International Trade Committee on Dec. 13th, 2022

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

I call this meeting to order.

Welcome to meeting number 44 of the Standing Committee on International Trade.

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

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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 potential trade impacts of the United States Inflation Reduction Act of 2022 on certain firms and workers in Canada.

We have with us, as an individual, Colin Robertson, senior advisor and fellow for the Canadian Global Affairs Institute, by video conference. From Bioindustrial Innovation Canada, we have A. J. Marshall, advisor and project manager, by video conference. From the Canadian Biogas Association, we have Jennifer Green, executive director. Finally, from the Cement Association of Canada, we have Adam Auer, president and chief executive officer.

Welcome to all of you.

We will start with opening remarks of up to five minutes.

Mr. Robertson, please go forward.

[Colin Robertson, Senior Advisor and Fellow, Canadian Global Affairs Institute, As an Individual]

Thank you, Madam Chair.

In the fall of 2005, I led our advocacy team at the Washington embassy. Softwood lumber was a top priority, and our ambassador, Frank McKenna, asked me when our troubles over lumber began. I called the Librarian of Congress. A couple of days later, he said their research showed that timber merchants in northern Massachusetts—what is now Maine—successfully petitioned Congress during the second administration of George Washington to impose levies—or tariffs, as we call them today—on New Brunswick timber sent to Boston to be used in shipbuilding.

The point of this story is to remind ourselves that Americans practising protectionism is as old as the republic, and it will never change. We are not usually the primary target of U.S. trade actions. A lot in the Inflation Reduction Act is aimed at countering China. However, the deeply integrated nature of our trade means we can become collateral damage, as we did with the Trump administration’s steel and aluminum tariffs.

Trade policy is even more complicated now, because it involves climate, human rights, labour and environmental provisions. In the wake of the pandemic and with the return of great power competition, national security is a dominant consideration. We must now secure and make resilient our supply chains through decoupling, nearshoring and friend-shoring. Security of supply now trumps comparative advantage.

We've witnessed the return of national industrial policies, complete with incentives and subsidies, like those in the IRA. For this reason—and this is my second point—our advocacy effort with the United States must be a permanent, ongoing campaign to remind Americans that reciprocity in trade and investment continues to benefit both nations. The U.S. is the market that matters most for all businesses, especially for people we are encouraging, like women and minorities.

Three-quarters of our exports—manufactured goods like auto parts, or resources like lumber, oil and gas—go to the United States. With trade generating over 60% of our economy, access to the United States matters. For 30 or so American states, the biggest market is Canada. Our trade and investment generates nine million American jobs. Parsing this by state and by congressional and legislative district, as I used to do, works because just as all politics in the United States is local, so is all trade.

Other witnesses have testified that a team Canada effort helped us secure a level playing field for the production of electric vehicles. Our ambassador, embassy and consulates play a critical role. Having done this both in Washington and at consulates, our success also depends on a Team Canada effort involving the Prime Minister, premiers, ministers and members of Parliament from all parties. All levels of government must be involved, as well as business, labour and interest groups.

To level the playing field on U.S. protectionism, we pursue various avenues. We will continue to protest their incentives on battery production as discriminatory and contrary to their CUSMA and WTO trade obligations, arguing, as we did in the case of the EV tax credit, that we should approach this on a continental basis. We will remind the United States of our right to respond to discriminatory behaviour with trade sanctions. The threat of targeted sanctions helped persuade the United States to lift the steel and aluminum tariffs.

However, imposing counter-tariffs also imposes a tax on our own consumers. As this committee knows, there is pressure to match the American subsidies with subsidies of our own. We have done this before, but the cost is borne by the taxpayer. Alternatively, we could agree with the United States on the use of incentives, as we recently did for solar panels. The ideal would be a continental industrial strategy that includes Mexico.

Regardless—and this is my third point—we need to get our own act together by making the sectors that matter most to us as competitive as possible. There is lots of useful research from business, government and think tanks to draw on. Two that stand out are “Restart, Recover and Reimagine Prosperity for All Canadians”, prepared by Canada’s Industry Strategy Council, and the Senate prosperity action group report “Rising to the Challenge of New Global Realities”.

To help implement and make practical their recommendations, we should reconstitute the sectoral advisory groups, or SAGITs, that served us so well during the Canada-U.S. free trade agreement negotiations. Composed of business, labour, provincial governments and civil society, they guided the negotiators with practical advice on what Canada needed, and acted as sounding boards on what we could accept in negotiations.

To conclude, advancing our interests with the United States is a permanent campaign requiring a team Canada approach with a clear focus on our objectives.

