FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, April 25, 2001

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[English]

The Chair (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): Order, please. I'd like to call the meeting to order and welcome everyone here this afternoon.

As we know, one of the interests of the finance committee is in fact the green economy, so today we decided to have a round table on this very important issue. We're very fortunate to have with us a number of experts who I'm sure will enlighten the committee on this issue and give us an opportunity to ask questions and seek answers as we deal with the issue of green economics.

I want to welcome, from the National Round Table on the Environment and the Economy, Mr. David J. McGuinty, executive director and chief executive officer, and Mr. Jean Bélanger, a member; from the Pembina Institute, David Pollock, executive director, and Stephanie Cairns, senior policy analyst; and from the Canadian Nature Federation, Judy Gelfand, executive director, chair, Green Budget Coalition. Also as individuals we have Dr. Ross McKitrick, assistant professor, Department of Economics, University of Guelph; Quentin Grafton, director, Institute of the Environment, University of Ottawa; and Philippe Crabbé, director, Research Institute on the Environment and the Economy, University of Ottawa.

Welcome. We of course give every single member of the panel approximately seven minutes to make your presentation, so that will give us enough time to have a question-and-answer session. Of course in this case, should you require up to ten minutes, we'll be generous with time, because some of these issues in fact require a bit of time to explain.

We'll begin with Mr. McGuinty. Welcome to the finance committee again.

Mr. David J. McGuinty (Executive Director and Chief Executive Officer, National Round Table on the Environment and the Economy): Thank you very much, Mr. Chairman. It's good to be here and recognize and see so many familiar faces again.

I'm going to be starting this overview, this presentation, and then turning it over to Jean Bélanger, who not only is a member of the round table but also chairs its economic instruments committee and has been doing so for roughly the past four or five years. So he will get into more detail, in terms of what the efforts of the round table are geared towards.

Very quickly, I want to remind members that the National Round Table on the Environment and the Economy is 25 members from business, labour, first nations, environmental groups, and other groups together in civil society. It's strictly a civil society grouping pursuant to the FTAA Quebec meeting, and we try to build national teams and act as a source of independent advice, providing objective and balanced recommendations for change.

As a mainstay at the round table now for several years, we have been studying the practical use of economic instruments to achieve environmental improvement. Every year for the past six years we have been tendering green budget submissions to the Minister of Finance and the Government of Canada. We do so by building, again, national teams, which bring together environmental groups, labour groups, private sector companies, and trade associations, and together put forward what we think is a balanced suite of recommendations that possess, perhaps, a different kind of authority from any single constituency's submissions.

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I think that the success we had in last year's budget—again, working with a team of 400 different players—where five of our six recommendations to the minister were in fact announced in the budget, accounting for roughly half of the environment expenditures last year, does not speak so much to the efficacy of the agency as it does the weight of authority that is accorded a grouping of the kind that we brought together to make the recommendations in the first place.

The members of the round table now want to move above and beyond what we call tinkering around the edges. They want to get to the core of the fiscal regime that is in play in the country at this stage. So we've launched an initiative that is both a fairly comprehensive analysis and a national debate on the structure of existing fiscal and tax regimes.

We're also inspired by one of the principal conclusions that we achieved at a leaders' forum we hosted in partnership with the Clerk of the Privy Council some two years ago, where we brought together 26 deputy ministers and ADMs as well as 40 leaders from across Canada, from every walk of life, to deliberate on Canada's approach to sustainable development. One of the number-one outcomes of that leaders' forum was that it was clear that the lack of integration between sectors and between government departments was the principal barrier that had to be overcome in order to achieve traction when it came to the implementation of sustainable development in Canada.

Furthermore, we're recognizing increasingly that the federal budget, like any national budget in any nation-state on the face of the planet—and by extension the regulatory and fiscal regime that underpins the budget—is the clearest statement of the government's policies and its spending priorities. Therefore we believe there's still potential for budgets and the regimes that support them to better integrate the goals of a sustainable environment, economy, and better social well-being. In effect, the budget ought to reflect, in our view, a triple bottom line in a national context.

I'm going to stress here a few things before turning it over to Jean. First of all, we're not disciples of green economics or ecological fiscal reform. We believe that economic or market-based instruments are being discussed seriously in a number of jurisdictions around the world as an alternative to traditional command-and-control regulations. We're detecting an appetite and a demand for more rigorous analysis of what we call an ecological fiscal reform in Canada and around the world.

Given President Bush's two public speeches withdrawing U.S. support for the Kyoto protocol and saying instead that the United States intends to achieve its greenhouse gas reductions through market mechanisms, and given the same statements now by President Fox in Mexico and his minister of the environment, we believe there is an international, or at least a trilateral, demand or an appetite for more such work.

Why are we calling this “ecological fiscal reform” and not “green taxes”? There are a couple of reasons. We think it's too limited a concept when you speak about green tax reform. We also think that it is scaring people. In Europe most environmentalists are withdrawing from the term “green tax reform” because they are associating environmental improvement with increased taxes. And in a Canadian context of zero tolerance for deficits and increased taxes at all levels of government, anything that talks about green tax, or anything that talks about taxes, is a risky business.

