Natural Resources Committee on June 15th, 2006

[The Chair, Conservative, Lee Richardson]

We'll commence this meeting.

Thank you for being on time. We've got a full house, with perhaps one exception.

This morning we're going to be hearing, from the Canadian Petroleum Products Institute, Jack Belletrutti; from the Canadian Renewable Fuels Association, Kory Teneycke; and from Pembina, Jesse Row and Matthew Bramley. We have Alain Perez as well.

We haven't talked about an order to start, so I think we'll just go with the usual format of ten minutes for each group. You can split it up the way you want between your groups, and then we'll follow up with questions.

Why don't we start with Pembina? Would you like to kick it off?

[Jesse Row, Director, Sustainable Communities Group, Pembina Institute]

Actually, we had discussed it briefly, after you suggested it—

[The Chair, Conservative, Lee Richardson]

Oh, you have talked about it? Okay.

[Jesse Row]

—and we were going to go third, actually. I can't recall who was going to go first.

[Alain Perez, President, Canadian Petroleum Products Institute]

I will.

[Jesse Row]

Okay, then we'll compromise. You can start.

Is that all right?

[The Chair, Conservative, Lee Richardson]

Fine.

Go ahead.

[Alain Perez]

Good morning, and thank you, Mr. Chairman.

Thank you for the opportunity to present our views and answer your questions.

The Canadian Petroleum Products Institute, the CPPI, strongly supports a national policy on renewable fuels. Our primary mission is to represent the refining and marketing industry in Canada, but it must be noted that two of our members, Husky and Suncor, are our major producers and marketers of ethanol, and have been for many years. Two other members, Petro-Canada and Shell, have been, for quite some time, major shareholders in Iogen, which we believe is the Canadian and world leader in developing ethanol from biomass technology, which could be commercialized pretty soon. So we have been involved in ethanol for a while.

We also indicated our support for a national policy on December 16, I think, during the election. We issued a press release before any of the parties, particularly the Liberals and the Conservatives, issued their own statements on renewable fuels. Since then, we have been very active at the federal and provincial level in the process that is under way under the auspices of the Council of Energy Ministers in preparation for a white paper in August and then the rest of the process to build the policy.

We are also attempting to build an alliance that would involve ethanol producers, our friends from the Canadian Renewable Fuels Association, blenders, and marketers. We will try to approach consumer and environmental groups and to form an alliance that will be able to present views on this issue that cover all the aspects of what we believe should be a national policy on renewable fuels. It's a very complex subject.

Some of the issues that we believe the Canadian government needs to address are how to build in Canada a world-class competitive renewable fuels industry that will be able to compete successfully with the U.S. industry and other industries around the world; and how to create a policy framework that is respectful of existing national and international trade agreements, such as the interprovincial agreement on trade--the AIT--and NAFTA. The key reason behind our desire to see a national involvement on renewable fuels is because current provincial policies, whether in Quebec, Manitoba, or Saskatchewan, are in contravention of these treaties. You cannot blend or produce ethanol in Ontario and sell it in Saskatchewan without a huge financial handicap. So we hope those kinds of things will be part of a national policy.

The third question is how to harmonize Canadian policy with the U.S. policy in order to maintain a free flow of goods, whether it's ethanol, gasoline, or blends of ethanol and gasoline, across the border. So we maintain the North American fuels market, which has been essential, we believe, to the prosperity of the industry, but certainly for the benefit of consumers in delivering market price, low consumer prices, which is a subject we have tackled many times.

This question of harmonizing with the U.S. is going to be very difficult for the Canadian government. The U.S. started a long time ago, and even though they are supposed to be the world leaders in free markets, they have established a system where, at every level--farm subsidies, producer subsidies, blender subsidies--they have created a cascade of subsidies that are there and will not change. Harmonizing is going to be difficult, but that's more your business than mine. But if it's not harmonized, segments of the Canadian industry will be at a severe disadvantage versus those opposite. So it's something to keep in mind.

Finally, how do we develop and enforce quality standards for all renewable fuels, ensuring that once they're introduced they'll be accepted because they are safe and will get wide consumer acceptance?

