Environment Committee on April 5th, 2022

[The Chair, Liberal, Francis Scarpaleggia]

I call this meeting to order.

Good morning, everyone.

I would like to welcome Mr. Maloney, who is with us this morning and who is also a member of the Standing Committee on Natural Resources. There's obviously a connection between the mandates of the two committees. We are very pleased to have you here this morning.

Today we're on our third meeting of the fossil fuel subsidies study.

We know the protocols. Essentially, if you're staff, you need to keep your masks on at all times. Those around the table can take their masks off. When you circulate, put your masks back on. For those who are joining us online, mute your mike when not speaking in order to avoid the problem of ambient noise. I think that takes care of the rules of procedure, more or less.

I need the committee to adopt one small routine motion related to the witness testimony of Grand Chief Phillip. He was supposed to appear at the last meeting but, at the last minute, couldn't. We would like to include his opening remarks, his testimony, as material for the study report. I don't imagine there's any objection to that. I see everyone is in agreement.

[Some hon. members]

Agreed.

[The Chair, Liberal, Francis Scarpaleggia]

[See appendix—Remarks by Grand Chief Phillip]

We have our first panel of witnesses. From Climate Action Network Canada, we have Mr. Eddy Pérez. We welcome Mr. DeMarco, our commissioner of the environment and sustainable development; Ms. Miller, assistant auditor general; and Ms. Marchand, director. We also have, from the Trottier energy institute, Simon Langlois-Bertrand, research associate.

Thank you very much. Each witness has three minutes, I believe.

We'll start with Mr. Pérez, for three minutes.

[Eddy Pérez, International Climate Diplomacy Manager, Climate Action Network Canada]

Thank you very much.

It's a real pleasure for me to be with you today. I am speaking to you from Tiohtá:ke on the unceded territory of the Kanien'kehá:ka.

I am the international climate diplomacy manager with the Climate Action Network.

Yesterday the intergovernmental panel released a groundbreaking report, the third out of three major reports. This one specifically focused on the mitigation of climate change.

The report says that, without a doubt, we have what's necessary to cut emissions by half everywhere. It also says that things have radically changed in the past eight years. We know climate impacts are more expensive and are hitting us harder. Governments and decision-makers globally face a historic test. Scientists agree on the following: Either we use all of the resources we have to finance and resource this transition, or we can decide to burn our hope for a climate-safe future.

The most recent report of the Intergovernmental Panel on Climate Change, the IPCC, contains the most comprehensive list of solutions ever prepared. We can cut greenhouse gas emissions, or GHGs, by half, which is consistent with a future in which we limit temperature rise to 1.5 degrees Celsius. To achieve that goal, we must eliminate fossil energy subsidies because that can help us reduce global GHG emissions by as much as 10% by 2030.

So far in this committee, we have had a discussion about regulatory reform, looking at the types of supports that in previous years the Government of Canada has provided to the oil and gas sector through direct and public finance support through Export Development Canada.

I want to propose a new kind of discussion, one that looks at the transformational potential of the decisions around shifting Canada's financial flows. We have been talking a lot about fossil fuel subsidies from a policy reform perspective, but this IPCC report actually talks about radically changing the conversation on subsidies. It's not just about reforming regulatory policy. Phasing out subsidies represents one of the most important ways to finance our way out of this climate mess. Phasing out subsidies means giving ourselves the power to imagine what we can do with these funds if they can help us build a pathway of economic, climate and energy security.

The IMF has previously estimated fossil fuel subsidies totalling $5.2 trillion U.S. or 6.5% of global GDP in 2017, compared with the $2.4 trillion U.S. annually used for energy investments over the next decade to limit global warming to 1.5ºC. Canada is a major fossil fuel subsidies contributor. It's part of those top five G20 countries that have given up to $63 billion per year in international public finance for oil, gas and coal projects.

We know, based on this IPCC report, that climate finance flows need to increase by a factor of four to eight in developing countries and two to five in developed countries. Now, this environment committee—

[The Chair, Liberal, Francis Scarpaleggia]

Unfortunately, we're past the three-minute mark, Mr. Pérez, but I'm sure you will have the opportunity to add your insights in response to questions.

We will go now to Commissioner DeMarco for three minutes, please.

[Jerry V. DeMarco, Commissioner of the Environment and Sustainable Development, Office of the Auditor General]

Thank you, Mr. Chair. We're happy to appear before your committee today to contribute to your study on fossil fuel subsidies.

