Proceedings of the Standing Senate Committee on
Energy, the Environment and Natural Resources
Issue 3 - Evidence - March 31, 2009
OTTAWA, Tuesday, March 31, 2009
The Standing Senate Committee on Energy, the Environment and Natural Resources met this day at 6:42 p.m. to examine and report on emerging issues related to its mandate.
Senator W. David Angus (Chair) in the chair.
[English]
The Chair: Good evening, colleagues and guests. I call this meeting to order.
[Translation]
Good evening everybody, and welcome to this meeting of the Standing Senate Committee on Energy, the Environment and Natural Resources.
My name is David Angus; I represent the Province of Quebec in the Senate and I am the chair of this committee.
[English]
I would also like to introduce my deputy chair, Senator Grant Mitchell, from Alberta. Next, we have Senator Nick Sibbeston, from the Northwest Territories; Senator Lorna Milne, from Ontario; Senator Tommy Banks, from Alberta; Senator Elaine McCoy, from Alberta; Senator Richard Neufeld, from British Columbia, a former Minister of Natural Resources; and Senator Dan Lang, from Whitehorse in the Yukon.
Just arriving is our colleague, Senator Gerry St. Germain, from the great province of British Columbia; and Senator Peterson, who has now come to join us. He is from Saskatchewan.
Our committee's mandate is to examine legislation and matters relating to energy, the environment and natural resources generally.
I would like to take this opportunity to welcome our witness tonight, a distinguished gentleman from Brampton, Ontario, who has developed a very interesting and profitable business. One of his particular areas of expertise and interest is in cap and trade, a subject dear to our hearts. It is one that some members of this committee are frank enough to acknowledge that we do not know much about. We recognize that it is an important element for us to understand in the ongoing battle in climate change and protecting our precious environment.
We are delighted, Senator Milne, that you have put us on to Mr. Mech. Mr. Mech, I would like to especially welcome you here tonight and apologize for the fact that we are about two hours late getting started because of debate that was taking place in the Senate.
The good news is that while we were waiting, we got to know you a little bit and your two sons, who are with us this evening — Eugene, 11, and Armand, 13. Welcome, young men. I understand if you are very good young men, as I know you are and will be, one of you might wish to make a statement later on. We will be looking forward to your wisdom.
Having said those things, I have given Mr. Mech a general idea of how we function. He has an opening statement. He has circulated some paper for us and he will proceed now. Later, we will open the floor for questions. Please proceed, sir.
Andre Mech, Principal and Director, MECH and ASSOCIATES Corporation: Thank you very much. Honourable senators, I believe there are some members of Parliament here, along with staff, guests and my two sons. Thank you very much for inviting me here tonight to speak to you on cap and trade.
This is an enormous subject. I will take you through a very straightforward, bare bones explanation about how cap and trade works. Hopefully, at the end of the presentation, we will see that it is a very flexible mechanism that will form the framework of what I believe is one of the ways of addressing global warming and managing carbon assets.
I also would like to thank my wife, Dr. Susan Williams. We moved yesterday, so I left her with her patients, the house and the boxes. As well, I would like to thank my sons' teacher for tasking them with coming to see how democracy works and how the Senate functions.
The Chair: Who said it works? How it functions is a better thing to say.
Mr. Mech: My presentation is about 15 minutes long. It just scrapes the surface of this massive subject. The objective is to answer some questions and to solicit quite a few more questions about how this mechanism can be used to benefit the population at large.
[Translation]
If you have any questions in French, please ask them slowly, so I can reply in French and confirm in English.
[English]
English is my mother tongue.
I will now go through who I am; cap and trade and how it works; and the tools that are needed to have a credible cap and trade system. We see that we have major banks struggling with the current economic situation because they have made some mistakes. We will discuss how to avoid those mistakes by utilizing these tools.
We will also go through the huge opportunity provided by a cap and trade system, and discuss why it is good compared to some other systems. We will then go through my experiences in Canada, Europe and the United States. The rest of the world is moving along very quickly and we will go through what my global experience has taught me.
Another general thing I have learned by working on every continent in the world is that Canadians have a few advantages. For instance, when I got on a plane in Bombay to fly to Hong Kong, I listened to Shania Twain, Céline Dion and ``Just for Laughs'' and watched Cirque du Soleil on a carrier that has nothing to do with Canada. I also watched a movie with Mike Myers and Jim Carrey.
My point is that Canadians go around the world and they do things. These are entertainers who are visible to us, but if we look at industry, we will also see that Canadians take leadership positions around the world in numerous corporations. The world does look to us for answers, whether it is the development of time zones or inventing hydroplanes, et cetera. In this current economic environment, it will look to Canada for some answers again.
I do not know whether it is the gene pool we are from or the fact that we live in a very intense environment, but we are doing some things right. Cap and trade is another way, I think, to do something right.
Who am I?
[Translation]
My name is Andre Mech. I obtained my BA in Mechanical Engineering from the Royal Military College in Kingston. After graduation, I studied at the Richard Ivey Business School, University of Western Ontario. I have 23 years' experience. I have worked in all parts of the world, and I have found they all face the same problems.
I am now the director and principal of my firm, MECH and ASSOCIATES, which specializes in planning, validation and verification of greenhouse gases. My firm has been in existence for more than 40 years in Canada, the United States and Europe.
[English]
The Chair: Could you elaborate a bit? We understand you have an MBA, you are an engineer and you have worked around the world in practically every country, but doing what?
Mr. Mech: When I was working around the world — not in every country but on every continent — I was installing radar systems at international airports. We got to work with contractors, and so on. One of the things that pushed me toward this sector of work was the fact that over every major city, there is the same problem: The traffic is terrible and there is a big, brown stain in the sky over every single one of them. Everyone is busy trying to get things done as quickly as possible and the environment is getting forgotten.
I think that it is very expensive because you see inefficiencies. You do not need to do any studies or anything; you simply have to stand and watch to see the inefficiencies as people are meeting short-term deadlines and creating long- term problems. That is what I did around the world.
The Chair: Installing these radar systems?
Mr. Mech: Yes.
