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

Issue 15 - Evidence - December 10, 2009


OTTAWA, Thursday, December 10, 2009

The Standing Senate Committee on Energy, the Environment and Natural Resources met this day at 8:06 a.m. to examine and report on the current state and future of Canada's energy sector (including alternative energy).

Senator Grant Mitchell (Deputy Chair) in the chair.

[English]

The Deputy Chair: Honourable senators, I wish to welcome all of you in Ottawa to what is definitely an environmental day with a large amount of snow and wind. It could not be a more appropriate context within which to conduct our hearing.

For those watching on CPAC, this is a meeting of the Standing Senate Committee on Energy, the Environment and Natural Resources. I am Grant Mitchell, a senator from Alberta. I would like to point out that this committee is involved in a two-year study of energy-related issues and climate change implications for how we conduct our energy systems and policies in the future.

We are here today with a very welcome and distinguished witness, Dr. Bryne Purchase. He is a PhD graduate in economics from the University of Toronto. In addition, he has had a distinguished public service career. He has been the deputy minister of finance, of revenue and of energy, science and technology for the Government of Ontario. He has also had a number of other senior positions in a variety of Crown corporations, some of them related to finance.

In 2004, Dr. Purchase returned to Queen's University. I pointed out to him that that is one of my alma maters. He is an adjunct professor at the School of Policy Studies at Queen's University and a senior fellow at the Institute for Energy and Environmental Policy.

I would like to introduce the people at the table. We have our two researchers from the Library of Parliament that provide us great support in many, Mark LeBlanc and Sam Banks; Senator Tommy Banks from Alberta; Senator Bob Peterson from Saskatchewan; Lynn Gordon, Clerk of the Committee; Senator Michael Meighen from Ontario; Senator Dan Lang from the Yukon; Senator Judith Seidman from Quebec; and Senator Bert Brown from Alberta.

I would now like to turn to you for your comments, Dr. Purchase.

Bryne Purchase, Adjunct Professor, School of Policy Studies, Queen's University: Honourable senators, let me thank you for allowing me to appear before you. I am proud to be an adjunct professor at the School of Policy Studies at Queen's University and a senior fellow at the Institute for Energy and Environmental Policy. However, I must admit that I am here to appear only as an individual. All of my views are my own and not those of the university in any way.

I would like to read my formal remarks into the record and then I am at your disposal.

I have organized my remarks around three major policy challenges that the Government of Canada faces. The first is Canada's climate change policy in the face of global political uncertainty about future human-inspired emissions of greenhouse gases as well as the scientific uncertainty inherent in the complexity of the Earth's weather systems. The second is the energy security policy in the face of uncertainty about future geopolitical stability in the Persian Gulf. The third is nuclear power generation and the future of Atomic Energy of Canada Limited, AECL, in the face of the political stalemate over risk sharing in the domestic markets as well as uncertainty about access to major foreign markets.

You might have noticed that I mentioned repeatedly that we are confronted continuously with a great deal of uncertainty in all these major policy issues. Not much of what I will say will clear up that uncertainty, nor do I believe that many experts can do so. As policy decision makers, you will constantly be operating in a bit of a fog with respect to the future, yet you still must act.

With respect to climate change policy, I firmly believe that the Government of Canada — I will make the distinction of what provincial governments might do — is correct to follow the lead of the United States on climate change, neither less nor more aggressively.

Committee members may be familiar with the "precautionary principle" that argues for going slow on the introduction of new technologies and chemicals in the face of significant scientific uncertainty as to their potential for harm to society.

I believe a similar principle can be applied to the political economy of Canada with policy action on climate change. Whatever its potential global benefits, aggressive policy action on climate change aimed at reducing domestic greenhouse gas emissions means that the wealth, income and employment now generated in the fossil fuels industries and regions of Canada must necessarily be reduced in the future. At the end of the day, please know that is what we are talking about here.

Such a direct policy attack to shrink an industry with a heavy regional concentration would be extraordinary and would surely stress our federation greatly — far beyond the ill-fated national energy policy of the 1980s. Also, it would not be a balanced or wise policy, given that climate change is a global policy problem. In fact, it is probably the biggest policy problem I have ever seen, since it requires global collective action. No major player can be left out; everyone must be in. The solution must emanate from the leadership of both the United States and China, which, together, account for about 40 per cent of global emissions of greenhouse gases, each roughly being 20 per cent. Incidentally, Canada accounts for 2 per cent of global emissions.

This does not mean that Canada should be a "free rider" on the efforts of others. Indeed, we will not be allowed to ride free, as we already anticipate that policy action in the United States will carry with it the stick of trade sanctions against its trading partners in the absence of their own equivalent action.

I believe we should adopt aggregate U.S. emission reduction targets as we move to harmonize a cap and trade regime covering both economies. In doing so, one of the major policy issues we will confront is the allocation of emission rights between provinces and territories. After all, cap and trade creates a new property right. I am not sure what the price of a tonne of carbon dioxide will be, but we are talking about hundreds of millions of tonnes of emissions. You can imagine the value of those property rates will be great. Since they are created by governments, there will be a considerable rush to get those emissions allocated to any particular constituency we might be talking about.

Economic models show that the long-run aggregate economic costs of dealing with climate change are relatively modest. The National Round Table on the Environment and the Economy appeared here and said that it is 0.2 per cent per year, off the growth rate of 1.5 per cent to 2 per cent per year, which is not insignificant, but it is still certainly manageable. The exact magnitude of that depends on the cost of replacing, or rendering benign in the case of carbon capture and sequestration, fossil fuels — a subject on which experts disagree. There will also be much larger potential redistributions of income between income groups and regions. Who gains and who loses — this is the essence of the political economy.

In that regard, Canadian policy-makers will need to balance the concentrated regional impact on suppliers with the impact across the country on low-income Canadians as consumers. At the same time, there should be no attempt to blunt the ultimate policy purpose of reducing consumption of fossil fuels. That will not be an easy task. I spent 25 years in government trying to convince politicians to let the price be determined by the market and let consumers bear the full cost, and I never won that argument.

I will now turn to energy security. Global energy security is primarily, although not exclusively, a function of the large and growing role of Persian Gulf oil suppliers. Oil accounts for some 98 per cent of all transportation fuels used in North America. It is an important issue in greenhouse gas reduction, as well. The principal risk in this regard is a prolonged supply disruption and consequent price spike — and possibly physical rationing — caused by war in the Gulf.

I do not know how long such a war would last. However, somewhere in the region of 20 per cent of the world's daily supply of oil passes out through the Strait of Hormuz, which is 23 miles of wide, I think, and we are talking about shipping lanes in and out of about six miles. It is two miles wide in and two miles wide coming out with a two-mile wide buffer zone. We are talking about a choke point in which 20 per cent of the world's oil travels daily. War would certainly interdict some of that for some period of time. For how long, I do not know.

If that happens, of course, the price of oil rises dramatically. We have had experience of dramatic increases in the price of oil. As a matter of fact, every recession in the post-war era in the United States has been preceded by a spike in oil prices, including this last one. Although it was ostensibly caused by other factors, such as the collapse of the subprime mortgage market, et cetera, no doubt increased oil prices also had a role to play in causing consumers to be unable to pay their mortgage payments.

Notwithstanding Canada's position as a net oil exporter, energy security is a relevant concern to Canada as well. Canadian consumers under NAFTA are not protected from global oil price spikes; we pay the world price of oil. This has regional macroeconomic implications, particularly for provinces, such as Ontario, with no significant petroleum or natural gas resources. It is our experience that higher energy prices also lead to a higher exchange rate — the Canadian dollar is sometimes referred to as a commodity currency or a petro currency — and possibly even higher interest rates. All these combine at once to have a significant negative macroeconomic effect on non-oil-and-gas-producing provinces.

A solution to this, still within the realm of energy policy, is for the federal government to assist Ontario, and other Eastern provinces, to speed the development of a cellulosic liquid biofuels industry. At this stage, this is still largely a research and technology development issue.

