International Trade Committee on Dec. 2nd, 2024

[Kevin Lee]

No, we can't do that analysis, because it's been up and down in terms of different prices, interest rates and all those things.

However, we know that when material prices go up, it obviously makes it more difficult to buy homes, build more homes, etc., so it's a challenge.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

Mr. Arya, go ahead for two minutes, please.

[Chandra Arya, Liberal, Nepean, ON]

Thank you, Madam Chair.

Ms. Payne mentioned 90,000 jobs lost in the sector. I want to remind the committee that, during the last meeting, the employee associations mentioned that workers get around $70,000 to $100,000 in salary. They also mentioned that the recent job losses have nothing to do with the trade dispute or the increase in duties with the United States. It was more due to forest fires and economic conditions.

Mr. Nighbor, you mentioned the high-value products that can be sent to Japan, etc. Since this dispute with the United States goes back to 1794—we've had many years of dispute, again and again—why is it that the industry has not started exploiting other markets across the world? We have signed free trade agreements with around 51 countries. Why has the industry not utilized that and exported? I think exports are around $400 million to Japan and $100 million to Europe. That's it. This problem is in front of our eyes. It is affecting all. It is well known. Why has the industry not stepped up to export to other parts of the world?

[Derek Nighbor]

Well, I would say that it's billions going to other markets, including Asia, not $100 million or $200 million. I'll send you the stats. I'm happy to send you the most recent figures from StatsCan on those shipments.

I think one of the challenges is the cost of competing globally. Think about eucalyptus from Brazil. That's now coming in because the growing cycles are very fast. One thing about Canada is that it takes a long time to grow our trees. It can take 80 or 90 years to grow a tree, versus 10 or 15 years in some of those other markets. That's one of the challenges we have.

Another challenge we have is competing with cheap, unsustainably sourced wood from China and Russia. Prior to the Russian invasion of Ukraine, there were no sanctions when it came to exporting. Russian wood is quite predominant and being sold throughout places like Finland and parts of western Europe.

The competitive landscape is not easy, especially when additional costs are being layered onto the way we do business in Canada. I'm not advocating for a race to the bottom here. However, the competitive structure in Canada is challenging in terms of our ability to grow markets beyond the U.S.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

Thanks to all of you for your valuable testimony today.

We will now suspend for one minute while our next panel of witnesses comes in for another initiative of the committee.

[The Chair, Liberal, Judy Sgro]

I call this meeting to order.

Pursuant to Standing Order 108(2) and the motion adopted by the committee on Thursday, May 23, 2024, the committee is commencing a study of the trade impacts of Canada's leadership in reducing emissions.

We are very happy to have with us today, from the Department of Finance, Michael Mosier, director, international trade policy division. From the Department of Foreign Affairs, Trade and Development, we have Emmanuelle Lamoureux, director general, international economic policy planning and horizontal issues division, and Shawn Morton, senior adviser, international economic policy planning and horizontal issues division.

I'm interested to know what the horizontal issues division specifically is as we go through these questions.

Welcome. We appreciate your taking the time out of your own schedules to come and share the information that the committee wants to know today. We appreciate it.

I understand that Ms. Lamoureux will be making an opening statement on behalf of the group, for up to five minutes.

The floor is yours, Ms. Lamoureux.

[Emmanuelle Lamoureux, Director General, International Economic Policy Planning and Horizontal Issues Division, Department of Foreign Affairs, Trade and Development]

Thank you.

Good morning, everyone. I'm actually the director general of strategy at Global Affairs Canada. My colleague has the long title. My team manages international economic policy planning.

I am pleased to be here today to talk about our ongoing engagement on carbon border adjustment mechanisms (CBAMs) and to provide an overview of the current international landscape. My colleague from Finance Canada is here to answer any questions on Canada’s work on a domestic CBAM.

As this committee is aware, CBAMs are policies that impose a carbon cost on imported goods equivalent to the carbon price paid by domestic producers. The main goal is to reduce the risk of carbon leakage, which is when production or investments shift to jurisdictions with cheaper production costs that result from lower or no carbon pricing. CBAMs are intended to maintain a level playing field between domestic industries that are subject to carbon pricing and imported goods that are not subject to the same costs.

CBAMs also encourage greater climate ambition by motivating countries to take action to reduce carbon emissions. They are generally considered for sectors that produce significant greenhouse gas emissions and face strong competition.

The European Union is the first jurisdiction to impose such a mechanism. It is part of the EU’s toolbox to become climate neutral by 2050. The EU CBAM applies to imported goods in the aluminum, cement, electricity, fertilizer, hydrogen, and iron and steel sectors.

