Finance Committee on Feb. 27th, 2007

[The Vice-Chair, Liberal, Massimo Pacetti]

Good morning. We should start, because we're running a little bit behind.

We seem to have a few technical difficulties, so witnesses especially, could you identify yourselves before speaking? I'll try to introduce you, but I think we're having some technical problems. I think we're especially speaking to the people who are on teleconferencing. Could you identify yourselves?

We are here pursuant to Standing Order 108(2) for a study on taxation of the oil sands industry. We have a panel of six witnesses.

If you could keep your presentations to five minutes, we'd appreciate it, so we can allow the members to ask questions.

We will start with the Green Budget Coalition, Monsieur Iterson. Thank you.

[Andrew Van Iterson, Program Manager, Green Budget Coalition]

Thank you.

Mr. Chairman, honourable committee members, thank you for inviting me to speak to you today. The Green Budget Coalition, as many of you know, comprises 20 of Canada's leading environmental and conservation organizations, which in turn represent over 500,000 Canadians as members, supporters, and active volunteers.

As you are well aware, Canadians are now demanding environmental progress. We--and I expect all of you too--want clean air, clean water, and effective action to reduce climate change; yet preserving Canada's environment continues to be akin to swimming against the current. We make occasional progress, and then we slip back because we have not yet aligned our economy with our environment. Too often we still view environmental progress as threatening economic health, and vice versa.

When Canada finally shifts to a healthy green economy, the pursuit of profit, cost-savings, and greater economic activity will inherently serve to preserve and restore environmental and human health. Similarly, companies who pursue environmentally friendly strategies should save money, increase profits, and gain a competitive advantage. Unfortunately, we are not there yet.

The coalition believes that to achieve a dynamic green economy we must integrate environmental values into market prices using well-designed fiscal policies, much as many OECD countries have already done.

One of the first steps to doing this, as the OECD has reiterated, is to phase out subsidies to limited energy-intensive resources such as conventional oil and natural gas. Such subsidies expedite the development and use of one-time polluting energy sources while making it less economically viable to develop low-impact renewable energy whose growth is pivotal to our environmental future.

The Green Budget Coalition believes that the accelerated capital cost allowance for the oil sands should be eliminated. It is expensive, unnecessary, and a waste of taxpayers' money.

My colleague Amy Taylor of the Pembina Institute has done substantial research on the oil sands ACCA and has submitted a more detailed brief, which the Green Budget Coalition fully supports. As she was unable to appear before you this week, I want to highlight some key points from her submission.

The oil sands currently qualify for a 100% accelerated capital cost allowance, which is much higher than the 25% provided to conventional oil and natural gas.

In 2000, the Commissioner of the Environment and Sustainable Development undertook a study of the level of federal government support for energy investments in Canada. His analysis found that the ACCA results in a significant tax concession for the oil sands. The finance department estimates that the benefit of this tax concession is between $5 million and $40 million for every $1 billion invested. This means that from 1996 to 2005, anywhere from $200 million to $1.6 billion in tax expenditures was allowed because of the oil sands ACCA.

As you can see in the bar chart included in our brief, these figures continue to escalate. The ACCA for oil sands is a very generous tax subsidy that is no longer needed. It was established to help spur capital spending and increase production from the oil sands. This it has done in spades. Between 1995 and 2002, capital spending in the oil sands increased by a staggering 1,649% and oil sands production increased by 131%. Furthermore, in the last decade technical know-how has improved, and oil prices have increased by over 200%.

The oil sands ACCA is clearly an unnecessary tax expenditure and a waste of taxpayers' money. The oil sands sector no longer needs this preferential tax treatment. It's a highly profitable sector. In fact, the oil and gas industry achieved a historical record for profits in 2005, when operating profits reached $30.3 billion, an increase of 50% over 2004.

To conclude, the Green Budget Coalition recommends that the Department of Finance eliminate the 100% accelerated capital cost allowance for the oil sands and put oil sands on a level playing field with conventional oil and natural gas. This can be done by eliminating the accelerated treatment currently granted to the oil sands within the Income Tax Act.

Thank you.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. Van Iterson.

From the University of Ottawa, we have Mr. Caccia.

[Charles Caccia, Senior Fellow, Institute of the Environment, University of Ottawa]

Thank you, Mr. Chair.