I mentioned earlier that we want to fully cooperate with government and key stakeholders. Our policy proposals are already largely in line with the Canadian Renewable Fuels Association. They reflect the principles of harmonization, competitiveness, consumer acceptance, and support for promising technologies.

Our position has been outlined in two letters, which we attached to our brief, that were sent to Minister Strahl, then to Minister Lunn, with copies to their colleagues.

I'm going to switch to French, if you don't mind.

It's not easy to develop a national policy in the proposed timeframe, i.e. 2006, and we understand that.

Renewable fuels could help Canada to meet the demand over the next few years if this policy is developed at the same time as an effective conservation policy. These two policies could help reverse the present trend and lead to a decrease in the consumption of oil products, which we've been waiting for for a long time. However, important political issues could lead to unfortunate decisions if they are not taken into account.

The first one is that provincial governments will have very difficult choices to make. Will they give up some powers to Ottawa? Will they rather agree to harmonize their regulations with the national policy?

Finally, as far as the federal government is concerned, there is the fact that we are expected to solve all of the problems relating to renewable fuels in a few months only. Adding 5% ethanol to gasoline by 2010 would be relatively easy to do. It's a known product that works well in all vehicles and would not jeopardise their warranties. However, we believe that the federal government should resist any temptation to act precipitously about other renewable fuels, especially biodiesel. We have to be careful because there are no standards. We have to take account of the cold climate of Canada and of the facts that future consumers, especially truck drivers, do not yet accept this product.

We are convinced that those products have a future but there is still a lot to do before being able to establish some regulations.

In conclusion, may we remind you that renewable fuels will be blended and sold by us. We believe that our know-how is essential to develop a national policy. Our support is real but our concerns are just as real. We will not spare any efforts to make policy-makers aware of the challenges and opportunities of this industry.

Thank you.

[The Chair, Conservative, Lee Richardson]

Thank you, Mr. Perez.

[Kory Teneycke, Executive Director, Canadian Renewable Fuels Association]

Mr. Chairman, honourable members, thank you for inviting the Canadian Renewable Fuels Association to appear before you today.

The CRFA is a non-profit organization with a mission to promote renewable transportation fuels through consumer awareness and government liaison activities.

Our membership is comprised of representatives from all levels of the ethanol and biodiesel industry, including grain and cellulose ethanol producers, biodiesel producers, fuel technology companies, and agricultural associations.

It should go without saying that we are very supportive of the government's commitment to require 5% average renewable content in gasoline and diesel fuel, such as ethanol and biodiesel, by 2010. We're also encouraged by the warmth with which this commitment has been received by various provincial and territorial governments. We believe that all levels of government--federal and provincial, from one coast to the other--are not only interested in the environmental benefits associated with blending renewable fuels; they are also interested in the economic benefits associated with producing these fuels domestically.

To this end, I'd like to make you aware of a comprehensive policy consultation process we are undertaking with our members to look at what barriers exist to the development of a vibrant renewable fuels industry in Canada, and what economic and regulatory instruments can be used to address these barriers.

Our final report is scheduled to be released on July 24, prior to the first ministers meeting in St. John's. So without prejudicing the outcome of that consultation process, I'd like to say in general that we need to have a stable economic and regulatory environment that is competitive with those found in neighbouring jurisdictions if we want to have these ethanol and biodiesel production facilities required to meet the 5% commitment built here in Canada.

This will be no small feat. Alain and CPPI correctly laid out that the United States and other countries have a big head start over our industry, and moreover, depending on how you do the calculation, the 5% requirement could be as high as three billion litres of renewable fuels. Today our annual production is only about 300 million litres, so you're talking about a tenfold increase.

Thankfully we're not starting from a standstill. A number of ethanol plants in the late stages of construction are going to be coming online to meet the ethanol requirements in Saskatchewan and Ontario, and that will take our industry to about 800 million litres by early 2007. These plants are being built not just by companies that are solely in the renewable fuel industry, but also by Suncor and Husky. They're being built not just in mandated provinces--one of the facilities is in Quebec.

