Bill C-30 (39th Parliament, 1st Session) Committee on Feb. 27th, 2007

[Jos Delbeke]

I think I underlined in my introduction that in Europe we were also going through a long discussion as to whether we would go for absolute or for intensity targets. And in the end we came to the conclusion that the absolute targets were creating a system that was capable of having much more simplicity and many more straightforward incentives to the operators in the system.

If I may link it up to the previous comment related to the cost-effectiveness potential of the scheme that we have created in Europe, we have had new estimates. The new estimates that were adopted on the occasion of the January 10 paper that I introduced last time have shown that the cost savings are at least as high as the ones that were quoted, and depend very much on the scope of the system, on the broadness of the system.

So linking up with other systems is a key element of driving costs down within Europe and, as we have studied it, potentially also in the wider world. So having compatible systems seems to us a key element for the future.

Thank you.

[Bernard Bigras, Bloc, Rosemont—La Petite-Patrie, QC]

Thank you.

My third and final question is for Mr. Bertrand.

On page 8 of your document, you talk about defining demand, and thus about implementing a GHG emissions reduction regime for industry.

Do you think that reduction targets based on intensity would facilitate the introduction of a carbon market in Canada or have the consequence of making it more difficult, as Mr. Delbeke has just said?

[Luc Bertrand]

Thank you, Mr. Chair.

We think that an intensity-based system would add another element of uncertainty to the market.

Now someone could argue that it is good to have an element of uncertainty in a derivative products market because ultimately it operates on assumptions of volatility and uncertainty. However, in this case, to ensure that there is real liquidity, if the government offered companies that must reduce their GHG emissions more clarity and certainty, the market would be much more efficient, deeper and more transparent. That's our impression.

Without a doubt, we would prefer the market to be built on an absolute basis. We've tried to analyze what the market dynamic would be if we adopted reduction targets based on intensity, and we believe that such targets would constitute another element of uncertainty for users. In our view, that might undermine liquidity over the long term.

Thank you.

[The Chair, Conservative, Laurie Hawn]

Thank you very much.

Mr. Dewar, go ahead for seven minutes, please.

[Paul Dewar, NDP, Ottawa Centre, ON]

Thank you, Chair.

Thank you to the witnesses, both here and abroad.

One of the issues we have been dealing with and discussing, and which certainly has been brought up by Sir Nicholas Stern and others, is the cost of not doing anything. And a lot of what we're discussing here are real costs, and that's what we're grappling with.

I'm going to turn my question to you, Mr. Bertrand, and I want to ask you about the costs of not acting. We've heard different numbers around that.

Yesterday we heard that Governor Schwarzenegger announced--and I think we heard it in one of the testimonies--that five western U.S. states were signing on to an MOU for a regional cap-and-trade system. And we also have the carbon exchanges that are already up and running. We've heard about Europe and London. And we're hearing that the U.S. government is moving.

I'd like to hear from you, your perspective on the cost to Canada and what Canada and Canadian companies stand to lose if we are left behind. In other words, if we don't engage in this system that's emerging everywhere else, both in North America and in Europe and indeed around the world, what's the cost to us?

[Luc Bertrand]

I must confess, it's very hard to tangibly give a number. But I think the greatest tragedy, if we don't do something in Canada, is that the market is going to go elsewhere. That's the bottom line. The market is either going to go over the counter, as I explained in my presentation, which is an opaque market among.... It's an interbank business, and no one really knows what goes on there; it's a huge market in the financial derivatives business today. That would be too bad, because the OTC business is really for the large player, so the smaller emitters who would feel compelled to do something, for a host of reasons—perhaps because of being afraid that another country would retaliate, or whatever may be the situation going forward—will not have access to a transparent price discovery mechanism, and we will be putting at odds a whole segment of our industry that will not have access to the over-the-counter business.

Likewise, my sense is that the real cost is that business is going to go offshore; Canadian companies will take their business elsewhere.

You probably often read of the extraordinary growth we have seen in the derivatives business in the last ten years or so. There's a reason for it. It's because derivatives have become a central part to a risk management approach, not only for life companies and pension funds and mutual funds and so on; it's become central to how CFOs and treasurers of companies manage their risk. They do it because it's cost-effective; otherwise they wouldn't bother, because it gets really complicated.