I'd like to thank committee members for inviting me to attend this meeting. I also take the opportunity to congratulate you on the motion you passed.

In my view, it has great potential for exploring the potential of new and most desirable policy approaches.

In addition to the paper I have submitted for your consideration, which in essence says that the current federal tax regime is antiquated, out of synch, perhaps even absurd, and the subject, internationally speaking, particularly at the OECD, of criticism ranging from despair to derision, there are five points I would like to make here this morning.

The first point is about your committee. It could play, it seems to me, a determining role in solving the problems caused by climate change. You could give guidance to your respective caucuses and to cabinet. You're entering a territory that other finance committees in earlier Parliaments have carefully avoided. Your findings could guide the Department of Finance, which, despite its claims to the contrary, can play, and does play, a central and very influential role in the process of policy development, federally and provincially.

For all these reasons, the motion before us today could represent the initial step towards a badly needed substantive policy for the Government of Canada. In so doing, you would be upholding the fine tradition established by other committees in the House and the Senate wherein they tackled difficult policy areas, be it in health, languages, justice, or the environment.

My second point has to do with your motion itself. It addresses two areas. One is the taxation regime for fossil fuels. In the text of my submission, I've done my best to highlight the highly contradictory nature of Canada's tax system. It promotes and encourages greenhouse gas emissions at a time when we want to reduce them. No wonder, therefore, we are encountering great difficulties.

It does not make sense to have the Government of Canada attempting to ride two horses galloping in opposite directions, the Kyoto horse in one, and the fiscal horse in the opposite. Canada's tax system has to be modernized and redesigned to facilitate and not to hinder the achievement of the Kyoto objectives.

The other area of taxation addressed in your motion is renewable sources of energy. While achieving a level playing field might have been desirable a few years ago, today, with only six years separating us from 2012, what we need to achieve is a playing field considerably tilted in favour of renewables, as much as it is tilted in favour of fossil fuels now. That, coupled with a program offered by the climate change innovation fund, could take us a long way. In addition, perhaps a Canadian solar energy institute funded jointly by public and private sources could be very helpful in stimulating innovative thinking and innovative technologies.

The third point I would like to make is rooted in the report by the Commissioner of the Environment and Sustainable Development. In 2004 she made an interesting observation:

Finance Canada has not done a systematic job of assessing opportunities and options for using the tax system to advance sustainable development.... In other words, the federal government has not established a systematic basis for deciding whether and how to tap the potential of the tax system to help shift Canada toward a sustainable economy.

She also said:

...the federal government has acknowledged the important role that economic instruments—including tax measures—can play in making progress...

She concluded that the OECD

...has also repeatedly noted that Canada needs to make more use of economic instruments and, in particular, “green” tax reform, for environmental improvement.

Mr. Van Iterson has already referred to this.

Finally, the Commissioner notes that Parliament's role in holding the government to account is vital to progress on sustainable development, and this role, I suggest, is important for government backbenchers as well as for opposition backbenchers, because what they have in common is definitely their desire to be re-elected.

Finally, the Commissioner writes in section 45 of her report:

It is time for the deputy ministers' Environment and Sustainable Development Coordinating Committee to deliver.... This is a unique and powerful mandate, coming directly from the Clerk of the Privy Council. In my view, the Committee is falling short of its potential... It is up to senior departmental officials to better use the opportunities available to advance sustainable development.

The fourth point, Mr. Chairman, has to do with a communication by the assistant deputy minister of finance, Mr. Drummond, who is no longer holding that position, when he wrote on fiscal matters raised by the committee on the environment and sustainable development. He made a number of interesting points that may be helpful to your committee. Time does not permit me to go into the details, but his letter and the appendix are public documents, easily available from the clerk of the committee. Your committee may want to explore the taxation areas analyzed by Mr. Drummond to determine their potential, which in my view is considerable, and incorporate the findings in your report. It may turn out to be a very worthwhile exercise.

The last point, Mr. Chairman, is about observations by the minister and a quote. The minister says:

Environmental issues–including climate change–have traditionally been placed in a category separate from the economy and from economic policy. But this is no longer tenable. Across a range of environmental issues--from soil erosion to the depletion of marine stocks, from water scarcity to air pollution--it is clear now not just that economic activity is their cause, but that these problems in themselves threaten future economic activity and growth.... And we now have sufficient evidence that human-made climate change is the most far-reaching--and almost certainly the most threatening--of all the environmental challenges facing us.

