International Trade Committee on Dec. 11th, 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 133 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.

We have with us today, from the Aluminium Association of Canada, Jean Simard, president and chief executive officer, by video conference; from the Canadian Climate Institute, Dave Sawyer, principal economist; and from the Canadian Labour Congress, Elizabeth Kwan, senior researcher. Welcome to you all.

We will start with opening remarks.

Mr. Simard, I invite you to take the floor for up to five minutes, please.

[Jean Simard, President and Chief Executive Officer, Aluminium Association of Canada]

Thank you, Madam Chair.

The Canadian primary aluminum industry in Quebec and British Columbia produces 3.2 million tonnes of metal, while having one of the lowest carbon footprints in the world.

From the very beginning, we have supported the carbon pricing mechanisms put in place in Canada, the cap-and-trade system in Quebec, better known as SPEDE, and the taxation mechanism in British Columbia. We also recognize the value of the federal system, although we are not subject to it, since all of our activities are covered by the provincial systems I just mentioned.

Indeed, the federal system is the mandatory benchmark used by provinces seeking to set up an equivalent system in their jurisdictions. It is also the only benchmark used by carbon adjustment mechanisms at the border of foreign countries to evaluate products imported from international suppliers, as only national schemes are recognized right now.

Our reduced footprint is a significant competitive advantage in a world that is increasingly and rapidly moving towards decarbonization, whether in America, for example, or Europe.

In the short term, however, we are not seeing this benefit due to the implementation of the European Carbon Border Adjustment Mechanism, better known as CBAM, since it currently recognizes only scope 1 emissions from industrial processes. Since the global aluminum industry uses the same process, all manufacturers have the same footprint. It's only when we look at scope 2 emissions, i.e., emissions from the energy source, that our competitive advantage conferred by our energy source comes into play.

It's also important to remember that, apart from small volumes sold to Europe, more than 90% of our exports are destined for the U.S. market, which is clearly not about to implement such a mechanism.

So we have to face competition from regions of the world where there is no national carbon pricing mechanism, and therefore no additional costs associated with such requirements.

Our sector has been dealing with the realities of this market dynamic and the existing systems in Canada since 2013. Those are two fundamental factors in our competitiveness analysis.

Another advantage of the current mechanism in place is that there is a fundamental incentive to maintain our reductions over time, due to the fact that the provincial mechanisms are pegged to the national one.

In closing, we want to underline the paradox that the Canadian aluminum industry is now facing and that you must absolutely take into account.

We need to maintain carbon pricing for the reasons I just outlined, as our low carbon footprint is linked to the significant challenge we face. Unlike our competitors elsewhere in the world, who are facing the challenge of the energy transition from coal or natural gas to renewables, for example, we are facing an industrial transition of unprecedented magnitude. We need to develop and implement so-called disruptive technologies on an industrial scale. These technologies, which are still at the research and development stage, will change the way aluminum is produced and allow us to get from two tonnes of emissions to zero.

As the Canadian mechanism and related regulations evolve, we must find the sweet spot that allows us to maintain our competitiveness and recognizes our carbon advantage in terms of emissions levels, while keeping us on a realistic reduction path over time and taking into account the time required to deploy and implement new technologies.

Thank you.

[The Chair, Liberal, Judy Sgro]

Thank you very much, Mr. Simard.

Mr. Sawyer, you have five minutes.

[Dave Sawyer, Principal Economist, Canadian Climate Institute]

Thank you for the opportunity to address the committee today.

My remarks will focus on the rising risks of border carbon adjustments and the role of Canadian carbon pricing systems, or large emitter trading systems. They are trading markets, after all, and they're designed to reduce costs through trading. They're markets, basically. These systems are an effective shield, I'm going to argue, and there's a need for stronger federal-provincial coordination to put our best foot forward to coordinate action to minimize costs on industry and reduce risk.

I'm the principal economist with the Canadian Climate Institute. I've run EnviroEconomics, a small consultancy, for decades. I'm a commissioner with the Canadian Commission on Carbon Competitiveness, and I've worked with most governments on designing large industrial emitter systems, so I understand how they operate and what they're trying to do at a practical level.