The Chair: In your description of your company, MECH and ASSOCIATES Corporation does not sound like it does radar installations to me.
Mr. Mech: No, it does not. That was a long time ago. I made a conscious decision to move out of the corporate world and into this sector. I stood back, took the pure education that I got at MBA school and ran the metrics. I looked at the Kyoto Protocol, and at carbon trading and cap and trade. Much like Wayne Gretzky would go to where the puck is going to be, not where it has been, I went to where I think the world is going to be and not where it is. I said carbon trading is where the world is going.
That was about eight years ago. At that time, the United States was against carbon trading, Kyoto, or anything to do with global warming. Now, how the world has changed. About four years ago, we see them formally recognizing it; we see governments that were against Kyoto adopting it, such as Australia. I think that I made the right decision.
This issue is gaining momentum around the world. Much like the dot com or the microcomputer, it will change how we live and also make how we live a lot better.
I made that conscious decision and educated myself and got involved.
The Chair: Very good. Carry on, sir.
Mr. Mech: We are now on slide 6, cap and trade. This is a very straightforward process. Here we have two companies, Firm A and Firm B, which form the economy that I will talk about. If we consider these two firms the micro-economy, we see that total emissions are represented by both columns right up to the top. Some organization — a government or entity — has formed a carbon dioxide cap, which is identified by the line halfway down. We see that both firms now are over the cap.
The Chair: Does that mean they are producing carbon dioxide, through their business, over that line?
Mr. Mech: That is correct. They are both overproducing.
The next thing that happens is they get their cap and one firm tends to be more aggressive than the other because of fiscal realities. Sometimes if you establish a cap, a cap is based on time; and, perhaps, unfortunately for one firm, they would have just finished their major capital infrastructure upgrades so they missed the target.
The next slide shows that Firm A has implemented some new technology — changed their process, done something different. Firm A is now under the cap. Firm B, for whatever reason, has decided not to implement new technologies. They are business as usual and they are still over the cap. If you go to the next slide, we can measure the amount that the first firm has gone under the cap and allocate a credit to them.
There is an international standard called ISO 14064. ISO 14064 is the validation, verification and planning standard that is the backbone of carbon trading. It was passed by the ISO committee a number of years ago. It was introduced and adopted by the UN at the Conference of the Parties, COP 11, in Montreal. Using that process, we can identify how much of a credit or an overage another firm would have.
We identify the credit and we validate and verify the emissions that benefit Firm A. We have one that is over and one that is under an arbitrary line that is set by some governing body.
Firm A transfers the credit that has been identified, validated and verified to Firm B. Firm B now meets their cap; Firm A is now up to the cap and the overall limit of carbon dioxide has been met. As a whole, we have lowered the amount of carbon dioxide in the economy in this simple example.
Senator Lang: Firm A sold their excess?
Mr. Mech: That is correct. On the next slide, we see there was a transfer of money from Firm B to Firm A for those carbon credits. Here, we have a true market. That is, someone who is over and needs carbon credits; someone who is under who has carbon credits. We have carbon credits to sell and then there is a transfer of money.
In that way, you are not allowed to pollute more and an overall cap is met. Once the cap is met across the economy, the governing body can decide what to do. Do we lower the cap, leave it there for people to get a breather and get their steam back up? What do we do?
On the next slide, we can talk about what is needed for a cap and trade system to work. A number of things are needed, which are all very good things.
First, we need new technology or the spread of existing technologies into the marketplace. We also need legal agreements to identify the ownership and end user of both the carbon dioxide and the technology. You need a greenhouse gas plan that follows the whole system, and a market: buyers and sellers. You can set a cap that is too high, but then you do not have a market. You do not have buyers and sellers. We will go through each one of those individually.
Senator St. Germain: For clarification, is the cap the line?
Mr. Mech: The cap is the line.
Next is technology. This is a nice thing to have, namely, a demand for technology set by the establishment of a cap. You set a cap and say this is what you must meet; this is what you must do. We see Barack Obama setting a cap on how he gives money to the auto industry today. He is saying that is not good enough. You need to go back and plan again. He is setting his limit.
I think that is good because it drives people to get things done. What we did last year was not good enough; we have to come up with new ways of doing things.
Technology comes from entrepreneurs, inventors, engineers, designers and existing technologies that sit on shelves for years and years. I know of one technology that was developed by NASA for use on the space shuttle by Argon National Laboratories, which was taken by Mr. Mike Phelps and a company called Advance Lubrication Technologies.
It sat on the shelf for 20 years. It did not work in space but it works very well in high pressure, high temperature, extremely intense environments on earth. It is an advanced lubricant that is solid based. It increases fuel efficiency by a demonstrated amount, on over 6,000 vehicles, of 15 per cent. You throw it in your oil once and that is it; it is good for 200,000 kilometres. It sat on the shelf for 20 years.
Forcing these technologies off the shelf is important. We know that we have technologies here at all the DCIEMs and all the defence research establishments, et cetera. We have to force people to go and look at them and adopt them. This is one of the ways. This cannot be bad for the economy — new technology, new proliferation, new jobs.
I also know of a company called Clean Air Technologies just across the border in the United States, run by a guy named David Miller. It is a small lab in a box. It is 97 per cent effective of laboratory grade, but good enough to stick on a truck and test a truck in use in the field. We all know that our vehicles do not do as well on the road, and it is hard to get data on this technology as it is being used because we have to go to laboratories. However, 97 per cent is good enough to make some fairly solid decisions. Technology is needed.
We also need legal agreements. Lawyers, paralegals, patent attorneys, governments — for millennia all these people have been deciding ownership issues. One of these issues with cap and trade is this: Who owns the credit and how does that credit get distributed among the value stream? We can leave this up to the legal profession but, once again, this is a whole new area of law that has not been practiced before — new jobs, new ways of doing things.
Governments also have been dealing with ownership issues for millennia, especially when they support major industries. Governments can decide where to put these carbon credits.
