Natural Resources Committee on March 19th, 2013

[Guy Drouin]

We need to have penalties for the large emitters that are not meeting their objectives. For instance, in the European market there is a penalty of €100 per tonne for those that cannot achieve their commitment to reduce greenhouse gas. The problem with the European market, as you know, is that they decided to go ahead with new allowances without any control over the supply and demand. With the financial crisis there were a lot of industries closing; the demand went down and the supply was going up so the price collapsed.

Looking at the experience of the European market, regulators in California hope to avoid such a situation. The carbon market is actually a commodity market. A very good experience with such a market was the SO₂ market. If you remember, in the nineties they decided to decrease the acid emissions coming from coal-fired power plants and they created an SO₂ market, the SOx market, in order to diminish the importance of the emissions of acid rain and so on. This market worked wonderfully because it was well designed.

In the end, I think we should look at the experience of California and Quebec, and we will eventually conclude whether we can keep at it.

[David Anderson, Conservative, Cypress Hills—Grasslands, SK]

Again, there is no real market without governments establishing it?

[Guy Drouin]

Yes.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Anderson.

We'll go now to Mr. Allen.

You have up to five minutes.

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

Thank you, Mr. Chair.

Thank you to our witnesses for being here.

Ms. Milner, I'd like to start with you.

When you were talking about no direct investment by the government, you said “timeframe of certainty”. To give me some certainty, what do you mean by timeframe of certainty for the government? Are you actually referring to a regulatory process? What does that actually mean?

[Alicia Milner]

It's actually locking down an existing benefit for a clear timeframe. Right now, there's no federal excise tax on natural gas as a transportation fuel. Coincidentally, there's no motor or road fuel tax on natural gas in most provinces. This is sort of a silent benefit, so that right now, when we're at maybe 1% of energy use in transportation, who cares? But as major fleets are making investments here in the multimillion-dollar levels, they want some certainty.

We are finding there's a lot of nervousness. Right now we're fighting a fire within one province that's decided—and we're talking about innovation here, but attitude is also important—based on literally one project in that province to apply fuel tax to natural gas for transportation. The short-sightedness regarding the benefits.... We understand that governments are strapped for revenues.

This is a very modest action. We did present this to the federal finance committee and we had all-party support around the concept of creating that period of investment certainty so that we wouldn't fall behind the Americans and then have to spend a huge amount of government money that really wouldn't be necessary if we got ahead of the game. That's really been our key message.

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

How long is that timeline?

[Alicia Milner]

It's 2020.

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

Okay.

Thank you.

There are just a couple of other things. When you talk about Caterpillar in 2017 bringing in heavy engines to market, what is the traditional timeline from innovation of these engines until they come to market? Can you comment specifically on that timeline in terms of the performance and power as well as how that compares to gas and diesel? When we're driving our cars, we tend to look at litres per 100 kilometres and we're watching that thing and panicking as it goes up or down.

Can you talk a little bit about the cost of these technologies?

[Alicia Milner]

In terms of technology advances what we're seeing is that we had the basic curve that started back in the 1980s, and that was the first dedicated natural gas engine. We're now on the fourth generation. That took 25-plus years. That fourth-generation engine matches the power, torque, and performance of a diesel engine. How do we go further? For Westport their particular technology came out of UBC about 20 years ago. Again, they now have the core technology and they're really branching off that—they have an agreement with General Motors on light-duty application, and Cat on the very heavy electromotive, etc.

In terms of costs to the technology, what we see is that the price point in terms of the premium is anywhere from about 10% at the low end to about 60% at the high end. The 10% would be, say, on a garbage truck or a transit bus where the technology has been out there for a long time. As we see more of the American fleets go there, a lot of the costs are coming out of the supply chain. On the Westport technology, that's still relatively new in the market. But, for instance, there was just an announcement in the last week that Lockheed Martin is now going to come into this space and make LNG tanks for vehicles. This is exactly what is needed to drive costs out of the supply chain. That can collapse that 20-plus years into more like under 10 years to really get into that space to be competitive price point to price point with the incumbent.

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

Thank you very much.

Mr. Mabee, I just want to ask you a clarifying question. You talk about a lot of focus being on electricity as opposed to heat. I just want to know in what context do you mean that? Do you mean it at an overall community energy level or do you mean it at the company level, because as you're probably aware in the last budget or so there have been some additions to capital cost allowance 43.2, which is actually heat for use in an industrial process and that's the 50% writeoff class 43.2. I'm just trying to understand exactly, do you mean in the context of these industrial processes or do you mean in something broader for heat?

[Dr. Warren Mabee]

If you can find an industrial process to use the heat, then I think that's great and we do have some programs to support that. For community heat, for district heating, we don't have a national system in place. There are some opportunities for that. Using heat in extraction of oil or of gas, that's also a place where I'm not sure if the writedown would apply. It might. I'd have to look.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Allen.

We go now to Mr. Nicholls, followed by Ms. Crockatt and Ms. Liu.

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

Thank you, Mr. Chair, and thanks to our witnesses.