BCAs are a growing risk to Canadian exports. BCAs are rapidly reshaping global trade, as you've heard a lot. Mechanisms like the EU's CBAM and the U.S.-proposed PROVE IT act all represent a growing trend towards linking climate policy and trade policy. While these measures aim to reduce carbon leakage and level the playing field, they present growing risks to Canada's very export-oriented economy. We do very well through open trade, don't we?

What do these risks look like?

Currently under CBAM, we figure that about $64 million in tariffs is likely to be levied against about $3 billion and change of exports going into the EU. This is across 81 product groups and represents a cost increase of about 1.6% against the value of exports. It doesn't look like a significant risk now, but that risk jumps significantly with our roughly $30 billion in trade with the EU, raising potential costs—if everything gets covered—to about $1 billion in tariffs looking out into the future. It's not small at all.

The proposed U.S. PROVE IT act could take an even broader perspective here by assessing the GHG intensity of a broader suite of commodities. We're looking at about 200 products—about 180 products listed in the bipartisan PROVE IT act—covering about 30% of our trade or more. It's really hard to nail down, but when you look at the product categories, it's about $30 billion in trade.

If the PROVE IT act pushes forward, there will be a lot of regulatory red tape on disclosing emission intensity for a big chunk of our exports, including aluminum, crude, fertilizers and critical minerals. Importantly, the act expands coverage to manufactured commodities—not just the raw steel, but the steel products, and not just the raw clinker, but cement products. It's fairly significant in its scope. This evolving landscape underscores the need for Canada to respond strategically, basically, to protect industries, maintain market access and reduce risks.

The large industrial emitter programs—the large emitter trading systems—are a shield against these tariffs. Despite these challenges, Canada has a significant advantage in these systems. Programs like Alberta's TIER program, the federal output-based pricing system and all the provincial and territorial systems across the country are there, and they can protect against punitive charges.

Why are they a good shield?

First, these federal-provincial systems are designed to impose only a modest cost. We've done a whole bunch of work on that, and you can look at our website and see what the average costs are for industry. They're not that significant. I'm happy to talk about that later. Yes, there are costs, but they're not off the charts.

Second, many sectors benefit through saleable credits. These systems are designed to help the large emitters. They're given generous credits, which are saleable. In a lot of cases, industry is making more than they're having to pay, so it's not just a bad-news story for everybody.

Finally, they're reducing emissions. They're doing their job. Yes, they need tweaks, and yes, they can be improved, but it's a continuous improvement process we see rolling forward.

The balance between reducing emissions and maintaining competitiveness is a core strength of Canada's approach, and it's essential that foreign trading partners and policy-makers in other countries come to understand what we're doing in our country with these programs.

I'm going to speak to federal-provincial policy coordination and how it can reduce the risk.

While the large emitter trading systems provide a strong foundation, there's more work to do. To maximize the effectiveness of these programs and mitigate the risks posed by the BCAs, Canada needs better coordinated action. I know we're in a federation and I know we're fragmented, but it's trade and industry.

What does that look like?

First, it's unified data and messaging—the nuts and bolts of the systems. What does that look like? Governments have a role here to highlight that to our partners. Canada must present clear, consistent data about our systems and the costs industries are already paying. This helps trading partners understand what we're doing and the costs we're imposing.

[The Chair, Liberal, Judy Sgro]

Could you please close, Mr. Sawyer?

[Dave Sawyer]

In closing, BCAs reflect a broader shift in global trade dynamics, linking climate policy with economic competitiveness. While these mechanisms present risks, Canada's large emitter systems are an effective shield. To avoid these risks and fully capitalize on opportunities, we need more proactive engagement from industry.

Thank you.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

Ms. Kwan, you have five minutes.

[Elizabeth Kwan, Senior Researcher, Canadian Labour Congress]

Good afternoon, Madam Chair and committee members. Thank you for the opportunity to present to you today.

I'm Elizabeth Kwan, senior researcher with the Canadian Labour Congress. I'm also the co-chair of the Canadian CETA domestic advisory group for labour. The Canadian Labour Congress is the largest labour organization in Canada, bringing together dozens of national and international unions, provincial and territorial federations of labour, and community-based labour councils. We represent more than three million workers in this country.

I'm going to start with six recommendations that I would like to present to the committee.