Thank you, Madam Chair.

[The Chair, Liberal, Judy Sgro]

Thank you very much, Mr. Robertson.

Mr. Marshall, you have up to five minutes.

[A. J., Sandy) Marshall (Advisor and Project Manager, Bioindustrial Innovation Canada]

Thank you, Madam Chair and committee, for the invitation to speak today.

My name is Sandy Marshall. I am an advisor and project manager with Bioindustrial Innovation Canada, also known as BIC.

BIC is a national not-for-profit business accelerator that provides critical strategic investment, advice and services to developers of clean, green and sustainable technologies. We have a track record of successfully supporting early stage companies across the country in multiple sectors. For example, some of our portfolio companies include leading lithium-ion battery recovery companies and renewable fuel producers working to decarbonize our transportation sector by creating sustainable aviation fuel.

We have a history of success. Our portfolio companies are on track to achieve over 13 megatonnes of GHG reductions by 2030, while at the same time supporting thousands of jobs. Simply put, BIC knows and understands the clean, green and sustainable technologies space and the opportunities that Canada has to become a leader and create thousands of good-paying jobs at home.

The introduction of the Inflation Reduction Act by the U.S. poses a threat to this industry in Canada. Even prior to the IRA, many early stage companies have had to make tough decisions on where to grow their business: at home or south of the border. The IRA will help make that decision just a bit easier for many of these companies. The massive subsidies being provided, such as the investment tax credit of up to 50% and production credits for clean fuels—including for sustainable aviation fuel, as I mentioned—mean that there is an even larger reason for Canadian companies to shift their interests abroad to gain access to these incentives and a significantly larger market and workforce.

The case of sustainable aviation fuel production is particularly telling. For every litre produced in the U.S. under the IRA, 62¢ Canadian is provided as a tax credit on a direct-pay basis. If Canada is serious about decarbonizing aviation and about having the green jobs associated with this decarbonization in Canada, a production tax credit equivalent to the 62¢ per litre in the IRA should be included.

Lacking a stronger response from the Canadian government, the reality is that it will be next to impossible to grow sustainable projects here in Canada. Beyond matching or exceeding available opportunities that the U.S. government has introduced, our government should also look at other complementary measures, such as supporting organizations like BIC, which can help bridge the gap and provide strategic technical support to early stage companies, and provide Canada with a chance to attract and retain globally significant green projects.

It should also be highlighted that the IRA builds on a number of other programs, including the climate-smart commodities program. It helps to identify, validate and provide technical, financial and market assistance to primary producers and processors—which is BIC's primary focus. They will be the foundational stakeholders in the U.S. decarbonization strategy, as well as suppliers of primary inputs into these IRA-funded technologies.

Thank you for this opportunity to speak today. I'm happy to take the committee's questions.

[The Chair, Liberal, Judy Sgro]

Thank you, Mr. Marshall.

It's on to Ms. Green, please.

[Jennifer Green, Executive Director, Canadian Biogas Association]

Thank you, Madam Chair and the rest of the international trade committee, for the opportunity to join you here on the unceded traditional territory of the Algonquin Anishinabe people to discuss the impact that the American Inflation Reduction Act has on Canada's biogas and renewable natural gas sector.

For the purpose of my testimony, I will be referring to the Inflation Reduction Act as the IRA and to renewable natural gas as RNG.

The Canadian Biogas Association serves as the collective voice of Canada's biogas and RNG industry. Founded in 2008, the Canadian Biogas Association has over 180 member companies representing farmers, municipalities, utilities, technology developers, consultants, finance and insurance firms and affiliate organizations, all with a focus on building the biogas and RNG sector in Canada.

For those of you who may not be familiar with biogas and RNG, our product is a drop-in gaseous fuel that is lowering the emissions of Canada's energy system today, with over 300 projects providing low-carbon energy in every province. We call biogas and RNG a drop-in fuel because both are a form of methane, just like natural gas. The major difference is that the methane produced by our members comes from organic materials from farms and municipalities rather than from drilling into the ground. This difference in methane source translates into a significant drop in greenhouse gas emissions associated with its production.

As you know, the IRA has upended the investment landscape for the clean energy and clean technology sectors, bringing in generous production and investment tax credits as a means of kick-starting the American domestic industry. As this committee has heard throughout its study, these measures have made Canada an uncompetitive investment jurisdiction overnight, especially in the biogas and RNG sector. As my American counterpart recently stated, the IRA gives developers and financiers “certainty and a competitive edge that will fuel growth of the biogas and clean energy industry for years to come”.

