Thank you very much.
My name is Germain Belzile. I'm a senior associate researcher with the Montreal Economic Institute. I'm also on the faculty of the Université de Montréal business school, HEC Montréal, in economics.
I would like to thank the Standing Committee on Natural Resources for the invitation issued to the Montreal Economic Institute. Our organization is devoted to economic research and education. We are an independent, non-partisan, and non-profit group. We accept no government financing, and we are very proud of that.
First of all, I'll talk a bit about natural resource firms and the environment. Canada is an important producer of natural resources. They represent a very large part of Canada's exports. Canada, with a highly diversified energy portfolio, is a major oil producer and exporter. Oil production is important for the Canadian economy and for ensuring a high standard of living and well-paid jobs for its inhabitants. Moreover, 41% of Canadian energy consumption consists of oil products.
Canadian natural resource firms spend billions of dollars each year to minimize the environmental effects of the exploitation and transport of their products. These investments include money spent on research and development, on building infrastructure and maintaining it, on making sure the day-to-day processes are working well, and in satisfying regulatory authorities.
Canadian firms face clear incentives to abide by the rules and to make sure people potentially affected by their activities are listened to, as well as to make sure scientific information circulates widely. Their own interest is to make sure everything runs smoothly and that the best technologies are used to minimize environmental problems. They have every reason to minimize environmental degradations for which they would ultimately be held responsible by the governments, by the courts, or by public opinion.
Research and development are costly and risky. They involve risk because the firms that engage in them are never sure in advance of the result. Any factor that makes an activity costlier or riskier will reduce this activity, including innovation. Therefore, reducing needless risks surrounding innovation in the environment should lead to more innovation.
Now, as for the factors complicating the adoption of the right environmental technologies, some risk is inherent in R and D, innovation, and investment, but some types of risk could be minimized by enlightened public policy. Among the problems that can be addressed by the government, we will mention four: the temptation to pick winners, the rise of the concept of social licence, the increasing complications surrounding official environmental assessments, and the effects of changing fiscal and regulatory environments.
First, on the temptation to pick winners, the role of government in a market economy is to make sure the rules of the game are clear and followed by all, not to pick winners in the market for ideas. In fact, no individual or group knows which innovation will be chosen as a winner by the market.
Trying to do this means trying to predict the future. Examples of bad choices by government abound. If the government decides to push for the adoption of a certain technoloy—by using subsidies, for example—the following problems may arise: a bad technology might be chosen, which will eventually be costly for all; the risk that companies did not want to take is not eliminated but simply transferred to taxpayers; and, finally, too much risk might be undertaken, which is a problem called “moral hazard”.
Trying to choose the winners de-risks innovation for companies, but increases it for society. Let us add that having the government actively deciding which technologies will be favoured probably reduces private R and D, as firms simply wait for the government to decide which technology to use.
Second, the rise of the concept of social licence has increased the risks involved in many innovations and investments that could lead to better environmental outcomes. Social licence is a concept that is ill-defined. In fact, its meaning varies from one individual to another, and Canada's laws and regulations make no reference to it. Taking into account such a fuzzy concept when deciding which projects will be allowed by regulatory institutions opens the door to arbitrary decisions and threatens the rule of law. This is clearly an investment killer.
Third, environmental assessment processes have become unduly long, complicated, costly, and uncertain. This increases the risks involved in investing in better ways of doing things and could lead to many abandoned projects, even if they are worthy of consideration. As an example, trying to replace the railway transport of oil by a safer alternative such as pipelines has become close to a nightmare.
Finally, a firm that commits to a major investment, whether in infrastructure or innovation, expects a return on its investment. The calculated return is always hypothetical, as the future is unknown. One of the determinants of return is the cost of regulation and taxation. A volatile regulation and tax environment discourages investment, as it creates uncertainty.
Now for our suggestions on what the federal government can do. The Montreal Economic Institute believes the Canadian government could help to de-risk the adoption of clean technologies in Canada's natural resources sectors in six ways. First, the Canadian government should not push for the adoption of technologies that may not be market-ready. Second, the government should not favour some technologies over others, by which I mean choosing prospective winners. Canada has largely abandoned the idea of an industrial policy, which involves picking winners in industry and we should not let this bad idea make a comeback by choosing which technologies will win in the future. Third, the Canadian government should make sure social licence aspects are addressed early on and in a way that does not run against the rule of law. Fourth, the government should streamline and guarantee a fixed duration for the process of environmental assessments. Fifth, the government should reinforce and make more credible the existing institutions such as the NEB. Sixth, the government should create a stable fiscal and regulatory environment.
I will now be pleased to talk with committee members.
Thank you.