Finance Committee on May 29th, 2007

[The Chair, Conservative, Brian Pallister]

Pursuant to the order of reference of Tuesday, May 15, 2007, we are studying Bill C-52, An Act to implement certain provisions of the budget tabled in Parliament on March 19, 2007.

Good morning to our witnesses. Thank you for being here this morning as we continue our discussions on the budget bill, Bill C-52.

You've been asked to keep your presentations to five minutes to allow time for questions from committee members.

We will commence with the Coalition of Canadian Energy Trusts. John Dielwart is here.

Five minutes to you, John.

[John Dielwart, Chief Executive Officer, ARC Energy Trust, Coalition of Canadian Energy Trusts]

Thank you very much, and thank you for the opportunity to present our views.

When the Conservatives broke their promise not to tax trusts, it came as a total surprise to millions of hard-working Canadians, and it will have severe negative economic impacts for all of them. The government continues to ignore their concerns and has advanced its broken promise into Budget 2007.

Our coalition has made every attempt to understand how the government arrived at their tax leakage calculation. This committee's previous investigation into the trust decision has revealed that the government has intentionally prevented this information from coming to light. In the absence of such information, Canadians have no alternative but to believe the government's decision was ill-informed and not well thought out.

In December 2006 we presented a detailed, comprehensive report of the importance of energy trusts in the Canadian oil and gas industry. We have yet to receive a response from the Department of Finance. Their failure to engage in consultation on our report indicates to us that the government has chosen to ignore the concrete facts presented by companies that are generating billions of dollars of wealth and employing thousands of Canadian taxpayers.

We believe our position is beyond dispute and that energy trusts should be allowed to continue to exist as they were prior to the so-called tax fairness plan. In our last presentation to this committee, we provided copies of this report.

You have previously heard testimony from government-selected witnesses, and ironically, many of them believe there is a role within Canada's capital markets for energy trusts. Let me highlight some of their comments.

Dominic D'Alessandro noted that real estate and royalty-producing assets such as energy trusts are the businesses that the current tax regime was designed for. He said that energy trusts have a strong case for exemption. We agree.

David Dodge said, “on balance, income trusts make capital markets somewhat more complete and somewhat more efficient”. He went on to say, “the income structure may be very appropriate where firms need only to manage existing assets efficiently”. That is exactly the energy trust role in maximizing production from Canada's mature oil- and gas-producing assets.

Jeffrey Olin, by inference, declared that there are businesses suited for the trust sector. We believe this is the case for energy trusts.

Kevin Dancey said, “trusts have a role to play in rounding out Canada's capital markets”. We agree.

The government has heard these inconvenient truths from their very own expert witnesses that they presented to this committee. These individuals say that trusts, and particularly energy trusts, have a role to play in Canadian capital markets. Contrary to this advice, the government's proposed tax measures will see trusts disappear from capital markets in Canada. We have repeatedly stated that eliminating energy trusts will reduce production and reduce government revenues.

There is an increasing threat of foreign takeover of trusts. Foreign corporations are not focused on maximizing production from conventional western Canada oil properties. This has been the domain of the energy trusts. The increased cost of capital imposed by this tax will alter the economics of these mature properties, leading to reduced ultimate recoveries of Canada's oil and gas resources.

It has been only six months since the government made this ill-considered announcement; nevertheless, our sector has already seen changes. Energy MLPs have made overtures to acquire some of our member companies, and others have been looking seriously at moving mind and management of their organizations to the U.S. The revenue losses to the government will be significant relative to retaining the status quo of the energy trust sector.

Another impact of the October 31 announcement is that Canada's credibility in foreign markets has been significantly eroded. We are no longer looked at in the same positive way by foreign investors. At a time of increasing globalization, this is a severe black mark on our nation's reputation. We expected better from our government.

You heard our position regarding this government's decision to break its promise on tax trusts from my colleague, Gord Kerr, on February 1. Let me conclude by restating our position.

Energy trusts do not cause tax leakage. Taxes are not avoided; they are transferred to the unitholder. Energy trusts enhance energy productivity. U.S. energy trusts in the form of the MLPs and LLCs not only exist but are expanding rapidly.

Canadian junior oil and gas companies are struggling today due to the materially reduced access to capital resulting from the trust tax announcement. The increased costs of capital imposed on the energy sector have negatively impacted the economics of important projects, including those targeting carbon dioxide capture and storage.

We believe it is only reasonable that the Minister of Finance revisit the issue of Canada's energy trusts, just as he did to fix a mistake he made on foreign interest deductibility for Canada's corporations. Individual Canadians deserve the same treatment afforded these large corporations.