Promoting domestic development of cellulosic biofuels does not, of course, reduce the geopolitical risk of oil price spikes. However, once such an industry develops, all regions would then benefit as producers of liquid fuels, not just Alberta or Newfoundland and Labrador, et cetera; any province that had its own domestic bio-fuels industry would benefit. If oil prices spike, we get a positive benefit right across all provinces in that regard. It should also have the added advantage of reducing greenhouse gases and would not compete excessively with food production, unlike ethanol from corn. Provinces have to act in this regard, too; and I can say what I think they should do, but we can come back to that.

Nuclear power generation is the third point I want to discuss. Ontario has a large bet on nuclear power in that 50 per cent of its power comes from nuclear energy. We have are two other nuclear reactors that are acting in Canada. One is being refurbished at Point Lepreau in New Brunswick and the other one is in Quebec.

No technology, renewable or not, is perfect or without risk. I try to get that across. I do not think that humans are capable of producing a perfect technology. They all have their drawbacks and their advantages.

In the case of nuclear power production, the risks relate to safety — including waste management — cost and nuclear arms proliferation. Safety and cost are, in turn, highly correlated. We have to build extensive containment mechanisms in case of accidents for a nuclear reactor, and that is extremely expensive.

Nuclear power generation is dedicated to the production of electricity and competes primarily with coal and large- scale hydro as "base load." That is, it virtually operates 24 hours a day, 7 days a week. Hopefully, it achieves very high operating rates so it only goes out of service once in a while. That is how the economics work with that sort of thing. It seems reasonable to assume that the global nuclear industry will begin a renewed cycle of refurbishment and expansion. How extensive this will be depends primarily on the progress of international policy on climate change.

In my mind, two primary issues exist for AECL's future in this context. Does AECL's ACR 1000 engineering design exist, or will it soon exist, in a way that can be licensed in Canada and abroad?

The ACR 1000 uses slightly enriched uranium to reduce the use of heavy water and related construction costs. Is this merely an evolutionary design change or a change that entails taking on new large technology and construction risks? I do not have enough information to have an informed view on this matter, but it is a matter that this committee should seek more information about from those who do have such a view.

The second issue is whether the global markets are large enough to support a reasonable return on investment in the next generation CANDU. In my view, this matter should also be reviewed carefully by this committee, and it is one on which I have some observations.

The sine qua non of global marketing of nuclear generating technology is a strong domestic market. However, the domestic market in Canada is uncertain now because of a political stalemate over risk sharing on new plants between Ontario and the federal government.

There are straightforward ways to resolve this stalemate. The federal government and a province — for example, Ontario — wishing to build a new nuclear plant could enter into a risk-sharing agreement, perhaps with provinces earning an equity interest in AECL for each new plant on which they agree to share the risk. That is my favourite idea. The province becomes, effectively, an equity partner with the federal government in sharing some of this risk. Another possibility is for AECL — the federal government itself — to become the owner of the facilities, take all the risks on building and constructing and then license the plant operations to provincial utilities or to private operators. You work in a provincial agreement, but the facility is totally owned by the federal government.

Being willing to do this depends on the answer to the technology risk question raised earlier, and also on an assessment of the potential global market. Without a dramatic "go nuclear policy" domestically — as, for example, France has done — the Canadian market cannot absorb a large number of new nuclear plants. My guess is that, at best, it would be four in Ontario and perhaps two in the West — maybe six, unless we do something dramatic with nuclear power.

Should there then be a conscious federal "go nuclear policy" aimed, for example, at dramatically reducing oil consumption in the transportation sector — back to where we have some significant risk of oil price spikes and so forth — through a policy-induced adoption of plug-in hybrid vehicles? Should Alberta and Saskatchewan also be encouraged to adopt nuclear power to displace coal and natural gas used in oil sands production — coal in the production of electricity and natural gas to produce steam and also hydrogen for upgrading the bitumen?

Two issues arise in my mind with respect to a major "go nuclear policy" in Canada. Will plug-in hybrids or all- electric cars be what consumers choose in the global transportation sector? It is not clear yet which way things will go. Those innovations certainly look promising, but that choice will ultimately be made by consumers, versus biodiesel and other possible technologies that are available.

If we are not highly certain, we should not pre-build a massive electricity supply and distribution infrastructure to accommodate only one possible consumer choice. In any case, Canadian consumers will not determine the basic technology that is adopted in the worldwide automobile sector.

Your committee should examine this matter. You should also determine the probability of Alberta moving forward on nuclear power in the oil sands. At one point, a parliamentary committee had some views as to its desirability.

The second issue that comes to mind is that a bold policy of going nuclear raises the question of the risk of too much dependence on a single technology. "Too big to fail" is not something that applies only to financial institutions. In fact, we have already witnessed its potential for problems in the provision of radioisotopes, where we have a large market share and a single technology to supply that market.

Extreme dependence on one technology can sometimes put regulators — in this case, safety regulators — and governments in the difficult position of choosing between two undesirable outcomes. You can do things that are necessary for the safe operation of the reactor and shut it down, in which case the medical treatments of a significant number of people would be delayed or denied; that is a huge cost to society. On the other hand, a potential safety risk is associated with that. It is an unpleasant choice when you have one technology. When you have all your eggs in one basket, you are sometimes confronted with this type of situation.

If a major domestic go-nuclear policy is not advised, this leads us to the desirability, if not the absolute necessity, of foreign sales of nuclear power reactors. We have to sell the ACR 1000 abroad; our market is just not big enough. In this regard, a nuclear power plant is obviously not a consumer durable — like the BlackBerry, where we have been hugely successful. It is truly a great Canadian success story. A nuclear power plant also has major strategic weapons' implications. Accordingly, the international market for nuclear power reactors is dominated by regulated utilities and governments as consumers and "national champions" as technology suppliers.

Europe has AREVA; in the United States and Japan, you have Westinghouse Electric Company and General Electric Company, which have Japanese ownership. These are the big three, if you like. The Russians have their company, which now has Siemens from Germany involved. The Koreans, perhaps, will have an entry. There are major players out there. It is expected soon that the Chinese and the Indians will as well.

In my view, AECL cannot compete in the new international marketplace without aligning itself with one or two strategic partners. In this sense, the next generation CANDU is potentially similar to the Avro Arrow. No major government, in my mind, would have bought a front-line jet fighter from a foreign power, no matter how good the technology. These are very politicized markets. You need to have major partners in those markets working with you.

This is not a matter simply of privatizing the power generation business of AECL. In my view, privatizing to Canadian partners will not change anything material in the international marketplace. AECL must find a strategic equity partner, or be wholly acquired by a competitor from one of the world's large markets — China, India, U.S.-Japan or Europe.

Will such a partner support the continued development of the unique CANDU design? It does not seem likely to me since it would divert resources and marketing focus from the partner's own technology. However, if it is possible to find an appropriate partner interested in the next generation CANDU, who would they be and what is the rationale? I urge the committee to investigate that question. Who could we partner with that would give us the type of access to foreign markets that we need? Is it the Koreans or someone else? I do not know the answer to that, but it is worthy of further investigation. That concludes my remarks, thank you.

Senator W. David Angus (Chair) in the chair.

The Chair: Good morning, Dr. Purchase. I am Senator Angus, chair of the committee. I apologize for being a little behind schedule this morning. I thank my deputy chair, Senator Mitchell, for taking the chair in my absence. I read your presentation earlier, and we are grateful that you stepped into the breach. We will move to questions.

Senator Lang: We appreciate your coming here this morning, given that you have a fairly long drive and the weather has not been kind to us.

You made it clear when you said that you firmly believe that Canada "is correct to follow the lead of the United States on climate change, neither less nor more aggressively." Some members of various political identities say that if the United States does not go, we should go ahead anyway. That is the message to the public. I would like you to explain in more detail what the implications to Canada are, and specifically, what the implications are to the average family of four if the political arm of government were to acquiesce and move forward ahead of the United States and lead the way.