We're now looking at a multiplicity of fiscal policy and tools that range from voluntary initiatives to tradable permits to targeted government expenditure—a better alignment, for example, at the federal-provincial levels, much more than the use of tax systems, but instead...again, to repeat myself, a better alignment of the weapons in the arsenal that the state possesses, including voluntary initiatives, hard-core regulation, expenditures, and other new kinds of mechanisms.

Now, with that being said, I'm going to ask Jean to pick up and continue with the details of our work.

Mr. Jean Bélanger (Member, National Round Table on the Environment and the Economy): Mr. Chairman, members, thank you very much.

What I'm going to focus on mainly is to explain the process we're going through in investigating, examining, and exploring the concept of ecological fiscal reform.

We've assembled some 30 to 40 experts in the matter: people from universities, environmental groups, industry, and a variety of government departments and provincial departments as well, who are cooperating to try to determine whether the concept of EFR—ecological fiscal reform—has any applicability in Canada and how we could apply it.

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It was very interesting from the outset that a number of people wanted to work on this but did not want this to be a conceptual review. So we are going to look at whether the concept works, but the way we're doing it is that we are looking at three specific areas. We've decided to choose three issues that the committee could look at and say, okay, let's bring together some of the generalists who are around this broad table—the expert group—with experts in three different fields, and let's see how we can advance this by looking at the issue and seeing how you would apply it in concrete terms.

The three issues that we have selected are meant to be exploratory. We're not saying that in the end these are going to be the recommendations we're going to make, but it is more like how can we try out the concept with real cases?

Of the three cases, the first one is EFR and agricultural landscapes. The working group is going to examine here how we might design economic incentives to help farmers across Canada conserve rather than cultivate ecologically sensitive lands like wetlands and riparian areas. This is the first one, and we've brought together people from agricultural communities, from the environmentalist communities, universities, and so on, to try and see what the array of tools is that can be brought into this.

The second one is what we're calling the track two toxic substances. As you know, CEPA has defined a number of areas of toxins where some management plans are going to have to be developed. Now, the normal route could have been simply to have regulations for all of those individual chemicals. That's almost an endless process.

So what we're asking there is can we have some dialogue on the variety of instruments that could be brought into play so that we wouldn't just rely on the regulatory approaches, but on how other things could be brought into the game to look at the advancement of environmental management so that we could encourage a better life cycle management of the products?

The third area that we have created is the cleaner transportation working group. Here we're looking at developing a set of economic instruments to complement forthcoming regulations associated with the Government of Canada's clean air action plan, which was announced in February 2001. Specifically, the group will focus on how economic instruments designed to facilitate the adoption of cleaner fuels and improved engine design could promote the transition to cleaner diesel-based vehicles.

In looking at all of these things we're asking ourselves a number of questions. The first broad area of questions is what are the instruments that could help us meet our goals? Some of them could be taxation; some of them could be capital cost allowances; some of them could be a variety of other instruments that could very directly meet the goals.

The next area would be if those are the instruments that we could choose, how are the impacts going to be felt? Who is going to feel them? What are the distributive impacts of applying those instruments? What are the sectoral impacts? What are the competitive impacts? What are the legislative impacts of all of these things? These are the questions that we're trying to bring together.

The last basic question is if these are going to be impacts that could be negative on some people, can we turn win-lose situations into win-win? Are there other instruments that could be brought into play that would help us reach a situation where, bringing in the totality of instruments that could be brought into the game, these would help us get to a broad objective of a win-win situation?

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So it has two areas of aspects. The first aspect is trying to ensure that we analyse the concept. Does it work in a Canadian setting? We know others are trying it. Does it work in a Canadian setting? We're not strictly staying at the federal level; we're looking at the variety of government levels that could be brought into the game.

The second area is if by chance, in analysing those three areas or case studies, we come to a broad determination from all stakeholders that indeed we've got an answer that is total and brings all the players and all the possible instruments into a win-win situation, then we'll move that forward. That I consider as a bonus.

What we're trying to do is to define by deduction whether the EFR process works or not. So this is our process at the moment.

Thank you very much, Mr. Chairman.

The Chair: Thank you very much, Mr. Bélanger and Mr. McGuinty.

We'll now hear from the Pembina Institute, Mr. David Pollock and Stephanie Cairns. Welcome.

Mr. David Pollock (Executive Director, Pembina Institute): Thank you, Mr. Chairman.

My colleague Stephanie Cairns, director of our ecological tax reform program, will be co-presenting with me today. We're both very pleased to join this discussion. We've been making submissions on green economics to the federal budget process since 1994.

It's my belief, based on the recent international conference in Vancouver which we co-hosted with over 100 participants from 10 countries, that approaches suggested by green economics and by ecological tax reform do indeed have much to commend them and can serve a variety of economic and social policy goals.

First I'll say a quick word about the Pembina Institute. I'll let the slide speak for itself in terms of where we're stationed across Canada, from Drayton Valley, Calgary, and Ottawa, and the variety of programs that we're engaged in.