In conclusion, I would say, as we have said before, that it is never too late to get it right, not just for energy trusts and its investors but for all Canadians.

Thank you, Mr. Chairman.

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Dielwart.

We'll continue with the David Suzuki Foundation. Bill Wareham is here. Bill, you have five minutes.

[Bill Wareham, Acting Director, David Suzuki Foundation]

Thank you, and good morning, honourable members of the committee. I appreciate being invited to present to you today.

I'm the marine conservation program director for the David Suzuki Foundation. I have a BSc in science and a master of business administration degree. I've worked for about 20 years for various environmental non-government organizations on various environmental policy issues. Over the last three years I've focused specifically on marine conservation and fisheries policy issues.

Today I'd like to present my views on Canada's efforts and performance in the field of ocean and coastal conservation and management, highlight some of the values in our oceans that I believe are at risk because of the current federal budget allocations, and suggest where I believe Canada should be investing more federal money to meet some of our international commitments.

With over 40% of our national jurisdiction in marine environments, and with the significant contribution that ocean-related activities make to our economy, I believe that Canada is currently significantly under-investing in the health and future of the well-being of our oceans and coastal environments.

Canada has made many international commitments to protect and manage our oceans in a manner that maintains the function of marine ecosystems. In 1992 we signed the United Nations Convention on Biological Diversity. Article 8 of that convention clearly states the mandate for the parties to the convention: to establish a system of marine protected areas; to regulate and manage biological resources for the conservation of diversity, both inside and outside of protected areas; and to promote the protection of ecosystems and natural habitats to maintain viable populations of species.

Canada also has commitments under the Migratory Birds Convention Act and our own Oceans Act, in which, under subsection 35(2) of the act, it directs the Minister of Fisheries and Oceans “to lead and coordinate the development and implementation of a national system of marine protected areas on behalf of the Government of Canada”.

In 2002, in an attempt to realize the Oceans Act mandate, Canada developed an ocean strategy. This strategy laid out a plan on how to realize some of these international commitments and our domestic mandate. Sadly, Canada is failing to meet its commitments. Other nations, including the United States, Australia, and New Zealand, which also made commitments to ocean strategies at about the same time Canada did in 1997, have moved far ahead of us in planning, protecting, and managing the biological resources within their economic zones.

How badly are we doing? As of 2006, Canada had protected 0.12% of our exclusive economic zone. It is not my view that Canada lacks the ability to reach our objectives; rather, there's a lack of political will and a serious lack of investment that's required to do the job professionally and in a manner that would maintain Canada's reputation as a world leader in stewardship, conservation, and sustainable practices. This critical view is not only mine. It was presented in 2005, when the Canadian Commissioner of the Environment and Sustainable Development issued a very detailed report highlighting that Canada had failed to meet the ocean strategy objectives and its mandate under the Oceans Act.

The commissioner identified the lack of inter-agency coordination and collaboration and a lack of adequate funding as the primary hurdles for progress on this file. Now, almost two years later, we have not only failed to make progress, but we are sliding backwards. We have no integrated management plans in place in our oceans. We have no new marine protected areas. We have declining budgets for science and research in oceans. And we have less funding in DFO's ocean management budget than we had two years ago.

How many years will Canadians have to hear that we have failed to meet our international commitments, failed to invest in the conservation and management of our oceans, and failed to establish a governance structure that maintains the benefits Canadians realize from our oceans?

The oceans are important to Canadians. Over 20% of our population lives in coastal cities and communities. And 98,000 people work in fisheries and processing jobs. Canada has over 11,000 ocean-oriented businesses with fisheries landings worth over $2 billion to the Canadian economy and seafood exports of over $5.4 billion. Recreational fishing in southern British Columbia alone is worth $500 million. And DFO estimated in 2006 that the overall economic activity was worth $23 billion.

Not all this economic activity is sustainable. It's increasing. The non-traditional things like aquaculture, oil and gas, and tourism are escalating on an ever-increasing scale. The threats we face from climate change are exacerbating the problem.

I'm very concerned that there is a $105 million decline in the budget at DFO in the next year, and there's only $18 million allocated over the next two years for conservation.

We believe that a much greater investment must be made, and we're asking for more than $100 million per year to be allocated to engage the integrated management planning process and related work necessary to actually complete the designation of marine protected areas and to move to an ecosystem-based approach to management of our oceans.

Thank you very much for hearing my comments today.

[The Chair, Conservative, Brian Pallister]

Thank you very much, sir.

We'll continue with Living Oceans Society representative Kate Willis.