To put it mildly, these new American tax credits have placed biogas and RNG projects in Canada, which were days away from their final investment decisions in August, permanently on hold. Canada must respond; otherwise, projects that hold immediate emission reductions will continue to be paused and/or go south of the border, where proponents can choose between a production tax credit worth 2.6¢ U.S. per kilowatt hour or an investment tax credit worth 30% of their project costs.

We recognize that Canada has started to lay the foundation of a robust response to the IRA's threat to our competitiveness. The Canadian Biogas Association strongly supports the investment tax credits for clean technologies and hydrogen that were introduced in the fall economic statement of 2022. These investment tax credits will help projects get built and bolster domestic clean energy security.

However, there is a crack in the foundation. Finance Canada did not include provisions for biogas and RNG in the fall economic statement's new clean technology investment tax credit. We know that the federal government is investing in the long-term decarbonization of the economy with hydrogen and other clean technologies, but leaving out a technology that is decarbonizing the gas Canadians heat their homes with every day is a major oversight. I have heard from my members that if biogas and RNG projects were included in Canada's new clean technology and hydrogen investment tax credits, they would be able to execute 80% of their projects. Without inclusion in Canada's response to the IRA, they have made it clear that it is unlikely that any new biogas or RNG projects will be built in Canada—not when they can receive favourable tax treatments in the U.S.

Our recommendation is an easy fix for Canada. Add biogas and RNG projects to the investment tax credit brought in by the fall economic statement and ensure that all low-carbon gaseous fuels are treated equally. This will put Canadian biogas and RNG projects on equal footing when it comes to competing for investment capital. It will help my members build projects, create jobs and reduce emissions with a proven technology.

Thank you for your time. I look forward to your questions.

[The Chair, Liberal, Judy Sgro]

Thank you very much, Ms. Green.

Now we'll have Mr. Auer for up to five minutes, please.

[Adam Auer, President and Chief Executive Officer, Cement Association of Canada]

Thank you, Madam Chair.

Good morning, members of the committee. Thank you for inviting me here today on behalf of the cement and concrete industry to discuss the impact of the U.S. Inflation Reduction Act.

First, here are a few facts about my industry.

Concrete is the world’s most used and most important building material. It is the foundation of economic growth and infrastructure in communities large and small, providing a cost-effective, reliable solution to building durable roads, bridges, water mains, sidewalks, schools, hospitals and community centres, and the list goes on.

Our industry generates more than $76 billion in annual economic activity and employs over 158,000 Canadians in good-paying jobs in communities across Canada. However, making the cement that holds concrete together produces a lot of carbon pollution—about 1.5% of total emissions in Canada and 7% globally. For our industry, the scientific and economic imperative is clear: We need to transform our industry for the net-zero future.

That’s why we were the first industry to join Canada’s net-zero challenge, committing to full transparency on how we plan to meet our targets. However, we can’t do it alone. Last month, we released a road map to net-zero concrete in collaboration with the Department of Innovation, Science and Economic Development, a first-in-kind collaboration, with a goal to avoid 15 megatonnes of carbon emissions by 2030 and to map the combination of technologies, fiscal incentives and regulatory and policy frameworks needed to decarbonize heavy industry.

We have already made significant progress, and there is still some low-hanging fruit remaining to be harvested, but with approximately 60% of our emissions resulting from the immutable chemistry of making cement, we know deep investments in innovative and expensive technologies, such as carbon capture, utilization and storage, or CCUS, are unavoidable if we are to achieve net zero.

Canada is already a leader in CCUS technologies, and the cement sector is at the heart of much of that investment, but the barriers to commercialization remain daunting. To give you an idea of the magnitude, for the capital needed to build a carbon capture plant in Canada or the U.S., a company could build two new cement facilities in China. Simply put, building a capture plant is greater than the value of the cement facility itself.

Recognizing market barriers to CCUS, governments around the world have entered the race to commercialize the technology and reap the benefits of emissions reductions and improved economic competitiveness for industry through the low-carbon transition. While Canada is off to a good start with the net-zero accelerator fund and a proposed investment tax credit for CCUS, the enactment of the Inflation Reduction Act means the U.S. has rapidly sprung ahead in the race.

The IRA introduces more than $369 billion in incentives for clean energy and climate-related program spending, including funding to encourage CCUS projects, which creates a significant risk that companies wanting to invest in emissions-reducing technology in Canada are at a competitive disadvantage vis-à-vis their U.S. counterparts. In addition to the significantly larger funding amounts offered under the IRA, one of the biggest gaps it fills is the production value gap. It provides a predictable return on investment by paying producers for each tonne of CO2 sequestered.

