International Trade Committee on Nov. 22nd, 2022

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

I am calling the meeting to order. This is meeting number 38 of the Standing Committee on International Trade.

Welcome to our committee, members and replacements. It's nice to see some other faces at the table as well.

Today's meeting is taking place in a hybrid format, pursuant to the House order of June 23, 2022, and therefore members are attending in person in the room and remotely by using the Zoom application.

I need to make a few comments for the benefit of witnesses and members. Please wait until I recognize you by name before speaking. When speaking, please speak slowly and clearly. For those participating by video conference, click on the microphone icon to activate your mike, and please mute yourself when you are not speaking.

With regard to interpretation, for those on Zoom, you have the choice at the bottom of your screen of either floor, English or French. For those in the room, you can use the earpiece and select the desired channel.

I remind everyone that all comments should be addressed through the chair. For members in the room, if you wish to speak, please raise your hand. For members on Zoom, please use the “raise hand” function. The clerk and I will manage the speaking order as well as we can, and we appreciate your patience and understanding in this regard.

Please also note that during the meeting it's not permitted to take pictures in the room or screenshots.

Madam Clerk, can we just verify with our translator that everything is in good shape? Is everything is fine with the translators?

Thank you.

In accordance with the committee's routine motion concerning connection tests for witnesses appearing by video conference, I am informing the committee that all witnesses completed the required connection test in advance of the meeting.

Should any technical challenges arise, please let me know. If necessary, we will suspend for a few minutes in order to ensure that all members can participate fully.

Pursuant to Standing Order 108(2) and the motion adopted by the committee on Tuesday, September 20, 2022, the committee is resuming its study of the potential trade impacts of the United States Inflation Reduction Act of 2022 on certain firms and workers in Canada.

Today we have with us, by video conference, Geneviève Dufour, professor, Université de Sherbrooke, who is appearing as an individual; Ivette Vera-Perez, president and chief executive officer of the Canadian Hydrogen and Fuel Cell Association; and Derek Eaton, senior director, public policy research and outreach, from the Smart Prosperity Institute. In person with us here is Bob Masterson, president and chief executive officer of the Chemistry Industry Association of Canada.

Welcome to you all. Thank you for taking some time out of your schedule to share some of the knowledge and information you have with the committee.

Madame Dufour, I invite you to make an opening statement of up to five minutes. Go ahead, please.

[Geneviève Dufour, Professor, Université de Sherbrooke, As an Individual]

Thank you, Madam Chair.

Members of the committee, thank you for inviting me to appear today.

My name is Geneviève Dufour, and I am a professor of international law in the law faculty at Université de Sherbrooke. I specialize in international trade law.

I am delighted to be here today to discuss the U.S.'s Inflation Reduction Act of 2022. I commend the committee for studying the issue, since it doesn't seem to have garnered much attention in recent months despite the legislation's significant repercussions.

Having followed the committee's proceedings over the past few days, I felt it relevant to focus my remarks on the lawfulness or legality of the act vis-à-vis international trade rules. My understanding was that many of you wanted clarification on that.

Let's say it right away: The Inflation Reduction Act is clearly illegal under international trade rules. First, it violates the national treatment principle, which aims to avoid protectionist measures. It also violates the principle of most favoured nation treatments, which requires states not to discriminate among trading partners.

[Technical difficulty—Editor] I just said that—

[The Chair, Liberal, Judy Sgro]

Can we just suspend for a moment?

I'm sorry, Madame Dufour, but we seem to have a problem.

I will suspend for a moment.

[The Chair, Liberal, Judy Sgro]

Thank you very much, Madame Dufour.

Please start from the beginning again.

[Geneviève Dufour]

Would you like me to start over?

[The Chair, Liberal, Judy Sgro]

Yes, please.

[Geneviève Dufour]

Shall I start from the beginning? Okay.

Good morning, Madam Chair. Thank you.

Members of the committee, thank you for inviting me to appear today.

I am an international law professor in the law faculty at Université de Sherbrooke, and I specialize in international trade law.

I am delighted to be here today. I commend the committee for studying the issue, because the U.S.'s Inflation Reduction Act of 2022 has significant repercussions but hasn't received much attention in recent months.

Having followed the committee's proceedings over the past few days, I felt it relevant to focus my remarks on the legality of the act under the international trade rule system. My understanding was that many of you wanted clarification on that.