I'll simply add that you may be aware, if you followed last Monday's edition of the Globe and Mail, that we are one of Canada's leaders in the whole area of sustainable indicators measurement. We think that to contrast this with the work that typically is done in gross domestic product, which does not really serve to give a good sense of our sustainable well-being, is one of the three prongs of our green economics program.

The second prong is through our climate change program, which operates both out of Alberta and Ottawa, in terms of the work we've done in emissions trading—possibilities, approaches, and models. You'll hear more from Stephanie on that in a moment.

The third prong is the collaborative work we are doing with a number of leading-edge Canadian companies working on ecological tax shifting.

I have five key messages to leave with you before I pass it over to Stephanie for more detail.

We were asked to speak about green economics in a broad overview, so the first key message is that there are indeed, based on an international assessment, a variety of powerful economic instruments that can and indeed are being used in various countries and are vital to meet the ecological challenge and even some of the competitive challenges Canada faces today.

The second key message is that these instruments do permit solutions that create market signals so that entrepreneurs, investors, and consumers will themselves drive innovation and make consumer choices based on price signals. But we must drive toward the actual full cost to society being included in the pricing signals, internalizing externalities.

The third message is that it's well past time for Canada to broaden and expand our use of these instruments. With Health Canada claiming a minimum of 5,000 deaths per year from smog in Canadian cities, and the Suzuki Foundation suggesting 20,000, we must conclude that neither voluntary measures nor regulations have or are doing what is required of responsible leadership.

Fourth, every single measure that you can point to has both strengths and weaknesses in it, but there are good designs that can overcome some of the obstacles.

Stephanie will address the question of competitiveness, industry adjustments, and protection for low-income groups.

Finally, the most important measures are the most difficult ones to take. It will require political leadership and courage, which is why, I imagine, many Canadians elected you to this House.

Let's take a closer look at why I say it's time. Since 1991 the Netherlands, Spain, the United Kingdom, and Scandinavian countries have adopted a variety of measures. More recently France, Germany, and Italy have followed. In the United States we're looking at Minnesota, Vermont, Wisconsin, Oregon, and Maine. More recently British Columbia introduced the first ecological tax reform policies in the 2000 provincial budget.

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If you turn to the recent OECD economic survey of Canada for 2000, they are pressing us to move in this direction. I'll just provide two quotes from the OECD report. The first says:

Voluntary agreements have not proved up to the task of dealing with the resource and environmental challenges on their own. Thus, more extensive use of economic instruments will be necessary.

That's on page 6. On page 7 it says that Canada

...will probably have to take steps to accelerate the reduction in domestic fossil-fuel consumption per unit of GDP. In this case, rather than resort to command-and-control-type regulations, it would be advisable to rely primarily on a cost-effective instrument, such as a tradeable permit scheme, and not to exclude specific sectors (such as transport and energy) from its application. Increased taxes on fuel might be helpful to reduce emissions related to transport.

Thirdly, it's past time, or it is time in the sense that companies are ready to work in this area. The Suncor energy company has given leadership, along with the Pembina Institute, in forming the CARE coalition, which is calling for a consumer green energy credit to increase demand for alternate and renewable energy, together with a broadening of the Canadian renewable and conservation expense—or CRCE—or the investment tax credit—or ITC—treatments to support private-sector and utility capital spending to increase the supply of green power.

The list of CARE participants includes not only such groups as the Federation of Canadian Municipalities and environmental bodies, but also Axor, BC Hydro, BP Canada Energy Company, Dofasco, Enbridge, Ontario Power Generation, Shell, Toronto Hydro, TransAlta, and Westcoast Energy. There is a growing acceptance that there are a variety of economic instruments available to rejig some of the pricing signals that we need to attend to environmental requirements.

Finally, I would say the OECD report has also made it clear that it's often very difficult to design a single policy instrument that will do the job. Very frequently, you're going to need to look at an interconnected body of measures. We'll focus on two broad ones this afternoon. One is emissions trading, and the other is tax or expenditure measures.

With that, I'll turn to Stephanie for a little more detail.

Ms. Stephanie Cairns (Senior Policy Analyst, Pembina Institute): Thank you.

Emissions trading is likely to be the major economic instrument used in North America for greenhouse gases. It has been used in the United States since the mid-1980s for sulphur dioxide reductions. In Canada, we have used it for methyl bromide, an ozone-depleting substance, and NOx and SOx trading has begun in Ontario.

Emissions trading, which is one of two main families of economic instruments, is suitable for pollutants with global or regional impacts, but not for substances where the impact is local, such as many persistent and bioaccumulative toxins for which regulation would be a more appropriate policy.

Very simply, this is how a cap and trade emissions trading system works. The government sets an overall cap on emissions, usually through a regulatory process. Individual emitters in covered sectors are then required to hold annual permits equal to their annual emissions. Permits are then allocated from the government on an annual or semi-annual basis, and permits can be bought or sold in the free market. Therefore, if your company can reduce emissions more cheaply than my company can, it makes sense for me to buy your emission reduction. This approach lowers the overall economic cost of meeting an environmental target, and, unlike an emissions tax, it allows the market to set the price for carbon.