I'd like to acknowledge that this hearing is taking place on the traditional unceded territory of the Algonquin Anishinabe people.

Joining me today are Heather Miller and Sylvie Marchand, who are responsible for a number of reports on this subject.

In 2017 and 2019 we examined whether Finance Canada and Environment and Climate Change Canada supported decision-making in order to meet Canada's commitment to phase out inefficient fossil fuel subsidies by 2025.

In these audits, we asked the departments to explain how they defined inefficient fossil fuel subsidies, and whether they had identified inefficient tax and non-tax subsidies. Without a clear definition, the departments could not identify which fossil fuel subsidies were inefficient and should be phased out.

In 2017, we found that Finance Canada had not defined what an inefficient fossil fuel tax subsidy was; nor could the department tell us how many there were.

In 2019, we found that Finance Canada still did not have a clear and meaningful definition of inefficient. It focused on fiscal and economic considerations, but did not consider economic, social and environmental factors, which are components of sustainable development in decision-making on fossil fuel subsidies over the short, medium and long term.

In 2017 Environment and Climate Change Canada did not know the extent of federal non-tax measures that could be inefficient fossil fuel subsidies. In 2019, the department’s work to identify inefficient non-tax subsidies for fossil fuels was still incomplete and not rigorous.

As you are aware, in November 2021, we presented an audit report on Natural Resources Canada’s Emissions Reduction Fund for the oil and gas sector. The program’s interest-free and non-repayable loans for oil and gas companies are examples of subsidies. We found that the program was poorly designed because it did not link funding to net emission reductions from oil and gas operations.

Canada needs to assess all of its supports for the fossil fuel industry against how they will foster or hinder Canada’s transition to net-zero emissions.

Despite repeated government commitments and plans to decrease greenhouse gas emissions, they increased by more than 20% from 1990 to 2019. Urgent actions are needed to reverse this trend.

Mr. Chair, this concludes my opening remarks. We would be pleased to answer any questions the committee may have.

[The Chair, Liberal, Francis Scarpaleggia]

Thank you, commissioner.

We now go to Mr. Langlois-Bertrand from the Trottier Energy Institute.

Mr. Langlois-Bertrand, the floor is yours.

[Dr. Simon Langlois-Bertrand, Research Associate, Trottier Energy Institute]

Thank you very much for your invitation. It's a pleasure to be here.

Although I'll be making my remarks in English, I will have no problem answering questions in the language in which they are asked.

I'm a public policy lecturer, and I work as a research associate at the Trottier energy institute. We do work such as the “Canadian Energy Outlook”, which provides a very deep level of evaluation for various technological and economic possibilities to reach net zero. It enables, among other things, a comparative assessment of costs for various options across the energy sector.

I use the current federal greenhouse gas emission reduction targets here as a starting point: net zero by 2050, and minus 40% in a couple of years.

The question is this: What are the principles that can be applied to the review of subsidies and that can ensure that the review leads to government support for industries that is conducive to achieving the decarbonization targets at the same time? This is, to be sure, a very tall task.

Given this frame of discussion, it appears to me that at least two principles stand out that can guide the review. One is that government subsidies of all kinds must facilitate the transition toward low-carbon activities and energies, and certainly must not act as any sort of hindrance to this transition. For instance, any research or support subsidy that favours the production or use of fossil fuels has to be eliminated to encourage low-carbon solutions instead. In the context of consumption in different sectors, for instance, any subsidy that supports the purchase of equipment for transportation, for heating or for manufacturing, for example, has to favour a transition to technological subsidies compatible with carbon neutrality.

That brings me to the second principle that should guide the review: The subsidies must not contribute to maintaining or increasing greenhouse gas emissions across the economy. Instead, they must be compatible with the objective of carbon neutrality. This last point is crucial. The subsidies cannot contribute to renewal or expansion of infrastructures that favour the maintenance or increase of greenhouse gas emissions. That includes the natural gas network; that includes heating infrastructures based on fossil fuels; that includes vehicles using fossil fuels, and so on.

In conclusion, the subsidies are supposed to be there to accomplish social and economic objectives. A review like this of fossil fuel subsidies should carefully reassess which such objective it is aimed at, and what's the best way to achieve it—through government action, funds, regulation or whatever actions—while facilitating decarbonization at the same time. For instance, if the objective is linked to a given sector’s activity—agriculture, manufacturing, mines and so on—then the subsidy should be made as visible as possible and not be hidden within the price of fuel, for instance. It should be accompanied with transitional subsidies facilitating the transfer to low-carbon technologies.