Madam Willis, you have five minutes.

[Kate Willis, Campaign Manager, Marine Planning and Protected Areas Campaign Manager, Living Oceans Society]

Thank you for inviting me to appear before the finance committee. My remarks today will focus on the implications of the lack of dedicated funding in Budget 2007 to integrated oceans management. I will be commenting on two key areas: why the amounts allocated towards oceans health and protection in Budget 2007 are grossly inadequate and the repercussions this lack of funding will likely have on progress that has already been made in the regions. Our written submission contains additional details. Unfortunately, due to the short notice to appear before you, we were unable to get a brief translated prior to our appearance, but French and English copies will be sent following our appearance today.

I work as the marine planning and protected areas campaign manager for Living Oceans Society, a non-profit research and public education organization based in British Columbia that is committed to conserving marine biological diversity in order to ensure a healthy ocean and healthy coastal communities. Prior to my position at Living Oceans Society, I worked for the U.S. Government at the National Oceanic & Atmospheric Administration in Washington, D.C., in their office of international affairs. In my position there, I attended several meetings at the United Nations and abroad, debating and discussing the dire situation of our world's oceans and the immediate need for more action to protect them from habitat degradation, overfishing, and loss of biodiversity.

While at these meetings I was always impressed by the Canadian delegations. They spoke of advancements in their legislation and governance bodies over the past 10 years: the passage of the Oceans Act; the development of Canada's oceans strategy; and, most recently, the development of Canada's oceans action plan in 2005. I was therefore optimistic and encouraged by Canada's international reputation when I moved to British Columbia. It is now just over a year later, and although I remain optimistic—it is a part of my nature—I must admit, I was very disappointed when I saw the 2007 budget.

Of the $4.5 billion dedicated in Budget 2007 to clean our air and water, reduce greenhouse gases, combat climate change, and protect our natural environment, only $19 million was allocated to help clean and protect our oceans and support greater water pollution prevention, surveillance, and enforcement along Canada's coast. Nineteen million dollars may sound like a lot of money to many people, but when you consider the extent of our coasts, all 243,000 kilometres of them, it's a drop in the bucket. Split evenly between the five major ocean regions over the next two years, this amounts to approximately $1.9 million per region per year. To expect any region, no matter how effective it is, to clean and protect our oceans with that amount of support is setting them up for failure.

In 2005, approximately $28 million was allocated towards the first phase of Canada's oceans action plan. Portions of that funding were directed at integrated oceans management, which considers both the conservation and protection of our ecosystems, while at the same time providing opportunities to create wealth in oceans-related economies and communities. It is Canada's opportunity and a common sense approach to shift from single species management, uncoordinated decision-making, and poor management of unsustainable industries to establish marine-planning processes that will ensure that our oceans resources are sustained for generations to come.

There was progress between 2005 and 2007. Several agencies within the Government of Canada started to undertake the difficult task of integrated oceans management. In B.C., the Pacific North Coast Integrated Management Area, or what we fondly call PNCIMA, was identified as a priority area. It's a huge area. It's about 88,000 square kilometres. If you're not from there, it's about the size of one New Brunswick and two Prince Edward Islands. So it's a really large area. It's an area of high ecological, social, and economic importance to British Columbia, and it contains some of the richest marine life in Canada. It's a spectacular and beautiful place, and there are approximately 72,000 people in the region who depend on it for their livelihood, recreation, and employment.

Notable indicators of progress made towards starting a planning process in British Columbia include a tripartite commitment from the federal and provincial governments and first nations to work collaboratively on planning in the PNCIMA. This is profound. In British Columbia, there has historically been a rift between our provincial government and Fisheries and Oceans Canada. To have them working together, in particular on a government-to-government level with first nations, is quite remarkable, and it's an opportunity that we need to take advantage of and to continue fostering.

I'm therefore here today to express our extreme disappointment that no funds were allocated toward integrated oceans management in Budget 2007. I would like to see the government show new leadership on oceans management in Canada and to put the resources and the political commitment behind managing our oceans and getting these marine planning processes under way.

Our oceans are important for all Canadians, no matter how you look at them, in terms of health and quality of life, in terms of economics, and in terms of the environment. Therefore, oceans management is not just for the people who live on the coast; it's for all Canadians. It's critically important, it's something that must be done, and $1.9 million over two years is not going to do it.

Thank you very much for the time and the opportunity to present before you.

[The Chair, Conservative, Brian Pallister]

Thank you very much, Ms. Willis.

We'll continue with the Canadian Vehicle Manufacturers' Association. Mark Nantais is here.

