such CO2 tax or carbon tax. I think that’s loud and clear.
You referred to the Washington-B.C. experience. There are some expert studies who don’t agree to say that was an issue of unfair competition with imports. It was basically all other factors. I want to mention that to make sure people understand.
On cement, what is that 30 per cent? In other words, you are going to pay 30 per cent of the benchmark that maybe your imports to the United States don’t have a similar cost? What dollar amount is that relative your output price? Is it a big number, 5 per cent, 1 per cent, 20 per cent? Do you have any idea?
Mr. Auer: To address your first point, I would point to studies that show the opposite.
Senator Massicotte: There are conflicting studies.
Mr. Auer: There are many factors, but there is no question that — and this gets to your second question — in British Columbia, at $30 a tonne, we are looking at somewhere in the order of a $10 per tonne increase in the price of cement, which is a low margin on differentiated commodities.
Senator Massicotte: What percentage of the sale price is that?
Mr. Auer: Something less than 10 per cent. At $30 per tonne.
Senator Massicotte: At $30 a tonne?
Mr. Auer: At $30 a tonne in B.C.
Senator Massicotte: At 10 per cent, it’s 2 or 3 per cent of your output price?
Mr. Auer: I’m not sure I understand —
Senator Massicotte: I took your number and divided by three. You started at $10 a tonne so therefore use the same multiple —
Mr. Auer: I’m saying the sale price of cement is about $107, on Canadian average. If a price on the fuels only of $30 per tonne increases the sale price by $10 then —
Senator Massicotte: They’re only going to tax to the extent you exceed 70 per cent of the Canadian average.
Mr. Auer: I’m talking about the B.C. example.
Senator Massicotte: How much is it relative to the federal examples?
Mr. Auer: The impact would be much greater, because that 70 per cent as it’s currently proposed on both processed and combustion emissions. Process emissions are over 60 per cent of our total emissions. The $30 per tonne price in B.C. applies only to fuel. That’s a $10 a tonne increase as a result of a $30 price on fuels only, 30 per cent of our emissions.
The starting point in the federal model, which is I hope not where we will end up, is 30 per cent of the total emissions, process and combustion. If you’re talking about $30 per tonne, up to $50 per tonne in 2020, even at $30 per tonne, you’re already pricing three times the emission.
Senator Massicotte: I’m from Montreal and have a big player there that started up I guess a year ago, which is heavily subsidized by the governments per se. How do you take that into account? Now you have a CO2 tax you say is unfair because international bodies don’t have that. At the same time they have cheap capital and cheap money. How does that make them competitive or non-competitive when you combine all the government impacts on their pricing?
Mr. Auer: I’m not really in a position to speak to the McInnis situation. They are not a member of the Cement Association. They are not in full production yet. One of the bylaws we have as an association is you have to be in full production to be a member.
They are not a member. I can’t speak to their situation.
Senator Massicotte: I am trying to understand the chemical industry. The feedstock is predominantly natural gas. If you look at the cost of production — if I generalize — for all the industry, around 22 per cent of total CO2 of those products relates to extraction and production. In the chemistry industry, but one barrel of oil and gas — one barrel — and I go all the way to the end, if I combust it, it’s 100 per cent. If I use it for a chemical product, how does it compare to combustion of gasoline? Do you emit a lot of CO2 during that process, after your purchase of the feedstock?
Ms. Des Chênes: Yes, we do emit CO2.
In terms of your previous question around the Canadian average and the impact on industry, it’s really difficult for us to price at this point, because the industry is so unique. Unlike some sectors, where there are fewer variables, with the chemistry sector, you can have certain chemicals produced for polyethylene that use different feedstock, for example, and other bio-based products such as our bio-succinic acid facility in Sarnia. It’s difficult to come up with an average in terms of a costing.
With respect to the benchmarking and that 30 per cent, in some cases, we have one plant in Canada producing that chemical. If you’re taking the Canadian average for that particular chemical, they are already producing it using low-cost and low-carbon feedstocks. The comparison is not fair with jurisdictions where there is a higher carbon cost to feedstocks. It becomes even more difficult to reduce those emissions without additional significant investments.
Senator Massicotte: I’ll go on a second round, please.