A carbon credit, for a typical vehicle to be run for one year, is about four tonnes. In today's market that is worth about $40. It is insignificant to someone who is running a vehicle; but if you take $40 from a vehicle and give it to someone who might need the money — like a major automobile manufacturer who is producing 1 million vehicles a year — that turns into a significant amount of cash. This cash can be directed by a government, as criteria for a loan or something like that, to a specific industry.
If you leave it to individuals, it does not have a significant economic impact. However, if you direct that to a specific sector of the economy, it could have a measurable impact. Therefore, government has a say in ownership of greenhouse gas credits.
On the next slide, I address an end user — the consumer and individual, corporations and/or governments. At the end of the day, someone has to decrease their carbon dioxide emissions. This tends to be the end user, so they are involved in the value stream.
However, there are other end users in the carbon market who are sometimes overlooked. For instance, I took a look at a project in Northern Ontario. There was a pulp and paper mill that had an enormous heap of bark. They were struggling with what to do with this liability — because it is a liability, as well as a tremendous greenhouse gas mess.
One of the ways to address this heap was to grind it up and set up a biomass production system and generate their own electricity. Using the bark offsets some of their costs and reduces the greenhouse gases going into the atmosphere. All of a sudden, this liability turns into a huge asset.
In pulp and paper, which is operating on very thin margins, this is good news. All of a sudden, these messes are now assets. That is another way of looking at greenhouse gases and/or carbon trading with the end user.
The Chair: When you talk about these ``end users,'' which is a nice phrase, are they Company A and Company B in the first two slides?
Mr. Mech: Yes; that is correct.
The Chair: They are the ones that produce these emissions?
Mr. Mech: That is correct.
The Chair: The end users are the polluters.
Mr. Mech: That is true. However, in order to have a cap and trade system, you need all these things. The end users are one of those.
The Chair: You need the bad guys and the place to catch them?
Mr. Mech: Absolutely. Not ``the bad guys'' — everyone creates greenhouse gases; it is how we control it.
The Chair: Does everyone?
Mr. Mech: Yes. To move on, we need a greenhouse gas plan. This is a whole new sector of the economy. It consists of technical, financial and greenhouse gas practitioners. That is what I do. I write greenhouse gas plans; I validate them and I verify them.
There are three people that are required to generate a greenhouse gas plan — the writers, validators and verifiers are all different. This is one of the beauties of generating a greenhouse gas plan. It provides you with third party scrutiny three times, so you do not end up in some of the messes that we have had and the economic fallout we have seen recently on financial markets. There are three independent groups looking at a plan before you create a credit.
Senator Milne: You say you need the writers, the validators and the verifiers. Are these the people who are actually creating plans for the end user, the producer or the one who will reduce their emissions and the other one who will buy them?
Mr. Mech: That is correct. These are all new jobs. What I am saying here over and over is new jobs, new sector, growing the economy and so on.
If we go through the creation of a greenhouse gas credit quickly, a plan writer writes a plan to a standard — ISO 14064 is the backbone of the standard. A validator is a third party technical analyst who takes a look at the plan and looks forward into the future. This is an engineering activity. You look forward into the future and say if they do what is said in this plan, then this will happen. The plan is then implemented.
When it is all done, a verifier looks at the plan, what the validator said would happen and then at what happened. The verifier is an accountant who performs an accounting activity. They look backwards at history.
The plan writer plans what should happen; the validator looks forward at what should happen; and the verifier looks at what happened. After all that is done, you get a greenhouse gas credit that is real, verifiable and has gone through three levels of scrutiny.
Senator Sibbeston: With respect to the plan writer, he must be someone who is very knowledgeable about that particular industry to see how the greenhouse gases can be reduced. It can be technology, chemicals or whatever. It could be very expensive or just some modification. Obviously, it needs that kind of knowledgeable, technical analysis and plan, does it not?
Mr. Mech: That is correct. Part of the validator's activity is to validate the competence of the individual or corporation that generated the plan. They have to demonstrate that competence. It is one of the items on the checklist.
This is a whole new economic sector. I believe that, much like the computer science of 30 years ago, in 20 or 30 years from now there will be whole departments in universities and whole sectors dedicated specifically to this type of science and technical activity.
The other thing that is needed for a greenhouse gas plan is standards and standards associations to provide third party review of the planning activity. Something like the Canadian Standards Association. We also need registries, places where credits that are generated actually get registered and serialized, much like a bond or a stock from a corporation gets registered and serialized before it is sold over a public exchange. What this says to me is new areas of study, new specialty organizations, new businesses and new revenue for governments.
Finally, we need a market. Markets consist of buyers and sellers. Someone has to buy and someone has to sell. That means there will be tough times for some corporations, who will have to belly up to the bar, and easier times for others. It is never always an easy time for everyone; those situations change.
People who are aggressive with respect to greenhouse gases will do fairly well in a cap and trade system. People who are not, will not do that well. This says to me that corporations will have to plan even more into the future.
The situation is like that of information technology. It was sort of a sideline 30 years ago, but we know that information technology forms a very important part of every corporation today. At the boardroom table, you have a chief information officer, the CIO, who takes care of the BlackBerrys so they do not go down and who ensures that the corporate intellectual property and information assets are taken care of.
I think, in the not too distant future, we will see a chief carbon officer or a chief environment officer at every boardroom table, ensuring that the environment is taken care of, simply because people will demand it.
Senator Sibbeston: You are assuming that in every industry or situation, carbon emissions can be reduced. Are there any situations where they cannot be changed and cannot be reduced?
Mr. Mech: I am sure there are. I am sure there are some things that you cannot change. I know that it will be tougher for some industries than it will be for others. That is where setting the cap becomes so important for a government.
We have to ensure that the targets can be met but that they will not be economically crushing. I think you can use cap and trade as a tool to grow the economy, clean up some sectors and not crush the existing industries. It is very important not to crush the existing industries; we cannot do that. We have to grow these things.
I remember talking to someone in the cement industry and they said, ``No, we cannot change. Cement simply produces carbon by the way it is. It is a chemical virtue.'' I also have seen cement that is 10 times stronger, has far better strength properties and sets in a number of minutes. That is a totally new technology that will change the way we do things. I do not think there is any industry that will not be touched by this, but it will be difficult.