Let's say it right away: The Inflation Reduction Act is clearly illegal under international trade rules.

First, it violates the national treatment principle, which aims to avoid protectionist measures. It also violates the principle of most favoured nation treatment, which requires states not to discriminate among trading parties.

The act also violates the Agreement on Subsidies and Countervailing Measures of the World Trade Organization, or WTO, because, in order for a taxpayer to qualify for the tax credit, the vehicle battery must contain 50% North American content by 2024, and 100% by 2028. As everyone knows, any subsidy contingent upon the use of local content is strictly prohibited under the agreement.

There is no doubt that the American act violates the basic rules of international trade, so the question is whether the U.S. can invoke an exception.

Some have cited protection of natural resources, which is an exception under international trade law. Too much information is missing to say whether the act would meet the threshold for that exception. We will have to watch how the U.S. implements the act. Nevertheless, we can start asking questions about certain aspects, including Canada's favourable treatment under the act and the fact that the act's protectionist restrictions could ultimately disadvantage electric vehicle production, which would be harmful to environmental protection.

One might ask whether the CUSMA allows the U.S. to favour Canada and Mexico. FTAs allow states to give each other tariff advantages and to work together to harmonize their practices and measures. Under no circumstances do FTAs allow a state to provide subsidies to companies to use domestic goods or goods from a state with which it has a free trade area.

Finally, the U.S. will probably try to justify this law in the name of energy security. They will therefore most likely want to invoke the national security exception, at least for the “foreign entity of concern” portion of the law. Analyzed quickly, this exception hardly applies to the law.

All the experts agree that the act contravenes the rules of international trade. Obviously, this isn't the first time the U.S. or another country has adopted legislation that violates the rules, but this legislation is unique for a number of reasons.

First, the act has a considerable scope. The stated purpose of the act is to restructure supply chains in the world's most powerful country trade-wise.

Second, the accepted aim of the act is protectionism, and the act's illegal nature is just as accepted. Everyone in the U.S. involved in drafting and passing the act knew—and knows—that it is unlawful under international trade rules.

Lastly, the unfriendly tone of the act sets it apart. That's how French President Emmanuel Macron described the act, calling on the European Union to wake up and pointing out that Europe's two major partners—powerful countries—provide government support to their industries. He said that Europe needed to respond.

Where are we headed? President Trump called out China for its illegal subsidies, starting a trade war that came under fire from all countries. Now we have President Biden passing a protectionist act that provides illegal support. It's highly likely that the world will react differently this time around. We could see escalating protectionism. What will international trade look like?

Above all, how will Canada, a country that has always advocated respect for the rule of law, position itself in this new landscape? That's a fundamental question because this act could have a major systemic impact on the multilateral trading system we value.

Thank you.

[The Chair, Liberal, Judy Sgro]

Thank you very much, Madame Dufour.

Now we have Ms. Vera-Perez, please, for five minutes.

[Ivette Vera-Perez, President and Chief Executive Officer, Canadian Hydrogen and Fuel Cell Association]

Good morning, Madam Chair and members of the committee. Thank you for the invitation to speak here today.

My name is Ivette Vera-Perez. I am the president and CEO of the Canadian Hydrogen and Fuel Cell Association, or the CHFCA. We represent over 160 companies at all stages of the hydrogen and fuel cell supply chain. Our members export clean technologies to over 42 countries. These countries account for 65% of the world's population.

According to a recent study by Ernst & Young, hydrogen's total Canadian annual market potential could reach $100 billion and create up to 350,000 jobs by 2050. That is in addition to the Government of Canada's estimate that the sector will assist with reducing Canada's emissions by 45 million metric tons annually.

With a 100-year legacy of industry and research expertise, Canada's hydrogen and fuel cell sector has until recently been a global leader in the space. However, unlike 100 years ago, we have competition for this leadership position. Countries around the world have rolled out policies and funding for the advancement of their domestic hydrogen and fuel cell industry. One of these policies is what has brought us together today: the United States' Inflation Reduction Act, or IRA.

The IRA contains several measures that make investing in the U.S. attractive. The investment and production tax credits for clean hydrogen and other incentives to produce clean technologies and clean energy, which are essential elements of the hydrogen supply chain, are all very attractive opportunities. These, in addition to the ease of use for companies accessing the measures and a very well-resourced regulatory approval process, add to the opportunity presented.

