International Trade Committee on Nov. 22nd, 2022

[Bob Masterson]

I would say that's very accurate.

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

You mentioned the accelerated capital cost allowance, or CCA, in the United States. I think it's a fantastic tool if you want to innovate. You were saying that it's sunsetting in Canada in 2023. The government will say, “Yes, but we'll renew it.”

Can you explain how accelerated capital cost allowance that's short term but has opportunities for renewal affects a business case?

[Bob Masterson]

I talked about two of the projects that are coming into commercial production in 2023 in our sector. Those started construction in 2014 and 2015. If you're going to build a $5-billion, $7-billion or $10-billion chemistry facility, that's a five- to seven-year activity. That's why we asked, and it was present in the fall economic statement of 2018, that accelerated capital cost allowance be included, and it was. However, it begins to transition out in 2023.

We've heard from Finance that they didn't see industry really respond, but we did have this thing called COVID, and nobody invested at all. Now, if you look at these dozen to 15 projects in our sector that are being proposed today, you're at a disadvantage. If those were in the U.S., you'd have the accelerated capital cost allowance for the whole five to seven years to build that. In Canada, even if you start putting shovels in the ground and buying material today, it will start to deteriorate in 2023. You don't get the full advantage of it.

We would say that given the COVID interruption, we think it was a great idea and it should be revisited and extended for another capital cycle of 10 years, especially because it's already available in the U.S.

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

How quickly should the government be responding? They released a fall economic statement with a couple of goodies, but they said we should just wait, because the budget's coming. That won't be until March or April. The IRA was August 16. We're going to wait eight months for the full thing. Is that a big disadvantage to industry? Will industry start making decisions within that eight-month period?

[Bob Masterson]

No, I don't think so. I do think people will be re-evaluating, again from a due diligence perspective. If you were proposing to build a $5-billion plant in Canada prior to the IRA, your shareholders and your board will be demanding that you have another look at that and convince them that it's still the right decision.

I think that re-evaluation is going on, but I think it's urgent in the short term—like, by budget next year—to know Canada's response to the IRA.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

We go now to Mr. Virani for six minutes. Go ahead, please.

[Arif Virani, Liberal, Parkdale—High Park, ON]

Thank you very much.

I'm going to start by thanking all the witnesses for their testimony.

I'm going to start with Ms. Vera-Perez.

You mentioned some of the important investments that were included in the most recent FES, the fall economic statement. You talked about the clean-tech investment tax credit and the 40% tax credit for hydrogen technology. I'd like you to expand a little bit upon the testimony you provided, but also in the context of the most recent visit by German Chancellor Olaf Scholz here.

Given the security needs of Germany and other allies, you're aware that we struck a deal for about $2.6 billion to provide hydrogen-based energy to the Germans. Can you comment on that deal and the potential for other deals like it, with respect to these tax credits going forward?

[Ivette Vera-Perez]

Thank you very much. It's a pleasure to meet you. I live in your riding.

First you asked about expanding on the news from the fall economic statement. The news is in general good. It's a good first step, but that's what it is—a first step.

Right now lots of the conversations and what we want to focus on during the consultations involve getting a fully functional ITC, investment tax credit, but also let's understand what the ITC entails. I'm getting lots of questions about what is eligible and when it is eligible. For example, would a project that started 12 months ago be eligible? We don't want to penalize the early movers, so hopefully the answer is yes.

There are other questions that I am asked by the members. For example, what is the timeline to review? When will the ITC be refunded? If it's, say, at the end of the tax year, and then six months for review, that means 18 months. Eighteen months is a very long time for an SME.

Then where do the other products fit in? How can companies be bridged if they find themselves waiting for 18 months? What is included? What is a capital cost? In an electrolytic project is it, for example, just the electrolyzer, or is it everything else that is part of the project?

There are many questions. Some members have asked—and this is something the IRA has done really well—about whether we can see some examples. Can we have a very simple table that shows that my project expects to achieve this much in terms of carbon footprint—kilograms of CO2 equivalent per kilogram of hydrogen produced—and therefore I will stand here? With prevailing job conditions, etc., I will stand here, and this is what I can expect. Then you can bring this to investors.

That's a little bit on my opening statement.

On Stephenville, you were asking about the potential for exports. I was in Stephenville that day. There was a lot of excitement and a lot of interest. After I came back home, I started to reflect. I thought, “All right, it's 2025. That's bold. What do we need to do?” Then the engineer in me started thinking in terms of a Gantt chart: What needs to happen today so that we advance as fast as we can? We need to develop the renewable energy side of the projects, the wind side of the projects and the hydrogen side of the projects and we need to break ground, but long before we break ground, we need to get all the regulatory approvals in place.