Mr. Purchase: It would dramatically increase the cost to Canada because there would be greater costs to our exporters if we were to add the cost of carbon to the price of fossil fuels produced in Canada. Clearly, those producers would have a hard time competing in the United States if they do not do something similar there.

It would increase the cost to no benefit because this problem cannot be solved without the United States and China. This is not a problem for Canada alone to resolve. We have to resolve it in the context of everyone. If we were to act alone because we had greater conviction, it would simply increase the cost and not have the desired effect. That would not be wise public policy.

Another difficult public policy was the period of the National Energy Program. I worked for a Tory government in Ontario that helped to defeat a Tory government in Ottawa under Joe Clark over the question of the price of energy. It has been a deeply divisive issue. It is not easy to raise the cost of energy because people just do not understand, even if it is the right policy. However, do not get me wrong: The Ontario position at that time was wrong, and we should have gone to the world price and then quibbled about sharing the revenues. This question of being aggressive and going it alone is totally contrary to my experience of what truly happens when you are in the trenches.

I was the Deputy Minister of Energy, Science and Technology in Ontario when we tried to bring competition to the electricity market. During that exercise, the price of electricity went up dramatically in the view of the public at that time. The government almost abandoned the entire scheme and wanted to put as much distance as it could from that policy, which had been in the works for years to plan and develop. It is difficult to do.

Perhaps that answers your question.

Senator Lang: I will take this a bit further because I am trying to understand precisely what all of this means. At this stage, we tend to speak in the abstract. What would it mean to that family of four? A target of 20 per cent by 2020, I believe, has been set. In your reading and research, have you found any indication of what that would mean to our ability to earn a living in Canada if we were to meet that target?

Mr. Purchase: Senator, you should invite the people from the national round table to appear again because they have done the economic model, which shows the real cost to the Canadian economy in lost output and lost growth. It was not huge. In the end, there will always be a return to economic equilibrium, which is built into the nature of the models. However, that raises the question of whether that will truly be the way things work out.

Thus, we have uncertainty. A great deal more certainty is being presented to you by the experts than there is in reality. I have spent my whole life at this. Expert may say how things will work out because they are smart and know how to crunch the numbers. They provide a sense of how the future will look, but it will not necessarily turn out that way. In fact, it is quite unlikely to look like that. It will be much messier than one can imagine.

Senator Lang: That is what I am afraid of. You talked about nuclear power as an alternative. You have hardly mentioned hydro at all as an alternative. Could you comment?

Mr. Purchase: It is probably because I am from Ontario, where we have tapped into most of the major hydro sources. However, there is still hydroelectric power in Northern Ontario for us to tap into. Certainly, major hydroelectric resources are available on Gull Island, Newfoundland and Labrador, in the range of approximately 2,000 megawatts. As well, major hydroelectric resources of about 1,500 megawatts are available in Northern Manitoba. I have seen that site.

Of course, the associated costs are significant, not only to build the required dams but also to build the transmission lines to deliver the electricity, which can be as long as 2,000 kilometres. As well, huge political issues are associated with crossing Native lands. The process is not easy.

We have enormous renewable resources in the North with wind and perhaps tidal power. Some people have appeared before this committee to talk about that. Again, the power has to be delivered south to the market. We have to tap that energy and transmit it a long distance at great cost with significant associated risks from weather.

The Chair: On that aspect, are there heavy environmental costs associated with such transmission of power, for example, disruption to wildlife habitats?

Mr. Purchase: I do not have detailed knowledge of the environmental hazards of projects. Certainly, people will be concerned about the environmental risks.

The Chair: Senator Lang raised the issue of hydro. The Americans do not see fit to categorize our hydroelectricity business in Canada as a renewable or sustainable source of energy. What do say about that?

Mr. Purchase: I think they are wrong.

Senator Banks: I want to talk about nuclear energy, Mr. Purchase. As part of the study in which we are being led by the chair and to which the deputy chair referred, we will be looking at many aspects of nuclear energy. They are endless. You talked about whether AECL can regain a position of being a player in the world in this. It is an interesting question.

We will have a bill before us soon. You talked about risk sharing. Part of risk sharing in any business, including nuclear, is contemplating the public liability. Canada presently has inadequate insurance in that respect in the view of all people. The bill that will come before us deals with that question. In the past, this committee has examined the question of dealing with spent fuel and those matters that have implications on public liability.

Some committee members share the view that the nuclear industry, whoever owns it, ought to be self-insured rather than paying the large amounts required for public liability. In the event of a serious incident, Canada would have to stand behind the obligation that would result from public liability, which would be far beyond any amount of insurance that we could possibly carry.

Have you thought about those questions?

Mr. Purchase: No insurance is available in a private market, so, ultimately, you have to look to governments to do this. People may say it is, and indeed it probably is, a subsidy given to that particular technology. We have developed that technology in the cocoon of government policy everywhere, not only in Canada.

This industry, unlike the BlackBerry, did not come from private enterprise with a brilliant idea and a bunch of brilliant business people. It has existed in the cocoon of government policy. It will largely remain there in my view, partly because of the strategic nature of nuclear energy.

I do not foresee any time soon when you will find private operators building new nuclear plants in competitive electricity markets. Electricity markets are ultimately still very regional. There is simply too much risk. The private sector would not do it in my view.

Senator Banks: At the moment, we are paying large premiums to private insurance companies to ensure against public liability.

Mr. Purchase: Beyond that insurance though, there is the ultimate liability to the public.

Senator Banks: We are on the hook.

Mr. Purchase: Yes.

Senator Banks: My second question pertains to the chicken and egg situation that you referenced about charging stations and plug-in cars. Which comes first? Does someone have to lead that?

The people building the cars say that they will build enough cars as soon as a network exists where people can plug in their car on the corner. The people operating the stations say that they will build the network as soon as there are enough cars on the road to provide a market. What is the solution?

Mr. Purchase: It can be lead in my view, although, in our case, it is a more risky proposition. The consumer will choose the appropriate technology if it works for them. That is the way it is.

People spend their entire lives studying the automobile business and understand more than I do about that. However, in the end, it is the consumer who chooses what he or she likes in the way of power and all the other factors involved in an automobile.

Senator Banks: Who would lead it? As a consumer, I might consider buying a plug-in car, but not unless I can ensure that there is a place where I can charge it again once I get half way to where I am going.

Mr. Purchase: In Ontario, that is not an issue in my view. We have sufficient capacity for overnight when we are most likely to plug in the car.

Senator Peterson: You said at the outset that politics will probably drive much of this, which is unfortunate because we may not have the right solution. With global warming, we need global solutions.

If a carbon tax is quantified and everyone knows what it is, the money can be segregated to go back into science, as opposed to a cap and trade system, which is very uncertain and many issues cannot be controlled. Therefore, where does the money go?

Which do you think would be the better approach?

Mr. Purchase: Senator, as an economist, I would much prefer a carbon tax to a cap and trade policy. The carbon tax is administratively far simpler. It has certain advantages in that you can start low and ramp up over time.

I would have thought that that was a great political advantage. However, it turns out that the revealed preference of politicians in governments is a cap and trade system. The Europeans have cap and trade; the Americans have cap and trade; now, we will adopt cap and trade.

Why is that so? My view is that this is the case because most people do not understand what you are talking about when you say "cap and trade." A great fog surrounds it. If they try to explain, it seems that only large polluters will pay. Most people do not realize that if they pay, it does not mean you will not also wind up paying. The public thinks the incidence of cap and trade is on the large polluters themselves, that somehow shareholders will pay the costs. This is simply not true. The system is also usually implemented over a period of time and so forth.

It turns out that cap and trade seems to be the superior policy in the political marketplace until you actually try to implement it. For example, in Ontario, when we tried to introduce competition into the electricity market, we talked for years about what a wonderful idea this was. It was many years in the planning. We spent a great deal of money to prepare for competition in the electricity market. We said that breaking up the monopoly would lower costs from what it might otherwise have been. People thought that was fine and that we should go ahead. However, when we actually introduced competition, it blew up in our faces.

