Proceedings of the Standing Senate Committee on
National Finance
Issue 25 - Evidence - October 16, 2012
OTTAWA, Tuesday, October 16, 2012
The Standing Senate Committee on National Finance met this day at 9:30 a.m. to study Bill S-205, an Act to amend the Income Tax Act (carbon offset tax credit).
Senator Joseph A. Day (Chair) in the chair.
[Translation]
The Chair: Honourable senators, this morning we are continuing our study of Bill S-205, an Act to amend the Income Tax Act (carbon offset tax credit).
[English]
Bill S-205 seeks to amend the Income Tax Act to provide for a non-refundable tax credit for carbon offset purchases.
We will begin by hearing from officials from Environment Canada this morning. We are pleased to welcome John Moffet, Director General, Legislative and Regulatory Affairs. He is accompanied by Ms. Kerri Henry, Head, Offsets Policy.
Thank you both for being here. I understand Mr. Moffet has a few introductory remarks and then we will get into a discussion back and forth. You have the floor, sir.
John Moffet, Director General, Legislative and Regulatory Affairs, Environment Canada: Good morning, senators. I am pleased to be here with my colleague. I will make a few general remarks about greenhouse gas offsets, and then I would be happy to answer questions you have to help in your consideration of Senator Mitchell's bill.
As Senator Mitchell has explained, greenhouse gas, or GHG, offset systems are a means to incent emissions reductions that would not otherwise occur.
There are quite a few greenhouse gas offset systems globally, and each system has its own rules that must be followed to generate an offset credit.
Some greenhouse gas offset systems are designed to be used as part of a regulatory scheme that requires emission reductions. When used in this context, offset credits can lower the compliance costs for regulated entities by providing them with access to emission reductions that cost less than actually reducing the entities' own emissions. These types of offsets can also be an effective policy option for inciting reductions from sectors that are administratively complex to regulate. Generally, the regulation that requires the entity to reduce emissions would also be the legal vehicle that stipulates what types of offset credits can be used for compliance purposes. In many cases the regulation would stipulate, for example, what portion of the overall reduction obligations the offsets can be used for.
Other offset systems make up a voluntary market that is not driven by any regulatory obligations. These systems are geared towards individuals or organizations that want to voluntarily offset the greenhouse gas emissions associated with their own activities. I believe that in his testimony Senator Mitchell provided the example of airline companies, some of whom offer passengers the opportunity to offset the emissions associated with their flight. That is a strictly voluntary activity and operates in an unregulated market.
Although the design details vary among the systems, the key feature of any greenhouse gas offset credit should be that it represents an actual reduction in emissions or an increase in sequestration beyond what would have occurred without the incentive provided by the payment from the creation and sale of the offset credit. In other words, no one should be able to generate an offset credit for doing something they would have done in the normal course of their activities or because they received some other incentive for doing so.
In practice, however, the degree of rigour, both in the offset system rules and in the oversight that is provided in ensuring that those rules are followed, varies among systems.
Similarly, the prices for an offset credit can vary widely. Prices for offset credits depend on market forces. On the one side, this includes the cost to create the credit, on the other side, the consumer demand for the credits and importantly, consumer expectations about the degree to which the offset credit actually represents a genuine reduction in emissions — what am I paying for — and expectations about the potential for the credit to be accepted for compliance in existing or future regulatory schemes.
With that very brief overview of greenhouse gas offsets, I will stop now. My colleague and I would be happy to answer your questions.
The Chair: Thank you, Mr. Moffet. You gave the example of an airline passenger wishing to offset the greenhouse gas they may be indirectly causing by virtue of buying an airline ticket and flying somewhere. Can you expand on that so we can all understand how that system would work, with the airline owner giving me an opportunity to offset the impact of my travel?
Mr. Moffet: As I explained, roughly speaking there are two broad markets for offsets. In some jurisdictions there are regulations that require facilities to reduce their emissions. In some of those regulatory schemes, the regulations allow the regulated company to discharge part or all of its reduction obligation by acquiring and submitting offset credits. They do not do the reductions in-house. They acquire an offset from someone else and submit that reduction. That is a regulatory system that uses offsets. There is also a voluntary market for offsets. The example you provide is within the voluntary market.
In Canada, that market is unregulated. If an airline company says they can offer you a service that allows you to offset the emissions associated with your flight, basically they will have gone out and entered into an arrangement with a provider of offsets — which could be any number of organizations, for-profit or not-for-profit — undertaking activities either to reduce emissions or to increase sequestration. Simply put, if you plant a tree you are increasing the amount of carbon that gets sequestered, or in other words, taken out of the atmosphere and stored in the tree.
They have entered into that arrangement and will have paid a third party X amount of money per tonne and then offer that credit to you. They will say that you are flying this far, that is the equivalent of so many tonnes, to offset that flight you would need to purchase four credits and we can sell those credits to you for this amount of money. That is a private market transaction, not regulated, and it would reflect an arrangement that they would have entered into with an offset provider. In turn, that offset provider could be any number of organizations. As I explained, in Canada those organizations are not regulated in terms of what standards they must comply with to demonstrate that they have actually reduced emissions or increased sequestration.
The Chair: Are there independent not-for-profit organizations that create the standard? As the purchaser of an airline ticket, and giving the airline some extra money, how do I know that is actually being used for my intended purpose of reducing greenhouse gas?
Mr. Moffet: The market for voluntary credits is evolving. It is relatively young. There are some emerging standards, in part, that have been codified internationally as best practices. There is also an emerging market where the standards that different providers use are starting to be more comparable than they were in the early days because best practices are evolving.
Let us say it is Air Canada. They would have a choice of who to go to. As with any market transaction, they can go to a reputable supplier or a less reputable supplier. As an individual consumer who is going through Air Canada, it is really a matter of trust on your part that when Air Canada says it is selling you a credit that it represents a reduction. You are relying on their due diligence to have selected a provider that is legitimately engaged in the business of reducing emissions or increasing sequestration.
At the moment, it is really a matter of the market policing itself as opposed to any governmental oversight of these transactions.
The Chair: Ms. Henry, did you have anything to add to that?
Kerri Henry, Head, Offsets Policy, Environment Canada: No.
The Chair: Some senators would like to engage in a discussion with you. I will start with the sponsor of the bill, Senator Mitchell, from Alberta.