Over to you, sir, for five minutes.

[Mark Nantais, President, Canadian Vehicle Manufacturers' Association]

Thank you, Mr. Chairman.

CVMA membership includes DaimlerChrysler, Ford, General Motors, and International Truck and Engine Corporation. Our members account for roughly 70% of all vehicles assembled in Canada, 55% of the vehicles sold, and over 85% of all the automotive investment in Canada.

As an association, we've been very supportive of several aspects of the 2007 budget. We have been particularly supportive of items including the promotion of ethanol production as a fuel, increased funding for infrastructure and borders, the accelerated capital cost allowance, and efforts to enhance the SR and ED tax credit system. But on the other hand, we, along with many others, have been very vocal in opposition, both publicly and privately to the government, to the ecoAUTO green levy program and its very perverse and unintended consequences for manufacturers and consumers that will yield no environmental benefit.

The ecoAUTO rebate green levy program, for all intents and purposes, is what we call a feebate program, so I will refer to it as a feebate program. This measure constitutes in my mind the single most significant intrusion into and disruption of the functioning of the competitive automotive marketplace that not only will fail in its objectives, like every other program similar in nature, but has also created huge inequities between manufacturers. In reality, it disproportionately only benefits the sale of one vehicle, which is produced offshore, not an advanced technology vehicle, and it only benefits one manufacturer. It has created very severe and unintended consequences at a time when the industry is in a very fragile state, and it will actually retard environmental progress. The timing could not be worse for our industry. On top of that, the policy will actually diminish the effectiveness of the support the government has already announced itself for the accelerated retirement of older vehicles, which is a much better approach that will yield real environmental benefits.

The intent of this feebate policy is to persuade consumers away from larger, less fuel-efficient vehicles towards smaller, more fuel-efficient vehicles. In theory, perhaps; in reality, not, definitely not. While improved new vehicle fuel economy is an important factor, the debate is and should be shifted to that of fuel consumption as a function of how and how far we drive our vehicles. In addition, we need to focus on greenhouse gas emission reductions, which means, yes, small, more fuel-efficient vehicles have their place. But in today's automotive technology world, we can deliver, in some instances, greater greenhouse gas reductions in larger vehicles equipped with technologies that, for instance, run on renewable fuels such as ethanol at 85%, particularly when it's derived from cellulosity processes. So contrary to popular opinion, big is no longer always bad. We must avoid being too myopic in our approach, but rather look to a broad range of technologies now available to address personal transportation's contribution to greenhouse gas reductions.

If we look at today's market realities in Canada, Canadians already purchase small, fuel-efficient vehicles in much greater quantities, especially in comparison to the United States. This is particularly due to lower disposable incomes and higher operating costs, including the price of gasoline. According to Dennis DesRosiers Automotive Consulting, as well as being backed up by a lot of supporting data, Canada's auto market is already optimized toward more fuel-efficient vehicles, with very limited opportunity to shift consumers between vehicle segments.

Let me tell you why this policy is fundamentally flawed.

Number one, it damages domestic automakers: $67 million worth of levies is placed on domestics. That's 80% of all the levies that will be collected. Transfers of $47 million benefit one company—that is 75% for one vehicle, and it is, as I said, produced offshore.

Number two, it damages the Canadian economy segment, that is the economy segment of vehicles. The $1,000 rebate for one vehicle, which makes up half of all rebates, undermines other dealers' and manufacturers' abilities to sell equally beneficial subcompacts competitively on the same basis.

Disincentive to Canadian green technology is another one.

Dangerous trade-offs: we are trading off the ability to put safety on vehicles, and it creates a possibility of actually putting vehicles on the market that are less safe in order to be competitive.

It hurts urban and rural families. It impacts segment choices. In other words, it does not promote people shifting from a larger segment to a smaller segment.

More older vehicles on the road: it tends to delay fleet turnover; therefore, you delay environmental benefit. It also allows, perversely, incentives for vehicles that do not meet the same smog-related standards in 2007, and it has an unreasonable cost-per-tonne reduction. There are several and many different implementation realities that are also problematic.

So, Mr. Chairman, many studies into it now suggest that this program will not deliver any environmental benefit.

We have a plan, as an auto industry. We'll be announcing that plan, and over the next several weeks there will be an ad campaign to address that.

I'd be glad to answer any questions you may have.

[The Chair, Conservative, Brian Pallister]

Thank you very much, sir.

We'll conclude our presentations now with Paul Hobson, who is here as an individual. Mr. Hobson, over to you for five minutes.