So Canada is not alone in predicting such a huge growth curve for this industry. As impressive and large a number as three billion litres is, it's only a drop in the bucket in the context of the North American market, which is expected to exceed 38 billion litres by 2010. The U.S. industry has over 100 ethanol plants in operation today, with 30 more under construction. The market for ethanol in the United States, at 38 billion litres, will more than double over the next two years.

Similarly, the market for biodiesel is expected to quadruple to about two billion litres over the same period; however, that's obviously a much smaller number and a much smaller market. This provides a potentially huge, growing, and lucrative market for Canadian renewable fuel production, and not just in Canada. There's an opportunity to produce these fuels and sell them in the U.S. market as well. However, if we fail to get that competitive and stable economic and regulatory environment established, it's far more likely that you'll see Canadian grains and oilseeds shipped to U.S. facilities, and the 5% requirement met with imported renewable fuel.

It is our belief and that of our members that the 5% renewable fuel standard can be met with Canadian ethanol and biodiesel by 2010. Furthermore, we believe it can be done in a way that respects our internal and international trade agreements--as CPPI has pointed out, that is not the case in some of the provinces today--gains the support of partners in the petroleum industry as well as the automobile sector, and includes strong participation by primary agricultural producers.

Let me close by saying that there are great social, environmental, and economic benefits for having a vibrant renewable fuels industry in Canada, but to realize them we need to get the policy right. We're working very cooperatively with the government in helping to do that right now. We're pleased with the process and the timelines that are under way. We would be more than happy to come back after our internal consultation process is over at the end of July, to give you more details in terms of exactly what mechanisms we think would be best for achieving those ends.

Thank you very much.

[The Chair, Conservative, Lee Richardson]

Thank you, Kory.

Now we'll go to Pembina. Who's going to begin?

[Jesse Row]

I'll begin.

Thank you, Mr. Chairman and honourable members of the committee.

I'd like to take you through the Pembina Institute's submission to the committee here today. We will start off with a little introduction as to what Pembina is. I guess the easy way to talk about Pembina is to say we're an environmental, non-governmental organization with our focus on energy. This is very much within the realm of the research and the work that we've been doing for over 20 years.

Our experience with renewable fuels resides in the academic field, working with companies on preparing research as to where the current status of the industry is, working within government processes, such as the Council of Energy Ministers working group on renewable fuels, as well as working with other NGOs on their perspectives on the renewable fuels industry and sharing ideas between the different groups. So we're very well plugged in on this issue, needless to say.

As far as the submission is concerned, we covered four basic areas. One is in a larger, broader environmental policy context, so I think it's appropriate to talk about renewable fuels within that context, and I'll do a bit of that here today. We do talk about how a renewable fuels policy can maximize the environmental benefits, so getting the biggest environmental bang for the buck is something we are going to focus our comments on today primarily, since our interest is on the environmental side. As well, I think it is important to mention a few words on the competition with food and future opportunities.

Looking at the larger picture, if we do some quick numbers on where the 5% renewable fuels content will get us as far as greenhouse gas emission reductions are concerned, we can see that it's actually less than half of 1% of national emissions. If you consider the fact that three provinces have already put standards in place, or are in the process of putting standards in place, that means the federal action in this area is going to be less than half of 1%. And when we consider the fact that emissions in this country have gone up 30% since 1990, I think we're very much saying that this is a drop in the bucket as far as emission reductions are concerned and where we need to be heading.

The main message here is really that renewable fuels is only one component of a larger environmental policy and greenhouse gas policy within Canada, and certainly as far as industry is concerned, we need to be seeing more building and addressing emissions from vehicles and other areas as well.

If we look at the air quality impacts of renewable fuels--we have been looking in this area and talking to other people about what the air quality impacts will be--there's a wide range of research on this subject as far as what the benefits will be. At the very least, most researchers agree that renewable fuels will not make the air quality worse than it already is, but the degree of benefit that we'll be achieving is uncertain. There is no consensus on it at this point. That's an important point to raise as well.