Senator Mitchell: Thank you, Mr. Chair. Thank you for pointing out that it is my bill. I want to mention to the witnesses that I am not taking any of their answers personally, and I appreciate their opening comments.
I think you have explained very well the application and how it is that offsets and credits can work. That is a difficult thing for people to understand because there is a sense that they are virtual; however, they really do provide a market-driven mechanism for reducing carbon emissions in the most effective and efficient way.
Was it your group that worked on the government's small project to buy credits — I think $225,000 worth of them — to offset the federal government's greenhouse gas footprint for the Olympics?
Mr. Moffet: Yes, it was.
Senator Mitchell: Could you tell us what steps you went through to ensure that you got real credits and to ensure that the Government of Canada was not wasting $226,000 — because we know they would not want to do that — to buy these credits that reflected real reductions in carbon and greenhouse gas emissions?
Mr. Moffet: The short answer is that the government relied on the good services of Ms. Henry, but she will tell you the process we went through.
Ms. Henry: Before the winter games, we set out the approach of what was to be done in regards to what emissions would be offset by us versus VANOC, the Vancouver Olympic committee. They wanted to have green games, so they set out a bunch of steps outlining how to reduce emissions at the start, whatever they could not reduce to offset, and establishing what needed to be quantified.
After the games, we collected the information and first quantified the amount of emissions that the Government of Canada was responsible for. That includes emissions from a government employee travelling to and from the games and at the games, emissions related to hotel accommodations and in particular to security for the games and the torch relay.
We did a scientifically based quantification to determine the amount of emissions we were responsible for and that we had caused from our participation in the games. After that we developed a request for proposals in which we set out the criteria we required for the offsets we were to buy. They were the standard type of criteria that are used in a lot of systems: The reductions would have to be real; they would have to be quantifiable; they would have to be verified by a third-party verifier; they would have to be unique in that they would be used only once — in this case by us; they would have to be reductions achieved in Canada; and they would have to be incremental, which means reductions or increased sequestration that would not have occurred without the money we were spending. We had some definitions around that and around the time frame of when the emissions could have occurred in that they had to go beyond what was legally required, beyond what other incentives they might have received and beyond business as usual.
We set out those criteria in the requests for proposals and had bids come in. We evaluated those against the criteria to determine whether they met those six criteria. The bids that passed were assessed based on the value of what they submitted, and we chose a bidder.
Senator Mitchell: What did the price per tonne end up being?
Ms. Henry: Fourteen dollars a tonne.
Senator Mitchell: In the case of this bill, if the market was at that time selling a tonne for $15 and the government was reimbursing 15 per cent, instead of paying 14 per cent in this case directly — all government money — they would have had to spend only about $2.25 to get the same reduction, it seems to me. Therefore, if they levered it through this tax mechanism to get Canadians to put money up and just gave them 15 per cent back, it would have been much cheaper than having gone straight out as the government did and just buying it. Sounds efficient, does not it?
Mr. Moffet: I do not know if we should comment on that. Maybe I can amplify a couple of the comments. I mentioned that the standards are evolving in the marketplace. These are typical criteria. The degree of rigour that any particular system applies to any one of those criteria may vary considerably. However, regarding these broad criteria, there actually has to be a real reduction. The credit can only be used once. It has to be incremental, which is the point that I made; it has to be beyond what you would have done anyway. These are standard criteria, so we used those.
However, we had a number of bidders. The point I would make is that we had a number of bidders, not all of whom satisfied us. They might have satisfied some other participant in the voluntary market, but we set a fairly high standard and as a result paid the $15.
It is conceivable that we could have paid less had we used a less rigorous standard. The prices out there correspond with what you buy; you get what you pay for.
Senator Mitchell: It is interesting you say "also" because one of the concerns that at least one senator had in the earlier meeting was that these things could be resold and resold and resold and be abused in that way. However, you are saying that they can be structured such that they can only be sold once — there does not necessarily have to be a resale value; is that correct?
Mr. Moffet: There are two answers to that. First, for regulatory compliance, it is possible that could be a rule that is put in place, but that is not actually what I meant. When I said "unique," that is not a point about being sold multiple times. That is a point about being used for more than one purpose.
Let us say I generate the credit and then Ms. Henry buys it from me and then decides she does not need it. However, you want it, so then you buy it, Senator Mitchell. Then you use it for the purpose of compliance. That is okay. That is still unique in the sense that it has only been used for one purpose. What would not be unique is if you used it but then also sold it to your colleague, Senator Callbeck, who also used it for compliance purposes. Then we would have the same tonne being used for different purposes.
Senator Mitchell: However, you could prevent that in a regulated market.
Mr. Moffet: In a regulated market, you could prevent that for sure.
Senator Mitchell: I think this is a document that was prepared by you, Mr. Moffet, during the period of time in which the government had made a commitment to a cap-and-trade system, which requires offsets and credits. That was March 2008.
Could you give us a little description of what this is and the depth of preparation that the government and your department had done in its work to develop a carbon market and answer the kinds of questions people had about credits and offsets, so that they could have implemented the cap-and-trade system? In fact, they campaigned on that policy.
Mr. Moffet: The document you are referring to is a draft document that outlined how the proposed offset system would have worked. In 2007, the government proposed a regulatory scheme for greenhouse gas emissions. As part of that scheme, the regulations would have allowed regulated entities to discharge a portion of their obligations by means of acquiring and then submitting to the government offset credits. Then the question was what would qualify as an offset credit for the purpose of compliance. The purpose of this document was to set out the way that system would work.
The system that is proposed in this document by Environment Canada was designed to be consistent with a standard that had been developed internationally, the ISO 14064 set of standards, which is an international standard applicable to greenhouse gas offset systems.
Under that proposed system, the plan was that in the early days the program authority would be Environment Canada, and then we would see how the program evolved. A program authority would issue offset credits to a project proponent for eligible reductions and removals achieved from an offset project. In order to be eligible, the proposed rules stipulated that the project would have to meet seven criteria. These are roughly similar to those criteria we just described that we applied for VANOC: The project would have to occur in Canada, credits would only be provided for reductions that would not otherwise have occurred, and they would have to be a unique sort of thing.
