International Trade Committee on Dec. 9th, 2024

[Aaron Cosbey]

The Commission on Carbon Competitiveness, which I chair, just released a couple of reports, the first of which tried to understand which industries in Canada are most at risk of carbon leakage. Those are the ones that would likely be best protected by CBAM. We came out with a list of industries that includes iron and steel, aluminum, cement, nitrogenous fertilizers, pulp and paper, conventional oil and gas, oil sands and petroleum refining. We gave these a red-light, yellow-light or green-light rating.

The ones most at risk of leakage and therefore most likely to benefit from a Canadian CBAM are iron and steel, nitrogenous fertilizers, basic chemicals—I'm sorry, but I forgot to mention that the first time—and pulp and paper, with cement having an honourable mention, or yellow.

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

I'll share my time with Vance now.

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

Thank you, Mr. Sheehan.

Mr. Cosbey, I want to get a bit more into the weeds, or a bit more granular on your comments with respect to utilizing a CBAM-type regime with the U.S. Of course, with that put in place, how is it we could strengthen our collective international trade performance?

Mr. Trump is on record stating that he looks at tariffs as a method of raising his finances over on the U.S. side. The unfortunate part of this is that a lot of it will be reliant on his own people being taxed on the products he puts tariffs on. This can very well be a mechanism for him to achieve the same goal, the only difference being that a lot of those tariffs would otherwise then be paid for by folks across the globe.

Can you comment a bit more on a direction we can take in dialogue with the U.S. to collectively—in the vein I just spoke about—strengthen our international trade performance, and to work more closely together versus farther apart?

[Aaron Cosbey]

Yes, that's an excellent question and top of mind for folks in this space.

Look, the incoming U.S. administration, as you said, believes in tariffs as the first go-to tool—well, first, second and third, really. Moreover, we don't expect to see a carbon price in the U.S. any time soon. Anything that tries to harmonize our approach with that of the States has to take into account those two fundamental starting points.

Where there might be some hope is in imposing, at the border, agreed-upon standards for the GHG intensity of products. Then no steel, or no cement, is allowed into Canada or the United States that was produced at a GHG intensity above x. Moreover, you could combine that with an element of the current bill before Congress, the clean competition act, which would potentially allow steel over the border above that standard but charge for it. There you have a way to accede to the penchant of the incoming administration to put in place charges at the border.

A system like that could work well in combination with Canada's OBPS. It can work well in the States, because it doesn't depend on having an existing carbon price for which you need to adjust, and it satisfies the geopolitical urges of the U.S. to ring-fence China and keep out high-intensity steel from other trading partners, including China.

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

Canada, right now—because of the ratified trade agreements we've put in place since 2015—has an economic population of over 1.3 billion versus our population of, say, 38 to 40 million.

When you look at the trade agreements and regimes we have in place with these different countries, do you find those advantageous in our discussions with the U.S.?

[Aaron Cosbey]

I wish I could say I do, but the inclination of the U.S. administration—and it's not just the incoming administration, but the U.S. administration over the last several terms—has been increasingly to disregard the multilateral system of trade rules when it suits them. They are increasingly a mercantilist nation, thinking of the U.S. first, in what I would argue is a short-sighted view, but that doesn't allow for much of an advantage in the way that it should in the kind of integrated trading system of which Canada is a part.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

We'll go on to Mr. Savard-Tremblay for six minutes.

[Simon-Pierre Savard-Tremblay, Bloc, Saint-Hyacinthe—Bagot, QC]

Thank you, Madam Chair.

Both witnesses can answer this question in whichever order they like.

The 2020 interim report on the pan-Canadian approach to pricing carbon pollution indicated that the tools and policies used to date in Canada, under the current carbon pricing regimes, seemed to work to mitigate carbon leakage and competitiveness risks. However, the report did indicate that, even though the price of carbon will rise to $170 per tonne by 2030, additional measures could prove necessary.

What do you make of that assessment? I'd like to hear from both of you in turn.

[Aaron Cosbey]

Who is the question for?

[Simon-Pierre Savard-Tremblay, Bloc, Saint-Hyacinthe—Bagot, QC]

As I said at the beginning and end of my remarks, the question is for both of you.

[The Chair, Liberal, Judy Sgro]

Who would like to go first?

Go ahead, Mr. Cosbey.

[Aaron Cosbey]

I can go first.

I would agree with the findings of that report that the existing mechanisms for protecting against carbon leakage are adequate. Those mechanisms, to be clear, are the standards, the sectorally set standards within the OBPS, below which there is no carbon price due.

If you meet the standard, you pay nothing, and if you exceed the standard, you have to pay. You still have this marginal price, this high marginal price that incentivizes you to reduce your emissions, but your average price, your average cost of carbon, is nice and low.

The existing system works well. As you go out to $170 a tonne and as you have a tightening of those standards—we've put in law a 2% tightening of those standards—you start to lose that benefit.