When we get into how to make the best environmental choices when we're talking about setting policy, we are aware that this is going to be a rather significant industry, and by setting the right policies in place we can maximize the return on investment from an environmental perspective.

Of two things that are important to note, the first would be to recognize, as far as the environmental impact is concerned, that it depends on how you produce the fuel. So it's expected that most of the fuel in the marketplace meeting that 5% demand will be starch-based ethanol that will come from wheat and corn. We know from the research out there that there's very strong agreement that if you produce ethanol from cellulose sources--wood fibres--you get a much better environmental bang for your buck, as far as the amount of emissions reduced on a per-kilometre basis. Biodiesel is another fuel that will give larger emission reductions than starch-based ethanols.

So what we're suggesting in this case is that policies are put in place in order to provide targeted support for the cellulose ethanol and the biodiesels. Unfortunately, those technologies are not as mature as for the starch ethanols, so without targeted support it's expected that they won't play a very big role in the 5% mandate that has been announced. If we want to make an impact in this area and move toward where the big environmental wins are, we need to be providing support to those in the early stages.

On page 4 of the submission we've outlined a number of areas in which we can provide that targeted support. The first two points really come down to providing incentives and support for the development, commercialization, and production of cellulose ethanol and biodiesel.

When we look at some examples of what policies may look like, there's certainly the ability to introduce additional credits towards a renewable fuel standard, such as they're doing in the United States. As well, you can look at production incentives, consumer tax incentives, and accelerated capital cost allowances. This is a tool that's been used quite successfully. An example is the oil sands. In order to move this industry over the years into one that is mature, they have been allowed to write off 100% of their capital cost expenses. It was basically set up to get the industry on its feet. I think it's safe to say the industry is on its feet right now, and we'd like to see mechanisms such as this be transitioned towards new emerging industry areas in order to provide the next generation of technologies.

Another item that I'd like to mention is that agricultural practices have a big impact on the life cycle of emissions and the environmental impact of producing renewable fuels. So certainly we need to be targeting policies in this area in order to ensure that the production of the feedstock is done in the most beneficial way possible.

The co-products that are produced from renewable fuels are another area where there are big environmental benefits, if you're able to use the co-products. Examples of these co-products are the animal feed and the fertilizer. By using these products you're displacing production of animal feed and fertilizer from other areas, and this is where you get a lot of emissions reduction, by displacing those other products.

With the expected increase in renewable fuels production we're expecting to see that there will be a lot more of these co-products on the market. Basically, if the market gets flooded and you're not able to move these products, all of a sudden your environmental benefits for producing these renewable fuels will decrease dramatically. We believe there needs to be some work in the area of ensuring that these markets do develop and we do see the environmental benefits from the co-products that are produced.

To spend a quick minute on the food or fuel question, this is a question that should be considered, as it is very important to this country. The one point I want to make here is that it is possible to make both food and fuel from the same piece of land. Technologies like cellulose ethanol allow you to take the non-food portion, the stalks of the corn and wheat, and produce fuel from them. By advancing these types of technologies, obviously we're getting multiple wins in this area. So potential conflicts with food production that may be foreseen in the future will become less of an issue if we transition to these new technologies.

The final point I wanted to mention was on future opportunities. Certainly, the challenge that we face regarding climate change is beyond the next five years; it is a long-term challenge. What we require at this point is deep emission reductions over the long term. What we would suggest is that we prepare for that by encouraging vehicles that are able to use high percentages of renewable fuels.

I'm sure many of you are aware of vehicles that are able to run on both 85% ethanol and gasoline. By getting these vehicles into the marketplace today we essentially start producing a market for when high-concentration fuels make it into the marketplace. If we encourage these vehicles, basically the customers will be ready by the time we're ready to put more 85% ethanol pumps in the marketplace. So certainly, policies directed towards encouraging these flexible-fuel vehicles would be beneficial.