We then had five major stages for developing a project. The way the system would have worked is that first what we wanted were rules, what we called quantification protocols, which would be used for a particular type of project, not for an individual project but for a type of project. Let us use capturing methane from a landfill site as an example that, of course, generates methane. What we wanted was a standard set of rules for any landfill gas project.
We said here are the criteria; you can come in and show us a proposed quantification protocol and we will tell you whether it is good enough, whether it meets our criteria. Our protocol developer would have created a quantification protocol, submitted it to us, and we would have reviewed it and hopefully would have said that is good to go.
You then would have had a quantification protocol that set the rules for any landfill operator who wanted to create offset credits. Anyone who then wanted to create credits for that type of project would have applied to have their project registered and they would commit to using this protocol that has already been approved. You are a municipality, you are running a landfill, you now know what the quantification rules are, you submit a proposal to show that you are going to start a project that will reduce emissions beyond what they would have been had you not initiated that project. You will use this quantification protocol to demonstrate those incremental additions, to monitor them and to submit the reductions for credit.
You then implement the project, you hopefully generate some reductions, you hire an accredited verification body, and we would have established some criteria for what type of body could be in the business of verifying those actual reductions. You would then submit the verified reduction claim, and we would issue credits for the amount of reductions that had been verified and met the criteria.
You would then have the credits, and you could use them yourself or could sell them to someone else. The way you sold them and the way the market worked would have been up to the market. Whether it would be bilaterally or through an exchange would be up to the market to evolve. If there was a small market, presumably exchanges would not be involved. If the market had evolved in a significant way and there were large transactions, and presumably money to be made, then you might have seen brokers get involved, aggregators get involved and you might have seen stock exchanges get involved. We were going to leave that entirely to the marketplace to manage itself. Our job was to determine whether there was actually a credit to be issued or not.
Under this system, as with most systems designed to enable regulatory compliance, the regulations would have stipulated the terms for the use of offset credits for compliance purposes. We would have ensured that only real incremental reductions got a credit, and then we would have also said in the regulations that a regulated entity could use each credit only once, and for X per cent of its compliance obligation.
As I said, the private sector then would have managed the buying and selling of the credits.
The Chair: Thank you, Mr. Moffet. That gives us a good feeling for the overall system, and maybe we will get into this bill specifically with some of the other questions.
Senator Buth: Thank you very much for being here and giving a comprehensive explanation.
I want to go back to Bill S-205, because we are here to examine this bill. Could you comment on the three criteria that you stated would have to be in place with this bill? With this bill, could you essentially see that there would be a real reduction in carbon, that a credit would be used only once and that it would be incremental? I am referring specifically to the bill.
Mr. Moffet: Sure. I am looking at the bill here and, as I understand it, the way the bill would work is that the bill would authorize the minister to approve a project, taking into account prescribed criteria, and also to designate carbon-offset providers. I think the answer to your question is that it depends on the details, and the details are not in the bill.
It is conceivable that the answer is yes, and it is conceivable that the answer is no. Would the prescribed criteria require that the project generate only real incremental reductions? That is absolutely conceivable. One would hope so, but I cannot answer the question because I have not seen the criteria.
Senator Buth: There is not enough detail in the bill for you to evaluate that?
Mr. Moffet: No, but there is authority for the criteria, so it is conceivable.
Senator Buth: Could you evaluate what the cost of providing this credit would be?
Mr. Moffet: Maybe I could ask for a little more specificity: the cost to whom?
Senator Buth: If we are going to approve any type of legislation we have to look at the cost. What will this legislation cost? What will be the cost of administration? You would have to do a cost-benefit analysis.
The Chair: We have to be a little careful with the word "credit" here because it is being used in two different senses here, in this bill. There is the income tax credit and then there is the offset credit. Maybe we can be specific when we ask a question about a credit.
Mr. Moffet: I did worry about that last night. Not a criticism of the bill, just a worry that I would start talking about too many different credits.
I want to be careful in answering your question because I think it is probably appropriate to think about various costs in looking at an offset system. There is the cost in the marketplace to actually generate the credit. It looks to me that some criteria would be established under the bill, and then it would be up to the market to respond to whatever demand is created by the income tax credits. Presumably that market process, the demand, would in turn determine the supply, and that would have an impact on the price. You would see certain projects go ahead because they could generate a credit at the price that individual taxpayers were willing to pay. I have no idea what that would be, although we can see this in the voluntary market. Senator Mitchell has given you some examples of prices that are being paid in the voluntary market. At the upper end, you have seen that the government paid between $14 and $15 a credit for a very robust credit. We know there are credits being generated out there for that much, and for less than that.
On the other side of things, there are two costs to government. One is the cost to the minister to approve an offset project and to designate carbon offset providers. There would have to be a system put in place to say that, yes, that particular project is a project that can generate offset credits that are eligible for purchase and that can in turn be used by taxpayers to claim a tax credit.
There would be a cost to set up that system. That cost could vary widely, depending on the take-up of this incentive that would be established; would there be a lot of transactions or a small number of transactions? The government would need to make a minimum investment to decide which credits are valid and which are not.
A second cost to government would be probably a fairly modest one. I will leave it to my colleagues at the Department of Finance and Revenue Canada to comment on actually administering the tax credits, because this would be a new system of tax credits. I am assuming that is relatively modest. There are a number of different types of tax credits out there, and this would be just one more. I think the main thing they would be relying on is whatever part of government would be set up to designate the eligible offset credits.
Senator Buth: It sounds like it would not be a simple system. It sounds like there would be quite a bit of administration to start a program like this.
Mr. Moffet: Some rules would have to be established. In terms of identifying and designating offset projects that meet the prescribed criteria, there are various options. As I said, there are a number of offset systems already in existence. At one extreme, the government could say — I am making this up — "We know there are 24 offset systems operating in Canada, or selling credits in Canada. The following 12 are okay," and any credit that those systems generate is eligible. You would have to do some due diligence and decide which ones meet your criteria, and then you would rely completely on those systems.
At the other extreme, the government could choose to do it all in-house, or it could be somewhere in the middle. I will not comment on what the best approach would be, but obviously the cost would vary considerably, depending on which approach you took.
Senator Buth: However, there is no indication in Bill S-205 of how that would be done?
Mr. Moffet: Not that I can see.