Senator St. Germain: So that I understand, you say that governments will set the caps. Will the whole world not do the same thing?
Mr. Mech: I do not know. I am recommending that governments set caps. I am just explaining how this works.
Senator St. Germain: I realize that but you are the expert.
Mr. Mech: I would suggest that governments set caps, absolutely.
The Chair: We will have a question period later so I have been a bit lenient, but where we may not all be following is that it sounded that this was happening; but this is all theoretical, is it not?
For example, let us say that Company A is Air Canada and I am the chief carbon officer and I am on the board. Someone tells us what the standard is, I suppose.
Mr. Mech: Yes.
The Chair: Some oversight body tell us that. Another person tells us how much emissions we are doing. We are in a deficit of X, assuming that there is a standard in place by a credible body — a government or an airline association.
Is that how it works? First of all, carbon emissions are there; we obviously know there are many people emitting too much. However, for the system you are advocating, now you have to find other similar companies to do business with in order to work out the scheme, right?
Mr. Mech: Yes.
The Chair: In other words, I think Senator St. Germain was thinking this is actually happening out there and he wants to know who sets that line.
Mr. Mech: Okay, if that was the question, I am sorry; I misunderstood.
Yes, it is happening in Europe and it has been for two or three years. When I go to the United States, there are a lot of corporate CEOs who say there is no carbon market or they want it proved to them that this is real. I take out The Economist. On the last page, the very last number, bottom right-hand corner, is their global metrics. The most important position on any financial page is the bottom right-hand corner because it gives you the whole picture, which is the price of carbon dioxide in the European Union trading system.
The Chair: What is the date of that issue?
Mr. Mech: It is February 21.
The Chair: What page is that?
Mr. Mech: It is the very last page and very last number before the advertisements, at bottom right-hand corner.
Senator Banks: Is it in that position every week in The Economist?
Mr. Mech: It has been reported there for the last three years and this is a multi-billion dollar economy that some people say does not exist. It has been there for a long time and the Europeans are gaining experience day by day on this market and some people do not even know it exists.
Senator Lang: I have done a little bit of reading. It is a relatively new system and has been in place, as you say, for about three years. How does your plan relate to how they do it in Europe? Is this basically following what they do?
Mr. Mech: This is essentially what they do: They have set caps for large industries, they have tested the waters with a limited number of industries and they have expanded that into a second phase. That is essentially what they do.
Senator Lang: I understand they are experiencing some significant problems with the implementation of their plan over there, financial and otherwise. Is that not correct?
Mr. Mech: There are always problems and they are working through the problems one by one. The important thing to note here is the trend toward expansion, not toward stasis or contraction.
The Chair: I now appreciate that we are interfering with your flow of thought. I hope it is not too off-putting for you. Please continue.
Mr. Mech: Thank you very much.
In order to develop a market, one of my points is that governments need to develop reasonable caps so that the caps are not debilitating for some industry or do not cause undue hardship. We have to continue to grow. They have to recognize incentives and credit for early adoption. I know that DuPont is very aggressive in reducing greenhouse gases and they need to get credit for that.
There needs to be a reasonable tax structure. This is a new commodity and it requires government resources for its implementation. Therefore, the government needs to tax this new commodity.
I think it allows for the introduction of levies on foreign goods that come from the other side of the world, which have a large carbon footprint before they come to Canada or to North America. That would be good for Canadian manufacturing. You do not want Canadian manufacturers competing against people who do not have the same carbon responsibility Canadians would be forced to adhere to. I think that is fairly important. Once again, my message here is jobs and a new sector for a global economy.
The next slide deals with the benefits of cap and trade. It is a new business sector. It uses a new global commodity: A ton of carbon dioxide mitigated in Canada would be the same as a ton of carbon dioxide mitigated in Australia. It creates new knowledge-based, high-paying jobs, offers manageable continued growth and caters to solid environmental stewardship and responsibility. That is what I see from a competently-managed cap and trade system.
From my experiences in Canada, the United States and Europe, early adopters and enthusiasts are moving along. In Canada, I have not been in a boardroom meeting where these questions have not come up relatively quickly, usually within the first five minutes: How many carbon credits do I have? When can you do it? What is it worth?
That is very interesting because, three or four years ago, there was a bit of a song and dance about this carbon market existing in Europe and working. Now it is different. People are getting educated quickly.
Second-stage adopters, I would think, are the United States and they are coming along extremely fast. I was in New York three weeks ago and every single meeting I had was exactly the same. They are very aggressive, asking: Why have you not done it yet and how come he has not been hired? That type of thing. The Americans are learning very fast. We know the Americans are sending envoys over to Europe to learn from their mistakes and they are coming up fast.
The adversaries are still there. Quite a few people still say it is not true; the planet warms up and cools down and it is part of the natural flow of things. However, taking carbon out from underneath a kilometre of stone and dumping it in the atmosphere is just not normal. Any child who conducts a grade 5 science experiment knows that, if you elicit a chemical change, it will have a chemical reaction and things will change. Regardless, the adversaries are there.
In Canada, everybody is asking and everybody wants to know what the next step is. In the United States, everybody is asking and everybody is doing something about it. In Europe, they are doing it and they are very aggressive.
One of my partners in Europe has started to introduce a piece of equipment to Europeans, an advanced lubrication system. He is just having tremendous success in Europe, even in a sector that does not exist, because he is dealing with transportation mobile emission reductions. That sector will not be recognized until 2012 and the Europeans are already starting to take action on it. These are companies like Électricité de France, super-large corporations with tens of thousands of vehicles across the nation.
The next slide is about questions. Before I say that, I will go back to how I opened. The world does look to Canada for solutions. Microsoft came here and did their first buyout. They bought Softimage from a company called McLean Watson from two guys, Loudon McLean Owen and John Eckert, years ago. Microsoft could have gone anywhere else in the world but they came to Canada because we had solutions.
My brother, with Drexan Corporation, is doing the same thing for the tire industry and has run a number of trials through the Freight Sustainability Development Program funded by the government. He is introducing technology that should increase the life of everybody's car tires by 50 per cent.
