International Trade Committee on Dec. 9th, 2024

[The Chair (Hon. Judy A. Sgro (Humber River—Black Creek, Lib.)), Liberal, Judy Sgro]

I call the meeting to order.

Welcome to meeting number 132 of the Standing Committee on International Trade. Pursuant to Standing Order 108(2) and the motion adopted by the committee on Thursday, May 23, 2024, the committee is resuming its study of the trade impacts of Canada's leadership in reducing emissions.

I will introduce our witnesses today. From the Canadian Steel Producers Association, we have Catherine Cobden, president and chief executive officer; from Carleton University, we have Eric Van Rythoven, instructor and adjunct research professor; and from Borden Ladner Gervais, we have Rambod Behboodi, senior counsel.

Welcome to you all. We will start with opening remarks of up to five minutes, please.

Ms. Cobden, we'll start with you.

[Catherine Cobden, President and Chief Executive Officer, Canadian Steel Producers Association]

Thank you, Madam Chair.

Good morning, everyone. We really appreciate the opportunity to appear before you today to share the views of Canadian steel producers on the role of trade measures as part of Canada's climate change response.

As this committee is aware, the CSPA is the national voice of the Canadian primary steel industry, as well as of some of the largest steel users in Canada. Our 16 members represent 123,000 direct and indirect jobs. They contribute $15 billion to the GDP and have facilities in Alberta, Saskatchewan, Manitoba, Ontario and Quebec.

In general terms, carbon trade measures are seen as a tool to level the playing field for domestic industries that face higher costs due to domestic climate policies, and to prevent carbon leakage through shifts to jurisdictions with less environmental regulation. Trade measures should indeed form part of Canada's comprehensive tool kit in the fight against global climate change. That said, these measures can take many forms. I will share with you some views on two distinctly different approaches that we are witnessing globally around steel-specific carbon trade measures—namely, the CBAM in the EU and the product intensity tariff approach contemplated and under preparation in the United States.

The CBAM requires importers to purchase certificates that mirror the net carbon price paid by the EU's domestic industry. The design of the CBAM has major flaws for the EU steel industry, given its accelerated phase-out of free allocations in its carbon pricing regime, as well as a lack of export tax rebates. These concerns far outweigh the benefits gained from having the CBAM in place. Similarly, the Canadian steel industry would share these concerns if CBAM, as designed in the EU, were adopted here in the same manner.

Furthermore, Canada has another consideration that warrants careful attention. Basing a carbon tariff on a carbon pricing regime would undoubtedly create trade tensions with our largest trading partner, which does not have a carbon pricing regime. For all of these reasons, the CSPA would reject an approach to carbon trade measures in Canada that mirrored the EU's CBAM.

Alternatively, the United States has launched a major undertaking through the U.S. International Trade Commission, the USITC, to establish product-level carbon intensity-based tariffs for steel imports into the United States. Essentially, tariffs would be set for a range of carbon intensities for a range of products and would apply to the import price of the steel, making it very similar to a “232-style” tariff regime. This refers to section 232, one of the tariff programs in the United States. The USITC will deliver their body of work to the new Trump administration in February, opening up, in our view, another possible tariff pathway to be pursued by that administration, should they choose.

It is worth noting that the steel industries of Canada and the United States have comparable carbon intensity levels for steel products. According to a third party benchmarking study conducted by the Global Efficiency Intelligence consulting firm, our respective intensities are many times lower than those of offshore steel producers, particularly those with a track record of unfair trade—China, Turkey, Vietnam and many others. The CSPA would be happy to submit this benchmarking study to CIIT for your reference, if it's deemed of use.

I'd like to remind the committee that 50% of Canadian steel production is exported to the United States, while only a negligible amount, around 0.1% of all exports, is shipped to the EU. To be clear, market factors, as well as the overall carbon performance levels, suggest that climate tariff alignment with the United States would be far more favourable than one between Canada and the EU.

Furthermore, a carbon tariff approach coordinated with the U.S., if it could be arranged—that's a big “if”—would provide another opportunity to strengthen what is already one of the strongest trading relationships in the world and further our critically important efforts to align trade policy with the United States.

From tariffs on Chinese steel products to requiring country-of-melt reporting for all imports and the many trade cases launched by the industry, Canada is on its way to demonstrating, with real proof, just how serious we are about protecting our respective markets from unfair trade.

Thank you.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

It's on to Dr. Van Rythoven for up to five minutes.

[Dr. Eric Van Rythoven, Instructor and Adjunct Research Professor, Carleton University, As an Individual]

Thank you, members of the committee. It is a great privilege to be here.

I'm going to avoid the technical details of CBAM and focus on the bigger political picture.