There is little public understanding about these issues. We talk about climate change and say what will happen 40, 50 or 100 years from now. We tell the public that they need to make sacrifices now for someone's great-grandchildren. People currently do not save enough money for their own retirement. We know that. We have a pension crisis because people have not saved for their own retirement, not that of their children or great-grandchildren.

We are at the outer limit of people's capacity to reason when we talk about climate change. We can all understand that in this room, however, when you go out into the public with someone who is on the margin living day-to-day where even a dollar or two is a big deal, they do not get it. They say, "Do not talk to me about my children or grandchildren. Right now, I cannot feed them because of what you are doing."

I know this. If you try to cut budget deficits and so forth by cutting programs, you will get push back from people about this, even though you tell them that this is to reduce the debt so that their children will not have that burden of debt hanging over them. It is not easy to do.

The Chair: On the cap and trade business, I understood you to say that you prefer a carbon tax rather than a cap and trade, which is market driven. You are not the first one to tell us that, and I believe there are many good economic reasons to go the tax route. You also talked about people not understanding and gave quite an interesting sociological explanation.

We were informed and are aware that the U.S. had cap and trade systems with other substances — acid rain, sulphur and so on — and everyone seemed to understand it very well. At least, that is my belief.

Why is it otherwise for climate change? Is there a psychological block when it is tied to climate change, or is it the sociological reason that we, as a society, have evolved and people, innately, are not willing to get their minds around it?

Mr. Purchase: It is true that the U.S. cap and trade system on sulphur dioxide emissions has worked. However, we are talking about a vastly greater policy here. We are ultimately applying something across the entire economy.

I am interested in public policy, and you are interested in public policy. We spend much of our time every day reading about these things and trying to understand them further and learn more. I had to spend some time trying to figure out cap and trade when it was first mentioned. I have studied this from way back when I was a student. After all, it was actually invented by an economic historian at the University of Toronto, a fellow by the name of John Dales.

The point is that it takes real effort to understand it, and the public really will not devote much time to understanding it. When it happens, they will taste it and then tell you whether they like it.

The Chair: It is all about putting the real price on carbon.

Mr. Purchase: Precisely. Therefore, when we do it is when it happens. From my own personal experience of 35 years of trying to influence public policy on this, it is not until the policy actually hits the street that you really get a sense of how something works. Up until that moment, you are living in a make-believe world in which you can convince yourself of anything. However, it is not until you get out there and it is actually happening that you find out whether it will be politically saleable.

Senator Mitchell: Thank you, Dr. Purchase. This has been very interesting. I would not choose to argue with what you are saying. However, it does raise a number of very powerful issues on which you have focused. One in particular makes me think that perhaps we need not so much new technologies on how to handle carbon, for example, but new technologies on how to communicate with the public about issues that are profoundly difficult and profoundly important that they have to understand. I do not think anyone here will argue that we have a serious climate problem. We are confronted with the issue, even if people are arguing. Hypothetically, let us say that if the world was confronted with a problem as serious as many of us think climate change is, how would you begin to convince your electorate that you have to do something about it?

If you bring out carbon tax, as was done in the last election, it is killed in an instant. We just met with business people yesterday who said that they would rather have a carbon tax. However, as I said, it is killed in an instant. Debates these days on important issues are four words, and it is over: It is a tax.

My point is that maybe we have to focus on how to stop backing off this idea when we cannot convince people and do not have the political credit or will; we have not changed that. We need to find a technology that allows us to change that, or we need to find politicians who are willing to run for one term and do the right thing.

I throw that out to you. With your problem with electricity, we had the same problem in Alberta. Have you thought about that as a public policy student?

Mr. Purchase: Yes, I have. This is the essence of the issue. Most of our thinking should probably go into how we actually engineer this in such a way that it is acceptable.

There is no question in my mind that your single use of the word "tax" was a huge marketing error.

Senator Mitchell: They imposed that on us.

Mr. Purchase: Cap and trade is now a tax by another name.

Senator Mitchell: We called it a "shift."

Mr. Purchase: It is the nature of competition in the political marketplace. People will use what they can to defeat you. In that respect, I am not sure if we actually have the governance structures in place that we need to deal with this problem. It is that big.

Senator Mitchell: Maybe you are right.

Mr. Purchase: Having said that, I am always hopeful. There are things you can do. I have always felt that if we start low with any new idea, there is a chance. Just start low; start someplace, and then just raise it continuously and inevitably over time, then we can get away with it.

When you jolt people with something, they resist. When you say that you have the solution, and they wake up to suddenly find the price of energy has gone up by 10 per cent, they will react negatively.

They will not like cap and trade because of the extreme volatility in the price of carbon dioxide you get under cap and trade because you have a fixed supply of emission rights and a highly variable demand for those rights depending on the weather. In that respect, energy is largely weather-dependent on the demand side, as is the supply side. Energy demand varies hugely, which means the carbon price will be bouncing all over the place. It will be politically unacceptable. I can guarantee you it will not work that way.

Senator Mitchell: I appreciate what you say about starting low. I am not worried about having an objective today driven by the science, which would be 40 per cent below 1990. It would help if we started with acid rain or CFCs because, once you start, it goes quicker and it is less expensive. We would begin to see powerful economic benefits.

You made the point about the study of 0.2 per cent; the Toronto-Dominion study and Jaccard made the point that on 2.7 per cent average growth to 2020, there would be a 0.13 per cent reduction. It is not negligible. However, that probably will not occur once we start trying to do this better.

There is the other side at which we never look, the economic impact if we do not do anything. I do not know why we say that we can predict 2.7 per cent out to 2020 in the face of accumulating climate change because the costs of that can be infinite compared to the costs of trying to fix it, actually.

Besides Stern, are you aware of any models or studies that looked at the costs to our economies if we do not do it?

Mr. Purchase: Again, I believe the round table will be doing something of that nature. This type of modelling is beyond my personal capacity; I have my own time to devote to these matters.

However, studies have obviously been done, and there are differences of opinion about the costs. Nordhaus, in the United States, is one of the pre-eminent American economists who has done studies on this.

Senator Mitchell: We are getting an impression of your opinion of cap and trade. I think many of us share it, but maybe we will be driven to that.

There are two issues with cap and trade that are solved by a tax. The first is when a company has been doing good stuff for 10 or 15 years, and all of a sudden they do not get any credit for it — or how could you build credit for that? The other issue that, for example, it is easy for a huge company with an old plant to shut that down and reduce carbon emissions; whereas new companies, like the much newer ones we have in Alberta, are 20 years from writing the plant off.

Is there any way that you can adjust or accommodate or create some fairness on those two issues under cap and trade?

Mr. Purchase: The issue is how new entrants are dealt with. The issue arises because of whether or not existing competitors are given the initial emission rights. Typically, looking at where the Americans have gone — and probably where we are going to go — yes, a lot of them are given away, not auctioned. If you auction, then someone already in the business or someone entering the business is in the same boat because they are paying the market price.

Senator Mitchell: They have to buy.

Mr. Purchase: However, the issue is that if someone gets in first and has his free, then there could be a problem for new entrants.

Senator Mitchell: Yes; there is not much of a solution.

Mr. Purchase: You can always create a fix for everything, if you want to focus on that particular problem, but it is an issue.

The Chair: We have been hearing a lot about this, not only because we have had witnesses from British Columbia but also because a member of this committee is a former Minister of Natural Resources from British Columbia. He is not here this morning, but I think you know Senator Richard Neufeld.

They talked about the carbon tax, which has been implemented in British Columbia in a modest way, and the government has been re-elected since the imposition of this tax. Is there any lesson to be learned there?

Mr. Purchase: Some people think there is. I believe that a carbon tax might have been doable in Ontario. However, the government chose not to do that. It should have, in my view, and still should with respect to the transportation sector. It would complement my idea if we had a carbon tax.