I am aware that Canada can't respond in kind to the U.S. IRA. We have a smaller market and different structure, but we have several measures in Canada that we could take that would better incentivize investment in our own domestic hydrogen industry.

The recent fall economic statement provided great news to the clean-tech sector, with a 30% investment tax credit, the ITC, for clean technologies and a 40% ITC for hydrogen technologies. These tax credits in addition to the creation of the Canada growth fund, which includes contracts for difference for hydrogen, will help incentivize domestic production of low-carbon hydrogen. As we work to gain clarity on the operational details around the hydrogen ITCs and the clean tech growth fund, there are several recommendations that I would like to share with this panel.

First, we should focus on rapidly deploying a fully functional and clear ITC, with clear guidelines on boundaries, eligibility criteria, processing timing and how these ITCs interact with other programs. This will give investors and project proponents much needed clarity as they develop their projects and secure financing.

Second, when exploring the potential of the clean hydrogen ITC in the fall economic statement, expanding the scope of this credit—at least in part—to apply to operational costs beyond capital costs could provide the flexibility needed to support companies in the industry.

Third, programs like the strategic innovation fund and clean fuels fund are great signals of the ambition the government has for Canada's clean-tech industry. The resource-intensive application process and long wait times are a deterrent to project proponents. We must commit to reasonable turnaround times for the SIF, CFF, CIB or any other future funding. Furthermore, we must consider how these programs and the ITC incentives interact with each other and help elevate each other.

This is a complex issue. Comparing the U.S. to Canada can seem like comparing apples to oranges, but that is a comparison that companies and investors in the sector make in their everyday decision-making.

In closing, Canada has always been at the forefront of the global hydrogen industry, but with the rapid development of the sector and our lack of action at home until today, Canada is falling behind. The fall economic statement is a solid first step to help us reclaim our leadership position. The devil, however, is in the details. We must invest smartly, heavily and rapidly to reclaim our leadership position in the hydrogen sector.

Thank you very much. I look forward to your questions.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

We'll go on to Mr. Masterson for five minutes, please.

[Bob Masterson, President and Chief Executive Officer, Chemistry Industry Association of Canada]

Thank you, Madam Chair.

Thank you, committee members, for this timely and important study, and also for the opportunity to be before you in person today.

Chemistry and plastics is your third-largest manufacturing sector in Canada, with about $90 billion in annual shipments. Eighty percent of that is exported, and the vast majority of that is to the United States. In short, the United States is our largest customer, but it's also our largest competitor, both for market share and for investment share.

Globally, our industry is embarking on two simultaneous and major transformations: the transformation for a zero-carbon chemistry sector and the transformation for a circular economy for plastics. In short, it's no longer a question of environment policy; it's entirely a question of investment policy. The sector will invest. It will transform. It will do so rapidly. The only question is where those investments are going to take place.

I would like to start with some good news. After several decades without major new chemistry investments in this nation, we have two global-scale facilities that will enter commercial operation in 2023. That's some start-up good news, but also, in the last 18 months, we have had over 15 major project announcements in our sector worth more than $30 billion of proposed new investments. Here's the interesting part. Every one of those investments is envisioned as net carbon zero from initial operation.

Those projects are largely in response to very aggressive investment attraction efforts from the Province of Quebec and the Province of Alberta.

I have to stress, though, that these are proposals only. Much work remains to turn them into final investment decisions and built infrastructure. My main message to you today is that indeed the U.S. IRA is a game-changer, and I can't imagine that there's not one of those projects that won't be re-evaluated from a due diligence perspective to see how the Canadian business case matches up with the new business case under the IRA in the U.S.

My second point is that it's not just those new investments that are at stake. In transforming our sector, we have about $200 to $300 billion of built chemistry infrastructure in Canada today, and to reach net zero, we have to recapitalize every penny of that in the next three decades. Our ability to do so will depend entirely on improving investment conditions in Canada.

Definitely, the IRA contains long-lived incentives. It covers all five of the pathways available to decarbonize the chemistry sector. All five of the pathways have various incentives available to them, and incentives can be stacked. They are already on top of major advantages that are in place at the state and federal level, and that includes accelerated capital cost allowances, which, unlike in Canada, are not going to start to fade away in 2023.