In closing, I'd just like to reiterate that certainly a renewable fuel standard is going to bring some environmental benefits. The degree to which we get those environmental benefits will depend on the details of the policy. To date we haven't seen anything concrete on what those details will be, so it's hard to say what the overall impact will be. Certainly there's a way in which we can introduce policies that will leverage this larger investment towards the largest environmental benefit possible.

Thank you.

[The Chair, Conservative, Lee Richardson]

Thank you.

Mr. Cullen--or is Mr. Tonks going to start today?

[Roy Cullen, Liberal, Etobicoke North, ON]

Mr. Tonks will start today. I'm just going through this, as I arrived a bit late.

[The Chair, Conservative, Lee Richardson]

I understand.

[Alan Tonks, Liberal, York South—Weston, ON]

There isn't going to be any fist fight over that, I can assure you.

[The Chair, Conservative, Lee Richardson]

You're finished with your duties on Bill C-2, so welcome back, Mr. Tonks.

[Alan Tonks, Liberal, York South—Weston, ON]

Thank you very much, Mr. Chairman, and thank you very much to the deputants.

As you were going through your presentations, it occurred to me that we're occupying a very important window for moving in the transportation sector to a hydrogen-type technology. So the whole notion of whether we are making a massive reduction in greenhouse gases through ethanol transition has to be viewed against a whole bunch of other reduction strategies. My first reaction is that I don't think we should ever downplay the reduction, whether it's from a grain-based ethanol strategy or the Iogen technology, because it's part of a behavioural paradigm. We are looking for many tactical approaches in a whole spectrum of initiatives. And I don't think that any one deputant has been overly emphasizing that it will be one sector that's going to make the enormous contribution to the reduction in greenhouse gases. There are going to be many.

I think the committee would be interested in the biodiesel analogy that was used in a couple of the presentations. It seems that it is more problematic than the ethanol initiative. You cited, I think, Mr. Teneycke, transportation issues with the trucking industry and interprovincial legislation, and so on. Or maybe it was someone else.

Could you elaborate, generally, on why biodiesel is fettered by industry problems, as opposed to ethanol, whether it's grain-based or whatever?

[Kory Teneycke]

I'll give you a quick answer as to what I see as the difference between the two. And I think CPPI may have a slightly different perspective on some of this.

It's a much newer product in the North American context, so I think for that reason there are more questions being raised by users, be they truckers or others, who aren't as familiar with it as they are in the European market, where biodiesel has been a much larger part of the fuel mix for a longer time. Diesel fuel is different in Europe. The mix of automobiles is different in Europe. Diesel plays a much bigger role in the consumer vehicle market. So there are a number of differences.

Like any new product, there are early entrants and a bit of a curve to go through in acceptance, whether it's for biodiesel or anything else. I think the industry and consumers are working their way along that curve of increased comfort with and understanding of the fuel. There are different assessments of where on that curve we are, but I don't think it's because of anything structural in biodiesel itself. It's just a new product, so there are questions associated with it.

There are some infrastructure changes needed, as there are for ethanol, to accommodate it in a fuel mix. It would probably be much better to have Jack and Alain talk about the specifics of those things, because they're far more knowledgeable.

[Alain Perez]

It's probably an issue where there are nuances in the views of the CRFA and CPPI on renewable fuels. Basically we're saying we need to be cautious.

We do not believe that between now and 2010 we could have a policy that articulated set targets for biodiesel, because for one thing the people who are supposed to use it, in the policy statement we have seen, are the Canadian trucking industry, and they don't want it. They have their reasons. They are right in saying that standards are not clear yet; they're right in saying that there are issues around the cold climate that could create problems, as problems have been created in cold climates with the introduction of biodiesel.

We are suppliers of fuel. When it comes to ethanol, the car industry wants it, consumers accept it, and the product is going to be subsidized somehow in a way that will make it acceptable—either subsidized, or the consumer will pay more—but in the end it will be very competitive.

Biodiesel is very different. Furthermore, we are involved in researching what other uses there could be for biodiesel. A couple of my members, the international ones, are looking at ways to use biodiesel in their refineries as intermediary stock for some of their process units. The benefits environmentally would be the same in the end.