They could raise the diesel fuel tax in Ontario. It will be increased anyway under the harmonized sales tax. Diesel will go up because the province did not apply the sales tax to it; the GST is applied to gasoline and diesel, but not the provincial sales tax. Under the harmonized tax, the provincial tax will be along with the GST, and that will raise prices.

I would suggest the province go further than that. It has a $25-billion deficit, I believe. Part of the solution to that will be raising taxes. The province could get the added benefit here of getting a jump on carbon pricing in North America, which, sooner or later, we will do.

I think provinces could do that. I believe that Ontario could have done that. Instead, the province has spent all its time saying how great it was about closing the coal plants. In my view, that was not the right policy and it has led to a bunch of other distortions in the system.

The government could easily have said, "Let us co-fire the coal plants with biomass," which is doable. You could get those coal plants down to the same emissions on CO2 as natural gas. We have been building new natural gas plants in Ontario that have CO2 emissions. Instead, the government said that coal was evil and it was getting out of it.

Of course, it could not do that. In the meantime, we have all these emissions anyway. We could have done something that was doable, but once the political stake was in the ground, we did not do it. Then we ignored the transportation sector, which is a larger problem.

The Chair: I mentioned that Senator Neufeld is not able to be here this morning. However, he has said we are very fortunate, because his representative, the chair of the Standing Senate Committee on Banking, Trade and Commerce, has a deep understanding of these market solutions. Senator Meighen, is next.

Senator Meighen: Thank you for setting me up. I think Senator Neufeld has sent me to show what you are missing by not having him here. I will demonstrate that right away.

The other side of the coin is energy conservation. Mr. Purchase, you had great experience as a deputy minister. You and I lived through the Ontario blackout in August of 2003.

Senator Banks: We all did.

Senator Meighen: Did we live in Ontario then? Were you here in August 2003?

Senator Banks: Yes.

Senator Meighen: Good heavens, you are a very hard-working senator.

In your experience, Mr. Purchase, in terms of conservation and reduction of consumption, has any government policy you have seen in your years really worked?

Mr. Purchase: The one government policy that really works is to stop subsidizing electricity. We subsidize electricity right across the country. Ontario still does it at the same time it will argue it wants to do conservation. We have a bunch of conservation programs, but we also want to ensure that we control the price of electricity, because it is such a political price.

We have a history of subsidizing energy in this country. We do not charge market prices for it. We did fight over the price of oil; we had, briefly, a made-in-Canada oil price. We no longer have that because the politics changed and everyone moved on. We moved to world oil prices finally, which is the right policy, and everyone has given up. No one says too much anymore that we should have a unique Canadian oil price that is lower than the world oil price.

We did achieve it there; but in electricity policy, which is still dominated by provincial politics everywhere — and state politics in the United States — it is extremely difficult to let it go and to do the right thing there.

Price is the single most important conservation policy. There are other things that are important but, again, they are related to price. For example, time-of-use meters have been introduced in Ontario, where people are responding to price; the rate varies over the day and stuff like that. That is an important policy.

I think programs like where you return your refrigerator that was a beer fridge have been successful. Studies have shown that a number of those policies have been successful.

Senator Meighen: In terms of subsidization — and Senator Angus would know what I am talking about — Hydro- Québec jumps to mind. In Quebec, the price of electricity is substantially subsidized, but we have dealt with that. That leads me to think of this recent proposed agreement between Hydro-Québec and New Brunswick.

I do not want to get into the politics of it, but I am interested in whether you see any economic advantage or cost advantage? Do you see it as the way forward? I do not recall, in recent times at least, other interprovincial agreements of this nature in the energy field. Do you think it will lead us anywhere, or is this a one-off deal?

Mr. Purchase: It is an interesting idea. In principle, I do not have anything against it. I have not followed it closely enough to know, but the initial question I had when I first learned of the deal — I think a reporter phoned me to ask what I thought of it because there were lower prices, I think, for consumers, business and so on — was what happens over the long term. What regulatory regime is in place? Will New Brunswickers always get the same price as Quebecers and so on?

My lack of knowledge about the details of that leads me to exercise great caution here as to what I say. In principle, it is not a bad idea for Quebec to own another utility beyond its borders. Perhaps Ontario Power Generation could buy a utility elsewhere, if only it could afford to do so.

Senator Meighen: I believe that up to 10 megawatts is classified as a small power generation plant. Is it feasible for someone to set up a generator by a nice little stream and plug into the grid?

Mr. Purchase: Yes.

Senator Meighen: Is that significant for overall power generation or is it only a drop in the bucket?

Mr. Purchase: In Ontario, it will not compete with a new nuclear power plant producing electricity in the range of 1,200 megawatts, such as the ACR-1000, but we should do it, absolutely. My town of Almonte, which is on the Mississippi River, has had its own generating capacity for quite some time because it was once a lumber mill town where water power was used to power the grist mills and so on. Today, that water power is used to produce electricity. The facility is undergoing an expansion, but I am not sure how many megawatts it will be.

Senator Brown: I am interested in your talk about nuclear energy. Can you tell us about the Breeder Reactor? My understanding is that they use spent fuel in a reactor that increases the amount of energy produced from the waste.

Mr. Purchase: Yes. I tend to occupy that space in the middle of a bit of knowledge about economics, a bit of knowledge about technology and a bit of knowledge about politics. I like to think of myself as a jack of all trades and a master of none, so I must be careful about trying to inform the committee on breeder reactors.

Senator Brown: I am troubled by the trading of carbon emissions. When they first tried it in Europe, they gave them away. I believe that you mentioned such a possibility here. I learned via the Internet that carbon emissions went up to $50 per share and then dropped to a few cents per share. I do not understand why we would look at selling permits for carbon emissions to persons who do not decrease their emissions. It seems to be a form of tax, as you pointed out. A tax levied on an item is a positive thing because you know exactly how much you will pay for a gallon of gas, for example. However, buying a permit for carbon emissions allows a person to not reduce the emissions they produce. As well, the price of the permit can increase. Who benefits in such a system? Is it the bankers who sell these credits?

Mr. Purchase: As I mentioned, under a cap and trade system, the unit price of carbon dioxide emissions will vary dramatically. Some people have proposed that it should have a cap and a floor, so that it would vary only within a band, which could be made very narrow. At that point, it begins to look more like a variable tax. In other words, a cap and trade can approach a carbon tax in reality. The variability is a very real issue that could be resolved by putting ceiling and floor prices in place.

On the question of offsets from an unregulated sector, some sectors of the economy may still be unregulated. Places where there is regulation might be able to buy offsets by helping those unregulated sectors to develop clean energy sources that displace their otherwise carbon-emitting options. This could happen internationally. If it were to happen in that way, the advantage to Canadian producers would be the lower price, because someone might be able to reduce carbon at a lower price than they could do in their own operations. That is why people look at having international offsets. The advantage would be the cutting of the price of carbon, thereby reducing the costs to the Canadian economy. However, the disadvantage would be that it would cause large international flows of money — another reason that cap and trade will not be internationalized successfully as a market. Too much money will flow around it, and we have no idea whether many of the foreign governments that might be involved in such a system would have the capacity to enforce the regulations.

You have to monitor before the trade has taken place, and then someone has to do audits of those caps and trades. For example, someone could sell their carbon emission rights and continue to emit carbon. Someone must ensure that does not happen. That is the advantage of a tax system: we have a tax administration in place. I used to be the Deputy Minister of Revenue in Ontario so I know that we have ways of ensuring that people pay their taxes.

Senator Brown: I absolutely agree with you and with the tax.

Mr. Purchase: I do not believe that cap and trade will be internationalized effectively, even though it would be the proper system if you wanted to build a liquid market.

The United States will not see large flows of money out to various parts of the world. I cannot imagine the U.S. Senate accepting such an outcome.

Senator Brown: I am glad to hear that because I have read that a cap and trade system could involve trillions of dollars.

Mr. Purchase: If it were internationalized, yes. There would be a heavy administrative cost to monitor the system to make sure that we are not just buying nothing.