In Canada, a cap and trade system for greenhouse gases has been explored, although there has been no political commitment to or comment on whether it would be used. Most observers, however, expect it will be part of our long-term policy mix. However, very important issues remain to be studied and determined, including who would be covered, which sectors, and which types of sources; where the emissions trading should be applied—where the fuel is burned, for instance, or where the fuel is produced—and, as a very important question, how the initial allocation of permits would be done. One way is through auction, which would be the option if you believe strongly in the polluter-pay principle. Another approach would be via the free allocation of permits on the basis of historical emissions, which is in keeping with the view that the right to continue emitting should be grandfathered for existing emitters. Finally, it's likely that we'll come out with some combination of these.

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The other main family of economic instruments is ecological fiscal reform. This uses budgetary measures such as taxes, charges and fees, reform of environmentally damaging subsidies, or tax incentives for research and development or for the adoption of cleaner technologies. The round table, as David mentioned, has defined ecological fiscal reform as a strategy to redirect a government's taxation and expenditure programs to create an integrated set of incentives to support the shift to sustainable development. Key to this concept, from the Pembina Institute's perspective, is the integrated element of it. We believe there's a need to balance incentives—such as tax breaks or subsidies for cleaner technologies—with new disincentives for pollution, such as green taxes or charges. In other words, we need both a carrot and a stick.

Ecological fiscal reform measures have generally been introduced in the international setting on a revenue-neutral basis, although the definition of revenue neutrality can be applied either at an economy-wide, a sector-specific, or the individual consumer level. The design of ecological fiscal reform measures is key to addressing many concerns that can be raised, such as issues of competitiveness, equity or regressivity of taxes, and adjustment or transition issues. A package of measures is really the best way to provide integrated, reinforcing, and revenue-neutral market signals.

We thought we would provide you with a few examples to illustrate that EFR can be applied at various levels, and how some key concerns have been addressed. I'm only going to cover three examples, given our short time here, but there are many others I can pull out of my back pocket in a discussion.

Most of the ecological fiscal reform that we hear about that is happening in Europe is underway at the economy-wide scale. This is a broad shift of the tax base away from, for instance, income taxes or social security contributions, and a recovery of that lost revenue through pollution taxes. The explicit intent in Europe is to reward eco-efficient companies and to reduce barriers to job creation. This is the so-called double-dividend approach. The most advanced example of this approach is in Denmark. Denmark collects 6% of the country's total tax revenue through green taxes, and it has reduced many of its other taxes by 20% to 25%.

The example I want to give here is Germany. Germany collects 2% of its total tax revenue from an energy tax. This tax was introduced in 1999. The revenues have been used to reduce social security contributions. Concerns about regressivity and impacts on low-income persons have been addressed through increasing children's allowances, increases in tax-free thresholds, and reductions in the income tax rates for low-income earners. Competitiveness concerns have been addressed by providing refunds to companies that pay more in energy taxes than they received in social security reductions. In other words, no individual company should end up paying more in total under the overall package that has been introduced.

In the U.K., a landfill tax has taken a similar approach. A per-tonne charge of waste going to the landfill has been offset by a reduction in employers' national insurance contributions. To ease the adjustment of companies to this tax, it was started at a very modest level. It was increased gradually over a period of, I believe, six years, and businesses were told well in advance what the future tax rates would be, so they were able to adjust their behaviour accordingly.

EFR can also be introduced at the sector-specific level. In British Columbia, the regulation requiring beehive burners to be phased out by the end of 2004 has been complemented with an ecological tax-shifting package. In the period prior to 2004, the permit fees for beehive burners have been increased substantially by amounts that depend on the proximity of the beehive burner to populated areas and hence the health impact they have on local populations. The fees will continue to increase each year between now and 2004.

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The carrot part of this equation is that revenues from the increased fees have been used to finance a rebate to burner operators, and if burner operators make an approved investment in an alternative technology or an alternative method, to reduce their burning of wood residue, or if they contribute to an R and D fund to find new alternatives to the burning of wood residue, they are able to get a rebate. This rebate can equal the fee increase. Therefore, an individual company that engages in responsible behaviour should be able to come out in a neutral position.

The last level of ecological fiscal reform, and the one we're most familiar with probably, is the individual consumer level, and the example here we all know about is deposit refund systems for beverage containers, a policy that's designed to encourage the return of containers for recycling.

We have just a couple of suggestions here on possible next steps to advance the actual application of green economics in Canada. In the area of domestic emissions trading, we believe there's an absolutely essential debate that needs to be engaged, and that is how the allocation of initial permits should be done. It'll be a lengthy debate, and we need to have that now, in order to be ready to introduce domestic emissions trading when the time comes that we have to meet international obligations.

Finally, and perhaps the more provocative statement, politically we really have to decide, are we only going to be using incentive and subsidy approaches in our green ecological budget measures, or are we going to also introduce something of a stick approach, with new charges and taxes, have that part of the mix, and design the approach we take in such a way that responsible individuals or responsible companies are able to come out in a neutral position, but those who are not acting responsibly are paying through new charges and therefore internalizing their environmental costs?