My final point is this: The true value of the IRA's incentives and the biggest challenge for Canada is the transparency and certainty provided to investors. I know you have heard a lot about carrots and sticks, but if you will allow me a seasonal analogy, I would say that all industries in Canada are on the naughty list. We pay a very steep and ever-steepening carbon price.

Some very fortunate few that do find their way onto the “nice” list get hand-picked access to federal grants, tax incentives, loans and other incentives to assist with decarbonization, but here's the thing: The criteria to get on the list are not transparent; they are not clear; and they are not available to everybody. That means that you can't build them into a business case, which puts Canada at a disadvantage.

In contrast, in the United States, no industry or company is on any naughty list; everybody's on the nice list. Everybody can look at the IRA and factor in these very real, very material, very accessible incentives into their business cases for proposed industrial decarbonization projects.

As time allows in questions, I would like to share further details that compare and contrast investment attractiveness for decarbonization of the chemistry sector in the U.S. versus Canada today.

Thank you again for this opportunity.

[The Chair, Liberal, Judy Sgro]

Thank you very much. It's much appreciated, Mr. Masterson.

Mr. Eaton, go ahead, please, for five minutes.

[Derek Eaton, Senior Director, Public Policy Research and Outreach, Smart Prosperity Institute]

Thank you, Madam Chair and members of the committee, for inviting me here today.

My name is Derek Eaton. I am the senior director of public policy research and outreach at the Smart Prosperity Institute, which is a clean economy think tank housed at the University of Ottawa.

I'd like to acknowledge that I reside on on the unceded traditional and ancestral territories of the Mississaugas of the Credit, the Anishinabe, Chippewa, Haudenosaunee and Wendat nations. We recognize the unique and enduring relationship that exists between indigenous peoples and their traditional territories worldwide.

The Inflation Reduction Act is positive for Canadian businesses because it provides more certainty about an economic decarbonization strategy for North America’s largest economy. The range of measures included in the act are likely to weather political changes in the U.S., because they are part of what has been called a “new productivist agenda” for economic policy, focusing on well-paying jobs and diverse, inclusive growth opportunities in various regions of the United States.

The act does, though, put pressure on Canada to determine its economic place in the net-zero transition. Otherwise, we will see businesses and jobs move to the U.S. or not consider Canada as an attractive option.

As a small open economy, highly integrated with our large neighbour to the south, Canada cannot afford to take a passive approach to our economic transition, but this is largely what we have done. The government has created an array of incentives and funding mechanisms to encourage investment in clean energy and clean tech. The latest of these is the Canada growth fund.

However, the approach being taken is to generally leave it to market forces to determine where the best individual funding opportunities are. The problem with this approach is that it ignores what we know from history about how new economic clusters emerge and consolidate in areas of innovative technology.

The coordination of investment opportunities locally, regionally and up and down a value chain is critically important and requires a strategic approach to the identification of a pipeline of projects. Modern industrial policy is about this coordination, which, although challenging, is pursued by many of our major trading partners. Modern industrial policy differs from what has happened in the past, which has tended to focus on supporting individual companies with government subsidies instead of looking at how to support the growth of an industrial ecosystem.

Work by Smart Prosperity and The Transition Accelerator, as well as others, including the Canadian Climate Institute and RBC, has identified a number of Canada’s top opportunity areas in the net-zero transition. These include electric vehicles and the battery supply chain; carbon capture, utilization and storage; biofuels, especially sustainable aviation fuels; hydrogen; alternative proteins; mass timber; critical minerals; and ag tech. These growth areas all present opportunities to transform Canada’s legacy industries in oil and gas, forestry, mining, aerospace, agriculture and automotive manufacturing into world-leading climate solutions ecosystems.

How can Canada begin taking a more strategic approach as a response to the Inflation Reduction Act? The process can be boiled down to two simple action items.

One is to set bold and clear economic targets to guide strategy in priority opportunity areas. Canada should create net-zero competitiveness goals. “Goals” here means quantitative economic targets that refer to physical actions—improvement, production and deployment of technologies. “Net-zero” means indexed to the government mandates or our net-zero targets. “Competitiveness” means benchmarked to a vision of Canada’s place in the global supply chains of 2030 and looking forward to 2050.

These targets must be supported by a clear supply chain strategy that seeks to build economic value in Canada while identifying export opportunities. The targets should be used to focus public funds and guide policy design at the sectoral level.

