Environment Committee on Nov. 26th, 2009

[Mark Warawa, Conservative, Langley, BC]

You're absolutely right that the economic conditions of different countries within the EU will determine what commitments they can make. Taking that into consideration, you're well aware of how interlinked the economies of the United States and Canada are. In the EU, economies that are similar will expect to have similar targets. Canada and the United States have similar economies.

[Prof. Yazid Dissou]

I agree with you. You are referring here to the competitiveness impact that will probably emerge because of the different targets we will have in Canada and in the U.S, for example. Assuming that we have a more aggressive target, it will probably be more costly to reduce emissions in Canada than in the U.S. I do agree with you on that perspective.

But if you're saying that having different targets in each country will lead to uncertainly about investment decisions we'll have to make, I don't necessarily believe that will happen.

[Mark Warawa, Conservative, Langley, BC]

I'm looking at the bigger picture and successfully achieving a target of 20%. This bill sets a target of 25% below 1990 levels. Our government's target and the U.S. government's target is 20% by 2020.

Professor Plourde, could you comment?

[Prof. André Plourde]

I agree with what Professor Dissou has said about setting this up. In a sense, you don't need exactly the same targets to reduce uncertainty. To reduce uncertainty you need to have a target that's credible--and you're going to get there. That will reduce uncertainty.

The issue after that is cost. Then there are the competitiveness effects across the county if, as you say, Canada and the U.S. have similar economic structures. As you know, we're more energy intensive than the U.S., for example, so how should that play itself out if we want to think of it in terms of costs across the countries?

But on uncertainty, the key thing is not whether we have an integrated policy with the U.S. or anything; it's whether we have a target that we know we're going to respect. Once that's in place, uncertainty kind of disappears from the picture. Somehow in this an implicit contract is being talked about. The next issue is about cost and competitiveness. That's when the integrated and harmonization issues are much more important.

[Mark Warawa, Conservative, Langley, BC]

Do you think it's important that we have a harmonized continental approach?

[Prof. André Plourde]

Yes, and I have said so before in committees--not in this chamber, but in others.

[Prof. Yazid Dissou]

As far as harmonization, it is necessary to have the two markets linked together in the possibility of trading emissions. We can have a different target in the U.S. than here, but as soon as we let permits move from one country to the other, that will equalize the payment price between the two countries.

I also agree with you that we need to make sure the target we are setting here does not penalize our industries too much compared to what the U.S. is doing, because most of our exports go to the U.S. To some extent we need to make sure we are not penalizing our industries too much.

[The Chair, Conservative, James Bezan]

Thank you very much. Your time has expired.

I'm going to start our five-minute round with Mr. Scarpaleggia.

[Francis Scarpaleggia, Liberal, Lac-Saint-Louis, QC]

Thank you, Mr. Chairman.

I'd like to get back to the question raised by Mr. Warawa, regarding what the impact on investment would be if Canadian and American targets were not similar.

Representatives of the Canadian Association of Petroleum Producers appeared before us a few weeks ago. They told us that if we adopted a 25% target but that the American target was much lower, Canadian companies would tend to buy more credits in the United States, which would in a way lead to an exodus of Canadian capital to the U.S. What do you think of that statement?

[Prof. Yazid Dissou]

From a strictly economic point of view, if we adopt different targets but allow an exchange of permits between the two countries, the price of the permit would necessarily have to be the same for both countries. As long as there is some fluidity between the two markets, the emission reduction will take place wherever it is least costly. From a theoretical and economic standpoint that's what will happen. However, if the targets are different in the two countries, the permit revenue will also be different, which will have repercussions on the way we could reduce emissions.

[Francis Scarpaleggia, Liberal, Lac-Saint-Louis, QC]

In other words, in order to meet Canadian targets, oil companies and other Canadian industries would have to spend two or three times more than American companies to buy the credits.

[Prof. Yazid Dissou]

I'm not sure of that. Let's suppose we adopt a target in Canada and we allow Canadian companies to buy permits that will cost less, for example in developing countries. In the final analysis, that would be significantly less expensive. As Professor Plourde said earlier, it would allow for fluidity between the two markets, which is important to minimize costs in this case.

[Francis Scarpaleggia, Liberal, Lac-Saint-Louis, QC]

But in your opinion, if the two targets were very different, wouldn't there be harmful effects in terms of investment in Canada?

[Prof. Yazid Dissou]

I would agree that if the markets were completely separate, the cost of doing business in the energy sector would be far higher in Canada. If we allow fluidity between the two markets, the cost of the permits would automatically balance out in the two countries. Therefore, the reduction in emissions will take place where it is least costly. For example, if an oil company needs to reduce emissions and buy permits, it can allow a company whose cost of reductions is lower in Canada to make this reduction and pay a premium to do so. From an economic standpoint, that is the principle we have.

Once again, I repeat that this would be possible only if we allow fluidity between the two markets, so that permits can be exchanged. As Professor Plourde said earlier, if the targets vary from one province to another in Canada, we will have to allow companies to exchange permits.