Senator Wetston: Thank you for coming. I just have a general question to all three of you. I think we understand how critical chemistry and cement are in this country, perhaps worldwide. I’m an Ontario senator, and I think in the GTA, we are in the process of completing over 300 new highrises. I think we’ll hit 350 or 360 by 2019 in the Greater GTA. I want you to imagine the amount of cement and chemistry in that. I know you know where I’m coming from.
We’re in pre-study here on this bill. We’re trying — or I’m trying, at least — to understand the implications generally for your sectors. I think you have described that in general terms. Following up from Senator Massicotte, one of my concerns would be that greenhouse gases are important, and this committee is studying greenhouse gas reduction for climate change and other factors.
I am concerned about the loss of business to the United States. I am concerned about some of your industry moving south. Is that likely; is it possible? Despite what Senator Massicotte was getting at — favourable exchange rates, et cetera. I’m not sure whether we have seen the impact of favourable exchange rates on trade. We recognize there are other issues south of the border.
Do you have any general comments? Are you concerned about the loss of business to the U.S.?
Ms. Des Chênes: Adam spoke about carbon leakage. We’re very concerned about investment leakage. As many of you know from our previous testimonies, in the last investment or business cycle, there were over $250 billion worth of investments in North America, and those were related to 300 projects in the United States. It was only at the end of last year we were able to count two significant investments in Canada. We have been tracking well below the traditional average of at least 10 per cent of the investment we see in the United States. It’s a concern for us.
When we speak about the notion of double regulation — and with respect to the actual legislation, we’re pretty comfortable with that. It’s the regulations that support it. A number of them have been tabled. It’s also working with the provinces. In some cases, those just add cost upon cost, and we would be paying twice for that carbon.
When we have about $12 billion, potentially, in the next two years that could be invested in Canada, the likelihood is it will go to the United States, given the uncertainty around the regulations we have at this point.
Shannon Watt, Director, Environment and Health Policy, Chemistry Industry Association of Canada: To add to that, with those investments dollars, jobs come with that and the economy improves. For the chemistry industry — and you see this — we don’t have incremental reductions. It’s a stepwise change. It’s those investment dollars that come in, and they bring the latest technology and the best in class. We need those investment dollars in order to continue to reduce our emissions. It’s really important for jobs but also for GHGs.
Mr. Auer: I would echo a lot of the same comments, but I would add there is a path that works. Our message has always been that you can design these systems to work. Ontario is a great example because they have hit all three of those criteria I mentioned in my remarks. We have a realistic benchmark. There are allocations up to that benchmark. There is recognition of the differences between processing combustion emissions. Yes, there is a steep decline — the intensity and the benchmark we have to meet decline rapidly — 4.75 per cent per year, which is, in four years, about the same reductions we have achieved since the 1990s. That’s not nothing.
They have also recycled the cap-and-trade revenue into technology investment that has helped ensure that when our investors and our headquarters — not based in Canada — are looking for investment opportunities, the investment environment in Ontario looks good, and it’s directed toward GHG reductions.
Senator Wetston: You are familiar with what is being proposed in this budget implementation bill. Your industries would be exposed to the out-based pricing system, as I understand it. We are all trying to get our heads around it.
California has a significant cap-and-trade system. Other states are looking at systems as well, despite the fact there is no federal carbon tax, as I understand it. You would have a better appreciation of that than me.
Is there anything in the way in which this bill is organized around this emission performance threshold, et cetera, that creates issues for both your sectors? Is there any advice you might give this committee as we reflect on the pre-study of this bill?
Ms. Watt: Sure. I would add two things. The 70 per cent weighted average is the strictest we have ever seen around the world. It’s interesting starting point in terms of developing your output-based performance standards. We have to provide evidence that is not suitable and we are emission-intensive and trade-exposed enough. They do have a nice criteria set out for us in three stages.
The other is the global average. As my colleagues said, we sometimes have one or maybe only two facilities, and those two facilities for one product have different processes. Given that we have low-carbon feedstock, given that we have a green electricity grid and given that we have biomass in Canada, we cannot be comparing ourselves among each other. We need to look globally. Globally, when we look at the chemistry industry, Canada looks very good. We should be encouraging investments in Canada. Those investments are happening. We want them to happen in Canada, because we will get lower GHGs than if they were to be elsewhere.