I'm thinking about what can be done in parallel. How can we accelerate without cutting corners so that we can get to that day when we break ground, and then we can develop our whole project? The idea of exporting hydrogen is a valid one, but it's also the idea of utilizing hydrogen domestically. We have 40% to 45% emissions reduction targets for 2035, and net zero by 2050, so all those—

[Arif Virani, Liberal, Parkdale—High Park, ON]

Thank you, Ms. Vera-Perez. I'm sorry, but I have limited time.

I'm going to ask one more question to Mr. Eaton from the Smart Prosperity Institute.

Mr. Eaton, you gave us a list of top opportunities, and I noted, unless I got it down incorrectly, that nuclear wasn't one of them. We've heard about nuclear and small modular reactors, particularly with respect to possibilities of getting indigenous communities in the far north off diesel fuel.

Can you comment upon that and the potentials there for transforming Canada's energy industry?

[Derek Eaton]

Yes, absolutely.

You're correct in noting that I did not mention nuclear or small modular reactors in the list of eight top opportunity areas. That list is based on work we've done, but as I mentioned, there are also some others, including the Climate Institute and RBC.

I would just say that on the role of small modular reactors in the transition pathways, there's not necessarily a large consensus. I think there is clearly evidence that there are particular opportunities for the types of situations that you are mentioning—remote communities and the far north—and there is potentially a competitiveness play. Our list, the list of eight I was enumerating, is really about areas where we can have new economic value-added cluster growth, ideally with some export opportunities.

Yes, there are a lot of people who are very bullish on small modular reactors, but there are a few question marks around, say, the timeline and the scale of that as an industry, if you want to call it that. Maybe it's in the second tier, if you want to call it that.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

We'll go to Madame Sinclair-Desgagné for six minutes, please.

Welcome to the committee today.

[Nathalie Sinclair-Desgagné, Bloc, Terrebonne, QC]

Thank you, Madam Chair.

Good morning, honourable members.

Thank you to the witnesses for their very insightful remarks.

It is clear that globalization as we knew it is no more. Protectionism is, without question, back in style. Sometimes, protectionism takes an irrational form. The U.S. president might wake up on the wrong side of the bed, and it could spark a trade war. Other times, protectionism is more organized, as we've seen with certain investments in specific sectors.

A useful indicator is the percentage of GDP invested in industrial policies. Some countries are already investing in certain key sectors of the economy. In the years ahead, those countries will have the edge.

In this climate, we can respond in one of two basic ways. We can either negotiate amendments to the act to bring Canada into the U.S.'s protectionist fold. We could, for instance, seek to have green products excluded from the act, as was the case with the Build Back Better Act.

The other option, which a number of witnesses have raised, is to not get left behind and introduce policies in Canada and Quebec—as long as Quebec is still part of Canada—that will help key sectors of the economy, critical sectors, stay competitive.

Ms. Dufour, in the U.S., in China and, to a lesser but still considerable extent, in a number of European countries, billions of dollars are being injected into the economy.

How can Canada stay competitive in that context?

[Geneviève Dufour]

Thank you for your question.

I think many solutions exist, and the other witnesses talked about some. Canada needs to make smart strategic investments. As a lawyer, I think some of our normative frameworks need reworking. Canada is a laggard on the due diligence front.

Do we want our businesses to be competitive in international markets? Do we want them to be able to export products to Europe, Japan, North America and anywhere else in the world where countries have brought in, or are bringing in, extremely restrictive legislation, countries like Mexico?

Sometimes only applicable to multinationals or companies with very high revenues, these laws force companies to pay careful attention to every step of their production lines as well as various other considerations, including environmental standards and human rights. This pushes companies to modernize operations and become much more competitive, using methods that are greener, more sustainable and more responsible. They can then export their products to countries with highly restrictive laws.

I would say that Canada is behind because, generally speaking, we don't have any due diligence laws. Yes, we are thinking about passing a law to prohibit imported products created under conditions of forced labour and modern-day slavery, but we are already way behind the pack. As a result, we need to modernize our legal frameworks to impose due diligence requirements on our companies at every stage of production.

That must, however, go hand in hand with a modernized procurement framework, one that forces our public institutions to purchase products and services, and to conduct procurement processes for major infrastructure projects, in a more sustainable and responsible way.

If we change both of those normative frameworks, we can restructure our market, help our companies compete much more effectively and give them the ability to bid on foreign procurement projects. That would, by extension, drive their growth.

[Nathalie Sinclair-Desgagné, Bloc, Terrebonne, QC]

Excellent.

From a carrot and stick standpoint, the examples you gave were more on the stick side, in other words, restrictive measures. Can you give us examples of carrot-type measures, for instance, targeted subsidies or measures that could help certain sectors flourish?

[Geneviève Dufour]

Yes, of course. It's what the other witnesses talked about. Having a clearly laid out plan for strategic investment is paramount. It is possible to provide subsidies. The rules of international trade don't prohibit that as long as we follow some basic rules. This is something we absolutely need to do.

[Nathalie Sinclair-Desgagné, Bloc, Terrebonne, QC]

Thank you very much.