[Francis Scarpaleggia, Liberal, Lac-Saint-Louis, QC]

Professor Plourde, for the most part, it would be the provinces that will introduce their own measures to achieve their targets.

In your opinion, is it efficient that each province have its own greenhouse gas emission target? Do you think it would be preferable to determine sectoral targets nationwide? Of course, the provinces would apply their own measures to help their industries achieve their targets. I did not quite understand your position on this issue.

[Prof. André Plourde]

If permits are auctioned, there is no problem because everyone can buy them anywhere, but if policies target certain industries or sectors and those sectors are granted a certain proportion of the permits, we will have to determine the emissions level by industry and grant a certain number of permits. To answer your question, I would say that it depends on the structure of the policy mechanisms that we seek to implement. If they are mechanisms through which we establish targets for certain industries, they have to be applied across the country. If that kind of approach is not used, and if we choose a much more global perspective, it will not be necessary for industries or sectors to adopt individual targets because the distribution in the effort to reduce emissions will be done in accordance with the cost of reducing emissions from one sector to another.

[The Chair, Conservative, James Bezan]

Your time is up.

Mr. Woodworth, you have the floor.

[Stephen Woodworth, Conservative, Kitchener Centre, ON]

Thank you, Mr. Chair, and my thanks to both of our witnesses for coming today. Your credentials are impressive, and what you've had to say has been helpful.

Professor Plourde, you've touched on some things that I think are particularly germane, so I'd like to go through a few of them with you. I will join Mr. McGuinty in saying that I thought your presentation was particularly exceptional and a breath of fresh air, if I might say, compared with some of the evidence I have listened to over the last several months.

I will begin with a comment you made about the Kyoto accord, which sets the stage for us. You said that the Kyoto targets would have meant a cut of about 36 megatonnes in greenhouse gas emissions over a period of 11 years. As we know, we won't get there. By 2007, Canada's emissions had risen by about 155 megatonnes and thus stood at about 125% of 1990 levels. In that statement you set up the crux of the problem.

You also said that the proposed legislation, Bill C-311, would require a 40% reduction in annual emissions to be attained over a period of about 11 years. In other words, in every single year between 2010 and 2020, Canada would need, on average, to reduce emissions by 75% of the total amount of reductions we agreed to deliver under the Kyoto Protocol. We will fail to deliver on this by a wide margin. Again, that sets out the crux of the problem. You end by asking whether the commitments identified in clause 5 are credible in the sense of being likely to be achieved.

I have received some information from Professor Chris Green at McGill University. No doubt there is a collegial atmosphere among economists across the country. He answered that very question for me. He began by pointing out that from 1990 to 2006 there was about a 1.1% per annum average rate of carbon intensity decline. Does that sound accurate to you?

[Prof. André Plourde]

That is probably about right. I won't question that.

[Stephen Woodworth, Conservative, Kitchener Centre, ON]

He was working on a 38% cut from current levels rather than the 40% you referred to. He said that even if there were zero growth between now and 2020, Bill C-311 would require a 4.8% carbon intensity decline per annum. Does that figure equate with yours?

[Prof. André Plourde]

It depends on the measure of intensity and the assumptions you make about GDP growth. We're not going to get into a numbers game, but the notion that it requires a bigger effort than what has been delivered in the past is something that I am comfortable with.

[Stephen Woodworth, Conservative, Kitchener Centre, ON]

Professor Green said that if there were a 2.2% per annum growth, the decarbonization rate would need to be increased to 7.7% per annum. One of his comments was that these are rates of decarbonization with no parallels, even in collapsing economies. That seemed to be a reasonable statement. I wonder if you are aware of any collapsing economies with decarbonization rates similar to what is being proposed in our economic analysis of Bill C-311.

[Prof. André Plourde]

The 2050 targets, for example, are in keeping with what a number of countries have suggested they are going to do. They are broadly consistent with what the U.S., Europe, and the U.K. have been talking about for some time. The issue is the transition to the longer term.

[Stephen Woodworth, Conservative, Kitchener Centre, ON]

I understand that the targets are comparable. But Canada is behind the eight ball in having to achieve as much as a 40% reduction. I'm only asking you about the 2020 level. Has there been anywhere else in the world, to your knowledge, that has set out to achieve the same rate of reduction that Bill C-311 would require Canada to make by 2020?

[Prof. André Plourde]

I don't know of any, and that's part of the issue of credibility, but then it may be that I'm not exactly up to date on what all other countries are proposing to do. But I would be remiss not to say that I think we need to act on greenhouse gas emissions reductions in Canada. We are one of the world's most energy-intensive countries; we are one of the world's most emissions-intensive countries. We need to take this seriously. We are a developed economy; we are a rich economy. We should in some sense be leading the way in terms of decarbonization—or at least greenhouse gas emissions reductions. The two are not necessarily consistent, or not necessarily the same thing, as you know.