Why would you rush into a policy the truckers are not comfortable with, to say the least, and change the whole infrastructure of the country to deliver to trucks when potentially we could be using more of it inside the refineries? These questions are months or a year away from having a good airing.

So we're just saying be cautious about diesel. Do not include it in the same mandate. Make it as if there were two separate trucks, and for the biodiesel trucks, make it a longer period than by 2010. That's our position.

[Alan Tonks, Liberal, York South—Weston, ON]

Thank you, Mr. Perez.

Thank you, Mr. Chairman.

[The Chair, Conservative, Lee Richardson]

Thank you.

We're doing better today.

I'll ask Monsieur Cardin to proceed and to try to keep it under seven minutes as well.

[Serge Cardin, Bloc, Sherbrooke, QC]

Thank you, Mr. Chair.

Good morning, gentlemen. It's a pleasure to see you.

It's obvious that there is a strong trend for biofuels in Canada at the present time among citizens, politicians, industry and even environmentalists. Obviously, I'm all in favor of protecting the environment.

Generally speaking however we know that there are still some concerns about biofuels, whether it be ethanol, biodiesel or something else.

Mr. Row has referred to the impact this could have on agriculture. There are two important levels of oil products. As we know, the price of oil is set on a global basis. It's never based on supply and demand and it always increases, which leads to significant profits.

Mr. Perez, you talked about the price of biofuels, i.e. ethanol, in the context of getting the best price possible in a competitive market within free trade. So, on the one hand, we know that oil prices are always very high and, on the other hand, we want to get to the best price possible for biofuels, among them ethanol.

Isn't there an imbalance there?

At a previous meeting, I asked if this could have a negative impact on agriculture. If people invest and the price of oil increases, the share of ethanol in the fuels mix will increase.

Mr. Row referred to the need to ensure there is some balance between feasibility, or environmental impact, and financial returns.

I would like you to try to give us an overall idea of the real impact of all this, both on agriculture and on oil companies. I suppose that the main objective of oil companies will always be to make profits and to make sure that we will keep using gasoline in the long run.

Could you give us an overall view of those components: the price of oil, the price of ethanol and all those other biofuels, and the impact on agriculture?

[Alain Perez]

I can talk about the price of oil and ethanol but not about the impact on agriculture, which is not my specialty. Mr. Row or Mr. Teneycke might have an opinion on that.

To tell you about the impact on oil products, let's try to simplify the issue by taking only the case of gasoline. The pricing system of gasoline on the North American continent and in Europe is well-known and is transparent. When you see the price at the pump, it's easy to understand: there is the price of oil and all the taxes and there is the wholesale price that you can find in Europe, New York City, etc.

When you blend in ethanol, you get a new product called E-10 which means it's gasoline with 10% ethanol. If our policy leads to harmonization of E-10 in Canada with other countries, there will be a global market for this product, prices will be transparent and the prices of gas and of gas-ethanol blends will probably be the same. The danger is that provincial or federal policies might create some isolated pockets in Canada that would be disconnected from this North American market because they would only be able to buy the blend within their borders. In that case, the price would be set according to local demand and I have the feeling that it would be much higher.

It is very important, when national policy is set, to be able to compare our prices to American and European prices. And, for this comparison to be done, refiners have to be able to buy their product anywhere, from Europe, Brazil, the US or Canada. That would ensure that the prices of our oil products, including those with ethanol, will be coordinated with world prices. If we establish a policy, like Saskatchewan has done, of encouraging people to buy only in Saskatchewan and to sell only what is produced there, we would probably have a different price in Saskatchewan, since people wouldn't be able to import from somewhere else, and that price would not go down. History has shown that in such a situation prices move as high as the market allows. Therefore, it is very important, as far as prices are concerned, to...

The only thing that you should put your mind to should be to make sure that we, the oil industry, will be able to buy those products from all the provinces, from the US or from anywhere else. If so, the integrity of the oil market will be maintained.

[Serge Cardin, Bloc, Sherbrooke, QC]

Is there enough time to get an answer about the impact on agriculture?