[Professor Paul Hobson, Department of Economics, Acadia University, As an Individual]

Thank you, Mr. Chair.

Let met briefly introduce myself. I've been a professor of economics for 29 years. For 25 of those years, I have studied equalization and associated aspects of federal-provincial fiscal relations. I have been working on this particular file ever since the budget came down. I've done some very detailed analysis of what is being proposed here. I'm still revising my results as I better understand what is proposed in Bill C-52.

My presentation today will focus solely on fiscal equalization payments to the provinces and associated changes to the offshore accords. The bill also makes important changes to the determination of territorial formula financing payments, as well as to the growth and distribution of the Canada social transfer and the eventual distribution of the Canada health transfer. These matters would require a separate presentation.

The bulk of Bill C-52 lays out, in terms of the text, the terms of the new equalization program applicable to the provinces. Associated changes to the Federal-Provincial Fiscal Arrangements Act are in clause 64, pages 64 to 83. In addition, clauses 80 to 86, pages 93 to 103, lay out the associated changes to the Canada-Newfoundland Atlantic Accord Implementation Act and the Nova Scotia and Newfoundland and Labrador Additional Fiscal Equalization Offset Payments Act. My point is, getting your head around all this is a huge undertaking.

Proposed section 3.1—this is in clause 80--specifies amounts for fiscal equalization payments to the provinces for 2007-08. What people need to understand is that these amounts are derived from application of the formula described in the subsequent proposed section 3.2. There are, in fact, three formulae at work in generating those numbers. One involves the O'Brien formula coming out of the expert panel. One involves a variant on that formula, with zero inclusion of natural resource revenues, and the third involves effectively a continuation of the status quo on option to Newfoundland and Labrador and to Nova Scotia.

If you go into the details of these—that's where the numbers come from—in particular how these numbers will be generated in future years, that's proposed section 3.2. Paragraph 3.2(1)(a) is the O'Brien formula. Paragraph 3.2(1)(b) is the zero inclusion of natural resources formula. And that is only part of what is being undertaken.

Proposed section 3.3 makes important transitional provisions for British Columbia with regard to the calculation of revenues derived from property taxes. There has been very little study of what the implications of those provisions are.

Proposed section 3.4 introduces the new cap on equalization, the so-called fiscal capacity cap, designed to ensure that equalization payments do not raise a province's total fiscal capacity above that of any non-receiving province. Where that does occur, equalization will be reduced. Indeed, it can be eliminated as a result of exceeding the cap.

Proposed section 3.5 provides definitions of terms and bases. There is a lot of important material in there that people are still getting their heads around. It explains the process, the three-year moving average lag of two years that will generate the data on equalization, but also the changes in how bases are being measured for purposes of determining equalization. Very little study has been made of that aspect either.

Proposed section 3.6 is very important. It makes special provision for Nova Scotia and for Newfoundland and Labrador, allowing them the option of continuing under the fixed framework indefinitely and, indeed, specifying an annual 3.5% growth rate in the aggregate equalization pot. Either province can, at its option at any time in the future, including during this year if it wishes, opt into the new program. That is specified in proposed section 3.7.

Beyond 2007-08, Nova Scotia and Newfoundland and Labrador will have to make choices. For 2007-08, the choices are obvious, and what choices are made in this particular year are not irrevocable. However, they will be irrevocable in subsequent years if either province opts into the new program. I would simply make the point that the analysis I've been involved in would suggest, from Nova Scotia's point of view, that remaining within the fixed framework indefinitely into the future would likely be its most preferred option, notwithstanding the fact that it might involve taking slightly reduced benefits in the 2008-09 fiscal year.

[The Chair, Conservative, Brian Pallister]

Thank you. We appreciate your comments, and I'm sure you will be able to work in some more material in responses to questions.

Mr. McKay, seven minutes.

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

Thank you, Mr. Chair. I just want to take a minute of silence for Professor Hobson. Anybody who has studied equalization for 25 years has nothing but my sympathy.

[Voices]

Oh, oh!

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

It's hard to imagine how one document, Bill C-52, could offend more people. Literally, a mari usque ad mare usque ad mare, from sea to sea to sea, to the industrial heartland of the nation out to Alberta, where, if you will, it's part of our new economy.

But I wanted to focus on Mr. Dielwart in my brief time. We had a presentation here yesterday and the presenter talked about the unintended negative consequences of this move with respect to the income trust fiasco. I don't generally go to paranoia, but I'm just wondering whether it was unintended or if this was a move intended to destroy the sector, because some of the consequences of the decision were blindingly obvious.