Senator Seidman: I am trying to focus on your comments and to capitalize on your skill set at the intersection of economy, technology and politics. We all understand that fossil fuel industries necessarily must be reduced. Clearly, there are provincial differences in available resources; some provinces are more able to develop hydro or wind or solar or nuclear power. As we try to think about a vision for the future in Canada, we might want to consider more collaboration and coordination of the federal, provincial, territorial and municipal climate and energy policy approaches. Could you comment on that, please?

Mr. Purchase: I think that is true. I argued that the Government of Canada should follow closely and harmonize its policies on a national basis with the policies of the United States. I believe that is doable, good politics. In the end, we will be forced to do it anyway.

Canada is a federation. In my view, that still leaves each of the provinces to proceed with its own political imperatives. Many states in the United States will continue to pursue their own policies. If the federal policy in the United States is not adequate, I do not imagine large states like New York, California or Texas will give up having their own policies, whatever they might be.

I believe either level of government can play a role in this. That is the strength of our federation, that it does not need to be one size fits all. The Government of Canada does not need, in this particular instance, to be in front in a hazardous way to itself, because many other things can take place at a provincial level.

Some people will come here to say, "Yes, but there should be a single national policy and it should be uniform." Most business people would prefer that; there is no question about it. In fact, they would prefer a single policy that was the same in all countries of the world, but that will not happen. That is not how politics works. Each government has a jurisdiction and will exercise what it thinks is best within that jurisdiction.

I agree with you. I believe there is strength in other governments, including municipal governments, acting independently to achieve their own objectives. All governments are constrained by what their immediate neighbours are doing. I can raise the gas tax in Ontario, but if I raise it too much, I have people living close enough to the border to travel outside of the province to Manitoba, Quebec or potentially the United States. Therefore, you are constrained with how much you can do if you use prices to achieve your results. However, you still have some degree of freedom.

Senator Seidman: How do you respond to the idea that there should be more collaboration or integration among the provinces and territories at every level — federal, provincial and municipal?

Mr. Purchase: I agree entirely.

Electricity policy, for example, is provincially driven. Each province has its own utility — or utilities, in the case of Ontario, where we have a large, private utility with Bruce Power. While we are interconnected, there is no joint planning for the future and no reason there should not be. These are little provincial fiefdoms and domains in which electricity policy is one of the few things you get to play with.

Increasingly, we will have to reach across these provincial boundaries and have coordination between provinces at a sub-national level on these things where we can. Governments are mature enough. It is not that they cannot think about it. However, perhaps it is not the first thing that comes to mind.

The Chair: We have been developing a number of buzz words and a lexicon related to the energy sector as we progress with our study. One of the terms is a "smart grid" or a "smarter grid."

Is this relevant in regard to this last exchange with Senator Seidman on integration and cooperation among jurisdictions? How would you define a smart grid, and what needs to be done to make that happen?

Mr. Purchase: I believe a smart grid is ultimately each of us interacting with everyone else through the grid. It supplies information in the form of prices for distributed energy. It requires an enormous technological advance with many potential generators of power. For example, one minute they would be taking power; the next minute they are sending power back into the grid. With smart grids, we might actually use our cars to power our homes at some point and then plug into the outlet to recharge the car. It is a sophisticated way connecting with one another through the wires.

The Chair: We started on this study with a fact-finding mission to the U.S., to Washington in particular. We probed what is happening in the joint dialogue on clean energy. We learned that Canada and the U.S — Minister Prentice and his counterpart — divided the dialogue into various study groups on different subject matters. In other words, it is not focused only on what our greenhouse gas emission percentage will be in any given year; they are working in many areas. I think that is smart, because it is one area in which we can cooperate and benefit from each other's knowledge. The smart grid was one of the topics discussed, which is why I raised it. It is quite important in the overall scheme of things.

Mr. Purchase: The traditional structure of the electricity industry is large-scale, centralized plants with very big economies of scale. In the electricity business, the philosophy is "Go big or go home." The first commercial nuclear plants we built at Pickering were 500 megawatts. The ones we are potentially building, such as the ACR-1000 is 1,200 megawatts. The Areva EPR is 1,600 megawatts. They are huge. The reason they are that large is the huge economies of scale from increasing the size of these plants.

However, the smart grid is trying to move in the opposite direction. You do not have the behemoth centralized plants sending out electricity over the wire system to be consumed. You have small-scale generators throughout the economy. It is a far more complex problem to solve. The electricity in the wires must be constantly balanced all the time. You have an independent electricity system operator in Ontario whose responsibility is to ensure that we have high-quality power and no surges. You are constantly balancing the supply with the demand on the grid. It must be maintained at an even keel for reliability and safety.

Senator Banks: You made the point that all predictions are wrong and they have always been wrong. One of the predictions that has always been wrong is that we are running out of oil. Every 10 years someone says, "We cannot possibly sustain this because we will use up all of the known reserves within the next 10 years." That has never happened, and more reserves are constantly being discovered. Economies of scale and prices allow us to extract oil from places that we could not previously.

For the sake of my question, let us assume that we will not run out of oil for a while. Coming from Alberta, we will certainly not run out of coal, either. While we have a lot of oil, we have a lot more coal, as do other places.

However, when you were speaking to us this morning, I think I understood you to say the ultimate public policy ought to be to reduce our reliance on fossil-based fuel. Since there is no prospect of our ever running out of fossil-based fuel, why should we be concerned about reducing our dependence on it?

Mr. Purchase: We would have to render the combustion of fossil fuels benign, such as through carbon capture and sequestration in the case of coal, which seems to be where it has its greatest applicability. It is not so much the case with oil, because carbon capture and sequestration with oil is not possible, because we are all burning oil independently and there is no technology that is allowed.

However, if we cannot render it benign, then we have the problem that, if we continue to use it, we will continue to add to greenhouse gases.

Senator Banks: Is that the problem? You have also talked about those predictions being wrong, too, eventually.

Mr. Purchase: They are almost certainly wrong in the specifics. It is always a range. However, there is a general direction among the majority of climate scientists now that global warming is an issue and is human inspired: 80 per cent of greenhouse gases come from the combustion of fossil fuels. It is the consensus, if you will, though I am not saying science proceeds by consensus. However, public policy does.

If you put that all together, they are saying we have to reduce the greenhouse gas emissions by something like 80 per cent below 1990 levels by 2050. That is virtually impossible. Carbon capture and sequestration, if it works, will be great. However, I doubt it could work on the scale required to do that.

Senator Banks: Are they right that we are contributing so much to it that we have to worry about our contributions to it? Many people say there is climate change but we cannot affect it and we are not affecting it all that much.

Mr. Purchase: I realize that. This debate will go on and no one will ever know what the truth is until we actually get there and find out. However, the argument would be that it is not exactly prudent to get there if we find out it is catastrophic and very serious.

I know all the models are flawed; I have no doubt about that. However, I am not an expert, and the point is that there may be enough truth in them that, because the Earth's climate systems are complex, we cannot ignore them anymore. We have to begin.

I am arguing for beginning modestly, having a price on carbon and ratcheting it up over time if need be. I think that can work socially. Our politics and our economy can sustain it, and we will see where we get to.

That is how I would do it. I do not try to second-guess experts, because we are always surrounded by them and they always have more knowledge than we do. It is just that they do not often turn out to be precisely right. They may be directionally right.

It is like most economists forecasting the economy. They have sophisticated models and are every bit as smart as the guys doing climate issues and certainly come from the best schools. The thing is we are always being presented with something that looks pretty certain, but who knows what the future will bring? It is always in a bit of fog, but we still have to act and take into account what people say about it.

The Chair: Senator Banks, is this not where you want to explore a little more about the scientists from East Anglia?

Senator Banks: Precisely.

Senator Lang: I want to pursue a little further. We could get into East Anglia. I know it is not politically correct, but it certainly raises some questions.

I would like to make one point, if I could. The political spin that is being put on the question of greenhouse gas emissions is that humans are responsible for climate change, and I think there has to be a differentiation. Climate change takes place every day in spite of us. We are contributing to climate change.