I want to suggest that there has been a series of global shifts that help explain the emergence and significance of CBAM. These shifts suggest not only that CBAM is here to stay but also that we will see more carbon tariffs in the future. This matters for Canada, because it points to a high level of political and economic risk. What do I mean by that? The day may come when it becomes good politics to punish climate laggards like Canada. CBAM represents one step closer to that day. This committee and other Canadian political leaders need to have a serious conversation about how to prevent that from happening.

What are these global shifts?

The first is the normalization of protectionism. In the 1990s, 2000s and part of the 2010s, the orthodoxy was that we liberalize trade. Now that orthodoxy is on the back foot. Trump's tariffs are a good example of this. When he said he was going to put a 25% tariff on Canadian goods, what surprised many of us was the 25% part. It was not that he was using tariffs, because these have become normalized as part of Canadian trade policy.

The second shift is that concern about climate change is growing around the world. I discussed some of the polling data in my written statement, but the summary is this: Other countries increasingly see climate change as a major problem and want their governments to do more.

The third shift is that other countries are increasingly suffering extreme climate events, and these countries are often our trading partners and allies. Whether it is the United States, Spain, Germany or anyone else, what we are seeing are a rising number of mass casualty events that can cause billions of dollars, if not tens of billions of dollars, in damage.

The fourth and final shift I'd point to is an uncomfortable truth: Canada is a climate laggard. I'm not saying we should dismiss Canada's climate successes. There have been many successes. However, when you compare Canada to other countries, in particular our G7 peers, we are not doing well, and the gap is growing.

What do these changes add up to? My concern is that they add up to a scenario where other countries look at us and ask why Canada, a rich and prosperous country, is not doing more. There is a very real risk that other countries that are making sacrifices to fight climate change and suffering extreme climate events are going to be angry and resentful towards those who freeride on their efforts. This anger and resentment are going to create strong political incentives to punish freeriders. At that point, the rhetoric around Canada's climate leadership will matter little when the prevailing sentiment is, “Make the bastards pay.” This is the scenario that concerns me.

How do we avoid this? We avoid it by taking credible action on climate change that closes the gap between us and our peers. We can talk about what that looks like today, but I would suggest doing something soon, because, right now, CBAM is designed to gently push countries towards climate action. In the future, it may not be so gentle.

Thank you for your time.

[The Chair, Liberal, Judy Sgro]

Thank you very much, sir.

Mr. Behboodi, please go ahead for up to five minutes.

[Rambod Behboodi, Senior Counsel, Borden Ladner Gervais LLP]

Good morning, Madam Chair and members of the committee. It's an honour to appear before you to discuss trade and climate change.

Let me start by introducing myself. I will then give an overview of two issues raised by the title of your study—namely, reducing emissions and trade impacts—and conclude by talking about Canada's leadership.

My name is Rambod Behboodi. I'm senior counsel at the law firm of Borden Ladner Gervais. For the last 32 years, my practice has focused on international trade law and policy. As trade lawyer, diplomat and negotiator for the Government of Canada, I had the privilege of negotiating key multilateral environmental agreements that advanced and protected Canada's interests in respect of trade in chemicals, control of pesticides and genetically modified organisms. I was also engaged for over a decade in trade litigation in defence of our natural resources and agriculture sectors. In private practice since 2017, I have advised developed countries and NGOs on deforestation, plastics and other climate change measures; and developing and less developed countries on trade liberalization.

I will now turn to the first of the two substantive issues, reducing emissions. Why should we do it? Simply put, if we go on as we have been going on, the human contribution to climate change will likely transform the planet in a way that we humans are not capable of dealing with. The planet will go on, of course, and so will some of us, but as things are, we're looking into the abyss. We have to change the way we do things.

What does that mean for trade? In the world of trade, we talk about win-win solutions. I'm here to tell you that, if we play our cards right—and Canada has an excellent hand—there is every reason to believe that we, our trading partners and the planet will come out on top.

Here, I want to mention two important concepts.

The first is externalities. Imagine that your neighbour is in the middle of major renovations. He dumps all the construction debris on his front lawn. It's an eyesore. It's possibly a health hazard if, like me, you’re allergic to dust. If you go to him and suggest that perhaps the debris should be landfilled, and he replies, “It’s my front lawn, and do you know how much landfilling costs?”, we would call that a negative externality. It's where economic activity, a good thing in itself, gives rise to costs imposed on others.

Uncontrolled carbon emissions are like the debris on the front lawn. No one is saying we should ban construction, but we should expect that the person creating the debris will have it removed and assume the costs.

The same applies to the second concept, carbon pricing. If you, as a consumer, knew the real impact of carbon emissions, you would adopt more responsible consumption habits. In a free market like ours, pricing is the best way to convey information to consumers and pass on costs to those who should pay.