Maybe that is not such a big deal for individual automobile owners; we can afford that. However, it is huge for the trucking industry, because, right after paying for your drivers or fuel, tires are, I think, number three on the list of expenses.
There are all sorts of corporations moving ahead. Ian MacKinnon at Jomini Environmental is aggressive in this field and making a great living from it.
That is essentially my presentation. I believe cap and trade is one of the solutions; it is not the only solution. I think that, as we look to the future, we will see a blended mix to address climate change and carbon management. I am open to questions.
The Chair: That is very interesting to all of us. I have a long list of questioners.
Senator Mitchell: I will defer. I know there are lots of questions people want to ask. I will let them go and I will jump in later.
Senator Banks: Thank you, Mr. Mech, and thank your sons for putting up with you and all the time that you spend here. Also, please take our thanks to your wife, the unsung hero of the day.
When you were talking about creating a market, you said you have to buyers and sellers. However, there will be no buyers until you have demand. The demand in this equation, I take it, is the result of the establishment of a required cap.
Mr. Mech: Yes.
Senator Banks: It has to be arbitrary. Therefore, that is the thing which, by itself, creates the demand; have I got that right?
Mr. Mech: That is correct.
Senator Banks: If I am company B who has bought the credit from company A because company A somehow did something, what do I get in the European system as it is now working? Is it a piece of paper, currency or a certificate? Is it numbered, certified or marked by someone to say so?
Mr. Mech: Yes, you get a certificate and it is usually handled by a registry. We have a registry here in Canada managed by the Canadian Standards Association and Trish Chartrand in the CleanProjects Registry. She registers the plan and the third-party validation certificate.
Senator Banks: Is it done by number?
Mr. Mech: She then registers the verification of all those things. Once it is verified, each ton of carbon receives an individual number and, when it is sold from firm A to firm B, the ownership on the registry is changed for those credits.
Senator Banks: It is changed to firm B?
Mr. Mech: That is correct.
Senator Banks: I am from B, so I bought that credit because I needed it. Otherwise I would be in contravention of something or other.
Mr. Mech: That is correct.
Senator Banks: A year later, I fixed my nickel plating plant and I am now, all by myself, below the limit. Can I resell the credit?
Mr. Mech: Yes, as long as you have not used it.
Senator Banks: So I have spent it already?
Mr. Mech: If you did not spend it, you could sell it.
The Chair: Or save it.
Mr. Mech: Yes, or save it.
Senator McCoy: If the carbon credits have been retired, they have been retired and cannot be counted again.
Mr. Mech: That is correct.
Senator McCoy: That is the point you are asking I think, Senator Banks. Mr. Mech's response is correct to the extent that emissions have not been credited against them. If they have, the credits would be officially retired.
Senator Banks: However, if I bought 10 and I find I only need five, I have five left over to sell to someone else.
Mr. Mech: That is right. It is a commodity.
Senator Neufeld: Or if you reduce your emissions through technology, you will get credits — not on the stuff you already spent but the extra credits.
Senator Banks: I know these things may not yet be known, but do you know about the system that President Obama is proposing in the United States? There are two kinds of systems that can trade credits: There is the mandatory kind that says ``you must do this'' and then the voluntary kind, which I think we are looking at. Which will the U.S. go with?
Mr. Mech: I have heard rumblings that they are moving toward a cap and trade system. I think the cap and trade system they will use is fairly similar to what the Americans insisted was put in the Kyoto Protocol.
We have to remember that the Americans were the ones who insisted that a trade mechanism be included in the Kyoto Protocol. I like the Americans for this: Trade is something that humans do. We now know that animals use tools but I do not know of any animals that trade. Humans trade; it is part of our human condition. Trade is one thing you can do, even if you do not speak the same language.
Therefore, I like the fact that the U.S. has put trade into the Kyoto Protocol and I think the Americans will adopt a cap and trade system.
To put that in the economy, you do not just dump it: all of a sudden, the whole economy has to do it. You analyse your economy and do what the Europeans did: You go after 15 per cent of the heavy emitters and try X and fix the problems as they come along. Much like flying, the Wright brothers did not invent the F-15 Eagle. They started with a kite with an engine in it. You start slowly.
That leaves areas for voluntary carbon emissions; for entrepreneurs to jump in and say, ``I can generate carbon credits over here and I can voluntarily decrease, out of the atmosphere, carbon credits and I can give it to a nickel- plating plant which will have difficulty meeting its cap.''
Senator Banks: Sell it to them, you mean.
Mr. Mech: Yes, sell it to them. There is a market. The environmental objective has been met. The nickel plant may feel some pain because they have to buy some, but again we see there is the development of a new market and there is a fulfillment of a need.
Senator Banks: However, the line on the date that it starts, however carefully it is done and taking into account all the things, demands compliance. It is not a voluntary line; it demands compliance, right? It is mandatory.
Mr. Mech: That is correct. In Europe, in order to force corporations that are above the line to comply, I think the penalty is four times the market price on the day of noncompliance.
The Chair: The day of noncompliance or the day you were caught?
Mr. Mech: On the day you have not met your target, you have to pay a penalty which is four times the price.
The Chair: Is it different every day?
Mr. Mech: Yes, but that would force you go and buy on the open market.
Senator Banks: We had that on Kyoto, as well: When we did not meet our target, we had a sanction for that.
When we were looking at this issue a year or two ago, we heard there was a burgeoning carbon trading market in Chicago. Have you ever heard of that? Does it exist? Did it fail?
Mr. Mech: I believe that the Chicago market had some issues to deal with because there was not as much third-party scrutiny as the market would require. That is why I spent some time explaining the ISO process, which has three layers of scrutiny before a carbon credit is developed. Two of them are done by independent third parties in order to add credibility.
I do not believe that exists for Chicago. The Chicago exchange exists, yes.
Senator Neufeld: I am from British Columbia. You are aware of the Western Climate Initiative?
Mr. Mech: Yes, I am.
Senator Neufeld: Four provinces and seven states, encompassing 115 million people, have been working on a cap and trade system now for a number of years. I want to know whether you followed that at all.