Senator Callbeck: Thank you very much for coming today. You just outlined the report from 2008, Canada's Offset System for Greenhouse Gases and what that involved. My understanding is that the government has scrapped that completely. I would like to hear what the main complaints were and why the government did not carry through with this.
Mr. Moffet: No doubt for various reasons that I was not privy to. However, the main reason the government provided was that its approach to greenhouse gas reductions was fundamentally based on an intention to align Canada's approach with that of the U.S., given the integrated nature of the North American economy. At the time the government developed the plan that included the offset system, of course the U.S. was talking about establishing some sort of a cap-and-trade system. There were a couple of bills in the Senate and in the house. The President was talking favourably about a cap-and-trade system. The Government of Canada, in turn, committed to developing a cap-and- trade system that would ultimately be aligned with the one that evolved in the United States.
When the United States moved off of the cap-and-trade path, similarly, the Government of Canada announced that it would not be developing a cap-and-trade system and that it would be pursuing an approach similar to the one that the U.S. is now taking, which is to take a sector-by-sector regulatory approach, and that is the approach that the government is now taking.
When the government dropped the cap-and-trade approach, it also dropped the offset system that was a component of that approach. In the development of sector-by-sector regulations, the government is still considering which sectors, what standards to be imposed on each sector and, additionally, what compliance options will be provided through those regulations, including whether to include any type of offset system in the sector-by-sector regulations, and that policy decision has been made.
Senator Callbeck: The bill we are dealing with today, Bill S-205, involves the tax credits. In this 2008 report, tax credits were not mentioned. Was that considered at all? If not, has it been considered since?
Mr. Moffet: The system that the government proposed as a component of the then proposed cap-and-trade system did not include tax credits because the exclusive purpose of the offset system was for regulatory compliance. I come back to the concept of unique. We did not intend to design a system where you could get two benefits from the credit that would be generated, so the credit that we were going to approve under this system would be used exclusively for compliance purposes. That was the exclusive purpose of the system we designed. We were not focused on the voluntary market or creating incentives for the voluntary market. No decisions had been made about whether further incentives would be appropriate for the voluntary market. The system described in this document was strictly for regulatory compliance purposes.
Senator Callbeck: Has the department given any consideration to the voluntary credits?
Mr. Moffet: To date, Environment Canada has not taken any policy position regarding the voluntary market.
Senator Callbeck: However, consideration has been given to it? You have not made a decision, but obviously it has been talked about and discussed.
Mr. Moffet: I think it is fair to say that officials have talked about it. I am not aware of any political discussions, and therefore no political decision for or against, or in terms of whether additional incentives should be provided for the voluntary market.
Senator Callbeck: It has been mentioned about the government's buying offsets for the Olympic Games in Vancouver and also for the Olympic athletes who went to London. Are there other events where the government has done this?
Mr. Moffet: In 2008, the government sponsored a meeting of La Francophonie, a collective of French-speaking nations that meet regularly. In 2008, the meeting was in Canada and the Government of Canada offset the emissions associated with the government's participation in that meeting.
Senator Ringuette: How did they achieve that?
Mr. Moffet: The government used a similar process to the one that we described for offsetting VANOC. First, the emissions associated with the meeting were estimated; then they established similar criteria to the ones that we used for VANOC; and then they solicited bids from suppliers who could meet the criteria, selected a winning bidder and then acquired the credits and retired the credits to offset the emissions. It was a similar process.
Senator Callbeck: Why were there only these three events where the government has done this?
Mr. Moffet: I do not think I can comment on government decisions about which of its activities it chooses to offset.
Senator Callbeck: When the Prime Minister goes on an international trip — and cabinet ministers, and so on — are there carbon emissions? Are they offset?
Mr. Moffet: Sorry; the question is does the government offset those emissions?
Senator Callbeck: Yes.
Mr. Moffet: Not to my knowledge. I should say that is to my knowledge — our group has not been involved in any of those activities.
Senator Callbeck: Those are the only three cases that you are aware of, the two Olympics?
Mr. Moffet: Yes, the Paralympics, the winter Olympics and La Francophonie. Some of the meetings of the United Nations Framework Convention on Climate Change, the convention of the parties, are every year. In some cases, this government has attended the meeting and brought along, in addition to government officials, a group of advisers, for example, academics from the private sector and Aboriginal people. For some of the meetings of the convention of the parties, the government has offset the travel associated with those advisers. Those were decisions made on a case-by- case basis associated with the activities of the Minister of the Environment.
Senator Hervieux-Payette: On the G8 and the G20, was there any role in calculating the offset, like for the Olympics? That is, for the big event in Toronto, were these two events part of the same treatment as the Olympics?
Mr. Moffet: To date, the government has not offset the emissions from the G8 and the G20 meetings.
Senator Finley: I have so many questions. Whether one agrees or not with the bigger issues on global warming and climate change, any bill that comes in under this guise will be fraught with lack of detail; I understand that. However, this one seems to be mischievously lacking in detail, which worries me. It sounds to me like a lot of organizations, third parties, verifiers, authorizers, markets, governments and individuals all went into this without any kind of real regulation or of a way to go through this.
Let us take one scenario that, obviously, you guys know well, which is the Vancouver Olympic process. How did you determine and how did you verify the actual output emissions, carbon footprint, whatever you want to call it? How did you actually do that? Was there a scientific basis for this, and what was the scientific basis?
Ms. Henry: The overall footprint of the games was calculated by the Vancouver Olympic committee. They were looking at doing the calculation for the buildings and for the overall hosting of the events. The portion that we calculated was related to government participation. We recalculated emissions related to transportation to and from the games, transportation at the games and security for government officials.
The quantification approach that we took is internationally recognized. We fold ISO 14064 procedures to do the quantification. I do not want to go into a lot of detail on all of them.
Senator Finley: The more detail the better.
Ms. Henry: For all the government participation, we had the identification of who participated, how long they were there, and where they flew from and to. We did calculations for the amount of emissions from the airline flights; for the amount of travel on the ground while they were at the games when they were travelling to and from their work sites; and emissions from where they were staying, whether in hotels or in other types of accommodation.
The other types of emissions we were quantifying were for security. That was based on the amount of fuel used at some of the security sites. Rather than looking at doing a quantification approach based on hotel stays, it was based on the amount of emissions generated from the combination of emissions on the cruise ships and the different security organizations travelling to the accommodations, depending on where they were staying. Security stayed in a number of different types of accommodation. We collected that data and did the quantification.