The EU CBAM is implemented in two phases. The transitional period, which began on October 20, 2023 and runs to December 31, 2025, requires EU importers to provide information on the CBAM-covered goods to be imported. This information includes country of origin, production site and the embedded greenhouse gas emissions for covered goods. In practice, Canadian exporters will be required to provide this information to the EU importers. During this period, no carbon fee or financial adjustment is being applied.

The definitive period, which will start in January 2026, will include a requirement to report unembedded emissions. The data will need to be certified by an accredited verifier, and the carbon border charge will be imposed on the imported CBAM goods. The effective carbon price paid in the country where the goods are produced will also be deducted from the carbon border charge to avoid double pricing.

Although the definitive period is set to begin in January 2026, many implementation details remain to be confirmed. For example, the European Commission is still developing how the carbon price paid in a third country will be calculated and applied, including the evidence required to demonstrate payment.

Although it is EU importers who must comply with CBAM requirements, Canadian exporters will be impacted due to administrative requirements to provide verified embedded emissions data to importers. The administrative cost of those requirements on Canadian exporters is uncertain, as implementing legislation is still being developed.

In addition to the EU, other countries are considering CBAMs. Last month the United Kingdom confirmed the introduction of its own CBAM by January 1, 2027. It will cover imports in the same sectors covered by the EU mechanism.

Australia is also exploring a variety of policy tools to address carbon leakage, which may include a CBAM. A decision is expected in 2025.

As the CBAM landscape continues to evolve globally, we can expect that this will have implications for Canadian exporters and emissions-intensive sectors. The proliferation of border carbon adjustments could also lead to a patchwork of unique CBAM requirements, which risks having a major impact on trade flows and creating burdensome administrative procedures and costs for Canadian exporters.

That's why Canadian officials continue to closely monitor CBAM developments and to engage with partners as these measures are being developed. To inform our advocacy efforts to advance Canadian interests, we collaborate closely with experts from other federal departments and seek input from provinces, territories and industry stakeholders. We also continue to advocate with our trading partners who are considering CBAM measures on the need to consider industrial carbon prices paid in Canada when the CBAM carbon border charge is calculated.

We also continue to emphasize that CBAMs need to be consistent with international trading obligations.

Thank you and I’ll be pleased to take questions.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

We will open it up with Mr. Williams for six minutes, please.

[Ryan Williams, Conservative, Bay of Quinte, ON]

Thank you, Madam Chair.

Thank you, witnesses, for being here today.

Ms. Lamoureux, I want to talk about trade and about some of the statistics we've been looking at across the whole field of trade and economic development in Canada, especially in the last nine years, specifically perhaps looking at the Americans right now and some of the shift.

You're responsible for international economic policy planning. When we look at what's happening with the Americans and this issue, do we see the new administration enacting a price on carbon or a CBAM at this point?

[Emmanuelle Lamoureux]

On CBAM, with respect to the U.S. administration, the incoming U.S. administration, as far as I know, has made no mention of such an intention. Currently, before the current Congress, there are a number of bills that consider those matters, but it is unclear whether they will be reintroduced under the new Congress.

[Ryan Williams, Conservative, Bay of Quinte, ON]

Have we looked this far while we've been developing CBAM? You talked about the European Union, maybe Australia and maybe the U.K. How would this affect our competitiveness, if Canada had a CBAM and the Americans did not?

[Emmanuelle Lamoureux]

With respect to a Canadian CBAM, I would turn to my colleague from the Ministry of Finance. We are not currently in the process of doing this.

In terms of impacting our competitiveness, I would flag that the EU is the first jurisdiction to put in place such a mechanism. It is still developing its legislation. The impact of various CBAMs actually implemented is unknown at this stage. We are observing the situation in the EU to determine the impact on Canada's competitiveness. However, as I flagged earlier, there is an administrative burden with respect to the implementation of the EU CBAM, which could impact the competitiveness of Canadian-made products.

[Ryan Williams, Conservative, Bay of Quinte, ON]

Mr. Mosier, I'll have you comment on that. Is Canada going to be implementing something similar to the EU CBAM, yes or no?

[Michael Mosier, Director, International Trade Policy Division, Department of Finance]

At this time, the government has not taken any specific position on moving ahead with the CBAM. We have done a good amount of work on this in the past. For example, we held broad-based consultations in 2021 on the potential of undertaking a Canadian CBAM, and we released a paper exploring border carbon adjustments in Canada, which is still available.

To date, we continue to assess what we heard in those consultations. There are a number of factors to go through, and I'm happy to speak to those.

[Ryan Williams, Conservative, Bay of Quinte, ON]

Sure. I'm just going to go back to something that the current government actually promised in its election platform, which was to implement a CBAM. You're saying there are no plans, but the government promised to implement this. Why would you be doing consultations if there's no plan to implement it?