That, Mr. Chairman, was Gordon Brown, the United Kingdom's Chancellor of the Exchequer.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. Caccia. We are way over on the time. Thank you.

We have to move on. If you have something else, perhaps when the members ask you a question you can insert that in your comments.

From the Mining Association of Canada, Mr. Peeling. Five minutes, please.

[Gordon Peeling, President and Chief Executive Officer, Mining Association of Canada]

Thank you, Mr. Chair.

Thank you to the committee members for the opportunity to speak with you today on this very important subject.

I will focus my brief introductory remarks this morning around three points. First, I would like to describe the economic impact of the mining and oil and gas sectors, including the oil sands. These sectors underpin much of the present prosperity we see in Canada, including the strong fiscal position of the federal government. Second, I would like to provide some context to the tax treatment currently provided to oil sands investment in Canada. Third, I would like to discuss the accelerated capital cost allowance tool.

On the economic impact, the Canadian mining industry employs almost 400,000 people and contributes $42 billion to gross domestic product. The oil and gas industry, including oil sands, employs a further half-million Canadians, and the industry trade surplus contributes four-fifths of Canada's merchandise trade balance in a given year.

The oil sands segment alone employs some 200,000 people in activities relating to existing and new projects. This is almost a tenfold employment increase from a decade ago and has come with perfect timing, helping to offset a comparable national decline in manufacturing employment.

The oil and gas industry paid over $26 billion to Canadian governments in 2006 in the form of royalties, lease bids, income taxes, and other payments. That is a lot of money, $26 billion. Some $5 billion of this figure represents corporate income tax payments to Ottawa. In addition, it is important to note that industry employees and oil sands employees are highly paid, considerably higher than the average manufacturing or financial sector employees, for example, and personal income taxes also amount to many billions of dollars.

While primarily centred in western Canada, the economic benefits of oil sands development span the entire country, with considerable spending taking place in Ontario and Quebec. The oil sands represent a form of anchor tenant at present, attracting world-scale goods and services companies to Canada.

The industry also brings important employment and investment benefits to Canada's aboriginal communities. For example, an estimated $1.5 billion worth of contracts have been awarded to local aboriginal companies over the past decade.

Turning to tax treatment, the tax treatment of the oil sands sector is affected by many facets, including its levels of exploration, capital investment, research, employment, and profitability. In some areas, such as the corporate tax rate, the oil and gas industry has paid a higher tax rate than other sectors for several years, a rate that is finally being equalized this year.

Accelerated capital cost allowance is the most significant tax structure element for the oil sands. Finance Canada classifies ACCA as a tax deferral. It delays the timing of taxes payable from the early years to the later years of a project, once the capital has been recovered.

It generally takes many years of planning, approval, consultation, engineering, and construction before an oil sands project reaches the production stage. Suncor, for example, has recently received approval for its Voyager project, yet it will not reach production until 2012.

The ACCA treatment accorded to the sector is important. It reflects the fact that very large amounts are being invested over long time periods in important and risky natural resource projects before receiving a financial return. The ACCA has been part of the fiscal regime of Canada since 1974, and in 1996 was extended to in-situ oil sands costs. The ACCA regime in the oil sands works well. Companies are investing large sums and projects are gradually moving forward.

Note also that 33 of the 65 oil sands projects are in post-payout stage, paying 25% royalty. Capital is being invested, projects are being completed, many have paid off their original investment, and they are now reaching the full royalty stage. In other words, the system is working as intended.

It is important to note that the ACCA treatment of oil sands investment is the federal component of a federal-provincial tax package. It was established by the previous government as an essential prerequisite to enable the development we are witnessing today. Weakening this treatment would impose a chill on Canada's investment climate and would significantly devalue Canada's natural resources, negatively impacting the provinces' resource revenues, as well as employment and GDP.

And for those who argue that such a mechanism is unnecessary, given current oil prices, I would point out that it was but a few years ago that oil was earning $20 to $30 per barrel. It is a cyclical industry, and there is no guarantee prices will remain at current levels over the long term. Some analysts are currently of the view that cost pressures are making oil sands projects relatively expensive and risky and that further oil price declines could cause a considerable softening or deferral of investment.