Senator Finley: You said "we collected that data." You talked about hotel rooms, the airlines, cruise ships, boarding accommodation — God only knows what you have included in that. How many people were involved in collecting, collating and comprehending that data, calculating it?
Ms. Henry: There was an oversight committee. Ottawa was looking at who was participating. The collection of data was done through that process. Obviously, those government processes are based on knowing who was attending. The data was collected through there, through the standard process. The actual quantification was done in our office, and a few people in my office did the actual compiling of the data and the quantification.
Mr. Moffet: Not to diminish the work that was done here, but this is a fairly straightforward procedure to be able to provide a fairly rigorous estimate of any particular activity. If you know that 10 people have flown, by air, 2,000 kilometres, these are standard models for estimating the emissions associated with that activity. Of course, the precise emissions might vary depending on the atmospheric conditions of the day, but there are standard approach models that can be used for different types of activities. The key was the decision in advance to track those activities and to account for them, and there was a bit of an exercise in rolling all of it out. It followed fairly standardized procedures.
Senator Finley: A calculation was made by an international organization, ISO 14064. Could you explain to me the origin of that organization and how it sets the standards? I can think of several million parts of human participation in this world today. Are all of them calculated? To what degree will you calculate human activities?
Ms. Henry: For determining the footprint of the games, we were looking at the increased emissions that were occurring due to the games and not at emissions that would happen anyway. If someone was doing their regular job in Vancouver, that would not be an increased emission. We were looking at increased emissions occurring because the games were held and quantifying the difference between the normal and increased activities from people traveling to the games.
Senator Finley: It is a calculation on its own and not based on what normally happens in Vancouver; you are ignoring that. You are saying this is just the increase. How do you know it is just an increase? A lot of people in Vancouver probably used the train and the bus more often to go to events. Is that included?
Ms. Henry: The Government of Canada was just looking at the Government of Canada emissions. We looked at government employees traveling to and from the games, at the games and security. VANOC did its own quantification. It may or may not have included the different activities occurring in Vancouver from people attending the games. The Government of Canada looked only at emissions related to the Government of Canada.
Senator Finley: There have been a number of reports recently in various newspapers and periodicals about extreme levels of abuse and scams in any market associated with this kind of endeavour. Huge amounts of money are involved. Do you see anything in this bill that would make you feel comfortable that this would not happen in Canada?
Mr. Moffet: Again, my answer to that is the same as I gave previously. The bill provides for a very broad framework for the minister to establish prescribed criteria that could then be used to approve offset projects and offset providers. I think the rigour of the system that is established, and therefore the potential for abuse, would depend on the criteria and whatever system was put in place to ensure those criteria were adhered to.
Senator L. Smith: The government is focused on regulatory issues in terms of the sectoral approach, aligning itself with the United States. Can you comment on the progress to date of our sectoral approach to controlling greenhouse gas and the economic benefits, or is it too early? What is the status of that?
It would appear logical to have a focused approach, get results and then evaluate your results. What comment do you have in terms of what your department has been able to do to assess the economic impacts of the government's initiative so far? Let us take an example. We can look at coal-fired. The electricity sector seems to be one of the areas that have been identified. What type of research, feedback or information have you been able to glean from your experience to date?
Mr. Moffet: For many years, the government tracked the total greenhouse gas emissions from Canada and desegregated them by sector. We know the pace of growth is now declining and that we are making significant reductions in some sectors. For example, Environment Canada has regulated the greenhouse gas emissions from most types of engines and vehicles, primarily in alignment with standards that have emerged in the U.S. We see significantly reduced emissions per vehicle, ranging across virtually all types of vehicles and engines.
The most recent regulations that the government promulgated were, as you mentioned, the coal-fired electricity generating sector regulations. Those are designed to reduce emissions from that particular sub-sector, not the entire electricity-generation sector. A lot of electricity in Canada is generated using non-emitting sources anyway, including hydro, solar, wind, et cetera, and also some significant amount of nuclear.
The focus of those regulations was on coal-fired electricity generation. The focus is primarily in the future to ensure that when the current capital stock turns over, generators — whether they are public or private sector — will be obligated to use as low-emitting a technology as possible.
The economic and environmental impact of those regulations is not being experienced today other than in informing the forward planning of these utilities and electricity generation companies. However, we will see significant impacts in the future when that capital stock turns over.
The Chair: We are down to three minutes left in this session, so I will ask each of you to put your comment or question on the record. If they can be answered quickly we will ask Ms. Henry or Mr. Moffet to do so and if not, they could provide an answer in writing.
Senator Finley: I have one question. A number of times you mentioned third-party verifiers. Who verifies the verifiers? Where do they come from?
Senator Buth: I am good.
Senator Mitchell: My question is back to the idea that how we would ensure the credit system worked efficiently and properly and guaranteed that credits were credible it is not embodied in the bill. I would like you to confirm in writing when you come back that, in fact, it is provided for in the bill for the government, the minister to set that process up — as is often the case in this kind of regulatory regime — and therefore, it is as likely to occur as the competence of the minister would allow it, dictate it, determine it to occur.
There is a cost to a regulatory regime and it is very costly. Could you give us an idea of what it will cost for government to impose regulations rather than a cap-and-trade system on the oil industry, the coal industry because there are huge regulatory conducts involved in that as well.
The Chair: Mr. Moffet, are you able to answer any of those questions quickly or would you rather have time to provide us with a written answer?
Mr. Moffet: I will do my best to provide a quick response and then follow up.
On the question of who verifies the verifiers, the short answer is that it depends. However, there is an option to use fairly normal procedures where the government would designate bodies that can establish and identify accredited verifiers. We do that for chartered accountants, for example. We have the Standards Council of Canada which oversees all standards development organizations in Canada. In turn, it can set norms that need to be adhered to in order for third parties to be accredited to verify adherence to a wide range of standards, from hospital helmets to the way your toaster works to something as complex as greenhouse gas offsets.
Indeed, we had a preliminary arrangement with the Standards Council of Canada to provide accreditation to third- party verifiers. Again, that is a completely market-based transaction where the standards council would have identified the criteria to be met in order to hold yourself out as an accredited verifier. There is a fairly well-functioning system out there for establishing verification protocols and criteria for verifiers.