[Michael Mosier]

In budget 2020, when it first came out, the government indicated its intent to study the potential for a border carbon adjustment mechanism in Canada. That's what's been happening to date, and we continue to undertake that study, talk to partners and look at that.

[Ryan Williams, Conservative, Bay of Quinte, ON]

One of the statistics we look at is the sharp decline in business investment per capita in Canada versus the U.S., especially since COVID-19. We've seen a sharp increase from the American side and a sharp decline from the Canadian side. The carbon tax has been implemented, and it continues to increase. This year, on April 1, it will increase by 19%.

It is something we do study, and it seems that, looking at the Americans, they don't have a price on carbon or a carbon tax, but we do. It's one of the biggest.... Causation may not always equal correlation, but it does seem so on this point. Would you see this as another barrier for businesses? If so, will it cost businesses anything if a CBAM is implemented?

[Michael Mosier]

To the extent that a CBAM is implemented in Canada.... Generally, where we've seen CBAMs, they are linked to the domestic carbon price. To the extent that the price is applied to Canadian industry, specifically those trade-exposed, emissions-intensive sectors—and we always think about steel, aluminum, fertilizer and those sorts of things—a CBAM can help ensure that importers pay the same price as domestic producers within the Canadian market. That's certainly something we would look at as our colleagues from Environment and Climate Change Canada adjust the carbon price applied to those sectors. That is certainly something we would continue to take into account.

[Ryan Williams, Conservative, Bay of Quinte, ON]

The main question on that, then, is, does that make Canadian businesses more or less competitive if they're adding these prices to their bottom line?

[Michael Mosier]

To the extent that a price is applied to Canadian businesses that is not applied to foreign importers of the same products, I would say less competitive.

I would say that there are a number of measures to address what we call carbon leakage or competitiveness concerns imposed by Environment and Climate Change Canada, primarily the allocation of free emissions allowances to our emissions-intensive trade-exposed sectors. That is how Canada has, to date, managed this issue.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

Mr. Sheehan.

[Terry Sheehan, Liberal, Sault Ste. Marie, ON]

Thank you very much to the presenters for this information and the questions.

I'd like to thank my colleague Manny for bringing this to the trade committee for us to delve into. It certainly is interesting.

I'm from Sault Ste. Marie. We have Algoma Steel and Tenaris tubes there. Algoma Steel has decided, along with a lot of the Canadian steel producers—I'm co-chair of the all-party steel caucus—to decarbonize and to go from a coal process to an electric arc. In the Soo, they're going to reduce their emissions by 70%. It's like taking one million cars off the road, gas-powered cars. I've been hearing not just from the steel producers, but from the unions, United Steelworkers, about how China, for instance, can produce their steel so cheaply, not just because of poor labour practices, to say the least, but because they use dirty coal. Basically, it's the Wild West, without any regulations as it relates to the environment, which creates that cheap, unfairly traded steel.

How would a CBAM...? I'm going to delve into it a bit further, because, even without the CBAM, we've placed a 25% tariff on Chinese steel and aluminum—and 100% on electric vehicles, but I'll stay on steel and aluminum. How would a CBAM go hand in glove with the 25% tariff, in your mind?

[Michael Mosier]

I think I'll answer that, given that it's more about a Canadian CBAM and how that would go hand in glove with that. It's a good question. Obviously, when we put the 25% surtax on steel products from China, part of the government's rationale was that there were lax environmental policies. I think that if Canada wanted to move forward with a CBAM against China, that's something that would really have to be better understood.

I think CBAMs, those that you see in the European Union, for example, are very much.... They're very technical. They're very detailed, and they gather a lot of information on the product-specific emissions contained within those. I think it would certainly be a larger administrative process to gather those emissions and to link them to a Canadian carbon price, whereas the surtax on steel and aluminum was more a measure that made the statement that these were problems and imposed the surtax.

[Terry Sheehan, Liberal, Sault Ste. Marie, ON]

Just because we're on the topic and it's in the news everywhere, I think it's important to be in lockstep with the United States, because they have a very similar program of 25% and 100% as it relates to duties on China, to make sure that we are not a back door. That is always a real, clear and present danger with the United States. If they see you as a back door, they'll have problems with you.

Let's go on to carbon leakage mitigation. What specific industries...? I understand it's steel and aluminum, the auto sector and the supply chains, but what specific industries in Canada are more at risk of carbon leakage, other than the ones I've mentioned?

[Michael Mosier]

When we look at this, we typically look at iron and steel, aluminum, the fertilizer industry, cement, chemicals and pulp and paper as our key emissions-intensive but also trade-exposed industries: those where we have a lot of imports and those where a lot of the things we make in Canada are actually exported. It's where they're in real competition with foreign products.