The transition to a carbon-neutral society can be successful only if there is a country-wide effort to review and reassess all measures and their impact on the use of hydrocarbons, and if it leads to changes accordingly, when necessary, to ensure continued support for given industries and populations in this transition.

Thank you.

[The Chair, Liberal, Francis Scarpaleggia]

Thank you very much, Mr. Langlois-Bertrand.

We'll start with Mr. Seeback for six minutes.

[Kyle Seeback, Conservative, Dufferin—Caledon, ON]

Thank you very much, Mr. Chair.

I wanted to start with questions for the Office of the Auditor General.

In your introductory statement, you talked about two studies. One is with the Department of Finance Canada. The other one is with Environment and Climate Change Canada. Some of the summaries are as follows:

[The audit] found that the Department of Finance Canada's assessments to identify inefficient tax subsidies for fossil fuels were incomplete, and that advice it provided to the Minister was not based on all relevant and reliable information.

The Department of Finance Canada did not clearly define how a tax subsidy...would be inefficient.

With respect to the second audit, the audit concluded that ECC's “work to identify inefficient non-tax subsidies for fossil fuels was incomplete and not rigorous”, in part because ECC “used unclear definitions.” The audit also found that ECC “did not consider the economic, social, and environmental sustainability of subsidizing the fossil fuel sector” in its assessments.

Have any of these deficiencies, to the best of your knowledge, been remedied by either of these departments in the last three years?

[Jerry V. DeMarco]

To clarify, the record of reports that our office has produced on this does include one study from 2012, which I didn't mention in the opening statement. It looks at supports for the fossil fuel industry, and not just subsidies. I'd like to call your attention to that 2012 study. Then, we have the 2017 audit, and then the two audits from 2019 on fossil fuel subsidies. There's quite a lot of material from our office available to the committee on this issue.

With respect to the question of what's changed since 2019, aside from the responses that the departments gave, we have not done a follow-up to the 2019 audit at this stage. We will consider doing one if we determine that there is a risk of inaction on these. What I can say is that one of the key components of the departments' responses to our audits was that they were going to undertake a peer review with Argentina. That was announced in 2018. We're expecting that an update from the departments will be forthcoming regarding that peer review. None has come to date. We're still waiting for that information from the departments, despite the announcement in 2018 that it was undertaken.

[Kyle Seeback, Conservative, Dufferin—Caledon, ON]

With all the audits you've done—the ones I was specifically mentioning in my questions—would it be fair to say that if these departments don't do the hard work to clarify these issues, or if they haven't clearly defined these things, that will make it much more difficult for the government to “end fossil fuel subsidies”?

[Jerry V. DeMarco]

Absolutely. That's one of the key themes from the range of reports we put out on this. Without a clear definition of what it is they've committed to phasing out, it's hard to phase that out, isn't it?

We were told they had a range of factors that they considered, and there's an exhibit in one of our reports that lists all of the factors they considered, but it's far from a definition. It's more of a laundry list of factors. No one could read that and figure out if it is in or out in terms of a fossil fuel subsidy.

It's unfortunate that it's sort devolved into a bit of a word game about these terms. If you go back to our 2012 study and perhaps consider any supports for fossil fuels, whether a department admits they constitute a subsidy or not, you may be able to get more to the root of the problem than continuing with interpretations of the term “inefficient fossil fuel subsidy”.

We've been mired in that for quite some time now. It would be good if we just got to the point of it, which is whether these supports, whatever you're calling them, are helping to achieve our journey towards net zero or hindering it. That's really the key question to ask.

[Kyle Seeback, Conservative, Dufferin—Caledon, ON]

From anything you've looked at, has the government made it clear that investments in carbon capture, utilization and storage would fall under an inefficient subsidy or, just in general, a subsidy that should be eliminated?

[Jerry V. DeMarco]

That's a topical issue. I expect there will be a new announcement in the budget this week about incentives for CCUS.

If the incentives are financial in nature and they favour one sector over another, then they constitute a subsidy. Whether the government would consider them inefficient or not, I do not know. Presumably they would not consider an instrument they're just about to roll out as an inefficient fossil fuel subsidy. Otherwise, they wouldn't be doing it, in light of their commitment to phase out inefficient fossil fuel subsidies.

