Natural Resources Committee on March 7th, 2013

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

You also talked a little about it being hard to sell stuff at home sometimes. When you look at some of the changes, and Mr. Lavoie talked a little about the accelerated depreciation and accelerated capital cost allowance for generation and other types of equipment, are any of those types of policies helping, from a Canadian standpoint, to adopt some of the technologies of your companies?

[Céline Bak]

Yes, they help absolutely, but I would suggest we need to consider looking at some other classes of energy efficiency assets that can be deployed.

You had a presentation earlier on district heating and others, some broader—

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

Okay.

Mr. Lavoie, I'm going to you for a moment.

You still have a lot of your folks on heavy fuel oil. What transition have you seen from heavy fuel oil to other technologies in terms of energy savings? Do you see your industry having a plan to move away from heavy fuel oils over the next so many years? I'm assuming that the accelerated capital cost allowance will help them do that.

[Martin Lavoie]

Yes, there have been some, but since 1995 it's been quite stable in terms of the source of energy. The only change you've seen is electricity and natural gas. Electricity became a bit more important. But it's not like in the U.S., for example, where natural gas really grew because of the lower.... Now the U.S. wants to become a net exporter of natural gas because they have new technologies to extract this gas from the soil, and so on, and in Canada we haven't got there yet.

Certainly, for our sector and in the sense of all these discussions, we talk about feed-in tariffs and so on. It's all nice, I think, to pay more for clean energy, but at some point you need to reach a balance. At the end of the day someone has to pay when you double the price we pay in terms of feed-in tariffs. It's either the taxpayer or the industry—

[A Voice]

Exactly.

[Martin Lavoie]

It's fine to have a feed-in tariff system and it's fine to promote certain types of energy, but if that means you're going to lose capital investments in manufacturing or in certain sectors, you need to reach that balance. You can't just see it from one angle; you have to see it from many angles.

In our sector, in our cost structure, energy's a big part of it. I named a number of policies that are good incentives. There are also other policies that are not that good in terms of providing incentives for manufacturers to become more energy efficient; they're actually a burden for them.

To give you an example, in Alberta some municipalities impose a franchise fee on your utility bill. If your natural gas bill goes up, then your franchise fee at the municipal level goes up. In B.C. they've introduced a carbon tax, which was supposed to be a tax neutral carbon tax.

Tax neutral to me means you would tax a manufacturer for its carbon footprint, but reinvest that money to make that manufacturer more energy efficient, but that's not what they've done. They've taxed manufacturers, and they gave tax credits to rural homeowners and a bunch of other things, so at the end of the day, the carbon tax is just a tax.

All these things need to be thought through thoroughly, because at the end of the day you want to invest in green assets, not just put in a tax or pay a higher tariff just because you want to be seen as a green government having a green policy.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

Thank you.

I couldn't think of a better way to finish my time.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Allen.

We go now to Mr. Nicholls. Go ahead.

[Jamie Nicholls, NDP, Vaudreuil—Soulanges, QC]

Mr. Lavoie, when the accelerated capital cost allowance came out, the Conference Board of Canada said it was a good feature to help adjust to the high dollar at the time. That was in 2007. They also said it should be temporary and not extended beyond three years. In 2007, as you know, it was brought in to help profitable companies with reduced profit margins due to the credit crunch among other global economic factors.

Would you agree with their recommendation that it just be a temporary measure, or do you think it should be continued? The Conference Board believes that as a permanent measure it encourages an artificial investment into the manufacturing sector and perhaps not in the right areas, not the innovation-based sectors, but just manufacturing in general.

Could you address their critique and counter it with your own analysis of the situation?

[Martin Lavoie]

Yes.

The accelerated capital cost allowance is not that much a measure related to innovation, but to productivity. If you're talking about the ACCA, it's the classes of assets that are used for manufacturing and processing. It's a productivity measure that gives incentives for companies to replace their old equipment with new equipment and become more productive, more competitive.

Of course, it was introduced as a two-year temporary measure and it's been extended three times. It's going to end this year. We're arguing that it should be extended for at least another two to three years. A lot of our companies have not taken advantage of it, because they hadn't seen profitability before 2010-11. It takes an average of about three years to make that kind of investment, so if they were planning to buy new equipment in 2011, they could probably take full advantage of that measure in 2013-14. Beyond the two-year writeoff, because it's really two and a half years, I think there's a way to review these classes of assets. Because you want a depreciation rate that reflects the real life cycle of an asset.

For example, when I see types of equipment that are related to ICT, information and communications technologies, we all know that ICT equipment accounts for about half the gap in productivity between Canada and the U.S.

Under the old system you have a 30% first-year decline, and then on a declining basis, so 30% of 30% each year after. It takes about 14 years to depreciate 95% of your investment. Do you keep your laptop or your phone or any piece of ICT equipment for 14 years? Maybe there's a way you can review these assets and say maybe two and a half is quite quick, but maybe five reflects the real life cycle of that asset.

I think there's a way we can revamp these classes of assets once the temporary measure is up.

[Jamie Nicholls, NDP, Vaudreuil—Soulanges, QC]

We know there's all this private investment money that's being sat on, basically. It's about 30% of GDP, I believe, and as opposed to the United States, our investment here is divided equally between machinery and equipment, as you talked about. Manufacturing invests in that equipment and it drives productivity. The rest is in storage and transport structures. How can we move the private capital, private investment, more to areas that will drive productivity up?

[Martin Lavoie]

That's a good question. In most of the industrialized countries, there is an amount of capital that is being held by companies for various reasons from uncertainty in the markets to.... We're expecting in some sectors a new wave of mergers and acquisitions, so some companies are holding on to their cash for that. The use of credit is less popular. We've seen a de-leveraging of companies. That's a trend that goes back to the 1990s.

