Environment Committee on Nov. 26th, 2009

[Prof. André Plourde]

You back out what the levels would be. You have to have a level approach. You have to figure out what the level of emissions is going to be. But the target can be specified any way you want, as long as you agree on an end point. Then you can back out from there. The levels consistent with the intensity target would be derived from a baseline assumption and that kind of stuff.

[David McGuinty, Liberal, Ottawa South, ON]

Professor, we talked about international credits. If we are trying to achieve even the government's targets in Canada, what would the effect be on the price of carbon? The economists speak about the carbon market being either liquid or illiquid. I'm told that if we try to achieve even the government's weak targets domestically, the price of carbon would soar because the market would be so small and so illiquid that it would have a negative effect on the competitiveness of Canadian companies that export to the U.S.

[Prof. André Plourde]

A Canadian market is probably a good first step, but we need to think of a broader market. Considered with the U.S., Canada's emissions are roughly 2% of the world's, give or take a fraction. This is a relatively small part of the action in greenhouse gas emissions reductions. To find where those cheap emissions possibilities are, you want a bigger market. That's why in other places I've advocated a North American approach, in part to deal with those issues.

[The Chair, Conservative, James Bezan]

Thank you. Your time has expired.

Monsieur Bigras, s'il vous plaît.

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

Thank you very much, Mr. Chairman.

I have many questions for you this morning. I will try to keep it short.

First of all, I am a bit surprised by what you said on page 2. You spoke to us about the costs associated with greenhouse gas emission reductions, but very little about the costs associated with an increase in these emissions. I would like to give you the following simple statistic as an example. In Quebec, we have seen the trade deficit increase considerably over the last few years, partly because of the energy sector. An increase in $1 in the price of a barrel of oil represents, in terms of debt, for Quebec's trade balance, $160 million per year. That means that there are costs associated with the status quo and the maintenance of our dependence on oil.

Moreover, Mr. Plourde, I was rather surprised to hear you say that a province-by-province approach should not be favoured. Yet the Europeans decided to negotiate an agreement targeting an 8% greenhouse gas reduction in 1997. In a common and differentiated way, they distributed the various targets associated with the carbon exchange among the 15 member countries of the European Union. This was based on absolute targets and not on intensity targets. They used strong market-based tools that they had at their disposal and hopefully they are on track to get closer to the Kyoto Protocol objectives. They are doing much better than Canada.

Given the fact that natural resources come under provincial jurisdiction and that the provinces' energy policies differ from Alberta's, for example Quebec would not have the same policy as Alberta, where you come from—how can we not move toward a common and differentiated approach, as well as a threefold model, such as Europe has done?

[Prof. André Plourde]

If I was not clear, I am sorry, especially since this is exactly the kind of situation I have in mind. It seems to me that based on certain established conventions, including rulings by the Supreme Court of Canada, the Canadian Parliament has the responsibility to negotiate and implement international treaties. However, when the application or the implementation of these treaties involves the provinces, the federal government cannot interfere in provincial processes, except under very specific provisions of the Canadian Constitution. Consequently, from that point of view, we need approaches or tools which have been established by the provinces.

I would like to clarify two points. First, if Canada is to respect its international commitments, all of these plans must deliver the goods. Second, regarding the benefits of the European plan which you mentioned, if we are to trade permits between countries, we will have to maintain that kind of system within the framework of Canadian policy.

If you understood that I thought we should have a national Canadian policy, I apologize. We must, however, integrate provincial and territorial policies. Further, if we choose a system of tradable permits, we cannot erect barriers which will prevent these permits from being traded between provinces.

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

A couple of years ago, our parliamentary committee heard from Mr. Luc Bertrand, who more or less was the man behind the Montreal climate exchange. About 10 years ago, an agreement was signed to separate the two exchanges, with Montreal trading in derivative products and Toronto trading in stocks. At the time, Mr. Bertrand told us that the system put in place by the government, which was based on intensity targets, would help create a North American carbon market, but it is clear that this would make the application mechanisms much more complex.

Unless I am mistaken, the European model has about six stock platforms. In the United States, President Obama seems to be more in support of a cap-and-trade system. Would it not be in our interest to ensure that the systems are compatible, so that the future carbon market, which Canada now belongs to, works more to our advantage and is more efficient?