First, the government should develop and implement a robust, pro-worker industrial strategy and a Canadian border carbon adjustment—or BCA—mechanism as part of a broader strategy to build up Canada's industrial base, foster innovation and create an environment where good unionized jobs can thrive.

Second, as part of this industrial strategy, the government should strategically build up a downstream economy that adds value to the production of goods, shifting away from exporting raw and semi-processed goods.

The third recommendation is that government actions and investments be established to support workers in labour force adjustment from the uncertainties of trade with the U.S. and the shift to a sustainable, low-carbon economy.

Fourth, the government should commit to accelerating the establishment and implementation of a Canadian BCA as a tool to level the playing field between Canada and other like-minded countries in trade and as one of the tools to reach Canada's climate targets.

Fifth, the government should publish a “what we heard” report on the input from stakeholders from the 2021 consultation on BCAs no later than April 1, 2025.

Lastly, the government should commit to developing a Canadian BCA mechanism that aligns with the EU's carbon border adjustment mechanism—or CBAM—and should conduct public stakeholder consultations on the new Canadian BCA mechanism in 2025.

People across Canada and across the globe are experiencing the unprecedented impacts of climate change in their work and their everyday lives. Many countries around the globe are racing to transition to a low-carbon economy. Our economy must adapt and be positioned to take advantage of the massive industrial and economic opportunities that come with the global shift to a low-carbon economy.

How do we take advantage of the current situation in the world of trade?

As we all know, the U.S. is Canada's top trading partner, accounting for 77% of total Canadian exports. However, there are many uncertainties that lie ahead for Canada's trade with the U.S., with the threat of tariffs of 10% to 25% and a call to move quickly on the renegotiation of CUSMA. We know that the new Trump administration will retreat from various climate change solutions. The response from Canada must be strong. We must all work together to protect Canada's interests and clearly prioritize the interests of workers, their families and their communities.

At the same time, the European Union, with its 27 member states, is Canada's second-largest trading partner. Since 2017, when CETA entered into force provisionally, the EU has enjoyed trade surpluses for goods, while Canada has experienced trade deficits that have continued to widen over time.

Here is the opportunity to develop a robust industrial strategy that diversifies the economy and Canada's trading partners, and includes a pro-worker agenda in the transition to a low-carbon economy more quickly. The carbon border adjustment mechanism is a trade tool to get us there. A BCA is a fair, predictable mechanism that keeps Canadian companies competitive and keeps good jobs in our communities.

Our EU counterparts have expressed to me, as the co-chair of the Canadian CETA domestic advisory group for labour, their keen interest in clean products from Canada because of our high labour and environment standards. One of the immediate government priorities must be to urgently develop a Canadian BCA that aligns with the CBAMs of the EU and the U.K. This will open doors to more trade and more good-paying jobs. There is no doubt that a Canadian BCA will benefit Canada's trading relationships with the EU, the U.K. and other like-minded, low-carbon economies.

Thank you very much.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

We'll go on to questions from members.

Mr. Martel, you have six minutes.

[Richard Martel, Conservative, Chicoutimi—Le Fjord, QC]

Thank you, Madam Chair.

Thank you to the witnesses for being with us today. I'd also like to thank Mr. Simard for being with us, whom I've had the opportunity to meet on a number of occasions. All very interesting.

Mr. Simard, I've often heard you say that Canada produces metal responsibly and has the lowest carbon footprint in the world. I'd like to know what impact the carbon tax has had on the competitiveness of the Canadian aluminum industry.

[Jean Simard]

I believe what you're referring to is the carbon pricing system in Quebec and the carbon tax in British Columbia.

As I mentioned, we are big supporters of these carbon pricing schemes, which favour emissions reduction initiatives and make us more competitive with the rest of the world over the long term. Our industry has reduced emissions by 36% while doubling capacity, making it a model for all of Canada in terms of emissions reduction. In fact, we already met the Canadian 2020 target 10 years ago. So we're very comfortable with this framework, which gives us a huge advantage when we compete in foreign markets such as the European market, because we have a very small footprint.

[Richard Martel, Conservative, Chicoutimi—Le Fjord, QC]

Mr. Simard, the Environment ministeris proposing an international tax on shipping, which could obviously hurt the competitiveness of Canadian ports, as well as, in my opinion, key industries like aluminum. Since our international partners aren't showing much enthusiasm, do you think this initiative could divert investments and jobs from Canadian aluminum-producing regions?