It would be blindingly obvious that this would give a boost to the growth of MLPs in the U.S. It would be blindingly obvious with experience in hand that it had potential to destroy billions of dollars worth of investment. It was blindingly obvious that it would tilt the playing field in favour of private equity, etc., and we see that rolling out literally in waves.

I know your group was talking to the previous government about energy trusts as a unique entity needing to be left alone, if you will, and it would be blindingly obvious that there are going to be a bunch of takeovers.

So I disagree with yesterday's presenter that it is unintended; these consequences were readily predictable and possibly even intended. So I want you, Mr. Dielwart, to tell this committee what's unique about energy trusts that they need a carve-out.

[John Dielwart]

Thank you very much. First and foremost, I'd like to address the issue of was it or was it not intended. I don't think there's any question from anyone who looks at this policy that this policy was intended to eliminate trusts from the Canadian economy. Based on the government's own tax leakage numbers, which we have repeatedly disputed, a 3.5% tax would have dealt with it. We got 31.5%, so I would agree with you that there was an overt measure here to eliminate the trust sector.

We in the energy trust sector have been saying from the beginning that we are different, and that has caused a lot of people to raise their eyebrows, but we remind this committee that energy trusts were created in the late eighties with specific rules from the Department of Finance. This structure was intended for these assets for very good reasons.

The maturing base in the costs of capital advantage that has been created by this entity is allowing us to more fully develop Canada's energy resources. We have repatriated tens of billions of dollars of assets from foreign ownership, and those foreign corporations are interested in one thing and one thing only today, and that's the oil sands. They are neglecting conventional production, which is the bread and butter of small-town Alberta, and we fail to understand how this government could look at the energy trust sector in any way but to say that this is a beneficial component of the economy.

The 20% of Canada's production that we represent would diminish significantly under the cost of capital changes that will occur as a result of this policy. So we have asked ourselves many, many times, why would the government do this? It's clear it doesn't understand our industry. It's clear we have not done a good enough job explaining what we do. We defy anyone to take a hard look at the report we presented to this committee and to the Department of Finance six months ago now and not conclude there's a very important role for energy trusts to play.

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

You can readily see how a finance minister from central Canada maybe just doesn't get it, but presumably a prime minister from Alberta should get it.

So why are energy trusts just going to disappear, and what has been the effect on the market for you? The TSX has been on a tear lately and has lifted all boats, but the trust sector has lagged the TSX since October 31. Explain to the committee how that has played out for your particular sector.

[John Dielwart]

It specifically addresses some questions that came from the chair yesterday about the fact that valuations are back up. I'll give you our example. We're one of the larger top performing trusts. We traded in the $28 to $29 range on October 31. We currently trade in the $21 to $23 range—a 20% to 25% hit. We have not cut distributions. Our programs continue to work well. So while the broad sector is up, we're down by 20% to 25%, and that's not going away.

Our cost of capital has gone up by 20% to 25%. Our access to capital has gone down—our ability to fund the projects that are necessary. I remind this committee that energy trusts are at the forefront of carbon capture and storage. I can tell you that on October 31, the economics of every CO₂ sequestration project we have changed—and our company has been at the forefront of that with several projects. They came into question. The probability of those projects proceeding on the same basis as they would have before has changed dramatically.

[The Chair, Conservative, Brian Pallister]

Thank you, sir.

Mr. Crête is next.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Thank you, Mr. Chair.

Mr. Nantais, you spoke to us about the ecoAUTO program. We all recognize that environmental matters require a major effort, particularly in regard to greenhouse gases, and that action is required across all sectors.

But you briefly spoke about what you see as the negative consequences of the current version of ecoAUTO. I know that a review is planned for 2008. I would like to know what changes you would like to suggest so that the program meets its objectives, but also does so in a way that is more effective for your industry in general.

[Mark Nantais]

Thank you very much, Mr. Crête.

Because this program is so flawed, our recommendation is that it be eliminated, that steps be taken to essentially phase out this program as quickly as possible. But in the meantime, make adjustments to the playing field between manufacturers and provide certainties to manufacturers for the 2008 model year.

This program was introduced without any warning or consultation with industry, yet it's almost three months later and the wheels have already come off the cart. Administratively, these programs are complex and don't work.

On recommending more appropriate action, we suggest following through on a broader integrated plan that involves the smog-related standards that have already been adopted—the most stringent smog-related standards in the world. We should follow through with our voluntary agreement to reduce greenhouse gas emissions by 5.3 million tonnes in 2010. We should now look beyond that with more stringent fuel economy standards that the Prime Minister has announced he will do in 2011. Those standards, in our view, should continue to capitalize on and benefit from the integrated approach that our industry has taken since 1965 and harmonize ourselves with the very stringent reformed CAFE standards that are forthcoming in the United States.