The Chair: I agree with you.
Mr. Auer, if the government in its procurement process were to mandate cement to respect some carbon footprint or low-emission process, and if a building code would mandate that new buildings in their soliciting contracts provide low C-footprint cement, will it help?
Your industry is a high emitter and you will be exposed. There are other things that can be done in parallel to attenuate the impact on your industry. Can you help us with other initiatives that can assist your industry to attenuate the impact of this tax?
Mr. Auer: Absolutely. As you know, I appeared before this committee on the study on the transition to a low-carbon economy. We emphasized infrastructure as being important to incentivizing reductions not just in our sector, but in the built environment writ large.
There are two things I would say. One is yes, there are lower carbon cements available today that we have been asking governments to mandate to ensure the market infrastructure for the supply of that cement expands and replaces the higher carbon-intensive cement that’s used today. That is a one-megaton reduction opportunity across Canada.
That focuses on the material itself. What we have been championing is a more sophisticated decision-making process around infrastructure that looks at life cycle greenhouse gases. Materials would be a portion of that analysis but you also have to look at the operational impacts, end-of life impacts and all the impacts along the value chain.
Within each of those life-cycle stages there are different opportunities to reduce greenhouse gas emissions which are quite significant. One we talk about a lot are pavements because it’s a great story for our sector. Rigid concrete pavements have a lower embodied GHG component but they also help save fuel because they are more efficient to drive on. This is a large GHG reduction benefit.
You can look at buildings, bridges and any manner of infrastructure in the same way. They all have points of leverage when it comes to greenhouse gases that can be identified through life cycle assessment.
You can also look at the other side of climate change, which is climate adaptation: How do you balance greenhouse gas reductions and life-cycle costs with the need to build infrastructure for a new climate, which will look different from the one we are accustomed to?
The Chair: Thank you very much. I asked you about this because we have our study. You came with these points but now we have a bill. These are two independent things. I need you to repeat these things, because if we are thinking about an amendment or even an observation we need evidence. I notice you didn’t give us a written statement. Will it be possible to send one?
Mr. Auer: There should be a copy circulating. I did provide some copies.
The Chair: Okay.
Mr. Auer: I’m happy to follow up electronically.
The Chair: Do you have any comments along the same lines of what you told us when you came for our study on high emitters or the chemical industry?
Ms. Des Chênes: From a green procurement perspective, it’s more difficult for us because the chemistries are within all of the products. Understand that the products we make help fuel the low-carbon economy and there are certainly elements of the products we make -- one of our members in particular makes an additive for green cement that allows for fewer greenhouse gas emissions in the production, but also in terms of extending the life of the cement.
If you look at alternative forms of energy, it’s chemistry and plastics that really help create increased battery life and light-weighted vehicles, wind turbines and solar panels. When Ms. Watt was speaking about the notion that the investment is important, in terms of helping to ensure we can apply the best available technologies to reduce our emissions. We have already done a significant job since 1992 in reducing them by nearly 70 per cent.
It is also important in it allows us to continue to use the best available technologies, fine-tune the processes and develop new innovations to help feed the low-carbon economy.
We are an important contributor. We have a low carbon advantage here in Canada with respect to our feed stocks and fuels, and the fact we are a very highly regulated society compared to other jurisdictions. I think we can be proud that we can sustainably make these products in Canada.
The Chair: Thank you.
Senator Patterson: Thank you for the presentations. I’ve got three brief questions.
First, Ms. Watt, I believe you said this 70 per cent standard is found nowhere else in the world on the output-based system. Is that standard in the bill? What should we change it to?
Mr. Auer: That’s in the regulatory framework.
Senator Patterson: That’s my second question.
January 1, 2019 is looming in the world of bureaucracy and I think Senator Cordy said earlier that in this bill is a framework, the devil is in the details. I guess that makes me feel a little helpless as a legislator because we don’t have a way of scrutinizing regulations. There is a committee that scrutinizes regulations but they are years behind. I don’t even know if they are going to get to this OBS.