Mr. Thurlow, we've been talking with some young people in the Toronto area who had some questions about the Oshawa ethanol plant. Young people and innovation are intricately linked because innovation will bring that economy of tomorrow and those are the people who will be dealing with the economic decisions we make. They asked me a few questions. One would be what is the 30-year energy balance for corn as an ethanol fuel source? In essence, what's the energy return on the energy investment, and furthermore, what guarantee is there that this product will continue to sell over a long-term period?

[W. Scott Thurlow]

There are a lot of underpinning assumptions in those questions that I'd like to deal with.

The first one is the notion that ethanol doesn't have a good energy return. This is something that we've heard for quite some time. At the advent of ethanol when it was first considered for the Model T, there was a concern with the energy return that you would get, but you no longer see that. You do see a significant energy boost for the energy that we invest into it. It's going to be different based on your process. As I noted in my remarks on cellulosic ethanol, which is something that can be bolted onto a traditional ethanol facility, you get a much better return. But it is an energy positive balance. It's going to depend on your facility. I don't know what kind of facility is going to go into Oshawa. I've seen some of the discussion in the media. I don't have a position on it one way or another.

The second question is a much more interesting one. If you had asked the same question about gasoline in 1945 what would your answer be? We wouldn't necessarily know. I would tell you that separate and apart from the fuel aspects of ethanol, which are mandated—and those mandates are incredibly important and you see them everywhere in the world—the octane enhancement of ethanol is very valuable in terms of getting performance out of the fuel. It's an octane performance that exists without some toxic substances, like things that are listed under CEPA as toxic, benzene for example. I think the answer to your second question is the more interesting one in that it is a very nice way to enhance the performance of fuel and as such oil and gas companies should use it in the future as an octane enhancer as well as a fuel.

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

Thank you for your answer.

This next question goes to all panel members. It's quite simple in its formulation, but I'm sure it will generate complex responses.

Do you believe that a price on carbon can be a driver for innovation?

Mr. Mabee.

[Dr. Warren Mabee]

The quick answer is yes. A price on carbon can drive innovation because it creates new opportunities. It makes processes that today don't look viable suddenly look viable because there's an additional revenue stream, an additional way to balance the books and to turn your IRR, your internal rate of return, to something that's attractive to finance.

How the price of carbon is introduced is probably important. If you're going to put a price on some carbon but not all of it, if you're going to apply a tax selectively, or apply a cap and trade system in a way that favours one industry over another, you may end up with unintended consequences, but in general, yes.

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

Thank you.

Monsieur Drouin.

[Guy Drouin]

I think so too.

For instance, why did a small Quebec business decide to invest in El Salvador? It was to solve an environmental problem, because there was a price on carbon. We went to a country where a civil war lasted 15 years and we took a risk because it was worth it. There was a rate of return. Furthermore, it was a win-win situation for everyone. The country ended up with a Canadian technology that has helped make the environment cleaner.

As you know, when biogas is not controlled, it not only represents a source of greenhouse gas, but also a source of odours and carcinogenic compounds such as vinyl chloride, benzene and all the organochlorines. Also, it is a source of environmental damage. It creates photochemical smog.

Controlling those gases is a win-win situation for everyone. First, a Canadian company takes a risk because there is a price on carbon. Second, a country inherits a technology that it would have never had. That is what the price of carbon does.

[The Chair, Conservative, Leon Benoit]

Unfortunately, Mr. Nicholls' time is up. I guess we'll have to see if we can have somebody else ask the question, if you'd like.

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

[Joan Crockatt, Conservative, Calgary Centre, AB]

Thank you very much, Mr. Chair. Thank you, also, to our guests today.

It's really fascinating to see the variety of ideas that we hear around this table. I want to thank you for coming and offering them.

I have a follow-up question, of a sort, to my colleague's question. I'd like each of you to answer, can putting a price on carbon be used to kill an industry? I'd like to start with Warren, please.

[Dr. Warren Mabee]

As I was saying before, if the price of carbon is applied in such a way that it penalizes an industry, it could kill the industry. If the industry is characterized by very, very high emissions, introducing a price on carbon, particularly if it's introduced fast, without any warning, could kill the industry.

What we've heard from our conventional energy players across the country is that they would like some certainty on a price for carbon. I'm sure that every major and probably every minor energy company runs a set of books where they apply different prices on carbon, and they try to make sure they're working on the positive side of the equation.

To answer your question, yes, it could happen, and it has to be done carefully if we're going to apply a price, that we don't penalize one industry unintentionally.

[Joan Crockatt, Conservative, Calgary Centre, AB]

Mr. Drouin, what do you think about that?

[Guy Drouin]

If the policy that sets the price on carbon applied to all countries at the same time, there would not be a problem. That was the goal of the Kyoto Protocol. There was a

common ground for all the countries with a price on carbon.

In my view, it is a question of international political cooperation. This is necessary so that the industry of one country is not more penalized than the industry of another country. It is an issue of international cooperation and it is very important.

Furthermore, economies, like those of California and Quebec, decided to move forward. It is a decision that can be a model. However, clearly, in each economy—Quebec’s as much as California’s—there was an opposition from large emitters. But the politicians in each of those places,…

[Joan Crockatt, Conservative, Calgary Centre, AB]

I'm not really looking for your political views. Could you just answer my question? Can putting a price on carbon be used to kill an industry?