[Jean Simard]

I don't think so, because our production is exported to the United States, not Europe. We export 93% of our production to the U.S. market, and a lot of it moves by rail and so on.

No, I'm not prepared to say that this is an issue for us as we speak.

[Richard Martel, Conservative, Chicoutimi—Le Fjord, QC]

In a context where countries like China are dumping their product and resorting to other unfair tactics in the aluminum industry, do you think current Canadian policies adequately protect our producers from these practices, which undermine competitiveness?

[Jean Simard]

The Government of Canada took ery robust measure last summer by implementing a 25% tariff on Chinese aluminum imports, for example. China does not export primary metal; it exports semi-processed products. Those are the products that are now being blocked by what I would call a tariff wall around the Americas, as Canada and Mexico have responded to the U.S. initiative that started in the spring of this year. As a result, Chinese products no longer really have access to those markets. In fact, they still have access theoretically, but they are no longer competitive enough to enter the market.

[Richard Martel, Conservative, Chicoutimi—Le Fjord, QC]

We know that Rio Tinto sells most of what it produces to the United States, since they are our immediate neighbours and transportation is easier. Do the EU's pollution pricing mechanisms create an opportunity for the aluminum sector?

[Jean Simard]

Canada certainly has a logistical and technical opportunity to export its metal, either to the United States or to the European continent. We produce—

[Richard Martel, Conservative, Chicoutimi—Le Fjord, QC]

The percentage shipped to Europe would be small.

[Jean Simard]

Yes, and I'll tell you why.

For argument's sake, let's say that what we produce is divided 50‑50 between value-added products and what we call commodity ingots.

Value-added products are sold to customers. These products are extruded and alloyed in such a way as to meet a specific need set out in a contract. So it's not a product that can be moved overnight according to the vagaries of the market, because you're meeting contractual specifications.

However, the other 50% can go pretty much anywhere in the world. That's what can be exported to Europe, as long as market conditions there are favourable. In other words, when we negotiate prices, the price paid by Europe, based on current market dynamics, must justify shipping the product over there to get a better return rather than sending it to the United States. That's not the case as we speak.

[Richard Martel, Conservative, Chicoutimi—Le Fjord, QC]

Do I still have some time?

[The Chair, Liberal, Judy Sgro]

You have 20 seconds.

[Richard Martel, Conservative, Chicoutimi—Le Fjord, QC]

Okay.

I would have liked to talk about trade diplomacy and what needs to be done there.

[The Chair, Liberal, Judy Sgro]

You can in the upcoming round.

Go ahead, Mr. Sidhu.

[Maninder Sidhu, Liberal, Brampton East, ON]

Thank you, Madam Chair.

Thanks to the witnesses for their time today on this very important study as we look at carbon border adjustment mechanisms.

Mr. Sawyer, you mentioned that Canada has a significant advantage, as we have both federal and provincial programs in place to reduce emissions. One of our programs, of course, is federal carbon pricing, which has already reduced close to three million tonnes of emissions in the last four years. That is roughly the equivalent of getting 11 million gas-powered cars off our roads. Canada leads the way with the largest emissions reduction in the G7.

You talked about what our country has done, our competitive advantage and bringing together the data. You mentioned making sure that federal and provincial governments bring data together to help emphasize the actions we've taken to bring down carbon. Really, this helps attract economic investments to our country. We've seen over $50 billion invested in our country, with people setting up shop and creating jobs for Canadians.

What would you recommend in terms of the data we share? Is it on the industrial side? Is it on the consumer side? Maybe you can speak more about that.

[Dave Sawyer]

In the context of the border carbon adjustment, it's really about the costs, or the carbon charges, the large emitters are facing, which are subject to border carbon measures. In this country, most provinces are running their own system. Alberta has had their large emitter program since 2007. They're running their own system, so they make their own decisions on the share of emissions that are charged and the cost imposed by industry. When you look at any single sector in the country, you see it's very fragmented. It's all over the place. The relative charge paid has a big distribution.

We have a domestic competitiveness issue, but we also have a problem with saying to the EU or the Americans what we're paying on average. Pulling that information together requires the feds and the provinces to work together to disclose and collect information so we can put it in front of the regulators that are driving these border adjustments.