[Prof. André Plourde]

Indeed, the transaction costs would be much lower if we had compatible systems. However, because we have a system of tradable permits, we will have to decide at some point how many permits we will issue, even if we have intensity targets. One way or another, if we opt for a tradable permit market, and if the government decides to issue a limited number of permits, we will have a system which will be capped. If the cap is established based on complicated calculations involving intensity targets, this will obviously create uncertainty. If we begin to trade permits, we will have to decide how many permits will be allowed onto the market. So, even though this would be a complicated process, we would implicitly have decided on an emissions cap.

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

This will be my final question, Mr. Chairman.

I remember that the federal government had tabled a plan which would have allowed certain provinces or certain companies to invest in a technology fund rather than reduce their greenhouse gas emissions. The approach was based on pricing a tonne of greenhouse gas emissions. I remember the testimony of representatives from the Pembina Institute, who said that this system would create loopholes for some companies, and might weaken a future carbon market because companies, instead of reducing their emissions, could spend money instead by investing in this technology fund. The money would go into an account which would be created a few years down the road.

Do you think that this kind of system would distort a future carbon market?

[Prof. André Plourde]

This contribution to a technology fund can be presented much more as a tax on carbon emissions. Depending on the structure and the way this fund is set up, it's a form of carbon emission tax. How this tax revenue will be spent has been determined from quite a broad standpoint. This isn't necessary as far as the effectiveness is concerned. However, it's a little more complicated to figure out what form or structure this type of tax should have.

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

Thank you.

[The Chair, Conservative, James Bezan]

Thank you very much, your time is up.

Mr. Cullen, you have the floor.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Thank you, Chair.

Thank you, Professors. This is quite informative.

Professor Dissou, something we didn't hear as much about in either of your testimonies is the cost of delay. I'm sure you're well familiar with Mr. Stern's report of some years ago now, trying as best as he could at the time to understand what the cost to the global economy would be of inaction with respect to climate change. We've heard from the climate change modellers that while Canada might be contributing only 2% to the total global emissions, the effect might be more severe on a country like Canada.

Have you done any primary research or looked at any research as to what the cost would be to Canada of a potential two- to six-degree rise in global temperatures, which again, for northern climes would be a factor greater, from all of the modelling that we've heard so far?

[Prof. Yazid Dissou]

I will confess that in all of my studies I haven't considered the cost of not doing anything. It is important that we, to some extent, take into consideration that when we are not doing anything we are aggravating the situation. The Stern report that you are referring to did, as you said, compute the cost. The problem in computing these costs is there are uncertainties on the exact cost of not doing anything. But assuming that we do know that in the future there will be some costs, what are the costs of implementing the policies that we have today? There's a difficulty here in terms of balancing the cost of today, the cost that you're going to bear today, and the cost of not doing anything tomorrow.

We do know that the rising temperature will cause some damage, but in terms of our knowledge, we don't know exactly. And our knowledge is increasing. Things that we didn't know before, we know today. Even the scientific...the climatologists who designed some modern models to know what's going to happen are making some errors, because there are things that we don't know and we are discovering new things. So for somebody to say that this is the exact cost of not doing anything tomorrow is a little bit difficult.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Thank you.

I have a question to Professor Plourde. I'm trying to understand in more of a business scheme, because I've sat with a number of heavy industry groups over the last number of years to try to understand what the impacts of these types of policies would be for them. Has there been any research done by you, or any literature that you've come across, that has looked at industries that have gone about a reduction in their greenhouse gas emissions? I'm thinking particularly of the smelting industries, the heavy users, some of which have gone ahead and done sometimes significant greenhouse gas reductions from 1997, when they thought the then government was going to impose something. In terms of productivity...and this is a question that economists struggle with all the time. Canada seems obsessed with it, in terms of increasing our productivity.

Am I wrong in saying there's any relationship between how productive an economy is and how much waste it produces through its industrial processes?

[Prof. André Plourde]

Of course, the less waste you produce the more productive you are, but that's true across all factors of production, not just one in particular. You could become more efficient, if you want, in using one factor, but at the cost of becoming less efficient in the mix of factors for that kind of thing just as quickly. I think one by one is not an easy case.