Thank you very much.

The Chair: Thank you very much, Ms. Cairns and Mr. Pollock.

We'll now hear from the Canadian Nature Federation, Ms. Julie Gelfand. Welcome.

[Translation]

Ms. Julie Gelfand (Executive Director, Canadian Nature Federation; Chair, Green Budget Coalition): Good afternoon. Thank you very much for inviting us.

[English]

I'm going to speak in English for the most part, but I can take some questions in French later.

My name is Julie Gelfand and I'm the executive director of the Canadian Nature Federation.

[Translation]

I am the Executive Director of the Canadian Nature Federation and Chair of the Green Budget Coalition, We still don't have a name in French.

The coalition represents all environmental groups. We have people from Greenpeace at our table. We also have people from Ducks Unlimited Canada. We have everybody from left to right on the spectrum. There is a representative from Ducks Unlimited here with me. The Pembina Institute is also part of our coalition.

[English]

I'm here to talk to you about the practice and the practicality of trying to implement some of these green economic ideas in the reality of the Canadian political system. We've put together proposals, which you have, that do all kinds of things. One of them is spend more money, one of them is cut taxes to encourage people to do the right thing on capital gains, for example, on land donations. We think we can create some jobs by introducing some energy efficiency measures. And we think there should be some subsidies removed. These are all the tools of what you would call green economics or ecological fiscal reform.

The other way of looking at our proposals is that some of them are doable, some of them have been done. Minister Martin took some of them. They were also recommended by the round table, by David McGuinty and Jean Bélanger's group. Also, our job is to advise as to what should be done. There are some of the proposals where the Department of Finance looks at us and says, what are you talking about here? It's our job, we believe, to be on the leading edge of pushing the Department of Finance, pushing the government of Canada to go as far as they can and to think as far ahead as possible in respect of what needs to be done for the environment and what could be done within the spectrum of green economics.

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I'd like to tell you why we're doing this. The first reason we're doing this is that Minister Martin himself asked us. He took a few of us out for a beer a couple of years ago and said, “Tell me, Elizabeth May, what could we do in the budget that would have a good impact on the environment?” So we are responding first and foremost to the Minister of Finance's request for some advice. We're also doing this because the budget is an incredibly important policy tool and the single most important environmental policy tool the government makes on a yearly basis.

We think it's time to look at economic incentives as they relate to the environment. I would say that in the past my community has been very much command and control. We've pushed regulations. That's not to say we're not going to push you to make regulations. When I hear governments saying that they're not going to make regulations any more, my only question is, if you don't make regulations, who will? I can't make up laws to protect the environment. That's a job that only parliamentarians and government can do. At the same time, as an industry or a sector of society, the environmental community has to look at different mechanisms, not just regulation. It has to start learning about green economics and ecological fiscal reform.

Finally, we're doing this because we think this might be a way for Canada to move itself back up on the international scene with regard to the environment. Over the past five years we've really lost a lot of ground. We used to be seen as the green country. We're losing a lot of ground in a lot of areas. Our competitiveness is going down. OECD reports are telling us that we're not doing a good job. This is an area where I think we could go back up in terms of our international reputation.

I've told you who we are. I've told you that our proposals span the whole spectrum of different tools, and I've told you why we're doing it. Now I'd like to tell you what we've done and what we've learned.

The two most important things we've done are some polling and we've met with many of you and other parliamentarians and government officials. Our polling results, which I believe we've circulated to you, indicate that the public would accept a green budget. The general public shows very strong support for environmental measures, which we've known for a long time, even when they're asked about trade-offs with other important fiscal policy objectives. The polling we did in October shows that by a margin of eight to one and nine to one, Canadians favour using budget surpluses for environmental initiatives over tax cuts. Two in three Canadians support increased taxes on pollution to protect the environment, even if that means higher prices for consumers.

We also asked the question, how important is the environment when you vote? Twenty-five percent said that compared with other factors, environmental issues are a major factor. Another 44% consider it a moderate factor. Only 9% of the population doesn't think about your environmental track record when they go to the polling booth.

Over the past two years, on top of polling, we've made two presentations to Minister Martin. He has given us his full attention and his advice: go talk to Vanclief, go talk to Goodale, go talk to so-and-so. This is not going to fly, Julie. We might have a chance here. He has been very attentive, and that's very important to us.

We've met with over 60 members of Parliament and many of your staff. We've also met with senior officials in about a dozen government departments. So we've gained a lot of knowledge on the barriers, I would say, to trying to introduce some of these new ideas.

There are two important lessons we've learned, which I want to leave with you. One is that there's what we call a silo effect. Each government department looks at our proposals, picks out the one that relates to them, and doesn't look at the rest of them. Green economics requires you to look much broader than most government officials are allowed to do at this point. We need government officials and the political system to be thinking broader.

We also found that there's a spending bias. It's easy for us to tell you how to spend the money. We're really good at that. There's even a spending bias within government. It's the easy thing to do. We find that the idea of removing a subsidy is a very difficult political decision. If an industry has been getting a subsidy for years and years and years and you walk in and say you're going to take that subsidy away, that's a very difficult political decision. It's probably one that has to be made, however. So I challenge you on that one.