Regarding the question about costs, there are two parts. The first was to confirm that the bill allows for the minister to set criteria, which in turn would then have to be internalized by the minister and whatever system the minister establishes — absolutely, and that is what the bill says. My point is simply that I do not know what those criteria will be, so I cannot comment on the degree of rigour. One would hope they would be rigorous, but that would be up to the minister, as you noted, senator.
The Chair: We are out of time.
Mr. Moffet: Regarding the costs of the current government's regulatory approach, I cannot give you a short answer on that. However, we have detailed estimates for each of the regulations that have been proposed by the government.
The Chair: Anything you can provide to us through the clerk will be distributed to all the members of the committee. Thank you.
On behalf of the Standing Senate Committee on National Finance, thank you to Environment Canada and representatives, Mr. Moffet and Ms. Henry. Thank you very much for being here and discussing the offset policies and, in particular, this private member's bill, Bill S-205, on offset credits and tax credits.
[Translation]
Honourable senators, in the second part of our meeting this morning, we will continue our study of Bill S-205, an Act to amend the Income Tax Act (carbon offset tax credit).
[English]
We will now welcome officials from the Canada Revenue Agency. Brian McCauley is the Assistant Commissioner, Legislative Policy and Regulatory Affairs Branch, and he is accompanied by Clément Bouchard, who is Director of the Processing Division, Individual Returns Directorate, Assessment and Benefit Services Branch. That is a mouthful! One can imagine what your door title looks like. You probably have a wider door just to get the title on there.
These gentlemen are both here to help us with respect to this private member's bill originating from the Senate: Bill S-205, Senator Mitchell's bill. They have been in attendance and have heard the other discussion, so we can assume that they are knowledgeable about the discussion we have had and the questions that have been asked.
Mr. McCauley, do you have a few introductory remarks before we get into a discussion?
Brian McCauley, Assistant Commissioner, Legislative Policy and Regulatory Affairs Branch, Canada Revenue Agency: Not really. We are happy to be here and we will be happy to answer as many questions as we can. For those we cannot answer, we will follow up as quickly as possible thereafter. We are glad to be here.
Senator Buth: Thank you for being here. Right now there are no nationally recognized standards for determining a carbon offset. We heard from Environment Canada that it would be up to the minister to put this in place, establish definitions, et cetera.
How would you go about making a determination of whether a carbon offset would be eligible for something like this?
Mr. McCauley: Further to the discussions this morning, we are not experts in carbon offset tax credits and we would very likely look at — as I think the bill was intending to — another policy or legislative authority, such as the Minister of the Environment and the Minister of Finance, to work through those details with us.
We administer legislation; we do not create legislation. We administer policy, but we do not create policy. As such, there is normally a very productive dialogue that would happen between the originator of policy and legislation as well as us as the administrator. I found the discussion this morning very informative because many of the questions that were asked were the kinds of questions we would ask as an administrator to come up with a design, a cost, or an approach to administering.
We would look to a fairly healthy dialogue, including in some places, as I think was suggested this morning, the marketplace and participants in the arrangements themselves — the degree to which third parties, businesses and even individuals would participate — to get as good a sense as possible from our perspective of how the whole system would work. We would then design an approach that would minimize the burden but provide as much assurance as we could through the tax system that the dollars being expended were actually achieving what, in this case, the bill attempts to achieve in terms of encouraging the use of offset carbon tax credits.
Senator Buth: What would this bill cost to administer?
Mr. McCauley: I can only speak to what it might cost from a sort of CRA, administrative perspective. Again, the testimony from this morning and even some of the testimony from October 3 when I read through it over the weekend provided some other dimensions to costs that we are certainly not in a position this morning to try to speculate on. Like anything else, the accuracy of any estimate on costs can be about as precise as the details we are aware of at the time. I can ask how much it would cost to renovate my kitchen, but if I do not provide details, it will be a wide estimate.
Since it might be helpful, I can say that in 2006, when the government introduced the fitness tax credits, the public transit pass credit and a couple of other smaller credits that we received around $5 million for the first couple of years. The ongoing costs we received for the administration of those credits is about $5.8 million. That is annually, Senator Nancy Ruth.
We would sit down with the policy department or the legislative department. Simply, we have costs that relate to the changes to the tax system, the software itself and the validation of that. With 26 million returns we cannot afford to get it wrong, and we try not to. We then look at the generation of information products and communication materials to make sure that everyone participating understands what is required of them and what the details are.
We then have to look at how we actually share that information out with the public, through websites and so on. We then make a cost accommodation for telephone inquiries, because typically for programs like this you will get inquiries and you want to be able to respond to people's interests.
We then have a processing cost for the actual processing. That tends to not be a huge incremental cost because it is automated, so we build it into part of our processing approach, but we will look at the level of risk. We will do a degree of validation. Sometimes it is a systems validation, just looking at matching things up in terms of receipts and claims.
We also then would probably pull a certain number of the returns and send you a letter saying that we note that you have asked for this credit, could you provide us with the receipt and any other information you might have. Further to that we also would probably pull a certain number where we might actually want to pay you a visit. In those cases, for credits like this, certainly when I am talking about the fitness tax credit and others, we would probably look at your entire return and certainly chat with you about that.
We then have to make accommodations in our costs for appeals and the Department of Justice because there are always a few people who may not be satisfied if we reject their application for a credit, and they have the right to appeal that, so we have to be able to process it through the system. Those are all the things we look at.
I would suggest that many of those are fairly standard. The one area that probably would, to me, be the thing that would require the most work, and again it is consistent with this morning's discussion, is the immaturity of the marketplace and how all of this would really work from a verification and validation point of view.
I will give you one small example. I am not being in any way critical of the bill; I am trying to observe what we would see as features of a particular credit that we look to in terms of trying to come up with a cost approach. With the fitness tax credit, for example, you, as a parent or family member, pay the $500 and you actually see the service or the good — your child goes there. You, in essence, verify it for us. Our degree of concern about whether that actually happened, we have 1.5 million or however many taxpayers claiming the credit who actually make sure that the $420 they spent was well spent.