In terms of greenhouse gas emissions, it's clear that Natural Resources Canada's office of energy efficiency has been tracking, for example, what the industrial sector has been doing, but in terms of energy efficiency. So you could look through that for measures that have been put in place by industry over a fairly long period of time now. From there, you can have a look at what their emission profiles would be as a result of that.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

I guess this is my question. Whether it's the cost to consumers or the cost to industry, an increase in energy efficiency in a marketplace that I believe, as economists, you would imagine going up in terms of prices for primary energy.... I've seen few predictions from economists that say the price of a barrel of oil in 20 years will be much less than it is now, or a kilowatt of electricity, or natural gas. Would efficiency not then be a cost not incurred by industry or by individual Canadians if we became a more efficient economy, if our individual use of energy as citizens, but also our use as an economy, were less?

[Prof. André Plourde]

Sure. I think we would be spending less on energy, but that doesn't mean that overall we'd be more productive.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Not necessarily. I'm just talking about cost. Cost is what we're actually trying to get at today.

[Prof. André Plourde]

Not necessarily lower cost, either, in part because to substitute for this energy you'd have to do something else. So now it becomes a case of whether this something else you're doing is actually “cheaper” than using the energy.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

So this comes to the question of certainty and flexibility, which I think you've both mentioned. I'm thinking of some of the large emitters, the large polluters in the country, that have for years pleaded with government to offer some certainty as to what they're expected to do. There is a cost to uncertainty, I would argue.

I want to get to this intensity question. I'm not yet satisfied with your answer with respect to the interchangeability between intensity and an absolute target. We've heard very consistently from Congress, from the European Union, that it becomes an apples and oranges case to say one country's intensity...because it's an after-the-fact measurement. Intensity means that less energy was used per unit of production, whichever one you want to say. You don't know the energy use to production until afterwards. An absolute cap is something that is measured upfront and in the present. I don't understand how on the Chicago or Montreal exchange a unit of greenhouse gas emissions' equivalent in Canada could be traded in an intensity framework with one that's happening in the U.S.

Professor Dissou, do you want to comment on that?

[Prof. Yazid Dissou]

From a technical point of view, they are not the same. I don't see how we can compare the price of emission intensity and the price of emissions per se.

For example, in one study I carried out in the past, when we cannot use a market-based instrument, how can the government design an emissions intensity to achieve this given level? On a theoretical basis, this is possible, but as far as asking firms to trade emissions intensity permits, from my perspective, it's impossible. It will be very difficult to assess who is doing what and what we are trading.

[The Chair, Conservative, James Bezan]

Your time has expired.

Mr. Warawa, you have the floor.

[Mark Warawa, Conservative, Langley, BC]

Thank you, Mr. Chair.

I also want to thank both witnesses for being here today.

This has been very interesting. I appreciate the brief you provided, Professor Plourde.

Both of you have touched on a possible harmonized approach; a continental approach. There were some questions from Mr. Bigras about the European approach. We had EU and U.K. delegates here a week ago. I believe there are 27 countries within the EU, with the U.K. being one of them. Each country may have a different approach in their commitments, but the EU has a continental commitment.

Since President Obama was elected, Canada has been in negotiations with the United States and working on a clean energy dialogue. I'm sure both of you are aware of that. There has been a lot of progress. Canada has been negotiating and working with the provinces and territories for years. Yesterday the provincial and territorial ministers of environment met here, before the federal minister goes to Copenhagen, so we have one voice.

Canada has committed to an absolute reduction in greenhouse gas emissions of 20% from 2006 levels by 2020, and a 60% to 70% reduction by 2050. In the United States, President Obama has announced that he'll be going to Copenhagen with a 17% reduction from 2005 levels by 2020. We heard at our last meeting from witnesses that the United States has a lot of work to do before they actually see legislation on the books. So as the different countries go to Copenhagen, of course there are conditional commitments. They're conditional on what other countries are doing.

My question is on the importance of harmonization and security--the certainty that provides for investment. If Canada had a different target from that of the United States and there wasn't a continental approach, would that provide uncertainty or certainty? I believe it would provide uncertainty.

I would like each of you to comment on the importance of a continental approach, with Canada and the United States negotiating together and coming up a continental cap-and-trade system--a continental carbon market that could be traded internationally. But it would be a continental approach, as the EU has a continental approach.

Thank you.

[Prof. Yazid Dissou]

It is not necessary for the two countries to have exactly the same percentage level of reduction. For example, in the EU there is a common level for what it must achieve, but there are different targets for different countries depending on the structure of their economies. As long as there is a target that is known for each jurisdiction, the business sector will have certainty in terms of the investment they will have to make. So I don't necessarily think that having different objectives will affect uncertainty in investment decisions.