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We recognize that there's a need for some technical details. I believe that the people from the University of Ottawa and folks like Stephanie can give us some of that technical detail. We need that. We get questioned about that all the time.

We believe there's a need for some political will. There needs to be more than Minister Martin asking us for these questions. We need all of you to say, hey, let's look at this. We're really thrilled that you're having a round table on green economics and ecological fiscal reform, because we're going to need your political will.

The last thing I want to say is let's try it. A lot of other countries have tried it. Let's learn from their mistakes. Let's see what is implementable. This doesn't happen overnight. We're talking about a shift in how we look at the environment and in how we look at where we raise our revenue. But let's just do something.

I'd like to end my comments on that note. Thank you very much.

The Chair: Thank you very much, Ms. Gelfand.

We'll now hear from Dr. Ross McKitrick. Welcome.

Dr. Ross McKitrick (Individual Presentation): Thank you.

What I'm going to do today is just try to explain some of the practical conclusions that have emerged from some of the more theoretical studies that have been done on the role of pollution taxes. The four advantages over standards that I will talk about are cost-effectiveness, dynamic incentives, the revenue recycling possibilities, and information advantages.

As Stephanie and the folks from Pembina have already said, pollution taxes have the potential to be cost-effective. What that means is that having decided on an emission reduction target, a pricing mechanism will get you there at the minimum possible cost to society. The other way of thinking about it is if you have in mind how much of a cost you're willing to put up with, an emissions tax allows you to achieve a greater environmental outcome than standards would be able to.

On dynamic incentives, under standards firms typically do not have very strong incentives to innovate in pollution control technology, and sometimes if the standards are implemented without proper attention to these incentives, they can actually retard innovation and development of new pollution control technology. This is not true of taxes, though. Emission taxes create very strong and enduring incentives for innovation and pollution control technology. So not only do you have a short-run benefit of cost-effectiveness, but also it reduces the long-term cost of achieving environmental policy objectives because it improves the technology that's available.

On the revenue recycling point, any kind of pollution reduction law will have the effect of raising production costs. That reduces real wages, and that's a cost to society. Some of those costs are what we call dead-weight costs, and they're not recoverable. But some of those costs accrue to the polluters in a hidden form, what we call scarcity rents. Standards don't give you any access to those scarcity rents, but pollution taxes capture those rents. That revenue can then be used, as the Pembina folks have said, either to reduce other tax rates in the economy or to provide some kind of implementation bonus to the affected industry in order to offset the economic and political costs of implementing these taxes.

The last point here is quite a subtle one. Pollution taxes generate information, which is very useful to the regulator. First of all, if you're negotiating with an industry about a new set of standards, you need that industry to reveal information about its control costs. If the policy that's on the table is some kind of emission standard, the industry has an incentive to report its costs at a maximum, and even to exaggerate the costs, if possible.

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The story is different if the policy being proposed is an emissions tax. This is a point that is easy to explain in theory, but not necessarily easy to translate. But if firms expect to pay a tax on emissions, they have no incentive to exaggerate their control costs during the process of negotiating the policy. The reason is simply that while they might save money on the emission reduction technology, it would wind up costing them more on their tax bill. So they have an incentive to give very accurate information about their control costs.

The second point is that once the policy is introduced, the market response to a tax generates information that, if you know how to use it, can be used to refine the policy and make it more efficient in an iterative process.

Standards don't generate that kind of information. You can't interpret the market response to standards because it doesn't reveal the right kind of information. One of the reasons economists favour pricing policies, like taxes and tradable permits, is simply that it generates the kind of information we need in order to refine the policy.

I'll conclude with two general points. I guess the typical comment from an economist is there's no free lunch. This is true in emissions taxes as well. Any pollution reduction policy is costly. There's nothing wrong with admitting that. The costs need to be properly accounted for. The advantage of emission taxes, though, is that they minimize these costs, whereas we find other policies can sometimes exaggerate those costs.

The second point is for the taxes to truly be environmental policy, they have to be targeted on the emissions themselves. There are taxes that go under the name of green taxes, but if they're not properly targeted, they don't actually generate an environmental benefit. For instance, the superfund in the United States is funded by taxes on chemical feed stocks. These taxes don't actually affect emissions in any appreciable way. Even though they're called environmental taxes, they don't have an environmental benefit. That kind of use of the terminology should be avoided if you don't want to generate suspicions that green taxes are just an excuse for new taxes. But if they're targeted properly on the emissions themselves, then they can serve as an effective environmental policy.

Thank you.

The Chair: Does that complete your presentation, Dr. McKitrick?

Dr. Ross McKitrick: Yes, I'm finished.

The Chair: Thank you.

Now we'll hear from Mr. Quentin Grafton, director of the Institute of the Environment, University of Ottawa. Welcome.

Mr. Quentin Grafton (Individual Presentation): Thank you very much. I'd like to thank the committee for inviting me here today. It's certainly a privilege to be given the opportunity to give you my seven minutes worth of green economics.