When we get into some credits where the connection between the payment of the money and the actual realization of the outcome is somewhat more distant, then you introduce some opportunity for the taxpayers themselves to be a little less certain about whether it actually happened. In those cases then, as was discussed this morning, you have to look at other ways of verifying that those things actually happened and that there is a degree of integrity and due diligence. I am not saying it cannot happen, but it introduces that. Those are some of the risks we would look to when you put in place a credit like this. I will stop there.
Senator Buth: How would you estimate the uptake that this might have?
Mr. McCauley: We would not. Normally the policy department, Department of Finance, or we do a lot of work with Human Resources and Skills Development Canada, when they actually bring a policy proposal forward they have to do the estimation on the fiscal cost and how many people might participate. Again, they are the experts. We would take that and say we will probably get so many phone calls if that is your estimate. We would work from a profile of the program that they would generate.
Senator Callbeck: Thank you, and welcome. I just have one question, and it is on non-refundable versus refundable. There have been many non-refundable tax credits that the government has brought in. You mentioned the fitness tax credit. It is a great idea, but the problem with it is that people who need it the most cannot take advantage of it. That is what I have against that.
In this bill we have a non-refundable tax credit. Do you feel that this legislation would be more effective if it was a refundable tax credit?
Mr. McCauley: We are agnostic on whether it is non-refundable or refundable, as the administrator of the credit. That again is up to the policy department or the minister or the sponsor of the bill to make a determination of which might be the best way to go. It is certainly helpful when one looks at the cost and implications and so on, but those are determinations made by the sponsor or the policy department. We are quite comfortable to work with it either way.
Senator Callbeck: Do you know the government's reasoning behind why we have all these non-refundable tax credits?
Mr. McCauley: I do not know anything beyond what is on the public record of why those choices are made. Again, as administrators, we do what we are asked to do. Those decisions are made, and unless there is some severe administrative or compliance risk or something else being created, we do not comment on those choices.
Senator Callbeck: You say beyond what is on the public record.
Mr. McCauley: Yes.
Senator Callbeck: What is on the public record?
Mr. McCauley: Whatever the Minister of Finance would say in a budget or whenever the measure is introduced.
Senator Callbeck: This is something that I really have never been able to understand. Thank you.
Senator Ringuette: In regard to the costs of implementing a new tax credit, would it be Treasury Board — I do not know, perhaps Finance — that would decide whether or not the purchasing of carbon offsets would be a taxable good or service? What would be the estimates of that revenue to the federal government? Would that offset the cost of your operation, and by how much?
Mr. McCauley: I am not sure I understand the question. Ordinarily, when a proposal, for example in this case for a tax credit, would come forward from the Minister of Finance in a budget, the minister would make provision for what the fiscal cost of that measure might be. We would have, at that time, provided some preliminary estimates of what it might cost us to administer.
After the measure is announced we work up more detailed costs, because we can do it a little more openly and publicly, and those are submitted to Treasury Board. Treasury Board challenges us on our costs and eventually says, okay, this seems reasonable in terms of what it would cost.
Senator Ringuette: I will make a parallel with one example that you used, which is the fitness tax credit. When parents pay for hockey coaching or piano lessons and so forth, the federal and provincial governments collect taxes on these services. The estimate of receivable taxes on these purchases, how does it offset the credit that you offer and the cost of your organization to put forth the required technology to implement the policy?
Mr. McCauley: Thank you very much. That economic analysis would be done by either Finance or Environment or whoever else the sponsoring policy or legislative authority would be. They may look at, as was discussed this morning, the degree to which the credit really encourages any incremental activity or not. Was it a purchase that would have happened anyway? Does it really generate additional tax revenue? Those considerations, the macroeconomic and some of the microeconomic calculations, would not be something that we would be privy to.
We give a sense of what it might cost. Obviously, if there is a disproportionate relationship in terms of what it might cost to do something and what the benefit would be, some of those things never see the light of day.
I apologize for not understanding the question the first time.
Senator Ringuette: That is okay. Thank you.
Senator Finley: I did not understand where Senator Ringuette was going. Are you suggesting, senator, that there would be a GST tax on carbon tax credits?
Senator Ringuette: No, that is not what I am suggesting at all. That would be an issue that the government would have to decide, whether it is a good or service that they want to tax. I was making a comparison in order to be precise with our witnesses and for them to understand.
For example, the current fitness tax credit is already in their system. It cost them roughly $5 million to implement. The parents who buy those fitness programs, by a government decision, do pay taxes on these benefits or programs for their children. How does that offset?
Our witnesses indicated that it is not in their realm of estimates nor in the realm of their responsibility. Therefore, actually, it is the government that decides.
The Chair: It is the particular department within government that puts forward the policy initiative that will do the economic analysis, I think is the point you have made.
Senator Hervieux-Payette: There is the tax, but there are also the schools — the yoga schools, judo schools, all the schools for which these people normally pay income tax. Is there a way that sometimes you check whether they exist and if they just give a receipt? It is important that they are legitimate businesses. It is easy when you are buying a piece of equipment for football, but it is not as easy to check when it comes to a service provided with a course. Is there also a way for you to check on that, not just the ones who are buying it, or at least have the receipt, but those who are supposed to sell it? We are talking about two sources of taxes.
Mr. McCauley: In terms of the fitness tax credit, I believe that actually the purchase of equipment and other things is not eligible under the credit. The credit is designed to generate a level of physical activity. The criteria that talk about the fitness tax credit — which was based, by the way, on a private sector panel that gave recommendations to the government about what would be helpful — sets out things like your heart rate and how long it has to be at a certain level to generate a certain level of physical activity.
However, I think it is fair to say that we rely a lot on the verification of the parent or the family member actually buying the service to make sure they received it. It would be reasonable to assume that if you are going to be paying $500, you are actually going to make sure that you receive a service and that your children go to the club and participate.
We might do some verification of clubs and things like that. However, to be fair, at the level of the credit and the involvement of parents and family members, we probably have bigger fish to fry in terms of the tax system, which we would spend some of the more expensive audit and other verification processes looking at.
Senator Hervieux-Payette: There is the verification and there is the revenue. It is interesting to know that you have revenue to pay your $5 million — revenue from the schools and revenue from the taxes.
Mr. McCauley: You are right. That is a separate issue: Do we make sure that the Senator Mitchell fitness school has books and records and is operating and paying their taxes and so on? Yes. There is a separate system that deals with them as a small business.