Let's talk about ACCA and other sectors. As a final point of my opening remarks, it's worth noting that the oil sands industry is not unique in receiving ACCA treatment. Incentives for investment in efficient or renewable energy production equipment are provided through ACCA under class 43(1) of the Income Tax Act. Cogeneration, wind turbines, small hydro facilities, solar and photovoltaic equipment, geothermal, landfill methane capture, and many other energy technologies and industries are provided with accelerated writeoff treatment.

In addition, committee members should be aware that excise tax exemptions and a broad range of R and D incentives and technology investments are also provided in support of these industries.

In closing, allow me to quote Department of Finance remarks contained in a recent response to a petition from the Sierra Legal Defence Fund. To quote:

The resource sector is vitally important as a source of investment, exports, income, and jobs in many communities in Canada and to the country as a whole. The sector also faces distinct commercial risks, including the uncertainty related to exploration, large capital requirements for development, and financial vulnerability due to price volatility and cyclicality. At the same time, investments in resource exploration can generate significant benefits beyond those captured by the firm performing the activity. Many resource producing jurisdictions provide special tax treatment for similar reasons, an important factor to be taken into account if Canada is to be competitive in attracting internationally mobile capital.

These Department of Finance remarks accurately summarize the situation, and I could not state things more eloquently myself, Mr. Chair.

That will conclude my formal remarks. I would add, however, that I have not discussed the environmental theme in my remarks.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. Peeling.

We're going to go to the video conference people. I have here, from Nexen Inc., Mr. Marvin Romanow, if you would like to go first.

[Marvin Romanow, Executive Vice-President and Chief Financial Officer, Nexen Inc.]

Thank you very much for giving us the opportunity to speak to you today.

I have a few comments on Nexen. We're a $20-billion worldwide energy company. We operate in roughly half a dozen countries in the world. We've been involved in the oil sands for several decades, and currently we are investing, together with a joint venture partner, $4.6 billion in bringing in an oil sands plant on stream later this year.

I want to make three or four points.

The first point is that investment thrives on consistency and stability. Investment returns in the oil sands today are in the mid-teens, and despite higher oil prices, margins and returns on these new investments have been eroded largely by higher input costs. This has already happened. And if you look forward, prices in the oil sector have dropped roughly 20% from the peaks we saw last summer. We appear to be facing an area where we'll have new environmental obligations to meet, which are uncertain. We're undertaking a royalty review, which may pose an additional burden on the sector, and collective agreements in the building trades area are up for renegotiation this spring. This is not really a great, conducive environment to be further tinkering with the economic system, and this is not conducive for the big investments that have to be made.

If you look at some of the policy reasons that ACCA was originally put in place back in the mid-1990s, it was to recognize the very substantial investments that are made in these large mining and oil sands businesses. It was also to recognize the large single-event risk that occurs when these investments are made. If you've read the newspapers over the last five years, these single-event risks have been substantial. It is unfortunately more common to read about cost overruns in oil sands plant development than it is to read the reverse of that. So this is not a business that can handle an infinite amount of tinkering and additional obligations put onto it.

The second point I'd like to make is the comment on subsidies. First of all, we deduct our actual cost, both capital and operating, in running this business, just like any other industry. The structure of the oil sands business and its tax and royalty regime is similar to what you find in many international jurisdictions. It is also consistent with the theme of big capital investments moving forward and the requirement to earn a return.

There is also a natural structure here, with oil and gas organizations having higher embedded costs of capital than governments. So from a financial point of view, it makes eminent sense to move these projects forward, to have oil and gas companies get their returns in the earlier period, and governments, with their lower cost of capital, get their returns during a later, after-payout period. They also get spinoff benefits, annuity benefits, and a future tax base from which economies are built.

There has been much said about the large absolute dollar profits in our industries, but nobody remembers the very substantial investments that are made. In many ways, these large profits are related to the size of the industry as opposed to high rates of return. This is no more complicated than, if you go to the bank and put in $1,000, you would expect to make a higher absolute earning on that than if you went and put $100 into the bank. These returns have to be put in the context of the investments that are being made.