We’re concerned about the health of our strong, trade-sensitive industries in Canada. How soon do you think you’ll know where these OBS consultations are going to spin out? We are expected to pass this bill before June. It’s a budget bill. That’s the way it happens every year. Are we going to know where you’re at and whether you have been respectfully consulted? How is that looking?
Mr. Auer: That is our hope. We have all been actively engaged with Environment and Climate Change Canada and have recently submitted our first round of data to ECCC to begin analysis. The plan is essentially to put the identified emissions-intensive, trade-exposed sectors through a competitiveness test that would qualify certain sectors for an increase above the 70 per cent baseline.
We have begun that process. The expectation is in the coming weeks we will get an initial draft response we can comment on. By early summer we probably won’t have a final regulation, obviously, but we should have a good sense of where the department is landing on that really important issue.
Senator Patterson: Can I suggest, Madam Chair, that we ask the industries represented here to let our committee know, through the clerk, how they are making out? This is a process we don’t know about as legislators. We don’t know what the draft proposals look like. Would you be willing to share with the committee how that is going?
Mr. Auer: Yes.
Senator Patterson: In the course of our study on the impacts of carbon pricing, we received a brief from a fascinating company called Carbon Cure in Halifax. I think you referred to that as the new green cement; it’s stronger and it somehow sequesters carbon in the manufacturing process.
Mr. Auer, I think you said this new technology could be mandated. Can you explain further? Were you referring to technologies like Carbon Cure? What did you mean when you said, “mandated?”
Mr. Auer: The lower carbon cement I was referring to is not Carbon Cure. We’re aware of and have very good relationships with Carbon Cure. I was talking about a different formulation called Portland limestone cement.
It is branded as Contempra in Canada, and effectively reduces the amount of the carbon-intensive component of the cement formula.
The principles of driving low-carbon innovation through procurement would apply to CarbonCure as they would to other carbon capture technologies that have yet to be commercialized. As you can appreciate, the codes, standards and regulations around infrastructure are quite complicated and slow to evolve. One of the things we’re concerned about — because we are facing difficulties getting a relatively simple technology, just a different recipe of cement into the market even though it’s already acknowledged in the building codes — is that as with other technologies, like carbon capture-based technologies that propose more radical changes to our material, the capacity of building codes and of the market to adjust to those new technologies will be a huge determining factor in how quickly they penetrate into the market and how quickly we can benefit from the GHG reductions to meet our compliance obligations under carbon pricing systems.
Senator Patterson: Mr. Auer, are you saying that Canada has a $100-plus billion dollar infrastructure program over the next 10 years? There will be a lot of cement utilized in those billions of dollars spent through the federal initiative.
Are you saying a mandate to require any building, any major construction projects to use lower carbon cement would boost the technology?
Mr. Auer: I’m saying that, and a more life cycle-based decision-making process will identify other opportunities through those decisions to reduce to greenhouse gas emissions. Yes, the time is now. As you say, we are at generational investment levels for infrastructure and the carbon pricing will not get those GHGs by themselves. You will have to think differently about how infrastructure is built. You have to look at infrastructure through a climate lens in order to able to capture the huge opportunities to reduce GHGs from those investments.
Senator Cordy: I have a quick question. You spoke about the life cycle of cement and that’s extremely important. I agree that should be a consideration.
What is the life cycle of the new low-carbon cement? Is it similar to the current or the —
Mr. Auer: In terms of greenhouse gas emissions?
Senator Cordy: Yes.
Mr. Auer: It’s 10 per cent less greenhouse gas intensive per tonne.
Senator Cordy: What is the life cycle of it? Is the cement as durable?
Mr. Auer: It is a functional equivalent to the cement we use today.
The Chair: As Senator Patterson requested, will you keep us posted on your discussion regarding this bill and your position? And maybe put in writing what you have said because as I mentioned, we are conducting a study but that is a separate issue. Right now we are evaluating Bill C-74.
Ms. Watt: Chemistry is in an interesting position where most of our facilitates are in the four provinces that already have carbon pricing set up. For us, in regard to these output-based performance standards, we will not be looked at for the next two or three years. We have difficulty commenting on this bill because we don’t know how it will implicate us.