As an aside, your explanation of cap and trade sounds like I should get into building office buildings because a lot of people will be needed to regulate this and they will need offices.

My concern, as we all desperately run towards the idea of a carbon tax or cap and trade, which means that everybody will pay more in one manner or another, is this: Right now, we are looking at roughly $80 a barrel for oil. I read in the newspaper yesterday that in November in China, over a million vehicles were sold. Last year, there were under 9 million vehicles sold in China. This year there will be 12 or 13 million vehicles. You can see the escalation of the utilization of fossil fuels, just in that category alone, without talking about other generations.

We are looking at $80 a barrel, and more people will be chasing that barrel of oil as we move along. I would like your observations. Some pundits say we have reached peak oil — similar to what Senator Banks said — and, subsequently, when we go for a barrel of oil, it will cost us that much more to produce it. We then have more supply and demand chasing that barrel, and we might be looking at $100 or $120 a barrel as a norm.

Could you comment on that?

Mr. Purchase: Peak oil refers to the situation if world production peaks and there is still oil but, rather than increasing annually as it has the last 100 years, production starts to decrease and we go down the other side of that peak.

If peak oil is a reality in the context also of increasing demand from the transportation sector in China and India, let us say, then the price of oil will go through the roof. We will not need a carbon tax because people will not be using oil; they will be finding ways of substituting for oil, for sure. The price will go dramatically higher and people will simply get out of it, if peak oil is a reality.

On this matter before us, I think we are confronted with a very short time frame to do something. If the climate scientists are to be believed, we do not have a lot of time; we have 40 years to do dramatic reductions. They are truly dramatic. People will argue that yes, carbon capture and sequestration is possible, but we are a long way from proving it out in a lot of ways. Once you sequester the carbon, it has to stay there; it cannot be coming back up. There are a lot of major political hurdles with the regulation of that and so forth.

We are a long way away from even that one thing, and it only helps to solve coal, to some degree.

Senator Lang: We are wandering away from the premise that we talked about at the beginning. Right now, we are looking at $80 a barrel and we are just coming out of a recession. I want to encapsulate this. If we are at $120 a barrel and that is the norm, then we do not need cap and trade or a carbon tax, because the marketplace is taking care of the question of supply and demand and cost.

Mr. Purchase: Even if oil was at $200 a barrel, there would still be what economists refer to as an externality; there is still a social cost associated with using that oil. A $200 barrel of oil is still being used; every time you use it, there is still CO2 going up.

Every tonne of CO2, wherever it is emitted in the world, has the same effect on climate, and someone has to pay for that. We have so far been using it and not paying for it. Now we are suggesting simply that we have to ante up and pay for the potential social damage we are doing by adding that CO2 to the atmosphere.

Senator Lang: We heard a question the other day. We had Mr. Bob Evans here from the University of British Columbia, and he gave a direct and simple explanation of what was occurring, which I think we could all understand. He also recommended very clearly what public policy could be.

Public policy from the Government of Canada could be to strike what emissions were allowed, in conjunction with the provinces where they have the responsibility for the electrification and the natural resources, and then it would be up to those provinces to determine how they were going to meet those emissions: Would they go nuclear or would they go hydro? What would they do to get the emissions down that was acceptable?

In other words, the Government of Canada sets the general parameters, and the provinces have to comply within a certain time frame. Obviously, they have to be working together to some degree. What do you think of that?

Mr. Purchase: It is doable if each province could find some different way of doing it. However, it does add complexity for businesses if everyone has a different system of achieving those goals.

In the end, there is no way that you are not going to be imposing a price on carbon dioxide. You can regulate and say you must use this technology or you must do that. This is a more costly way of doing it, because when you dictate what businesses should do as opposed to letting them find their best way to do it, there are additional economic costs. That is why economists like market-based solutions. Even cap and trade, with all its deformities, is better than some of the alternatives.

We always come back to the same thing. We have a social cost that somehow has to be taken into account every time we consume or produce fossil fuels. Somehow we need to have a policy that would implement it.

I do not disagree that you could tell every province, "This is your cap and you do it the way you want." It is conceivable; it is not as efficient as a single national price on carbon emissions, but it is not inconceivable. It is just not the best way of doing it, in my view.

Senator Lang: I want to pursue that further, because I do not understand that. It would seem to me that if each jurisdiction had an emission level it had to reach, it would be doing something real like building a hydro dam or building a nuclear plant or some alternative — maybe going from coal to gas because there are fewer CO2 emissions.

I do not want to pretend I am an expert; I am new in the area, probably like many of the listeners out there, but I have been doing a lot of reading. I believe we have spent around $30 billion on these various climate organizations, convincing the public there is a problem. We have not done anything like build a nuclear plant or an extension to hydro. We have just talked about it.

My point is that I do not understand why you think it is complicated. If we set the emissions that would be allowed across the country, the Province of Alberta looks at that, for example, and says it has to convert its coal plants to natural gas, maybe, because that is what available to them, or maybe they buy hydro from British Columbia or Quebec.

Something real would happen as opposed to a cap and trade situation. With cap and trade, I think you told me that the business community will decide what businesses will survive and what will not because of who can buy what or get away with what. Meanwhile, have we actually built anything or gone to an alternate source of energy?

Mr. Purchase: Yes, in principle, that is the way cap and trade works. People substitute cleaner forms of energy. First, they do conservation and energy efficiency, and then they begin to substitute cleaner forms of energy for fossil fuels or do carbon capture and sequestration for fossil fuels. Those are pretty much the available options. Either we use less of it, we find a way of making it benign or we switch to some other fuel.

Senator Lang: What is the best method of switching to an alternative source of energy?

Mr. Purchase: The best method, if you are an economist, is to raise the price of carbon emissions. It is not to make political judgments about which technology we should choose here.

Senator Mitchell: In this East Anglia debate on climate change around what is the science and what does it say, people who are critical of the notion of climate change have kind of morphed from saying it is not occurring to this idea that it is occurring but human activity is not causing it. It dawned on me the other day that if human activity is not causing it, we are in real trouble, because in that case, we have no chance of fixing it. The fact is that it is occurring and we have to hope that is because we are causing it.

We have looked at the problems of cap and trade. We have been talking about the market and the need for a price that would drive the market and make those infinite numbers of decisions rather than having someone else impose them. To an extent, if you did the allocations — the offsets, the credits, whatever — properly, then you do drive the market. You start to put a market price that way and start to drive businesses and individuals — particularly businesses, I guess — to make decision about finding the low-hanging fruit, also. That is the redeeming feature of cap and trade.

Mr. Purchase: Absolutely. It is not my preferred way of putting a price on carbon because I think there is a simpler way of doing it — and a way ultimately that would work out better politically, even though it has that terrible word "tax" associated with it. However, it is still better than the alternative, which is simply to mandate the technologies that will be used.

I do not believe in that. I do not believe that any group of smart people, any government should be in the business of mandating which technologies should be deployed.

This is the fundamental insight of Adam Smith — that we are all individually smarter. It is the strength of our system that we allow everybody to solve this problem on their own when confronted with the price of carbon — either to invent something that helps us or simply cut their consumption, change their behaviour or do whatever they need to do. We are far better off to have a decentralized response mechanism than to have a bunch of smart guys sitting at the top trying to decide what the future of society will look like.

Senator Mitchell: That is the problem I have with the funds — the $15 per tonne you can put into a fund. To his credit, Alberta's Premier Stelmach set up a cap and offset or cap and something arrangement, cap and fund, which is not enough, though it is intensity based. It is great that he started, but the fund idea causes me problems because it causes people to sit around a table to decide how to spend it. Let the market figure it out; that would be much quicker and more efficient.

My second question relates to the tsunami of change that occurred about 18 months ago with the shale gas breakthroughs in the U.S and Canada. If I burn enough gas or coal to produce one BTU of energy, do the two fuels emit exactly the same amount of carbon dioxide? I know that gas seems to be cleaner in many ways, but is it also cleaner in terms of carbon dioxide emissions?