The oil sands today, at current production rates, have roughly a 500,000-year resource life index. This is not an over-invested sector. Typical in our industry would be five to fifteen years. If we look at the period of time we've been at the oil sands, we had a large plant go in 40 years ago—and that was Suncor. Syncrude went in approximately 30 years ago. Shell went in a few years ago. As well, we have a number of smaller projects. But we have been working hard over a long period of time to bring this resource to market.

If you look at what brings innovation into our sector, it is, number one, an enhanced economic outcome. It is a robust, consistent, and supportive investment environment. Capital is among the most portable commodities in the world, and commercial organizations have many choices worldwide.

Canada has a chance to be a worldwide leader in sustainable, economic, and environmentally supportive oil sands development, and we need to support it.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. Romanow. You're right on the five-minute mark. Thank you.

I'm going to go to the next presenter. From the Canadian Association of Petroleum Producers, we have Mr. Stringham. Go ahead, please.

[Greg Stringham, Vice-President, Markets and Fiscal Policy, Canadian Association of Petroleum Producers]

Thank you.

I'm hopeful that, given the short notice, you were able to receive the package of slides and distribute them. Is that correct, Mr. Vice-Chairman?

[The Vice-Chair, Liberal, Massimo Pacetti]

Yes, I have them here in front of me.

[Greg Stringham]

Thank you.

I don't plan on going through the full extent of that, but I thought it would be useful to provide your committee with the background documents associated with what's going on in the oil sands industry right now. I will touch on a couple of them to help clarify some of these points.

As Mr. Peeling has already said--so I won't repeat many of the things that are in the first few slides of that--the Canadian oil and gas industry is a major driver in the Canadian economy today and a major contributor to government revenues through royalties, taxes, and fees.

Recently we have heard a number of comments in the media and amongst your committee and others that there is a subsidy that's being provided to our industry by the government. In response to that, we feel it's important that we reiterate the facts about what is going on, to help ensure a full understanding of that.

The first assertion we've heard, which has been covered very well by Mr. Peeling, is that the oil and gas industry pays no royalty or no tax. That couldn't be further from the truth, as you've heard. Mr. Peeling has covered that. But I did want to add one point regarding tax and royalties that he mentioned, and that is the fact that in addition to the direct tax, there is a significant amount of indirect tax that is paid through to local governments in property tax, and to the federal and provincial governments through income tax on employees and on incomes that are generated by our industry.

The Canadian Energy Research Institute recently conducted a study--which is shown on slide 3 of the package I gave you--that showed that just for the oil sands sector, for the period from 2000 to 2002, there was $123 billion that will be generated for governments of all levels--federal, provincial, and municipal. You can see the split that's associated with that.

Actually the federal government, according to that study, because of the indirect taxation, ends up getting 41% of that $123 billion. Now, lest we think that all of these benefits accrued to western Canada, the investment in the oil and gas industry this year of $40 billion will generate economic activity, employment, and taxes across the country. We have a very strong need for goods and services. In fact, Alberta buys more from Ontario and Quebec than they get. So growth in the oil sands industry is benefiting not just western Canada but, as again shown in that study by CERI, there's $155 billion in GDP that is generated to Ontario and Quebec and Atlantic Canada. Along with that, there are employment benefits, to which Mr. Peeling referred. I'll just put a number to that: there are 1.8 million person-years of jobs generated from this activity that go into Ontario and Quebec and Atlantic Canada.

Certainly the second assertion we've heard is that the oil and gas industry receives over $1.5 billion per year in subsidies directly from the government. We've addressed this assertion many times over the past few years, and it's based on an old and incorrect analysis that included many of the tax elements in a system that no longer applies. The assertion relates to tax elements that are simply, as Mr. Romanow referred to them, deductions of actual expenditures. Most of those are the Canadian exploration expense and the Canadian development expense, which are deductions of amounts that we spend on exploration, development, and drilling. Many of the elements in that number that has been thrown around are things that are just no longer there when it comes to oil sands.

For example, the resource allowance is mentioned. That resource allowance is gone as of this year. Earned depletion is mentioned as a tax feature. It is long gone, since 1990. The Syncrude remission order was mentioned. It is now gone. The investment tax credits are gone, except for of course in Atlantic Canada, where they apply to all industries.