In the current version of the Inflation Reduction Act of 2022, what should be amended? What should we be focusing our efforts on? What should the Canadian government's position be?

The question is for all the witnesses, but you can go first, Ms. Dufour.

[The Chair, Liberal, Judy Sgro]

Whoever would like to answer that briefly has 17 seconds remaining.

[Geneviève Dufour]

As things stand, amending the act would be pretty difficult given the recent changes to the political landscape in the U.S. It's worth mentioning, however, that the act reserves quite favourable treatment for Canada at this time.

I'm actually concerned that other countries will turn to the WTO to challenge the legality of the act, and that would greatly undermine our position.

[The Chair, Liberal, Judy Sgro]

Thank you.

Mr. Cannings, you have six minutes.

[Richard Cannings, NDP, South Okanagan—West Kootenay, BC]

Thank you.

I'll follow up on that line of questioning.

Ms. Dufour brought up the statement that the IRA is illegal. I assume it wouldn't be in Canada's best interest to travel down that road and fight it. In my riding, we've been fighting the softwood lumber battles for 30 years now, and the Americans are taking us to tribunals and to court over those issues. We win every time, but it's still very devastating to our forest industry. I'm assuming it wouldn't be the best tactic for Canada to fight this through CUSMA or something like that, but you mentioned the WTO.

Briefly, what are any avenues for action by Canada? Would they be helpful, considering that the IRA favours Canada over other countries?

[Geneviève Dufour]

Thank you for your question, Mr. Cannings.

I don't think Canada needs to turn to a dispute settlement body, either through CUSMA or the WTO. Canada really came out ahead following the negotiations that led to the most recent version of the act. For the time being, we are receiving preferential treatment, as compared with other countries.

As I said earlier, my concern is that other countries will turn to the WTO's dispute settlement body to challenge the act. The outcome of any such process would probably be highly uncertain, given that the U.S.'s refusal to appoint new judges has stalled the body. Similarly, I don't see how Canada would benefit from filing a challenge of the act and requesting a panel under CUSMA. That means the Europeans or the Chinese would likely be the ones to file a complaint with the WTO's dispute settlement body, although the impact would be rather limited since it is possible that the decision might never be implemented.

The fact remains that the people in the U.S. who worked on this act are very competent people, and they know full well that the act violates international trade rules. For decades, under our multilateral trading system, a country could choose to flout the law and simply accept the consequences, for instance, paying a tax or duty. In fact, we could do that if the Americans were acting in good faith, but I don't mean to imply that they aren't. That said, we could go down that road within the framework of multilateral trade negotiations, if the Americans were to say that their priority was to maintain the act even if it was illegal and that they would pay countervailing duties.

[Richard Cannings, NDP, South Okanagan—West Kootenay, BC]

Thank you.

I'd like to turn to Mr. Eaton.

You mentioned, Mr. Eaton, towards the end of your presentation, the need for inclusive partnerships. You said that we have to act quickly and act collaboratively, and that we have to have working groups.

I've heard in other committees about the importance of data and IP issues around acting quickly. I've heard in other committees about the need for Crown corporations to bring groups together to do this. Do you have any quick comments on what the structure of those collaborative partnerships might look like and what we need to do?

[Derek Eaton]

What might those partnerships look like? I think there are some lessons to be taken from our recent history with the industry strategy council and the economic strategy tables. They were a very good start, but they don't get to the next level down of getting more granular, getting more specific and developing plans and road maps.

We've sketched out at Smart Prosperity, together with our collaborators and transition accelerator, a proposal for building these collaborative partnerships with leadership from the federal government. We would say that one way to do this is to have a lead department tasked with delivering on a clean competitiveness goal—one of the areas I was mentioning—and tasked with creating a sector strategy and road map, but these are then set up as, effectively, partnerships involving business, stakeholders, finance and first nations to develop a strategy that leads to the identification of priority projects and priority policy supports.

These sorts of tables, if you want to call them that, could be a competitiveness table for hydrogen or a competitiveness table for the electric vehicle and battery supply chain, and they would be asked to make periodic recommendations on three things: evaluating the effectiveness of current goals and strategies, identifying the mix of policies needed to achieve these goals and identifying priority investments and projects for the sector.

Ideally you would have some form of working group to oversee the work of these various tables. That could be perhaps under the leadership of PMO or PCO, because it's important to find and identify the interdependencies, the connections, across these areas, and they—

[The Chair, Liberal, Judy Sgro]

Thank you very much, Mr. Eaton. I'm sorry to cut you off.

We'll go to Mr. Martel for five minutes.

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

Thank you, Madam Chair.

Thank you to the witnesses for being here.

Ms. Vera‑Perez, the Inflation Reduction Act of 2022 was signed into law on August 16. Is it acceptable for the Government of Canada to wait until the March or April 2023 budget to respond to the U.S. measures?