Having been involved in the government at the time, I can that that we got involved as a province because, to be perfectly honest, we saw it coming. It is real and we will have to live with it at some point in time and if you do not get at the front of line, you will get whatever the dog leaves you at the end.
The United States is the ``elephant.'' They will do things that would benefit themselves and maybe penalize others — ``others'' being Canada, even though we are friends. I appreciate that because that is the way business works. Therefore, B.C. wanted to get in at the front.
One thing you did not say, or maybe I missed it, was that you have to identify the source and the number of tonnes for your jurisdiction. For instance, in British Columbia, we identified our greenhouse gas emissions. However, you also have to identify the number of tonnes. That is across Canada and we have that across Canada. I think every province and state has probably done that, from what they emit. From that, you set a hard cap — not an intensity cap but a hard cap — that sets the target.
I agree with you in that you have to figure out where that cap will be and there is no magic in figuring that out other than you do not want to crush the industry or make it so that it is not adhered to.
In your looking around, what system would you recommend in actually allocating those credits? Would you have a government or other entity allocate those credits, or would it be done by auction? I am not exactly sure how Europe did it. How did they do it and, as a government or entity, how do you feel about giving out X number of credits to each type of industry?
Mr. Mech: I believe Europe identified the carbon intensity of their heavy emitters, allocated them carbon emission rights and then cranked it down. They cranked it down once and said, ``There it is. Off you go.''
I think it was fairly successful; it was a bit of a boom time and people sold credits and made lots of money. I think some people retired but did not exactly address the problem and they came back and said, ``We want you to change the cap'' and the European Union said, ``No, we are not changing the cap.'' I believe everybody has bellied up to the bar. It is not easy but they met things.
To answer your first question, I do know about the WCI. I made a submission through Drexan Corporation to the Pacific Carbon Trust. There were 27 formal submissions, four of which were accepted and we were number 3. I know that one group has dropped out since. Therefore, I am very familiar with that situation and congratulations to B.C. for making a big step.
Senator Neufeld: Pacific Carbon Trust is still part of its development; it has not yet been fully put into place.
We have also put into place a carbon-neutral tax. I want to understand your view on this. We actually tax all carbon, at source. That means that, wherever you burn it, CO2 needs to be dealt with. If you manufacturer it at a plant, they have to deal with but, if you use natural gas in your home heating, the CO2 is created at your burner tip. Therefore, we tax it there. However, it is revenue neutral to government through corporate, personal and small business tax reductions.
I am not familiar with whether that happens in Europe. We should be clear: Not all of Europe is in the EU carbon trading system.
Mr. Mech: I am not sure. I am not a big fan of taxes because, I think, if you set up a cap and trade system or something similar, there is more opportunity for growth and that the government would be able to tax as they grow different sectors of the economy. Then again, I also think that, in the future, we should have a blended approach to this, such as partial cap and trade, partial something else and a little bit of tax — that kind of thing — to encourage people to make the change.
Senator Neufeld: For the large polluters, it is envisioned to have cap and trade. However, one needs a carbon tax for the rest because you miss a whole bunch unless you are advocating just heavy emitters. Maybe that would be a good question. Are you advocating just heavy emitters in a cap and trade or does everyone have to pay a bit to reduce CO2?
Mr. Mech: I think the best thing is to take small steps toward a hard cap. Therefore, maybe it is not everybody at the start. Getting towards that hard cap is a question for government and not for me. I do not know.
Senator Neufeld: You are waffling a bit on me so I will let you go. Maybe you and I will have a little chat later on about that. I would have liked to hear what you would say about large emitters and vehicles. Vehicles are another good example. Everybody who fills up their gas tank is emitting CO2. You are saying you actually hit the large emitters such as the refineries — and they create a certain amount of CO2 in making gasoline and diesel — but it is the end user who also contributes to CO2 emissions.
Mr. Mech: Regarding vehicles, earlier on, I tried to introduce the concept of a significant economic volume. An average vehicle driven in Canada produces about four tons of carbon dioxide a year. Paying 100 per cent carbon tax on that it is $40; it is not that much. However, you could go to a large automobile manufacturer and say, ``We will give you the benefit of 100 per cent of the carbon tax if we set your cap here and if, you get under it, you can sell your carbon credits on the open market.''
If they are producing 1 million vehicles a year, that becomes a significant amount of money for them. Let us remember that this is contribution margin money; in other words, they would have to make 10 to 20 times of that amount on the open market in order to get that amount of spending.
I would think that you do not tax the end user but you task the manufacturer and give them the benefit of the carbon credit — give them a bonus. As a government, where do you place this significant economic volume of carbon credits to encourage people to move in the right direction? How do you instil a change in the behaviour, yet deliver the same amount of performance, the same standard of living and so on? That is where I think the government should be focusing. I think tax is a bit punitive.
Senator Neufeld: I have a quick last question. I have lots of questions for you because you are waffling a little bit and I can tell where you are coming from now. The U.S. has said that, by 2012, they will have a cap and trade system in. Do you believe that? I know the U.S. has done a tremendous amount of work. Even though they opposed Kyoto and those kinds of things, they still did a lot of work but this is a pretty complex thing. This is a ``yes'' or ``no.'' Do you think they can have cap and trade in place by 2012?
Mr. Mech: Do I think they can or do I think they will?
Senator Neufeld: Will. Will Obama meet what he said he will do?
The Chair: What was your answer?
Mr. Mech: One second here. I have not answered yet. Can I call a friend?
Senator Neufeld: After the show.
Mr. Mech: I think he will do it. I do. It will be messy, but I think he will do it.
Senator Neufeld: If he does, it will be a botched up mess.
The Chair: Senator Milne, are you ready to cap and trade?
Senator Milne: No. I think Mr. Mech agrees with you that it will be a botched up mess, but he will do it.
Mr. Mech, you said that they are moving to the second phase in Europe. Are they moving from certain specific large emitters to a larger group of large emitters, or to smaller emitters in certain industries?
Mr. Mech: I believe that they are moving to their second group of medium-large emitters.