Mr. Purchase: Gas has lower carbon dioxide emissions per unit of heat. The mention of shale gases goes back to a point Senator Banks made about peak oil production. Three years ago, I was convinced absolutely that we had peaked on gas production. I thought we would have to move to importing liquefied natural gas into North America through the international marketplace on gas. Suddenly, technology has done it again and shown that we can have these kinds of breakthroughs that dramatically change the prospects.

I am no better at predicting the future than the next guy is. That situation was a vivid illustration for me, because I would have argued strenuously for public policies to be careful about getting involved heavily with gas, but I would have been wrong.

Senator Mitchell: I have one other question, if I may.

Senator Lang has been pursuing a very interesting theme. If oil prices were to rise to $200 per barrel, would we deem it to be right up there with a $120 carbon tax in terms of costs? It takes time for people to adjust, but I would not want to be selling gas-guzzling vehicles to earn a living.

I will paint a scenario. Canada is highly dependent on fossil fuels and production is at $200 per barrel, which is good. Elsewhere, the U.S. is 40 per cent alternative energies, which are much cheaper. One might argue that Canada no longer has a competitive advantage in manufacturing because Canada's fuel costs are high and Canada has not gone out of its way to find alternative energy sources to be more competitive in a world that has found them. That scenario would be problematic. On the other side of it, Canada would be getting $200 per barrel, but would the alternative energy sources price go up with oil? Might a company generate electricity with solar panels and sell it to the grid at a price just below a $200-per-barrel equivalent?

Mr. Purchase: Yes, that could happen to some degree.

Senator Mitchell: It would not be competitive.

Mr. Purchase: It would be if there were substitutes in the particular application. That is why all fossil fuel prices track to some degree, although there are wide discrepancies because of the nature of the market and whether people have alternative energy sources. It used to be that natural gas and oil tracked pretty closely together, but they have separated somewhat. If people can substitute one fuel for another when the price changes, then that substitution will happen.

Senator Mitchell: This committee had an interesting visit to the U.S., where we met with all kinds of people. One of the threads throughout was that pieces of legislation are on the books or about to be on the books in the U.S. There are initiatives in California, for example. How serious do you think the threat is that some Americans would use any levers, including environmental concerns, to prevent the importation of Canadian oil when the bottom line might in fact be protectionism to promote their shale gas?

Mr. Purchase: It is a very serious threat. That is why I recommended that we follow American policy closely. You can bet they will not give us any breaks and that they will do it for their commercial reasons, not because it is good for climate change. Of course, behind it all, there will be attempts to use it in a protectionist way. Canada can do many things alone and it does not matter, but on this subject we have to be cognizant of needing to replicate closely what the U.S. has done on a national level. That still leaves the possibility of different policies in the various states because of the politics. It strengthens our hand if we have a common North American policy, including Mexico. However, I am not sure where they will be in that process. We can hold off protectionist forces, but they will always be lurking. We must remain cognizant of those forces and maintain a good national policy that closely aligns us with the U.S. Also, as I mentioned, if they do nothing, then nothing will be done.

Senator Mitchell: Exactly.

Mr. Purchase: If President Obama wants to win a second term, the key states for the Democrats are the Great Lakes states of Wisconsin, Illinois, Indiana, Ohio, Pennsylvania and Michigan. I would not include New York because it is dominated by New York City and financial interests. The big three automobile producers and their suppliers are located in those states. Obviously, the government has rescued two of them and is very involved in their policy going forward. Those states are also important to the transportation sector.

The Great Lakes states hold 100 Electoral College votes, and he cannot win the presidency without them. The other key is that those states all use collectively more coal to produce electricity than the average state uses. With the exception of Illinois, they are about 50 per cent usage. The President's home state uses 50 per cent coal to generate electricity. In many of those states, people heat their homes with electricity. When the price of electricity increases dramatically, which will have to happen in a coal-fired jurisdiction, it will have big political implications. President Obama will have to manage all that or he will not be re-elected.

Senator Peterson: Regarding the last point, I also think the elephant in the room is the 13 or 14 coal-producing states that will not fall in line. That is a major problem.

On that issue, I think we would agree that global warming is a global problem. Canada produces 2 per cent of the emissions, but the world press would have you believe that we are the world villains. What do you think will come out of Copenhagen?

Mr. Purchase: There seems to be a lot of hype coming out of Copenhagen.

The Chair: I do not get to Copenhagen until Saturday morning.

Mr. Purchase: The pressure will be on. It will be interesting to see what President Obama comes up with. He now has the Environmental Protection Agency, EPA, behind him, which is a bit of a hammer against Congress. In the end, the Senate of the United States is a key factor. I do not know where the politics will take them.

Ultimately, the United States will want to do something. They will get started, in my view. I doubt whether they can get started effectively in Copenhagen. I do not know how far the President can go. What can he do to commit the nation? He may say some things, but I do not believe he has ultimately committed the nation to any international treaty.

Having said that, I believe the United States will act on climate change; there will be a national policy. It may not look pretty, but there will be one.

Senator Brown: Do you think research for alternative energy sources and ways to conserve energy might be the solution to this whole problem?

Mr. Purchase: Nearly everyone agrees that the way out of this is the technologies that we either know already or need to prove, like carbon capture and sequestration or more solar and wind energy and so forth. Other energy sources, such as geothermal, are a long way away. Technology has to lead us out of the problem.

Approximately 85 per cent of the world's primary energy comes from fossil fuels. We have a long way to go if we are to replace that. That is how we became rich. The work can only be done with technology. There is no other way I can conceive of for it to work.

Senator Brown: I agree with you. I would like to point out that Alberta has the only existing fund in this country, currently. It takes $15 per tonne from carbon and puts it into a research fund to try to improve everything from alternative fuels to conservation.

General Motors, which got itself into a lot of economic trouble, is now testing a car in California that will go 220 miles on a gallon of gas. I think that is the way we should go: bear down on more research and conservation.

Mr. Purchase: I agree. We need to do a great deal more research. In addition to that research, we need incentives in place to commercialize the research. There is no doubt in my mind that we need to find technological solutions to this problem. Otherwise, we have serious issues ahead if it is happening to us.

Senator Brown: We should have two years of lap time. From what I understand, whatever is agreed in Copenhagen will not be implemented for two years.

Mr. Purchase: This will be a process. We are nearly in 2010 and we have to meet our first target by 2020. We do not have a lot of time. It takes 10 years to build a nuclear plant: three years to find the site and obtain site approval, three years to approve the technology, and four years to build the facility. All of that is only if everything goes well. This time frame is ridiculously short in the energy business. Almost nothing can be built in 10 years.

Senator Brown: I was referring to what I am told about Copenhagen. They will set up the plan during the next couple of weeks — we hope — but implementation will be two years down the road.

Mr. Purchase: Yes.

Senator Brown: We have two years within which to do research.

The Chair: Honourable senators, we have had a great session. We usually have two witnesses in this time frame. Obviously, Mr. Purchase, you provoked our interest. You also seem to be familiar with the study we are doing. We need all the help we can get to keep it orderly.

Yesterday, Senator Mitchell mentioned that he and I had met with people from the energy business, including gas representatives and upstream petroleum producers. They are also doing a study to develop a framework for a strategic energy policy for Canada going forward.

Our challenge is that we do not want to be helter-skelter all over the map. However, the change in natural gas supply and this whole technological breakthrough in the U.S. are coming out rapidly. This makes us feel good. One of the buzz words we have learned is "technology, technology, technology." Today, you have given us another golden rule: Price is the key to conservation. That is a very good line. I have asked our researchers from the library to note it; it could be a chapter title.

We know you are nearby. You have been very generous with your time. I understand from the clerk that you said you would be available to help us. We appreciate it.

Mr. Purchase: Yes. If you need my help, please call on me.

The Chair: I apologize that I was not here at the beginning of the meeting, but we have had a wonderful session. Thank you.

(The committee adjourned.)