I'd like to start off by telling you that I am the director of the Institute of the Environment at the University of Ottawa. The institute is about integration of research in the area of environment, where integration is important. It's about supporting teaching in the area of the environment. The third aspect to it is communicating the research and academics that we're doing at the university to the community at large. That's certainly what I'm trying to do today.

My seven minutes, or a little less now, will be on the issues of effectiveness, economy, and efficiency. I'm stepping back from some of the specifics that have already been addressed by several of the other presenters.

The first issue is the issue of effectiveness. That's essentially the issue of trying to reach predetermined environmental goals and social goals in the hope that we can achieve them in a particular period of time.

The second issue is the issue of economy. How can we achieve those goals sticking to the predetermined inputs, resources, and funds that we've allocated to them?

The third aspect, probably in some sense the most important, is the issue of efficiency, which is essentially doing the best we can with what we have. Namely, if we want to achieve a particular goal, whether it's reduction in pollution or some environmental quality target—whatever that may be—we want to do it at least cost. That's what we mean by efficiency.

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What this diagram tries to do is to put all those three pillars together. The issue of effectiveness is is about the relationship between actual outcome and planned outcome. So that's what we want to achieve relative to what we've planned to achieve.

The issue of economy is about using the resources we've planned on versus what we actually end up using. And the other aspect in the middle, which combines both, is the issue of trying to achieve those outcomes, those standards, those goals, those objectives, as a ratio of the resources we've ended up using to achieve that—namely, resources that we've ended up applying.

I'm going to talk in a sense about the four issues here. I think most of the presenters have addressed the issue of three, the specific actions and tactics, and I suppose that's the focus of the committee here. But I think it's important for all Canadians and this committee to step a little further back behind this notion, and that's the issue of vision. What is Canada's vision with respect to the environment, with respect to green economics?

I had a brief conversation with David McGuinty just before the committee meeting. We talked about Rio plus 10. It's coming very soon. What is Canada's vision? What are our objectives in terms of green economics, in terms of environmental goals? We have a lot of talk about it, but I think it would be a very good idea to specify those objectives in a quantifiable and measurable way.

We then want to have strategies to achieve that and specific actions and tactics. Then how we evaluate ourselves is to ask, what have we done? Have we achieved our objectives? What are the strategies we've used? Have they been successful? Have they not? Those are the sorts of things we need to think about, need to step back from, when we think about the sorts of policies and strategies we wish to implement.

So this diagram here tries to illustrate that notion, the notion of the setting of objectives. It's not quite clear to me what those objectives are here in Canada. Certainly they're on the federal, provincial, and local levels. Then we have to come up with performance criteria and reference points. This is a point that is often neglected. We often talk about strategies and tactics, but we don't often talk about the information we need to be able to implement that effectively, namely how are we performing in terms of environmental quality? What's the impact on our current environment in terms of population? Those sorts of questions we don't have answers for, given the current information base we have right now in Canada. It's critically important, and I would urge the committee to put resources into thinking about how we can come up with these sorts of measures and quantify them over a period of time.

Strategies and tactics people have talked about already ahead of me. Then the issue is evaluation. We need to evaluate. It's very easy to talk about a strategy, a green tax or whatever it may be, put it in place and then forget about it. What we need to do is to think, has it been successful? Why has it been successful? Why has it not been successful? Those are pretty straightforward sorts of things that need to be done, but surprisingly enough are not done as often as they should be. So clearly there has to be a response following that evaluation.

I'll briefly talk about performance criteria. From performance criteria come our target points and our limit reference points so that we'll have some measures of what the drinking water quality index is—there are all sorts of measures you can come up with—and air quality indexes. So those represent ambient standards of what we'd find in the environment. Measures in terms of flora and fauna in our environment, species diversity, measures of abundance, for example, concentrations of contaminants in wildlife, and then the outcomes, the results, the effects of the environmental situation we have, those sorts of things in terms of population are absolutely important to Canadians. We need to develop from those performance criteria targets of what we consider desirable and what we we can move towards, and limit reference points. In other words, we don't want to go below this or above this, whatever that particular point may be.

Then the third point I'll address is the issue of efficiency. There are three points I'll try to emphasize to you, because we're talking in a general framework here.

The first point is respect differences. There are a lot of differences here in Canada in the jurisdictions, in the way things are done, and I would suggest, and I'm sure the committee is aware of this, that the one-size-fits-all approach does not work and is generally not cost-effective. We need to adapt. We need to develop policies that are innovative, that suit different circumstances. So a policy for Ontario in a particular situation may not be suitable, for example, in British Columbia.

We need to respect individuals, and this again gets back to the issue of incentives. There has certainly been in the past in Canada, and certainly in other countries, this issue of trying to regulate, trying to prevent people from doing a particular action. What we should be trying to do is to provide them incentives to do the right thing.

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Finally, there's the issue of respect for the traditions of common law. There's the issue of property rights, for example, where if someone does something to me, it's a private nuisance for me if it affects my property rights. That sort of tradition should be respected and upheld. In the past in Canada those sorts of things have been undermined by certain policies.