We can do all that domestically, but we know it isn't enough. That is where trade impacts come in.

When the costs related to the production of goods within a country are high because of, say, carbon pricing, organizations tend to look at moving their operations outside the country for trade reasons. The result is an increase in carbon leakage, in other words, the relocation of production to an exporting country with a less stringent climate policy and carbon pricing system.

That does nothing to help trade, the environment or the legitimacy of climate change actions.

This is how we arrive at border carbon adjustments, which have been mentioned. We can discuss those later.

In my remaining time, let me turn to Canada's leadership. Canada is very trade-exposed. It's in our interest to ensure that the global framework for carbon pricing functions well. How? Abroad we must remain engaged and active, leading by persuasion and by example. At home—that's the example—judicious deployment of domestic and trade policy can ensure that our exports remain competitive internationally. A homemade carbon pricing framework, along with appropriate border adjustments, may be the most effective mechanism to forestall or offset all, or at least most of, the carbon costs associated with trade.

Thank you again for inviting me today. I will be happy to answer your questions.

[The Chair, Liberal, Judy Sgro]

Great. Thank you very much to the witnesses. I'll now open it up to questions.

Dan, the floor is yours for six minutes, please.

[Dan Muys, Conservative, Flamborough—Glanbrook, ON]

Thank you, Madam Chair. It's a pleasure to be here.

My questions will be for Ms. Cobden. Obviously, as an MP from Hamilton, or Steeltown, I appreciate the work that is done by the Canadian Steel Producers Association. I know that our friends at Algoma are instrumental to the steel industry as well, so I'll also give them a nod.

You indicated that 50% of our exports are to the U.S. and that 0.1% go to the EU. Maybe you can elaborate on what you see as the trend line going forward. I know that a number of different things could impact that. Are we intensifying, or...?

[Catherine Cobden]

Thank you for that question. It's always great to connect with an MP from Hamilton.

The discussion around the EU CBAM and, of course, the threat of tariffs coming out of the United States continue to raise a question about whether the Canadian steel industry can grow market share in Europe. I hear that as well in your question—trend lines.

We don't anticipate significant growth in the European market for Canadian steel. The reason for that is multifold. There's a large existence of overcapacity in the world, and they're already well into the European market. As well, they have their own domestic producers, so we don't see growth in the EU. That 0.1% is likely to stay about that. By the way, that goes back as a trend line for many years. It's not a new phenomenon.

As far as the U.S. goes, I think a lot of that is unknown at this point. We do require and rely on access to the U.S. market for 50% of our production. We maintain that needs to be far and away our most significant priority. That trend has been around for some time, and we hope it continues into the future.

[Dan Muys, Conservative, Flamborough—Glanbrook, ON]

Obviously, the Canadian and U.S. steel industries are quite integrated, as we know. Thank you for elaborating on that.

The Canadian Steel Producers Association has raised alarm bells, of course, about our competitiveness and the increase in our carbon costs versus those in competing jurisdictions. Can you comment on the impact of the carbon tax, in whatever form that is, on the Canadian steel industry?

[Catherine Cobden]

Before we had a carbon price, our steel industry was suffering in our competitive position when we had to compete with unfair traders who were dumping into our market. Now we have the added problem of trying to compete with fair traders, like the Americans, who are very prevalent. They represent 40% of our import share, and we're competing with them, and they do not have a carbon price. Given the $80 per tonne of CO2 emissions that we now face, that makes a significant difference. The issue is that the carbon price will continue to rise year over year, by $15 per tonne. That just intensifies the competitiveness challenge.

[Dan Muys, Conservative, Flamborough—Glanbrook, ON]

I know that the Canadian steel industry has made significant progress in terms of the greening of steel. We've heard about that.

I'd be curious to hear your reaction to some of the comments from the other two witnesses, given what has already been accomplished by the industry here.

[Catherine Cobden]

I can only speak for the Canadian steel sector, which I'm very proud of. I hope you all are as well.

In partnership with the federal government and the provincial government, we have decarbonization projects that will result in 6 million tonnes of CO2 removed from the atmosphere. Those projects are globally significant and, frankly, nationally relevant in terms of our overall greenhouse gas emissions in the country, let alone the sector.

[Dan Muys, Conservative, Flamborough—Glanbrook, ON]

I think the comments from a couple of the other witnesses here were that Canada is obviously a laggard and that that's going to come back to bite us. I'd be curious to see if you agree with that or could comment further on that.

[Catherine Cobden]

What I'm trying to say is, from the perspective of the Canadian steel producers, we are doing very well on a global stage with respect to...but that doesn't mean the pathway for the rest is going to be easy. Nonetheless, we have a good jump onto the reductions from this sector. That's really all I can speak to today.