My recommendation and the recommendation of the carbon competitiveness commission is that for the sectors that are most at risk of leakage—and not all sectors are equally at risk of leakage—you need to maintain a high standard, a very generous output-based allocation, in those sectors.

You still have the nice high marginal price. You still have the incentive to decarbonize, but you've got to keep the average cost of carbon low in those sectors. Moreover, in the medium and long terms, you need to be thinking about something like a border carbon adjustment or GHG intensity standards at the border, for reasons that I'm happy to go into in further depth. For now, the output-based allocations work.

[Simon-Pierre Savard-Tremblay, Bloc, Saint-Hyacinthe—Bagot, QC]

What do you think, Mr. Kubrin?

[Andy Kubrin]

Thank you for your question.

I do not have anything to add, though. I respectfully cannot add any more.

Thank you.

[Simon-Pierre Savard-Tremblay, Bloc, Saint-Hyacinthe—Bagot, QC]

I have another question. Whoever wants to answer can.

Are Canada's environmental standards and domestic emissions reduction policy sharply different from those of any of its trading partners, apart from China, of course? If so, should Canada move swiftly to introduce a border adjustment mechanism vis-à-vis any of those countries?

[Aaron Cosbey]

I can go first.

It's not so much really a question of the policies of the countries that are exporting to us as it is the actual GHG intensity of the firms in those countries that are exporting.

If I look at Indian steel, for example, Indian steel is extremely GHG-intensive. The policies in India are not so bad, but it's just the fact that they use more blast furnace—basic oxygen furnace—production, so it's very high-intensity steel.

Also, when and if we do put in place measures at the border that are designed to keep out that kind of steel, I strongly believe that it should be focused not on the policies of those countries but on the effect of those policies. The question is, is the steel clean? That's the fairer way to proceed, because there may be very clean producers within countries that have that policy. You don't want to punish those producers.

[The Chair, Liberal, Judy Sgro]

You have a minute and 30 seconds.

[Simon-Pierre Savard-Tremblay, Bloc, Saint-Hyacinthe—Bagot, QC]

Thank you.

Mr. Kubrin, do you have anything to add this time?

[Andy Kubrin]

Thank you for your question, but I have nothing further to add.

[Simon-Pierre Savard-Tremblay, Bloc, Saint-Hyacinthe—Bagot, QC]

Again, this question is for both of you, as appropriate.

During his first term in office, Mr. Trump repealed more than 100 environmental laws. Now he is talking about getting rid of the U.S. Inflation Reduction Act during his second term in office, as well as the rule requiring coal-fired plants to capture 90% of their emissions within the next eight years.

How do you think that might influence the Canada-U.S. trading relationship?

[Aaron Cosbey]

I can start, if you like.

There is a good in this, and there is a bad in this.

The short-term good is that a lot of the incentives offered under the Inflation Reduction Act have been drawing investment away from Canadian clean technology and clean production processes toward the United States. If you abolish all those incentives stateside, you start having a greater availability of capital in Canada to invest in green technologies and green productions. That's the short-term benefit.

The longer-term cost, of course, is that if you have huge investment like that going into solutions like industrial heating, heat pumps and decarbonized steel, the solutions that are developed as a result of all that investment spill over into other countries as well; the United States is not hermetically sealed. We benefit from the lowering of costs that takes place as a result of all that investment.

So, it is a good story, and it is a bad story.

[Simon-Pierre Savard-Tremblay, Bloc, Saint-Hyacinthe—Bagot, QC]

I'm not sure whether Mr. Kubrin has anything to add.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

Mr. Johns.

[Gord Johns, NDP, Courtenay—Alberni, BC]

I normally don't sit on this committee, but my understanding is that, a few weeks ago, this committee heard from Quebec foresters that the forest fires caused by climate change have had a much bigger impact on their operations than the U.S. softwood lumber tariffs.

Mr. Cosbey, can you speak about the cost of climate change?

I will highlight that this morning I met with the Canadian Federation of Independent Business, and they stated that the top concern from small businesses right now is rising insurance costs due to climate change. Climate change is what's provoking that increase. It went from being the concern of 55% of small businesses to now being the concern of 74% of small businesses, so we know that this is impacting small business as well.

Mr. Cosbey, if you'd like to comment....

[Aaron Cosbey]

We're venturing outside my area of primary expertise, but I never hesitate to step onto a soapbox. I think the Canadian Climate Institute has done excellent work that tries to quantify the costs of climate change to Canada specifically. Those costs are staggering, and they don't just consist of, as you have said, rising insurance costs for businesses and for homeowners, the direct costs of natural disasters, and the cost of lost livelihoods.

I'm coming to you from British Columbia. The mills that are shutting down in interior British Columbia are shutting down, at least in part and in large part, because of a lack of supply of timber. It's from forest fires, wildfires, and from the pine beetle, both of which are exacerbated by climate change. Climate change is not just an environmental issue. It's fundamentally an issue about the economic security of our country. I think that's why we're here. That is the urgency that impels measures like carbon pricing in Canada and in the EU, and it's what gives rise, then, to the border measures that try to make those measures more possible.