Thank you, and thanks for the opportunity to be with you today. I wish I were there in person, but I'm coming from the traditional territories of the Sinixt and Ktunaxa peoples in the western Kootenays of British Columbia.
I chair the Commission on Carbon Competitiveness. It's a group of 11 experts drawn from different fields. We're devoted to in-depth thinking about the competitiveness of Canadian industry in the context of a decarbonizing world. I'll be presenting some of the findings contained in our first three reports.
First—as a little side trip—why do we focus on industry? In part, it's because it makes up over 40% of our national emissions, and getting those down is critical to achieving our targets for 2030 and beyond. Also, it's because it is the last frontier in climate policy.
We can see the clear paths ahead for electricity, for transportation and even for buildings, but industry is the last on the docket because it is the toughest. In part, it's tough because these are heavily traded sectors, and we don't want our climate policy simply lowering their competitiveness vis-à-vis the producers in less climate-ambitious countries. That's one pillar of the carbon competitiveness angle.
Another pillar is the fact that the markets of the world and the investors of the world increasingly care about the carbon footprint of traded goods. If we don't successfully decarbonize, we lose markets; we lose jobs. Think of the EU CBAM, an example being followed by other countries, or the 100-plus sustainability standards currently in use or being developed in the global steel sector alone. We see carbon competitiveness not even so much as an environmental preoccupation but as an essential ingredient to Canadian prosperity in the years to come.
I'm going to try to distill three key messages from our research to date, the ones I think most relevant for this committee's deliberations.
First, Canada's industrial pricing systems are critical, but they need serious fixing. Second, in the long run, output-based pricing is going to struggle to protect against leakage and loss of competitiveness, so we need to start thinking now about mechanisms like border carbon adjustment. Third, an industrial carbon price is necessary, but it is not sufficient. It needs to be heavily supported by other policies.
I'll go into a little more depth on those three.
First, modelling from the Canadian Climate Institute shows us—and you've heard this from other witnesses—that the potential mitigation from large-emitter trading systems, like the OBPS, is slated to account for up to almost half of the incremental mitigation out to 2030. However, industrial carbon pricing in Canada is in crisis. The sectoral performance standards—that is, the level above which the carbon price is paid—need to be tightened. More important is that they need to be much better tailored to the different sectors. These standards are supposed to protect against the risk of carbon leakage and competitiveness impacts, and our research shows clearly that those risks are vastly different from sector to sector. The current approach is too burdensome for some sectors, and it provides absolutely no incentives for others. Other improvements are also needed: price transparency, stronger rules on equivalency, price floors or contracts for differences, larger markets, and so on. Our key message is the need to treat different sectors differently.
Second, right now, those sectoral standards are working pretty well to stave off the competitiveness and leakage risks, but in the long run, they are not enough. As firms decarbonize over time, there's going to be a need to keep carefully tightening the standards to keep the credit markets in balance. This is a difficult balancing act. Fear of leakage is going to tempt policy-makers to err on the side of caution, undercutting stringency and incentives. We've already seen this dynamic. As we get closer to net zero, we're going to need other mechanisms to reduce the risk of leakage, like border carbon adjustment similar to the EU CBAM. That kind of an instrument is going to be challenging for Canada to implement—for reasons that include wanting to avoid kicking a hornet's nest south of the border—but we need to begin now to explore the viable policy options.
Finally, an industrial carbon price may be necessary, but it is not sufficient. All sectors face barriers that are going to impede their investment in responding to that price. We need sector-specific enabling policies to make the carbon price work. This is true not just in legacy sectors, like steel and aluminum, but also in the up-and-coming sectors of our future. Think carbon fibre from bitumen; think critical minerals and batteries and so on.
Our most recent report, published with The Transition Accelerator, pushes for a game-changing new Canadian industrial strategy. We need to apply the lessons of successful industrial policy, choosing a small number of sectors or technologies and pushing hard on them. We're not going to get breakthroughs without that kind of active policy support.
To wrap up, achieving Canada's climate targets has to be more than an environmental achievement. It has to also be a nation-building effort that, to use an analogy, sees us skating to where the puck is going and finding success and prosperity in the burgeoning low-carbon markets of the future.
Thank you for your attention. I look forward to questions.