Senator Hervieux-Payette: However, you have not quantified it.
Mr. McCauley: No.
Senator Hervieux-Payette: If you pay $5 million, maybe you will make more. Because if you increase the number of services in these sectors, you may make more money, collect more taxes.
Mr. McCauley: As with the previous answer, that macroeconomic analysis would be done by the Department of Finance or whoever the sponsoring department is.
Senator Mitchell: The point my colleagues are making is that if this $500 fitness credit generated more lessons by more schools, that would generate more income for the schools and the people who teach, that would generate more economic activity, that would generate greater taxes, and that would offset the $5 million it costs you to run it. Therefore, it is not just the cost side. That kind of credit, the fitness credit, would have that effect.
Of course, it is reasonable to assume — it is a direct line, economic directive — that if people were investing in Canadian farms and small businesses that legitimately reduced carbon, that would be net new activity, net new investment. It would be the kind of investment that would generate business activity and incomes to individuals and businesses. It would actually keep farms and rural communities going, because farms are going and so on. It would inject. That would be a factor that you might not consider, but the Department of Finance certainly would want to consider it, would not it?
Mr. McCauley: One would certainly hope that, as you say, the macro and the market analysis would be done. Yes, those kinds of multiplier effects and other things would normally be part of that analysis.
Senator Mitchell: I appreciate your point that it is a $500 tax credit, so you are not as concerned about checking on whether it is my cousin who is teaching my child how to do karate or my wife teaching my child how to do karate, and we are handing her $500 and getting $75 back. There is risk in those credits, in that way, except that in this case it would not just be individuals confirming it. We would actually have a regime that might be run by the private sector, for example, by stock exchanges that would verify and be verified by verifiers, to use the senator's words. That would give double assurance that, in fact, these really are credible and it is not just someone's cousin providing a karate lesson that may or may not have occurred.
Mr. McCauley: There are actually arm's-length provisions in the Child Fitness Tax Credit regulations to ensure, as much as possible, that that does not happen. You are right. Is it conceivable that there could be a system in place that would provide enough due diligence and verification? Sure. I have to admit, after looking at it over the last three days, I am not aware that there is one there. However, that is more out of my lack of information as opposed to saying there is not. I think the discussion I heard this morning is that it is maybe not as mature, robust or defined as the kind of system that we would feel more and more comfortable about, but could you get there?
Senator Mitchell: Surely you and I would have confidence in the Minister of the Environment that he or she could actually set up a system that would be mature and robust and that we could have confidence in. The question that begs is where do you start? This is new, yes, so you have to start somewhere. You would have faith in a minister of the Government of Canada to do that properly, would not you?
Mr. McCauley: As much faith as anyone else does.
Senator Mitchell: Good answer.
The Chair: Before you go to another question, Senator Buth had a supplementary.
Senator Buth: This is a very complex area, and I do not want to leave people with the impression that you would actually generate more economic activity on a farm through this credit, because you are actually reducing activity on a farm by limiting the amount of tillage you would do. It is not like you are doing something extra in terms of farming. You would be doing something less. Let us not make assumptions with regard to what might happen in terms of economic activity.
The Chair: I think we are getting close to a debate.
Senator Mitchell: Just a supplementary to the supplementary. If you were going to set up — and I have seen it done — a system where you generate methane gas from manure, it takes a great deal of capital investment on the part of a farmer, and there are huge economic opportunities. It is frightening that that is not considered by the government.
The Chair: I have a supplementary on the supplementary on the supplementary.
Senator Mitchell: I have one other question.
The Chair: Mr. McCauley, I wanted clarification on one point. You indicated that arm's-length regulations are in place with respect to the fitness tax credit. Those are regulations that were generated after the legislation was passed, before it came into effect?
Mr. McCauley: The normal practice with Income Tax Act changes is that, as much as possible, the regulations are tabled at the same time as the actual legislative changes, simply because of the tax system and consistency — that is, wanting to ensure that there is as much clarity as possible to citizens in the marketplace about how the system will work.
In the case of the fitness tax credit, the legislation was announced at the same time the government indicated that there was a panel and that they would look to the panel to research this and come back with their best advice and provide regulations. I believe that is what happened for the fitness tax credit. For most of the other ordinary credits, the regulations would have been tabled at the same time as the legislation.
The Chair: Thank you very much. That is helpful because there has been some comment that this bill does not have the entire regulatory scheme. Your comment has been helpful in explaining that these are two different processes.
Senator Mitchell: That was my next question, that in fact it is not the case that there is always the kind of detail that some people are saying is a fault of this bill; that, in fact, the detail is often worked out afterward. In the case of these credits, it was not just given up to the minister to do — which my bill does — which is powerful and a very rigorous way to do it, but they went further and said, "We do not know what will qualify; we will ask a panel to tell us that." If they are levying that kind of criticism against this bill, it is not a unique criticism, it is part of a process that they have implemented, that the government has implemented itself in the past.
The Chair: You do not have to comment on that if you do not want to.
I have no one for round two, so on behalf of the Standing Senate Committee on National Finance I would like to thank Mr. MacAulay and Mr. Bouchard. Thank you for assisting us. I think it was helpful that you were here for the earlier questions. We will try to suggest that to other panels in the future because that helped to move things along quite nicely.
Just as our witnesses from Canada Revenue Agency are packing up their notes, colleagues, I wanted you to know that we have tried to have Climate Change Central come before us. They have declined to appear but have provided us with their written comments, which are in one of our official languages, are now being translated and will be circulated to you as soon as their comments are in both official languages.
That, so far and maybe forever, is all that we had intended to hear with respect to this bill. I will give you a day to think about it and if anyone has any other witness who you think could clarify any of the points that are outstanding in your mind, please let any one of steering know; otherwise, in due course in the next two or three sessions, we will proceed with clause-by-clause analysis of this bill.
Tomorrow, it is our intention to take a look at the new draft that has been circulated to you with respect to the price discrepancies between Canada and the U.S. If you have any comments please read the document so that we do not have to read it all together tomorrow here. If we can make any other proposed changes or recommendations or observations that you wish highlighted, now is the time for us to hear from you.
Are there any comments from anyone? Hearing none, this meeting is now concluded. See you all tomorrow.
(The committee adjourned.)