Good afternoon, Mr. Chairman, ladies and gentlemen. Thank you very much for inviting us to appear before your committee today.
My name is Peter Boag, and I am the president of the Canadian Fuels Association. With me is my colleague Carol Montreuil, who is the vice-president of our eastern Canada division and our policy leader on the carbon pricing file.
The Canadian Fuels Association represents the industry that produces, distributes and markets petroleum products in Canada. It comprises nearly 95% of the transportation fuels that keep people and goods moving in our country.
Our members also produce asphalt, heating fuels and feedstocks for manufacturing facilities. We're strongly integrated with the petrochemical industry, for example. In short, our products support every sector of our economy, and our members comprise an important component of Canada's critical energy infrastructure.
While the fuel mix is changing, independent forecasts, including those from our own National Energy Board, show that demand for our products will remain relatively constant through 2040 at least.
You've asked for our perspectives on carbon pricing. We're pleased to do that today, both from a general perspective and, more specifically, with respect to the current federal carbon pricing proposal.
We support carbon pricing policies that adhere to the following six design principles: one, clarity and predictability; two, transparency; three, challenging but feasible targets; four, equity, and from our perspective that means no one jurisdiction, sector or entity is assigned a disproportionate burden; five, cost-effective outcomes supported by sound evidence; and six, economic and environmental performance balance.
Through that lens and those principles, we offer the following perspectives on the proposed output-based performance standard component of the federal carbon pricing backstop which will require industrial facilities, with a very few exceptions, to reduce their emissions to 80% of their current sector average, or pay a carbon tax on emissions above that benchmark. That is commencing January of this year. In other words, it's an emissions cap for industrial facilities that's 20% below the current sector average.
Let's start with the principle of challenging but feasible targets. For Canada's refining sector, the 80% benchmark corresponds to an emissions performance that even the best performing refineries in the world would struggle to achieve. This is illustrated on the first chart of the handout you have that shows the emissions performance of Canada's 16 full fuel refineries.
Refineries with the best GHG emission performance, the ones with the lowest carbon emission intensity numbers, are on the left side of the green curve. The green dot is the refining sector average. The red line at the bottom is the 80% benchmark set by the federal proposal.
The chart really tells us, and very simply, that the 80% benchmark has not been achieved and is likely unachievable, at least for the foreseeable future, by even the top performing Canadian refineries. The situation would be the same for more than 90% of the 200 refineries in all of the OECD countries.
This leaves the six Canadian refineries that currently would fall under the federal backstop really with no option but to pay their way out. They really don't have emission reduction opportunities of that magnitude to achieve that level of emissions intensity performance. Perversely, setting those infeasible targets will divert investment away to pay a carbon tax, and away from process and technology improvements that would actually reduce emissions.
This brings me to our next principle, and that's equity. The following chart, on page 4, compares the compliance costs through to 2022 for an average-sized refinery operating in a backstop jurisdiction versus refineries operating in other jurisdictions with their own carbon pricing programs, such as Quebec, the EU, or California, or with no programs at all, which really is virtually every other jurisdiction in the United States.
The cumulative cost for an average refinery in a backstop jurisdiction, as seen in that chart, is about $100 million over that compliance period ending in 2022. That's more than three times the carbon cost burden in any of those other jurisdictions. For refiners operating in New Brunswick and Ontario, that will come under the backstop, their carbon costs are four times those paid by or experienced by or encumbered by Quebec refiners under Quebec's cap-and-trade program.
This inequitable patchwork is compounded because refineries in these jurisdictions, perhaps with the exception of California, all compete in the same market. They supply fuels and they compete against each other throughout the eastern or Atlantic basin.
These market-distorting impacts raise significant concerns for us about our final principle: the need to balance economic and environmental performance. The risk is that, by imposing inequitable carbon costs on Canadian refineries, they become uncompetitive and vulnerable to closure. On this point, a 2017 study we commissioned by independent consultants Baker and O'Brien found that up to seven Canadian refineries, mostly those in eastern Canada, are at risk of closure, with disparate carbon costs a major factor in that risk.
It's really a classic case of what we call—and I'm sure you know—carbon leakage, where carbon costs in one jurisdiction cause energy-intensive, trade-exposed businesses, like refining, to lose out to competitors in other jurisdictions where carbon costs either don't exist or are lower than in their current location. Really, the upshot of that is that closing Canadian refineries erodes the economic benefits to Canada from our refining sector and simply shifts emissions to another jurisdiction. The economic benefits leak away and the emissions leak away to somewhere else. They're still happening; it's just somewhere else.
By doing that, it also makes us more reliant on fuel imports and potentially undermines the security of our fuel supply.
Reducing economic activity and simply shifting emissions to another jurisdiction is, from our perspective, clearly not achieving balance in economic and environmental performance.
In conclusion, let me say that we're not opposed to carbon pricing as a GHG emissions reduction policy. We support any well-designed carbon pricing mechanism that embodies our six principles. On the positive side, carbon pricing offers transparency and economists are generally unanimous that well-designed carbon pricing systems drive to the most cost-effective emissions reduction opportunities. But successful carbon policies, pricing or otherwise, need to respect other principles.
From the perspective of the principles of feasible targets, equity and balanced economic and environmental performance, the federal pricing backstop proposal in its current form does not pass the test.
Mr. Chair, I'll leave my remarks at that. Thank you for your attention. We look forward to your questions.