I think it's fair to say that managing cost with respect to greenhouse gases using an effective derivatives market, which we could build, provided we're given the proper regulatory environment by the federal government, will be an added tool for Canadian companies to manage the risk associated with this activity.

[Paul Dewar, NDP, Ottawa Centre, ON]

In doing so, what is the importance of the linkages you mentioned with Chicago and with other markets that are presently established? We can't do this in isolation.

[Luc Bertrand]

I think the second biggest mistake we could make is not to have an infrastructure that would allow fungibility, meaning that the products here could be fungible into products in the U.S. or Europe or elsewhere; that our criteria would be different; that our certification and so on would be. I can appreciate that it can't be 100% fungible or analogous to another jurisdiction's, but if it is very different, then I think we're putting our own companies at a disadvantage compared with non-Canadian companies against which they have to compete.

[Paul Dewar, NDP, Ottawa Centre, ON]

Mr. Marcu, what is your take on the importance of acting now and not waiting, and what the opportunity costs will be if we don't?

[Andrei Marcu]

I have testified in front of other committees and commissions, and in front of Mr. Delbeke's commission on a group called “environment, competitiveness,and energy”; essentially, he's looking at how these three elements play. A market-mechanism emission trading system is another tool to help companies that deal with a carbon-constrained world stay competitive globally; it's as simple as that. At this point, there are European companies that have access to this, there are Japanese companies that have access to it, and Canadian companies are simply not acting right now because they don't know what the regulatory system is.

When I was in Ontario Hydro many years ago, we started and then we stopped, TransAlta started and stopped, and many Canadians companies started and stopped. We were leaders in this, and I would submit that as a result of inaction, we have lost that lead.

It's a pity, because it will be a choice. The way the U.K. government has spent a couple of hundred million pounds to make sure that London is the centre of trading.... And by God, it is the centre of trading—anything you want to do in carbon trading—and they haven't done this because they're nice people; they've done it because they know this is a strategic commodity. Why shouldn't Montreal or Toronto be the North American centre?

[Paul Dewar, NDP, Ottawa Centre, ON]

So the cost of not doing anything is that we'll be left behind and trying to catch up a little too late.

[Andrei Marcu]

I would hesitate to get into the economics of Nicholas Stern, but what I will get into is the economics of the Dutch government, which has completed its purchase program at prices that are well below what others are purchasing at today. Again it's a matter of whether you are getting into this market sooner rather than later.

[Paul Dewar, NDP, Ottawa Centre, ON]

Just quickly to my friends from Brussels, I want to know what the value of the market presently is, what you see the value of the market that you have in front of you is, and what the opportunities therefore would be for us.

[Jos Delbeke]

Today the spot price on the market is one euro for allowances traded this year, but most importantly, as I tried to indicate, the expectations and the forward prices on the market for the Kyoto period is around fifteen euros today and is expected to increase. So the early birds are best served.

[The Chair, Conservative, Laurie Hawn]

Thank you, Mr. Delbeke.

We'll move on to Mr. Warawa, for seven minutes, please.

[Mark Warawa, Conservative, Langley, BC]

Thank you, Chair, and thank you to the witnesses for being here.

Time is short, so I will get right to it.

I'm going to be asking Ms. Donnelly a question regarding Canada's leverage on international negotiations. Before I do that, I just want to verify. I'm reading testimony that you provided to the committee on Bill C-288 on December 5. You shared, when you were representing GEMCo, that you are the largest carbon credit buyer in Canada and the third largest in the world. Is that still the case?

[Aldyen Donnelly]

The first statement is still true, and the second one is probably no longer true.

[Mark Warawa, Conservative, Langley, BC]

Okay, but you're the largest in Canada.

[Aldyen Donnelly]

Yes.

[Mark Warawa, Conservative, Langley, BC]

Okay, thank you.

We've had a number of witnesses make comment regarding the availability of the carbon market. The carbon market is part of the Clean Air Act.

Just as a quick comment to all the witnesses, I encourage you to provide recommendations to the committee. Thank you for the written submissions we received, but many of them do not have actual recommendations on how to strengthen Bill C-30, and that's what we're looking for.

Mark Jaccard, a professor at Simon Fraser University, was one of the witnesses here. He said buying credits is an option often discussed—and that's what we're discussing today—but little understood. He said:

Buying international credits in a four-year timeframe is virtually impossible because you have to buy it from someone. Someone somewhere has to have done some greenhouse gas reductions and we have to be able to verify that they did that. That is really difficult.