We recommend that we take the broad comprehensive plan to integrate fuels with greater diversification of fuels, that we integrate the whole notion of green fleet zones, where government fleets and commercial fleets can adopt many of these vehicles that we already have on the market that run on renewable fuels, like 85% ethanol or biodiesel.

We should help consumers, not with a program like the auto eco-rebate or the green levy program, but with an incentive to actually help offset the premiums attached to some of these very sophisticated advanced technologies.

We should also look to driver behaviour. This is not so much a fuel economy debate as a fuel consumption debate, and it's a nuance that is very important. Our ability to reduce greenhouse gas emissions really depends on how we use our vehicles and how far we drive a vehicle. The amount of greenhouse gas emissions we all emit when we drive a vehicle is directly proportionate to the amount of gasoline consumed.

That is what we would recommend, Mr. Crête.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

I have somewhat of a conflict of interest because I myself drive a subcompact. The program certainly targets very small vehicles through a criterion that means that, in practical terms, there is only one choice. Would it not be helpful, for the second generation of the program in 2008-2009, if the integrated plan you spoke of allowed the purchase of a family vehicle, a minivan or any other kind of vehicle as long as their results are good in the future?

Purchasers of large cars will not necessarily embrace smaller ones, but some activities are perhaps not sufficiently covered by the current policy. I mentioned the family car, but I could also be talking about the need, in a rural constituency like mine, for such and such a type of work vehicle.

Would a future approach be to reduce fuel consumption rather than just favouring one specific make of vehicle?

[Mark Nantais]

In many respects, you're absolutely correct. The program, as it now stands, does penalize people who have legitimate needs for particular vehicles; in many respects, people who are in rural parts of this country have specific utility needs, so again there's a fairness issue there.

Although this program has been touted as a revenue-neutral program, it's not. In fact, it's like any other feebate program: it's a tax. That's really where other things come out. There's a $55 million net gain, if you will, in revenue by virtue of this program.

All literature suggests, whether it's the National Round Table on the Environment and the Economy, the Ontario government, the British Columbia government—Other independent studies in the United States clearly show that these programs do not work, but if we are able to remove the program and provide a look at a whole broad range of advanced technology vehicles and help consumers afford them—

We have and continue to have an affordability challenge in this country simply because of lower personal disposable income and higher operating costs and so forth, so the market is actually already optimized to a smaller, more fuel-efficient fleet, and the data shows this as well. People really don't buy much beyond their needs, except in the high-end luxury vehicle segment, and that's where there's a great deal of price inelasticity, where it doesn't matter; because of their affluence, they'll continue to buy the vehicle that they do purchase.

Clearly, with all these things going on and with gasoline prices being the way they are, we are moving to more fuel-efficient vehicles, but if we take on the wrong policy—policies like this one, which can actually retard environmental improvement and retard fleet turnover—not only do we lose out on the smog-related benefits, but we lose out on the greenhouse-gas-related benefits.

The third one we lose out on is vehicle safety benefits. For every old vehicle that's taken off the road—There are over a million 1987 and older vehicles on our roads, each emitting 37 times more than a new vehicle in terms of smog-causing emissions. These new vehicles are equipped with some of the most advanced safety systems that exist, and there's data to show that if we were able to turn over the fleet overnight—we can't do that, of course, but if we could—we would see as much as a 50% reduction in fatalities on our roads. So the whole key here is policies that support fleet turnover.

[The Chair, Conservative, Brian Pallister]

We'll continue now with Mr. Del Mastro.

Thank you, sir.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you, Mr. Chair.

I'm going to continue with Mr. Nantais.

Mr. Nantais, as you know—or as you may not know—I've been around cars since I was 14 years old. I started washing cars, and worked in parts departments, worked as a mechanic, and worked in various dealerships. I've worked every capacity in a dealership. I've sat on Suzuki Canada's dealer advisory board. I've sat on the CADA industry relations board. I have a lot of experience around the auto industry. And we've also been, amongst other things, an emissions test and repair facility since 1999.

When I first heard about the program announced in the budget, I was very suspicious, to be perfectly honest with you. I'd had experience with things like the air conditioner tax, the federal air excise tax that was brought in during the eighties, the provincial gas taxes that have been brought out, and they really didn't curb consumer appeal or demand. They didn't drive anything. They didn't really do anything except create a new tax.