In comparison, Canada’s efforts have focused only on upfront capital subsidies, leaving investors exposed to unpalatable operational risks in an environment where, despite the carbon tax, the production value of captured carbon remains entirely unpredictable. In other words, investors in U.S. projects can now calculate with confidence what the long-term ROI on a CCUS project will be, making Canadian investments significantly riskier in comparison. Cement companies, like many industries in Canada, are part of large multinationals, and Canadian divisions must compete within their companies for projects.

Canada has been successful as a destination of choice for internal allocation of capital to CCUS projects and in fact is home to two of the most advanced full-scale CCUS projects in our sector—one in Edmonton and the other in the Bow Valley region of Alberta. If Canada wants to remain competitive, capital supports must be paired with a well-designed market surety mechanism, such as carbon contracts for difference, as proposed in the fall economic statement.

We welcome the federal government’s commitment to seizing the opportunities provided by a net-zero economy, but thoughtful and well-designed implementation of these incentives will be needed for Canada to remain a first choice for the trillions in private capital waiting to be invested in clean technologies around the world. Budget 2023 is our next opportunity to course correct and provide Canadians with the economic and environmental benefits from the low-carbon transition. The opportunity is within our reach. We need to take it, and quickly.

Thank you.

[The Chair, Liberal, Judy Sgro]

We will go to members.

We have Mr. Seeback for six minutes, please.

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

Thank you very much, Madam Chair.

Throughout this study, what we seem to be hearing, in my estimation, is a clash of ideologies in Canada.

Canada wants to talk about various funds. For example, we have the clean growth fund, with approximately $15 billion that companies can apply for—and may or may not get—in order to invest in technologies that are going to reduce carbon emissions, whereas the U.S. has been very clear: They have said there are going to be tax credits and production credits that are easily calculable, so you can determine exactly what you're going to get as a result.

I'm going to ask this of all the panellists here today. What would you prefer in Canada? Would you prefer to apply to a fund through the Canadian government to get some money, or would you prefer to have what was done in the United States, which is to have tax credits coupled with production credits?

I'll turn to Mr. Auer first.

[Adam Auer]

I think the production incentives are the missing piece of the Canadian picture. I don't want to say that the capital supports aren't useful, but in the absence of that sort of operational component—the production piece—they're not as efficient as what could be achieved with the suite of tools that could be developed using the capital investment tax credits and something like a market surety mechanism. That's especially the case for CCUS, whereby you're capturing a commodity that doesn't have any market value that's predictable in the way investors need.

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

Go ahead, Ms. Green.

[Jennifer Green]

There are RNG projects being supported by the government through grants, but they are on a project-by-project basis. I don't see this as being a very efficient process. It really doesn't help the producers of biogas and RNG make investment decisions. That market's surety and certainty are an important element, so an ITC and a PTC would be an absolute preference for our members.

Also, the programs that tend to be one-off take a very long time to go through the process, so ultimately, certainty of market conditions is what would be best for our industry.

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

I'll turn it over to our other witnesses now.

[A. J. (Sandy) Marshall]

I'll jump in here.

I agree with what the first two panellists or witnesses have said. The tax credits and the production support structures are very important for defining the return on investment on these projects so they can move forward and attract investment. I would add, though, that all of the companies we work with are earlier-stage companies, and access to capital is a significant challenge for them. When you're trying to build larger, expensive facilities that could cost tens of millions to hundreds of millions of dollars to build, access to capital for early-stage companies is a huge challenge.

The opportunity to obtain funds through things like the Canada growth fund is important to that sector as well, but access to funds through the Canada growth fund is not sufficient. There needs to be clarity in what the return on investment will be. That's better defined or can be defined through tax credits and production credits.

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

Go ahead, Mr. Robertson.

[Colin Robertson]

I was part of the team, when we negotiated the Canada-U.S. Free Trade Agreement, that was trying to arrive at a subsidies code whereby Canada and the United States would agree on how to provide incentives. We were not successful. We punted it to what is now the World Trade Organization.

The holy grail has been trying to get a subsidies code. That would be the ideal because we have our free trade agreement with the United States and Mexico. If we could agree on a continental basis how we're going to manage incentives and subsidies, that would be the ideal, because we are now moving to that era of industrial policy for the reasons I've enumerated.