[Kyle Seeback, Conservative, Dufferin—Caledon, ON]

They wouldn't, unless they haven't properly defined what “inefficient” is, which is where we are right now.

[Jerry V. DeMarco]

Yes. That's why I would say that this committee and others, and the debate generally, should rise above the word game and the wordsmithing issue. We should go to what the nature of the measure is and whether it will help or hinder achieving the objectives of the climate plan and the journey to net zero, and not get too worried about terminology.

I know it's important because of the Pittsburgh 2009 commitment to eliminate inefficient fossil fuel subsidies with the G20, but we're past that now. We have to look at all of the measures, whether they're subsidies or not, to see whether they're helping or hindering.

[The Chair, Liberal, Francis Scarpaleggia]

Thank you. We'll go to Mr. Longfield now.

[Lloyd Longfield, Liberal, Guelph, ON]

Thank you, Mr. Chair.

I'd like to continue with Mr. DeMarco on the discussion we're having on subsidies in this study and the nature of the definition being important globally.

If we remove a subsidy here that is inefficient in Canada and it's not removed in another country, then capital will flow to that country. We could choke off our own oil and gas industry by not making a coordinated effort with other countries that could have substitutes for the products we're producing in Canada. I think that's the nature of the peer review that's going on with Argentina.

When you're doing your audit work, are you looking at the externalities? Do you work with auditors general in other countries, who are maybe also auditing similar topics to what we're working on in Canada around fossil fuel subsidies and their definition?

[Jerry V. DeMarco]

At the Office of the Auditor General, including in my role as commissioner, we work closely with our counterparts around the world through the international network known as INTOSAI, and in particular the Working Group on Environmental Auditing.

You've hit on an important point there, which is the potential for an uneven playing field. If one jurisdiction sticks its neck out and does something and the others don't follow, it could be put at a competitive disadvantage and so on.

It's a difficult issue with climate change, because you're never going to get a 100% consensus among nearly 200 countries on every measure and every definition and so on. There's always going to be some unevenness. There are going to be all sorts of externalities and market failures, as is the case right now.

To the best extent, if we can at least collaborate with our G7 and G20 colleagues in looking at this in a coordinated way, which, as you mentioned, includes peer reviews with other nations, then we'll have a better chance of having the entire herd go in the same direction, rather than just one of us going ahead of the pack or behind the pack.

[Lloyd Longfield, Liberal, Guelph, ON]

Thank you.

In terms of working with other countries through their auditors general, is that an opportunity we can include in our report?

[Jerry V. DeMarco]

Certainly.

We can't control what the other offices choose or what audits they select to do, but if the committee has recommendations for us on what issues they would like us to look into and whether we can seek partnerships or collaborative initiatives with our counterparts around the world, we're certainly open to that sort of recommendation.

[Lloyd Longfield, Liberal, Guelph, ON]

Before I move to the next witness, the Trottier energy institute, I'd like to ask you a final follow-up question.

We need to be working with the oil and gas industry, because clearly they're creating emissions and they're trying to get to net zero themselves. If we're not investing in that industry, if we're not helping them get to net zero, then we're losing the biggest opportunity we have for reducing emissions.

We need to be working together to reduce emissions in a key emissions sector. You're not suggesting that we work apart from the fossil fuel sector but in conjunction with them. Is that what I'm hearing?

[Jerry V. DeMarco]

I don't think I addressed that point, but I can give you my thoughts on it now.

One of the lessons learned in our November report deals with the fact that Canada's oil and gas emissions constitute a large portion of emissions. Historically, usually between 20% and 30% of annual emissions are from that sector. Transportation is also a very important sector, as are others.

Canada will need to work with the oil and gas sector, but it shouldn't be afraid to regulate as well. It's not an entirely voluntary relationship between government and industry. They work together, but it's up to Canada, which made the commitment to net zero, to meet it, and that will require a range of measures, from carbon pricing to regulation to working with industry on voluntary measures—the whole gamut.

[Lloyd Longfield, Liberal, Guelph, ON]

Clearly. Thank you.

Regulations include provinces and territories as well, so it's not an easy job, but it's one that we are committed to.

To the Trottier energy institute, I looked at the “Horizon 2060” report that your organization published. It concluded that carbon capture and sequestration are critical to achieving carbon neutrality.

Do you agree that it's necessary for the government to support these technologies that lead to reducing the concentration of CO2 in the atmosphere if we're able to achieve our climate targets of net zero by 2050 or earlier?