That said, I think there are a couple of things we need to recognize about the direction of the auto industry over the last number of years. It's been in complete contravention of the direction in which we know, inherently, we need to go as a society.

As we talk about reducing greenhouse gas emissions—and I know the former government talked a lot about it, especially since 1997. What we actually did was we started building cars that were less and less fuel efficient. When I signed on in 1997 with the manufacturer that I represent, we had a car that got 58 miles per gallon. Our best car on gas for fuel economy now is 42 miles per gallon. Why? Well, because we kept on driving up horsepower numbers. We were feeding what people wanted.

I understand, because the auto industry is in the business of giving people what they want. That's what they compete on, creating appeal. Showroom appeal really sells cars. But ultimately the government has a separate responsibility, and that is to tell people that showroom appeal is important, but we really have to bring this back because greenhouse gas emissions continue to go up.

I applaud the vehicle manufacturers, believe me. I will tell you, from the point of view of an emissions test facility, that smog-causing pollutants in vehicles are down dramatically. People need to know how much cleaner today's cars run and the technologies they've developed, the safety technologies that are going into cars, the investments the manufacturers have made to make cars better in every conceivable way. And I applaud the vehicle manufacturers for that.

I also applaud you for the opening remarks you made with respect to the very positive things that are in the budget for the vehicle manufacturers, such as the accelerated capital cost allowance and other issues we put into the budget that assist the industry.

I did want to quote something here, and I want to get your remarks on it. This comes from a Toronto Star article of May 2:

The Canadian auto industry has smashed its sales record for April with a boost from the federal government's rebate program for fuel-efficient vehicles.

Sales and leases of new cars and light trucks jumped 9%, or almost 14,000, to 168,984 vehicles last month from the same period last year—

The big increase in Impala business fuelled a turnaround at General Motors of Canada Ltd. last month after significant monthly declines. GM's light vehicle sales jumped almost 16 per cent, or more than 6,000, to 44,651 despite two less selling days than April 2006.

Industry watchers said Ottawa's new program in March's federal budget contributed to the strong gain.

Dennis DesRosiers also said, “Since the Canadian consumer primarily buys small fuel-efficient vehicles, this incentive helped propel the market to its best April on record.”

Now, I recognize what you're saying--except that the government did make some very significant concessions in the new announcement. We excluded minivans because we know families need space. We excluded pickup trucks because we know workers need trucks. We've really taken a look at the program and asked how we can make it work best. We've also made very significant concessions for vehicles that will run on E85, flex-fuel vehicles. We see that result.

You made the point that big is no longer bad. We agree with you. That's why we put the money on Impala, and we'll see how the Impala does. There are other E85 vehicles that are doing very well. We're not telling everybody that they have to drive a small car. We're just telling them they need to drive a better car.

I'd love to get your comment on that.

[Mark Nantais]

You raise a lot of issues, and important ones. When you look at one-month sales like that, you really have to start looking into the longer trend. Clearly the rebate program, for instance, has shown that yes, for one vehicle in particular, again the one that I was referring to, it has generated huge volume sales increases. It's the same with the E85, obviously. It would generate that. But the perversity comes into the fact that you have other manufacturers who might just be on the other side of the arbitrary threshold that was chosen. Our objections, and they're supported by a great deal of literature out there, show that ultimately these programs do not work, and it's very difficult to either determine or even demonstrate that people actually shift from either a smaller vehicle to a larger vehicle to a smaller vehicle.

What we're saying is when you have basically the on-road fleet accounting for only 12.5% of greenhouse gas emissions in Canada in total and new vehicles accounting for only 1% of that, and feebate programs and any regulation only address the new vehicle market, it doesn't make a whole lot of sense. If we were able to take this broader integrated approach that we speak about, we could make a great deal more progress without the perversities, without the inequities, without the unfairness that is imposed on manufacturers and ultimately consumers. That's what we're saying here.

While I think the intent may have been to actually generate or create a greater level of visibility on the issue and environmental benefit, I think in the end you will find that won't be the case. You will not be able to attribute any success to the program, particularly when you complicate things by increasing gasoline prices. All of the literature shows and a lot of economists will clearly show you that what really matters here, what really does make a difference, is that people respond to gasoline prices, fuel prices.

We still operate, even despite increases in gasoline in Canada, in a relatively low energy cost environment. Any other countries around the world that have high gasoline prices and so forth clearly have a smaller, more fuel-efficient fleet. All we're saying is we don't think this is the right thing to do. We would like to see it eliminated, and we would like to work with the government on how we can bring forward a more integrated plan that will actually yield greater benefits in terms of transportation and GHG emissions.