There was a very good report just published by the Ontario Institute for Competitiveness and Prosperity. They actually recommend that governments should implement a tax credit for machinery equipment, not just a capital cost allowance related to depreciation, but a tax credit, so you're actually giving incentive for companies to take part of this cash and invest it in machinery equipment.

[Jamie Nicholls, NDP, Vaudreuil—Soulanges, QC]

The United States has 100% writeoff, is that not correct?

[Martin Lavoie]

For certain sectors it has a bonus depreciation of 50% more, so 150%. That's a temporary measure that was supposed to end this year, but in the fiscal cliff deal, they renewed it for another year.

What the report says is that it doesn't agree with some of the statements from the Bank of Canada, for example, which says to give it to shareholders in a dividend. The report says that no, you should provide an incentive so this money actually goes into a productive asset, as you said.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Nicholls. Your time is up.

We'll close the questioning with Mr. Menegakis followed by Ms. Crockatt, for five minutes each.

Go ahead, please.

[Costas Menegakis, Conservative, Richmond Hill, ON]

Thank you, Mr. Chair.

I want to thank all our witnesses for appearing before us today. I certainly have found your testimonies and your responses very informative.

I want to start by talking about greenhouse gas emissions. There are nine areas of the world—China, U.S., EU, Brazil, Indonesia, Russia, India, Japan, and Germany—that represent 70% of greenhouse gas emissions on the planet. Canada is about 1.8% , and as you know our government has committed to reduce greenhouse gas emissions by 17% from 2005 levels by the year 2020.

As the Minister of the Environment announced in August 2012, we are now better than 50% of the way towards accomplishing that goal. We believe it's a realistic target to get there by 2020, and it's in accordance with the Copenhagen accord that we signed, and it's also aligned with the United States.

I want to start with you, Mr. Morin. We're accomplishing this by focusing on the two largest sources of emissions for us here in Canada: electricity and transportation. You're representing the Association of International Automobile Manufacturers of Canada with 931,000 vehicles sold in 2012 here, I believe you said. From the research I've done, the associations you represent, a group of 15 or so companies, employ about 77,000 people, and 50% of those vehicles sold in Canada were built in North America. I was struck by your comment. You speak about Canada-unique vehicles. Can you tell us how that would be different from our biggest neighbours just south of the border? What are the requirements here that are so different from those in the U.S.?

[Andrew Morin]

In essence, we have harmonized or aligned GHG regulations, which is an easier situation to deal with, in that we have a continent-wide approach to this.

What we're saying, though, is that given that the Canadian fleet has historically been a little different from that in the U.S. in terms of the cars that people like to buy.... Certainly there is a strong desire for larger SUVs and trucks in this country. In recent years that's gone up as people put a lot of money on the hood to sell those vehicles, but I will say that in general the fleet mix in Canada is much more efficient already than it is in the U.S. There's a long history of that, going back to the oil crisis of the 1970s, for that matter. By and large, Canadians live in that compact to mid-size car category, as opposed to their U.S. neighbours, who live sort of a notch above that in terms of the efficiency of their vehicles.

What I would say is that different technologies and the regulations that we're in right now.... An important point I need to make is that for these regulations, when you read automotive commentary, you'll often see “when these targets go into effect in 2016”. That's the line that's often mentioned. It's a little misleading. We're in that regulatory space right now. Canada's regulations actually started a year ahead of those in the U.S., in effect, in model year 2011, as opposed to model year 2012.

We're in that right now. Given that companies are going to have to produce and sell a mix of vehicles specific to a company target within the regulations, they are going to have to constantly re-evaluate their product plan. It might mean that they sell fewer trucks and a few more small cars or that they might have allowances to sell more larger vehicles given that they've been very successful in the small vehicle realm.

It's a major technology and sales planning effort, and a compliance effort, to make sure they can live by the regulations. At any given time, they may need to bring in a technology, a specific vehicle, or a specific powertrain that's not available in the U.S. but might sell better in Canada or improve their situation in this country, or in response to Canadian consumers' demand.

[Costas Menegakis, Conservative, Richmond Hill, ON]

Thank you very much.

In the minute I have left in my questions, I'd like to direct this to you, Madam Bak.

You commented in your opening remarks that policies in place are definitely attracting capital. Can you elaborate a little on one of those policies and how it's attracting capital?

[Céline Bak]

There are two different things, I guess. We have STDC, which is attracting three to one. I expect that the EDC, in some of its investment rules, will also be attracting capital. To the extent that we engage in a more proactive way with the International Finance Corporation, that will definitely attract capital. Also, I would suggest that our companies should be joint venturing with emerging country companies to get equity capital and then to attract the debt financing that the World Bank can provide. As I mentioned earlier, project finance will become an issue.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Menegakis.

We'll go now to Ms. Crockatt for up to five minutes.

[Joan Crockatt, Conservative, Calgary Centre, AB]

Thank you very much.

I'm going to go back to Mr. Lavoie, if I may, please, to talk a little more about the accelerated capital cost allowance. You're recommending that it be extended for another two to three years. You are probably aware that it has been discontinued for the oil sands. I wonder whether you think this is discrimination against the oil sands and whether you would recommend that it be extended across the board so that we're not picking winners and losers.

[Martin Lavoie]

Discrimination against the oil sands....

[Voices]

Oh, oh!

[Martin Lavoie]

I like this expression.

[Joan Crockatt, Conservative, Calgary Centre, AB]

Yes, they're the only industry that doesn't receive it. The Ontario manufacturing sector receives the accelerated capital cost allowance. The oil sands do not.