Senator Milne: What will happen to us here in Canada if we do not move in this direction but the U.S. does and Mr. Obama has this cap in place by 2012? Will we be forced to follow their system, or will we be left behind to smother in our carbon?
Mr. Mech: I have heard this before from other senators: That we can either swim in front of the wave and surf down the front of it, or we can try to swim up the back of the wave and try to catch up and swim over the top, which will be very difficult. If the U.S. has a system and we are not in front of them, then I think it will be fairly difficult for Canada, as a whole.
I have heard, in Europe, governments say that they will impose carbon taxes on countries that do not have the same stringent level of activity in the carbon market as they do.
Senator Milne: That would be carbon taxes on imports?
Mr. Mech: On imports. I believe the World Trade Organization mechanisms allow for those kinds of attacks in order to level the playing field. I have not studied it, but that is what I heard in the hallways in Europe.
Senator Milne: When you began, you said that cap is based on time. What did you mean?
Mr. Mech: A cap is based on time. In other words, you can set a cap. Suppose everybody has achieved the cap, say in five years time, even the aluminum smelting industry which found it difficult in the beginning, because it has found new technologies, et cetera. Then, at that time, you move the cap down again in order to encourage the next level of change and keep that part of the economy going. We are developing a whole new industry and a whole new group of professionals to measure carbon dioxide, grade plans, validate them and verify them, and a whole new set of legal professionals to identify ownership issues and a trading mechanism, et cetera. Once you achieve the cap, you move the cap down again to keep everyone employed and to keep that new business sector growing.
I am holding up a copy of The Economist here. We see papers and news journals talking about people being laid off and out of work. Cap and trade provides a tremendous opportunity for some controlled growth and some controlled knowledge-based economic development.
Senator Peterson: Do these validators and verifiers exist now?
Mr. Mech: Yes.
Senator Peterson: Are they all trained?
Mr. Mech: Some of them are trained. The training courses are run by the Canadian Standards Association. It is a formal course with formal examinations, and people do fail.
Senator Peterson: This would have to be an integrated carbon system for North America. I do not think one country can operate separate from another. How difficult will it be to establish these limits? It seems to me that it is pretty subjective. There will be lots of lobbying, and everyone will have their pet idea about why I should not be in or should be a little lower. Who will do all that? Is that governments or is it the experts?
Mr. Mech: It would be a mixture of experts and governments.
Senator Peterson: I am from Saskatchewan, and we have coal-fired generating plants. You cannot shut them down or cut them back. They are saying that they know there will be penalties, but they do not want to send the money off someplace out there. They say they will keep it in Saskatchewan and put it into research. Is this realistic?
Mr. Mech: I am not so sure of the regional issues here. Could you rephrase the question, please?
Senator Peterson: We cannot shut down the coal-fired generating plants because they generate all the electricity in the province. There is no hydro. These are large emitters. They know that if they joined in, they would be shipping money off somewhere because they will be the ones way above this line that you are talking about. They say, ``We do not want to send that money somewhere else; we will pay it to ourselves, and we will put it into research in Saskatchewan to hopefully deal with the emissions from coal-fired generating plants, which will be there forever or until we get a nuclear plant.'' Does that make sense?
Mr. Mech: Yes, that makes sense. It becomes the responsibility of governments to establish caps but not to cripple industries. If establishing a cap on a coal-fired generating station in Saskatchewan specifically would cripple the province of Saskatchewan, you cannot do that. However, you can establish a target and say, ``Okay, Saskatchewan, you have this much time to achieve that, and you have to show progress towards a goal.'' I think that is reasonable. There is talk of clean coal technology. I know that there are ways of getting rid of carbon dioxide in some geological deposits, et cetera. I know that Saskatchewan has lots of natural gas, and moving from coal to natural gas decreases greenhouse gases. There are different options.
The most important thing to do right now is to get it on the agenda so that it is discussed all the time and it becomes a line item and people are given action items to go and find solutions.
Senator Lang: First, I want to say that I enjoyed your presentation. I could actually understand it, I think. You did very well.
I want to get something clear. Is a carbon offset another way of saying a credit?
Mr. Mech: That is correct, yes.
Senator Lang: I was not clear on that.
Second, I understand you are involved in a voluntary market.
Mr. Mech: Yes.
Senator Lang: Perhaps you could tell me why there is a voluntary market. If no one is requiring anyone to do anything, then why would I, as a company, be involved in a voluntary market, and who would I pay?
Mr. Mech: There are individuals who are looking to the future. They think that carbon dioxide credits will have more value in the future than they have today. For instance, in the system I just described, if a validator looked at a technology and validated that technology and sold four of those credits, then someone took the risk of buying those credits before they were actually achieved. You have a plan, it is validated, and then the plan is being implemented and someone buys it. As those credits are achieved, they increase in value because the risk is being retired. They are no longer in the future but are being achieved. As they become achieved, the value jumps tremendously, 50 per cent or 60 per cent.
Senator Lang: If someone will buy them.
Mr. Mech: People are actually doing this, especially in the United States.
Senator Lang: I want to follow that through. What we are doing is very speculative at this stage. If I am a buyer and I buy those four credits, then I am hoping that the government will come in and set a cap. The government would have to do that. Senator Banks then has to buy my four credits because it is worth his while, but I got it at a bargain basement price and he will pay a premium; is that right?
Mr. Mech: Yes, he will pay a premium because the credits that you bought, which had risk associated with them because they had not been achieved yet, have probably been achieved by the time you sell them to Saskatchewan, which needs the credits because they are still working on their coal development projects.
Senator Lang: My next question is broader. Not unlike what is happening in the debate in the United States, what are the economic consequences to your general economy? Senator Peterson touched on that. With your coal power plants, the reality of it is that the company may pay for the credits or whatever they are, but the fact is, the consumer will pay. That means prices will go up.
Senator Banks: Yes, that is right.