If we did that, I think it would open up the door with Europe as well. We have a free trade agreement with Europe, and if we could do that under article 24—which provides that when you have a free trade pact, you can come up with a subsidies code—that would work well with the Europeans and perhaps with the U.S. Then we also have, of course, the free trade agreement across the trans-Pacific through the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

The danger we're talking about is getting involved in a gigantic subsidies war, which is already taking place. That's why we saw the Europeans in Washington last week: They're worried about what's going on. It would be best, particularly among the democracies with which we have free trade agreements, if we could come up with an agreement on how we're going to manage subsidies and incentives, because ultimately we're trying to strengthen democracies in what is seen to be an existential fight with the autocracies.

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

Mr. Auer, you said we can unlock trillions in private capital. The solution to this transition is going to be unlocking the trillions in private capital.

I'm going to run out of time, but what's better for unlocking that private capital? Is it a government program or tax credits and production credits?

[Adam Auer]

I'm not sure I fully understand the distinction between those. They're all sort of government programs.

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

I mean a program that you have to apply for, and you may or may not get some funding. As one witness here said, you might be on the naughty list or the nice list, so you get it or don't get it.

[Adam Auer]

I think the challenge, at least in my sector, is that the types of projects we're looking at are first-commercialization applications. CCUS has never been applied at scale at a cement facility, yet around the world, a number of projects are moving in that direction, including the two I mentioned in Canada. However, they present unique challenges because they've never been done before.

I'd go back to my original comment that all of those options—the capital supports, the investment tax credits and the production incentives—can play an important role in getting those first-commercialization technologies across the finish line. The balance between them can really determine the outcome.

One thing we believe is that de-risking operational costs through something like carbon contracts for difference or the types of incentives that exist in the IRA reduces the upfront capital risks and therefore the upfront capital supports that are required. In theory, it's a more efficient approach.

[The Chair, Liberal, Judy Sgro]

Thank you, Mr. Auer, for your comments.

Go ahead, Mr. Arya, for six minutes, please.

[Chandra Arya, Liberal, Nepean, ON]

Thank you, Madam Chair.

I would like to address my first question to Mr. Colin Robertson.

Mr. Robertson, I was glad to hear you mention industrial policy three or maybe four times. I rarely hear that. I've been saying that we need an industrial policy statement for the country. The IRA is obviously one of the most significant pieces of legislation that has come out of the U.S. for the manufacturing sector and the economy in general. We can take this piece of legislation along with the $280-billion CHIPS and Science Act, $200 billion of which is for setting up 20 technology centres focusing on semiconductors, energy transition and biotechnology. Some experts in the U.S. are calling this a once-in-a-generation opportunity, or a once-in-a-lifetime change the U.S. has made to industrial policy. I'm also glad you mentioned continental industrial policy.

We talk about various strategies. For example, we recently announced the critical minerals strategy, and when it comes to new technologies such as artificial intelligence, robotics and genomics, we talk big. We have said that we want to be at the forefront of every new technology, which is good, ideally, but whether it's possible or not I'm not sure. Do you think we need a Canadian industrial policy?

[Colin Robertson]

Yes, sir, I think we do. The United States has moved to an industrial strategy, the Europeans are moving in that direction and I think Australia is too. I think we should do it, but I would try to do it in tandem with our largest trading partners. That would start on a continental basis, because the United States is very much going down that road under the Biden administration. I have no doubt that if there is another administration after Mr. Biden's, whether it's Republican or Democrat, they'll take the same approach. I think we have re-embraced industrial strategy and we should look to see how others are doing it.

Just as in regulatory reform between Canada and the United States, we'd set up a commission that basically assures we're keeping what we call the minutiae of small differences from upsetting that relationship, because again, so much of our trade is with the United States. In the case of industrial strategy and incentives, we should be looking at this together, because together we'd have a much more successful platform.

I would endorse your point about finding the sectors where we are in the lead. We're not good at everything, but we are good at some very good things, and we should really focus on our areas of competitive advantage. As I said, a number of studies have identified these areas. I pointed to the Monique Leroux report, for example, and I think it would be a good starting point. Again, a lot of the work has been done within Canada.

[Chandra Arya, Liberal, Nepean, ON]

You mentioned that we have to look at sectors where we have some advantage. If we consider that we have an advantage in the steel sector and aluminum sector.... I'm just taking them as an example. I'm not very sure that we have the advantage there, but assuming we have an advantage in the steel and aluminum sectors, if we look at the last 15 to 20 years, hardly any new capacity has been added in these industries. All the companies in Canada are foreign-owned. They've become the branch offices of big multinational companies, and 90% of their exports go to the United States. We have free trade agreements with Europe and the Asia-Pacific region; we have free trade agreements all across the world. However, no exports are being sent from Canada—again, taking the examples of steel and aluminum—because foreign ownership hinders development of certain sectors in Canada.

What are your thoughts on that?