[Dan Muys, Conservative, Flamborough—Glanbrook, ON]

You indicated that every increase in the carbon tax that's coming in—and as you indicated in your opening statement, the U.S. doesn't have that—is going to widen the gulf in terms of our competitiveness. Given the integration of our industries and the importance of the U.S. market to us as Canadian steel producers, how concerned are your members about that?

[Catherine Cobden]

Our members continue to be highly concerned.

At this point, we have asked for a freeze on carbon pricing rises, as well as stringency and trade exposure protection reductions, because we are facing already....

I think all sectors are at different points, but it's been well documented by the Canadian Commission on Carbon Competitiveness that steel is one of the most significantly at risk under the carbon pricing regime. We underline that by calling for a freeze on price and stringency for a period of time, because we don't have the solutions. We're doing solutions that we can, hence the 6 million tonnes, but we need additional solutions, many of which are outside our control. An example of that would be green hydrogen access at scale or clean electricity across all of the country.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

Next is Mr. Sheehan for six minutes.

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

Thank you.

The other steel town is Sault Ste. Marie, home to Algoma Steel and Tenaris, which are very significant employers in our community, as well as for Canada. To your point, Algoma itself exports 50% of its steel to the United States.

We took some bold action to reduce the carbon our steel industry was producing, not just in Sault Ste. Marie but also in Hamilton. The Soo was the first to announce $420 million, which is going to be generational. I always mention this here at committee: When I was first elected, Algoma Steel was in bankruptcy and Tenaris had a handful of people. Tenaris now has 800 people, for example. We've been investing in modernizing it and producing less carbon for quite some time.

The question for you, Catherine, is this: How can we leverage the fact that our steel exports are some of the greenest around? When this project is complete at Algoma, 70% less carbon will be produced. That's like taking a million cars off the road. How can we leverage that with the EU under their CBAM framework?

I'll let the other witnesses take a stab at that, too.

[Catherine Cobden]

I wish we could leverage it further in the EU. As mentioned in my response to Mr. Muys, we don't predict more access for Canadian steel in the European market.

We find this to be a very interesting proposition, though, for the U.S., should this new administration be interested. Who knows what it will be branded as, Terry? Perhaps it will be “foreign pollution tariffs” or that sort of thing. That's among the new terminologies we're hearing for this. One of the ways we can leverage this is by working with the United States.

To your point, given that our CO2 emissions are some of the best in the world, as are the ones in the United States, we have a great opportunity to work together on this challenge and use it as another instrument to combat what we're always talking about: the overcapacity in steel that is creating such havoc for Tenaris, Algoma and all of our.... I don't want to start naming them, because I'll have to name 16 member companies.

Anyway, you understand. That is, I think, a core task at hand.

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

Thank you.

I'll let Eric take a stab at this, too.

Because we're showing such leadership in terms of overall trade arrangements with the EU, how can we leverage what we've done with steel to reduce our emissions? I think one of you, in your testimony, talked about the leadership we have to show on fighting climate change.

[Dr. Eric Van Rythoven]

Thank you for the question.

The point I want to clarify is that, yes, Canada has had climate successes. I think my colleague here pointed to a very important climate success for Canada's steel industry.

What I'm talking about is Canada as a country. When you compare our carbon emissions with those of our G7 peers, we are quite a bit behind. We are dead last in the G7.

I don't think I should presume to speak for the steel industry in relation to CBAM, though, so I'm going to back away from that one.

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

Fair enough.

Catherine, we started talking about what everyone knows as the elephant in the room: China and its overcapacity. We haven't discussed melt and pour or anti-circumvention a lot. We've done anti-circumvention before, in previous budgets.

Can you please explain how melt and pour works, for the record, and how that is helping to reduce some of the dirtiest steel ever made?

[Catherine Cobden]

Excellent. If I may, I will also highlight section 53 tariffs.

You mentioned bold action. I think Canada—with the support of everybody around this table, by the way—took bold action against China with tariffs set at 25%. That was super helpful, not just for this problem but also for convincing our U.S. colleagues that we take this issue very seriously.

On top of that, you can add in melt and pour, which just went into effect on November 5. This gives much-needed transparency to a supply chain that is fraught with unfair trade. Melt and pour is under way, but we need to ensure fast execution.

Finally, on anti-circumvention, we have a framework. It was announced a few budgets ago. I can't remember the exact timeline. However, we feel there is opportunity to strengthen the anti-circumvention framework and do more. We want to do that for our domestic market considerations, as well as, again, align with the United States and say, “We're not the problem here.”

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

Right, and since we have you here, then what happens if the United States increases its tariffs on the Chinese steel. Would you suggest that we also increase tariffs to stay in lockstep with them?