I'd like to read a paragraph here of some of the comments that were made when you were before the committee on December 5. This is regarding the state we find ourselves in.

We all agree that the ultimate goal is to reduce greenhouse gas emissions to deal with climate change. We've heard from Mr. Delbeke the same ultimate goal, but is the emission trading system that Canada is part of—the international, the domestic, the actual market that is available there—fair?

You've said:

In Kyoto, round one, the European Trading Zone (ETZ) negotiated a share of the Upper Atmospheric Reserve that was 7.7% larger than the ETZ's capacity to discharge GHGs at the time of the negotiations; Canada, by comparison, accepted a national quota allocation that was 13.3% smaller than Canada' s capacity to discharge GHGs at the time of the negotiations. Overall, the Kyoto Protocol created a GHG quota supply that was 14% larger than the covered nations' capacity to discharge GHGs in 1997. Almost 170 nations ratified the Kyoto Protocol. When we treat the ETZ as a block, that reduces the total to 140 nations, of which only three—Canada, Japan, and New Zealand—have accepted GHG quota allocations that are lower than their 2008 through 2012 forecast GHG emissions. In the original 1997 agreement, two more nations—the United States and Japan—initially accepted GHG quota allocations that were below their 2008-2012 emission forecast. In November 1998, realizing their error, U.S. negotiators notified the EU and other parties that the U.S. would not ratify the treaty unless the EU agreed to renegotiate a more balanced quota distribution. The U.S. team gave the EU until December 31, 2000 to return to the negotiating table. The EU refused. A couple of years later, Australian negotiators pulled out of the treaty having also determined that the Kyoto distribution of GHG quota was unfair.

Is that still the case? What leverage does Canada have to shift international negotiations so that we're working within a fair market?

[Aldyen Donnelly]

We have huge leverage, because you're looking at a global market with 160 countries and only three buyers. Everybody out there is crying for us to get into the market, because they have nobody to sell to but us. There's no market if we're not in it, which means we can reshape the market to make it a valid greenhouse gas market.

Through the back door, I want to respond to you and have you kick this over to Mr. McGuinty. The situation that you just outlined is the whole reason that other experts agree with me that cap and trade is not it. You might invite them to be witnesses to testify. They include Alan Greenspan, Dr. Robert Shapiro, and Governor Arnold Schwarzenegger, who signed a bill in December that says no cap and trade, but product standards, product standards, product standards. The first people to reject cap and trade and to introduce product standards as the leading environmental regulatory strategy were Governor Bill Weld and Paul Cellucci, then lieutenant-governor.

If you're in Massachussets or California, they are going to stipulate that if you sell gasoline in one of those states, you account for your emissions and you comply on a retail level. Cap and trade may come in later, but to do cap and trade without a product standard is the same as having an ultra-low-sulphur diesel regulation that says refineries must refine and make low-sulphur diesel, but gas stations can still sell high-sulphur diesel. You put a product standard in first, and that's the same as saying gas stations must sell low-sulphur diesel, so that when the refiners are compelled to make low-sulphur diesel, they have someone to sell it to.

[Mark Warawa, Conservative, Langley, BC]

How much time do I have?

[The Chair, Conservative, Laurie Hawn]

You have 45 seconds.

[Mark Warawa, Conservative, Langley, BC]

When you were here, you also made a comment that if we did want to buy these credits, the CDMs, 51% of them were to buy an illegal substance, which was HCFC-22. Could you comment on that?

[Aldyen Donnelly]

I checked again this morning, and 51% of the forecasted CER supply in the CDM market is made up of CERs that are issued to plants that make freon, a substance that we have decided is so damaging to the environment that it's illegal to make it here. It will be illegal to import it into Canada in 2010.

I'll add another fact, which is that 18% of the CERs that will be issued to projects in the CDM program are being issued to hog producers in South America who confine, on average, 100,000 hogs per farm. They're getting CERs because they capped some lagoons back in 2001, and the specific company that is selling those CERs is the single largest competitive threat to Canadian hog producers. I, for one, am not going to raise my electricity rates so Canadian hog producers end up subsidizing their single most important strategic competitive threat.