The one that actually gets the most attention right now is the accelerated capital cost allowance, and this is where I'd like to spend the last few minutes of my time.

The accelerated capital cost allowance is not a subsidy for the oil and gas industries. As has been explained by other witnesses, it is simply the deducting of capital costs, with restrictions that apply only to the extent of the revenue generated from that mine or that project. This is applicable to the entire mining industry across Canada--from iron ore to potash to coal to diamonds--including oil sands. This has been the prescribed mechanism for deducting capital costs for the mining sector since 1974. Within the oil sands industry, it has been applying only to the oil sands projects, and it levels the playing field between oil sands mining and other mining projects across Canada.

In 1996 it was extended to include the oil sands in situ projects. Those are projects that are not mines but that extract oil from oil sands projects deeper underground. The ACCA is a deduction only of costs that are actually incurred. There has to be revenue from the project before that cost can be deducted. And for an illustration of this, I would ask you to turn to slide 7 in what I handed out. That slide is entitled “Capital Cost Deduction for Income Tax”, and it's simply a bar chart. What it tries to explain is the misconception on what accelerated capital cost allowance is.

As you can see from that chart, you get normal capital cost allowance, but only two to three years after you have spent that money in the oil sands, because you will not get production until year six on most of those projects. And you can see that in years six, seven, and eight what you really are doing is taking the deductions that would happen from year six to year twenty and moving them forward, but again, limited only to the revenue that's generated from that individual mine. So it is not a 100% writeoff of the entire capital in the first year.

Then you'll notice in years nine through seventeen on that chart, actually the deduction then is lower for the remainder of the life of the project. A lower deduction of that same $100 cost in this example means that there are higher taxes generated to governments during those later years of the project. So you can see it is a shift in timing of the same $100 deduction, but it is not a subsidy to the industry.

[The Vice-Chair, Liberal, Massimo Pacetti]

Mr. Stringham, if you can just wrap it up, I'll give you 30 seconds.

[Greg Stringham]

Thank you very much.

The purpose of this accelerated capital cost allowance was the same as it was in 1974 and as when extended to the in situ in 1996. It was to recognize large capital costs, long lead times, and high risk of volatile prices with financing risk. It is fair to say that today these reasons are still valid, and the energy security implications are now even more important.

In the last ten seconds, I'd like to simply talk about how the accelerated capital cost allowance has also been extended to other sectors, which Mr. Peeling has also mentioned.

One of the really—

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. Stringham. We're way over.

[Greg Stringham]

Thank you.

[The Vice-Chair, Liberal, Massimo Pacetti]

You'll get a chance to reply when the members ask you questions.

For the next witness, from EnergyINet we have Dr. Michael Raymont. Go ahead.

[Dr. Michael Raymont, Chief Executive Officer, EnergyINet]

Thank you, Mr. Chairman and members of the committee. It's a pleasure to speak to you from Calgary.

I received about four hours' notice for this, so you have no handout from me at all. I'm going to speak totally off the cuff. If you want further information provided later, I can do that.

EnergyINet is a completely neutral body. It is neither a lobby group for the industry nor a representative of environmental interests. It is purely a neutral gathering place and network to provide information on energy technologies.

My own background is not as a tax expert or an economist but as somebody who's worked in the areas of energy R and D, innovation, and venture capital. I've been an entrepreneur and a senior government official. My remarks are made in this context.

First of all, Canada need the liquids that are produced and will be produced by increasing activities in the oil sands. We have no other choice if we are to preserve our role as a net energy exporter, with the enormous economic benefits that go along with that.

In spite of the best will in the world on renewable resources--and I applaud initiatives to accelerate the deployment and introduction of alternative and renewable energy resources--many experts will tell you that there is no doubt that we will be using fossil fuels in the amount of 80% to 90% for our energy supplies for the next 50 to 100 years. No tax measures will alter that reality. It is based solely on the amount of energy that this world consumes. Any energy economy measures, any conservation measures, will not close that gap.

So we need the oil that will come from oil sands projects. There are no other practical sources for this. In fact, conventional oil is declining at an increasing rate. Gas has probably plateaued and will decline also.