Senator Lang: That is my question to someone like you. You are saying that there are new jobs, new industry and new technology. The reality of it is, however, that, in this case, every Canadian will pay for it. You will not see it initially because it will be the big polluters. They will pass that on, but that may be insignificant as we start. However, as it broadens, there will be a major shift in the economy and a major cost to the economy. One can argue whether or not it is justified, but the fact is that things will cost more. Is that true, yes or no, and in Europe, what has been the financial consequences so far in the three or four years that they have been in business?
Mr. Mech: I do not know exactly the financial consequences of what is going on in Europe, but I do know there is a multi-billion dollar market where none existed before.
We have to look to the future. We cannot do things the same way we have done them for decades. Over the past couple of days, we have seen President Obama look at the automotive industry and say, ``Listen, you cannot do the same old thing anymore.'' He needs to see something different in order for that industry to survive and service the population. Right now, they are doing the same old thing, and it is not good enough. We have to look to the future, and we have to look to doing things differently and growing the economy.
You talked about cost. One person's cost is another person's revenue. I always use the Wayne Gretzky analogy: it even works in India. Wayne Gretzky became an excellent hockey player because he went to where the puck was going, not to where it was. If you watched Gretzky play, he would go and stand somewhere on the ice, and the puck would pop out and he would skate down the ice and throw it in the net. He would watch the flow of what was going on and gauge the game and say, ``Here is where the puck will go.'' He would go stand there and pick it up and do his thing.
We have to look at the economy in the same way. Where is the world going? If you hear rumblings from other countries saying that they will put a carbon tax on you because you have a fairly carbon-intensive process, that is something to worry about. As managers of the economy, we have to look for it and say, ``We have to take this into account and start to address it now.'' The last thing you want is to have it blindside you from the side.
I think the trend in the world is towards carbon emission controls of some sort. We tested the water with Kyoto, and people did not really like it, but the issue has not gone away. The issue is here to stay, and we are suffering from global warming. We can see it. Everyone in this room is old enough to actually have seen climate change. It is not going away. It will gather speed. We have to address it.
One person's cost is another person's revenue. Let us get in front of the wave and not swim up the back of it. I am afraid we will be told what to do as opposed to doing what Canadians do, which is develop technologies and develop demands for our intellectual horsepower, and helping the world do what they do.
Senator Lang: It would be very difficult to sell global warming back home this past winter and summer.
Senator Banks: It is climate change.
Senator Lang: It is climate change, but it is going the other way.
I am not disagreeing in part with what you have said, but I do question — and I think it is a fair question and should not be dismissed — the projected economic implications of doing this. I am not saying that there should not be change, but we should have a pretty good idea of what the effect will be. Will it put that coal plant out of business? If it is, that is fine, but we should know it. I am using that example, but it may be a chemical plant that now, all of a sudden, has been priced out of the marketplace so they cannot sell. I will not buy whatever they are producing. If you are going down this road, you better have a good sense of what will happen, or as best you can.
Senator Milne: We also must think about whether your exports will be accepted into the United States. If they go this way, we will be up the creek without a paddle.
Senator Mitchell: There has been lots of food for thought. I appreciate what you have been saying.
There have been some comments about the economic impact. I remember during the election a truck driver phoning in to Stéphane Dion who was defending his policy. The truck driver said, ``Well, I have done everything I can possibly to lower my gas mileage. If I get two or three cents a litre, I am done. I will never be able to keep my business going.'' I said to myself, how do you think you will keep your business going when oil is at $250 a barrel? It will not be a couple of pennies. You will look back and say that we should have taken some time back in 2006 or 2008 or before to have figured this out.
We argue that we cannot start — we do not, but others do — before India or China. We cannot start before the U.S. because there would be no point. I say, ``Wait a minute. I want to start before all of them, just like Europe, because they will be in a position to sell all this technology and all these credits to all these other companies when we start saying that we will not buy their washing machines. We will put a tax on you, China, because what you are doing is so terrible.'' I do not want to wait. I want to be on the front of the wave.
As I think about it, maybe Europe is saying that it does not even matter if the rest of the world does it, although it would be nice if they did because it would save the world, but in the interim, they are making a lot of money. All of a sudden, they are creating all kinds of wealth. You could actually take it one step further and say, ``We are stimulating economies because we are stimulating creativity, because we are driving people's entrepreneurship.'' It has a wonderful impact on an economy.
The Chair: Is this the lead-in to your question?
Senator Mitchell: Yes. I do not know why we accept this argument out of the ether that somehow it will hurt our economy. It will not hurt our economy. The Second World War did not hurt our economy.
How many credits are right now being produced by Canadian firms that are trying to sell these things elsewhere in the world or in Alberta? Do you have any idea how many those are?
Mr. Mech: I do not know how many, but a large number would be registered on the greenhouse gas clean projects registry at the Canadian Standards Association.
Senator Mitchell: You do not have a figure in mind?
Mr. Mech: I do not have the figure. I would think in the millions of tonnes.
Senator Banks: Do you know how to find that figure?
Mr. Mech: Yes.
Senator Banks: Would you find that and send it to the clerk, please?
Senator McCoy: It is not a registry in Canada, so it will not give you a complete answer.
Senator Mitchell: You are saying that some of them are selling right now for $8 a tonne. At $8 per tonne, you can even do Kyoto with relative cost effectiveness.
In Europe, did they sell the credits up front, or did they just issue them?
Mr. Mech: I believe they issued them. After that, there was a market.
Senator Mitchell: The U.S. is talking about selling them, and correct me if I am wrong, but I think they feel they could raise about $300 billion in selling credits?
Mr. Mech: That is correct.
Senator Mitchell: That is money they could use to help GM adjust. Thank you.
The Chair: Mr. Mech, it is late, and it is quite far beyond our usual time. Thank you very much. We are most grateful to you. Senator Banks, you asked him to get a figure for us?
Senator Banks: Yes. What is in the bank now at the CSA that would be saleable if there were a market.
The Chair: Quite frankly, if there are other well-known registries, as Senator McCoy suggested, would you give us that as well? Basically, as I said at the outset, we are here to learn, and we will become effective advocates if we really understand the dynamics of it.
Having said that, we will go off the record now to cover a few other items.
(The committee continued in camera.)