There is also an opportunity for this committee to look at the cumulative effects of other federal initiatives. For us, the clean fuel standard probably concerns us the most in terms of costs that are going to hit our industry and will also not give us the opportunity to make reductions on site. As an EITE sector, the clean fuel standard will get passed through to us and we will not be able to pass those costs on. In essence, we are helping others pay for their own compliance. That one will affect us and it is certainly where we would appreciate more understanding and economic analysis on the impacts.
The Chair: Thank you.
Mr. Auer: I absolutely echo that. I tried to make those points in my remarks as well. It’s one thing to look at the competitiveness impacts of the carbon pricing system, but it’s not the only climate policy being contemplated under the pan-Canadian framework and even outside of that framework. And the CFS is the one we are most focused on because its impact on our sector could be more significant than the carbon price.
The Chair: Thank you.
Senator Mockler: I’m going to steal a bit of Senator Wetston’s comments, as I heard earlier, and even this morning. Plus I’m going to sponge an idea from Senator Neufeld about Fred and Martha, who will pay for this at the end of the day.
It’s very difficult to understand what will happen. I know that in Fredericton, New Brunswick this morning, we need to do something. When you look at what happened to Calgary a couple of years ago and look at what is happening in Eastern Canada right now, being under water, there is definitely a concern for all Canadians about climate change.
When I look at carbon tax versus cap and trade, and when I take into consideration that carbon tax in Canada, emissions have continued to rise. An example of that is British Columbia. British Columbians now pay more for gas than anyone else in North America. That’s confusing when you look at Eastern Canada. I don’t want to talk to you about the two pipelines. With the people who are the taxpayers of New Brunswick — we are all taxpayers of New Brunswick — you look at what is happening right now with carbon tax. We’re paying more for gas, paying more for family values on a daily basis, bringing our children, playing hockey. I could give you a litany of all sorts of things that we do. I know you know this, but right now I give you a choice: carbon tax or cap and trade. Which one do you choose?
Mr. Auer: We believe both systems can work but we prefer cap and trade for a variety of reasons. One is that the price is driven by an emissions goal. The tradeoff, as I’m sure you’ve heard, between carbon tax and cap and trade is one gives you certainty on emissions reductions and the other gives you certainty on price.
From a business perspective and long-term investment perspective, despite all the things that might happen around the market and changes in government, having a fixed cap gives a long-term horizon on where your industry needs to go. Of course, cap and trade is amendable to linkage and the cap and trade system in Ontario, Quebec and California is linked. That cuts down the cost of compliance credits. It’s very efficient in that sense. You find it is more effective at finding the lowest carbon reductions. Those would be the two main points. We do think both can work.
Ms. Des Chênes: I’ll start and then Ms. Watt can jump in with more detail. We would agree with Mr. Auer; both could work. From our perspective, it’s about certainty and understanding systems.
Cap and trade, as your previous witnesses noted, can be complex. When we have facilities that operate in each of the provinces and will now be faced with some federal regulations in those other provinces where they may just have a small facility, it adds to the complexity in terms of understanding the various components.
Ms. Watt: For us, it depends on the facility and on the company.
Depending on how and where they’re set up, they’ll have a preference for one or the other.
I want to clarify its carbon tax but also some sort of relief for emission-intensive, trade-exposed industries, like an Alberta system where there is a levy and output-based allowance. If it’s just carbon tax, we probably wouldn’t be that thrilled. If there is a mechanism to allow for emissions-intensive, trade-exposed and competitiveness issues, we’re fine with either one. And again, we are supportive of carbon pricing.
[Translation]
Senator Dupuis: Mr. Auer, I’d like a clarification. When you spoke about changes to the building codes and to the fact that we should think differently about the construction of infrastructure, you referred to a generational aspect. I suppose you were talking about changes in the types of construction, or in materials. Could you clarify that? It was the generational aspect as an opportunity that struck me in your statement.
[English]
Mr. Auer: When I mentioned the notion of a generational opportunity, it was speaking to the amount of investment committed to infrastructure. We haven’t seen that level of investment in infrastructure in a very long time. It’s unlikely we will see it again for a very long time. The infrastructure built with that money will be here for decades, if not longer.
Any decisions we can make now to reduce GHGs will have a lasting impact.
The Chair: I’m not seeing any more questions from the senators. Witnesses, thank you very much.
(The committee adjourned.)