Not producing oil would give rise to huge negative economic consequences, potential geopolitical tensions, and so on and so forth. We're asked, just as an example, why we can't turn to wind power, and I'd like to give you some numbers on that. A million barrels a day of oil is equivalent to 75% of the total Canadian electricity-generating capacity installed today. It would require 20,000 wind turbines, which is one and one-quarter times the world's installed capacity, and five years of the total wind-turbine production of every manufacturer in the world simply to replace that million barrels a day, dedicated just to Canada. It won't happen.

And anyway, wind turbines produce electricity. Airplanes don't fly very well on electricity. They need liquid fuels. We must have a source of liquid fuels.

The problem, then, which I think can be rationalized with the environmental concerns, is the need to integrate energy and the economy and environmental matters. This comes down simply to a question of providing the right incentives and risk-sharing by government to make certain that innovations that will reduce greenhouse gasses, reduce water usage, and reduce conventional fuel usage are brought into effect.

Canada has had for a long time a very high R and D tax writeoff. This has been ineffective in spurring business research and development. We have one of the highest rates of R and D tax credits. At the same time, we have one of the lowest OECD rates of corporate R and D. Why? Because tax writeoffs for R and D encourage R and D, perhaps, but they do not encourage the implementation and commercialization of such technologies.

It has been repeatedly shown that capital cost allowance and other capital deployment incentives encourage the deployment and commercialization of technologies and innovations. Therefore, my strong recommendation is that this committee look very seriously at encouraging innovations--innovations that would mitigate the impacts of greenhouse gases, that would mitigate the use of excessive amounts of water, that would mitigate other negative environmental effects of increased oil sands production--by providing strong capital incentives for the deployment of technologies that provide those mitigations. Those technologies are today either there or close. We see many oil sands project technologies that in fact have focused on such things as gasification, the possible use of nuclear fuels as a source of energy in the oil sands, alternative sources for hydrogen, and so on and so forth. I'll leave the experts to figure out what the level of risk is and what's tolerable and what's not.

I think the capital tax structure can be used very effectively to encourage oil sands production, which is needed if we are not to fall into a total energy-deficit picture, and at the same time, it can be used to help mitigate the environmental negative impacts.

Thank you.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Dr. Raymont. I can see this is not an easy subject; almost everybody went over on their time.

Perhaps we can get to members. We're going to go for six minutes on the first round. Mr. McKay, and then Monsieur St-Cyr.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Thank you, Chair, and thank you, witnesses.

First of all, I want to see whether we're talking about the same thing here. Mr. Stringham, in his paper, says that the oil and gas industry receives over $1.5 billion a year and then he goes on to say why that's not true. Mr. Caccia, in his paper, says the most recent data produced by the Pembina Institute and not disputed by Finance Canada show that the industry receives $1.4 billion annually in federal tax breaks. Provincial tax breaks are considerable too, but harder to quantify.

So my first question is to both Mr. Stringham and to Mr. Caccia. Are you talking about the same thing?

[The Vice-Chair, Liberal, Massimo Pacetti]

Mr. Stringham.

[Greg Stringham]

From my perspective, I believe that is the same number. It's a number that was generated based on a 1997-to-2002 study originally by the Parkland Institute and then adopted by the Pembina Institute. So it is, I believe, the same number, which is again, as I said, historical and is not accurate to today's reflection of what's going on.

[John McKay, Liberal, Scarborough—Guildwood, ON]

So in your view, Mr. Caccia got it wrong.

Mr. Caccia.

[Charles Caccia]

The Pembina study was published in January 2005 and it was evidently based on data of preceding years. It may actually require an adjustment, but nevertheless there it is a fact that the ACCA treatment, which includes, as mentioned by Mr. Stringham, an accelerated capital cost allowance and other special treatments, is still a valid point. Whether the trigger is exactly the same, that may change from year to year.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Mr. Stringham has been pretty detailed here. He says that the resource allowance is gone, the earned depletion allowance is long gone, the Syncrude remission order is gone, the investment tax credits are gone for everywhere except Atlantic Canada, and then he says the ACCA is not gone, but it's an issue of timing.

Is that what we're talking about here, an issue of timing as to the recognition? Because obviously for the accelerated capital cost allowance the timing is far quicker than for conventional sources. Is that the source of the dispute between the two of you?