The second major action item is to create inclusive partnerships to foster strategic collaboration. Canada needs new forms of collaboration between first nations, government, industry, finance, universities and civil society. Collaborative forums here should not be talking shops but active working groups that set and revise targets, create strategy, seed projects and identify high-priority investments.

Brokers and independent intermediaries are crucial to the process of collaboration. It's important to empower independent voices that can provide expertise and help develop projects. An independent agency of this type could be in government so long as it is insulated from politics and free from bureaucratic routines. Otherwise, it could come from civil society or it could be true public-private partnerships, organizations built for the purpose of catalyzing strategic collaboration for net zero.

I thank you for this opportunity. I look forward to your questions.

[The Chair, Liberal, Judy Sgro]

Thank you very much, Mr. Eaton.

We will now move to Mr. Seeback for six minutes, please.

[Kyle Seeback, Conservative, Dufferin—Caledon, ON]

Thank you very much, Madam Chair.

I want to pick up on the opportunity Mr. Masterson gave to expand upon some of his comments.

You talked about how the investments for net zero must be massive investments. I think RBC says $2 trillion between now and 2050, and $80 billion a year. The government brags about the $9 billion they've invested over the last three years. It's nowhere close.

You talked about the IRA having five pathways for investment in your industry in order to get to those net-zero goals. What are those five pathways that they're investing in? Is Canada coming close to matching them?

[Bob Masterson]

Just to be clear, the chemistry sector has five pathways to decarbonization, and the IRA covers all of those—plus, plus, plus.

If you talk about those individually, you can start with hydrogen production and utilization. For example, we have one major proposal by Dow Canada in Fort Saskatchewan to build the world's first net-zero petrochemical facility. They will consume their own hydrogen and bring in other hydrogen to offset natural gas use.

The second part is very important. That hydrogen production and utilization is covered by the IRA.

[Kyle Seeback, Conservative, Dufferin—Caledon, ON]

Is it covered by what Canada has released so far?

[Bob Masterson]

Again, in Canada there are opportunities to apply for certain incentives. You may or may not get those, and again, you cannot build them into your business case.

[Kyle Seeback, Conservative, Dufferin—Caledon, ON]

But you get that in the United States—

[Bob Masterson]

You will under the IRA. They're very transparent.

[Kyle Seeback, Conservative, Dufferin—Caledon, ON]

That's under the IRA: Okay.

Next is...?

[Bob Masterson]

Second, you would have carbon capture, utilization and storage. If you go back, the U.S. had the 45Q tax credit. Canada proposed an ITC, an investment tax credit, for carbon capture. Our estimate was that the 45Q was about twice as robust as the Canadian proposal. Under the IRA, that's at least double. Our analysis says it's now four times better than what Canada's proposing. We have members who will tell you that when they've been in to see Finance Canada on opening up their books, on a project-to-project comparison basis, it's actually eight times better in the U.S.

Again, here's the most important thing: Under the IRA and the 45Q, it's just in the tax code. If you want to do it, the tax incentive is available. What's proposed in Canada is that you would have to get permission from the environment minister and the resource minister to obtain a tax credit, so—

[Kyle Seeback, Conservative, Dufferin—Caledon, ON]

You might be on the naughty list and then not get it.

[Bob Masterson]

You might be on the naughty list and not get it. What are the criteria? That's the second one.

Electrification is another example that's covered in the IRA. There's a lot of information about electrification. There are many opportunities in our sector. You could be looking at small nuclear reactors. You could be looking at solar installations or battery storage. We have battery storage proposals in Canada. We have solar proposals in our sector. Those are all covered under the IRA and are, again, all very transparent.

I could go on further, but I think you get the point. The main message here is that we do have opportunities to seek support to help accelerate decarbonization of our sector, but when it comes to the federal level, it's all behind a black box. There's no transparency. That's okay, but you just have to recognize that if you're looking to investors, they can't build it into a business case. As soon as something says “ministerial decision”, the value of that is zero until you get it. That's the challenge.

[Kyle Seeback, Conservative, Dufferin—Caledon, ON]

In the United States, before the IRA and now with the IRA, you can say that these things are available in the tax code. An investor can factor that into the decision on where they're going to invest. In Canada you apply for this, and you may or may not get it, etc. It's a government program, government-run, and a bureaucratic decision, so you don't know if you're going to get it or not get it.

Is that an accurate summary?