Then there is the issue of incentives, which I probably can't stress enough and which has been talked about by previous presenters. Certainly there's the issue here of moving to what we call market-based instruments.

We have talked about pollution permits, which certainly exist here in Canada in a limited form. I think we need to move towards a greater application of them. They've certainly been applied in the United States in a number of instances, and a recent study of the U.S. sulphur dioxide trading program has rated it a very valuable policy tool, one that's proven itself superior to traditional methods of command and control.

Canada, however, has been innovative in a number of areas on the issue of property rights and incentives. We've implemented what are called individual transferrable quotas, providing the incentives approach to address what we would call externalities or problems in the fisheries. In some cases they've been highly successful. We can build on those successes in Canada to do a better job.

I will end by identifying priorities in what we should be thinking about in terms of green economics. First, I'll emphasize information. One of the things I'll point out to you is a work we can credit to the Government of Canada. It is a book entitled Human Activity and the Environment 2000, published by Statistics Canada in collaboration with Environment Canada. This is the sort of thing we should be doing on an ongoing basis. It's about getting data on what's going on in our environment.

This is a beginning, and it's a good start. It needs to be developed and moved much further and faster. If we don't know where we are, how do we know where we're going? That's the fundamental issue.

The second issue is one of incentives. People have already talked about them before me. I think we need to focus in on that as a way to try to reduce the costs associated with trying to achieve environmental objectives.

The third aspect is innovation. It's very easy to think, well, this is the flavour of the month, this is a particular policy that seems to have worked in Sweden or wherever. That's fine, but we need to be innovative. As things and circumstances change, we need to change our policies as well, to develop them, improve upon them, and adapt. Adaptive management is what I would suggest.

So those are the three priorities I'd leave with the committee.

I'd like to thank you very much for the opportunity of speaking today.

The Chair: Thank you very much, Mr. Grafton.

We'll now hear from Mr. Philippe Crabbé. Welcome.

Mr. Philippe Crabbé (Individual Presentation): Thank you, Mr. Chairman.

My purpose here is to address a few basic, key micro-economic principles that concern the implementation of green taxation.

The purpose of green taxation is to increase the marginal productivity of natural capital. We hear a lot in the newspapers and in Parliament about the emphasis on the productivity of labour. Green taxation shifts the emphasis to the productivity of natural capital. Natural capital is the environment as a source and a sink for matter and energy in the set of life support systems.

Marginal productivity is one of the two blades of the scissors used by economists to value a factor of production. The other blade is the market price. The market price for natural capital is too low. It is too low because some of its components are totally unpriced, such as clean air for example, or do not include their full environmental costs, such as fuel for example.

This low market price for natural capital results in marginal productivity too low for natural capital, meaning that it is overused: too much water is being consumed, too much gas is being burned by SUVs, too much air is being polluted, and too many species are disappearing.

What are the reasons for this low price of natural capital? They are twofold. They are either market failures or policy failures. For market failures, economists include externalities, public goods, and open access resources. Externalities are essentially interactions among economic agents, such as firms and consumers, that do not pass through the market. Examples are many forms of air, water, and solid waste pollution that are unsolicited bads accompanying the production of solicited goods.

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Public goods are essentially indivisible and therefore not excludable, with the result that nobody has an incentive to protect the supply of public goods. This in turn leads to too low a supply price with respect to its efficiency level. The scenic beauty of the Grand Canyon may be breathtaking, but nobody has an incentive to control smog, which is responsible for poor visibility, because nobody can fully appropriate the benefits of enhanced visibility.

The Amazon forest as a carbon sink is of the nature of a public good, and this is why Brazil alone will not protect it as a carbon sink. Public goods also have the feature that their consumption is not competitive, meaning that my consumption of the climatic benefits of a carbon sink, for example, does not diminish yours, a situation contrary to that of the consumption of private goods.

Finally, free access to environmental resources is not subject to any working form of property rights, examples being high-seas fisheries, clean air, and clean water. This situation may result from the indivisibility of the resource stock, much as in the case of public goods. The difference with public goods is that in this case the consumption of the fish is competitive, as is the withdrawal of clean water or clean air.

Each tonne of pollutant you send into the atmosphere decreases my consumption of clean air. Who is to tell which litre of water from the Great Lakes belongs to whom, Canadians or Americans, until this litre has been withdrawn? On the other hand, if the Canadian and U.S. governments came to an agreement about the possibility of using some water from the Great Lakes for commerce, they could issue water rights. This could be in the form of tickets for a cubic kilometre of water deemed to be for commerce, tickets which could be appropriated and bought and sold. Property rights may be created artificially on indivisible environmental resources through this device.

Policy failures consist essentially of subsidies for natural capital use, such as energy subsidies. In Canada, the taxation level on fuels, for example, is inversely related to their pollution intensity.

The advantage of green taxation is to sharpen the blades of the evaluation scissors. This sharpening may occur through the removal of subsidies or through green taxation. Under ideal conditions, environmental taxes generally achieve environmental goals at lower cost than command and control. That's what economists call static efficiency. They also provide continuous incentive for technological innovation. Economists call this dynamic efficiency.

However, we know that commodity markets are imperfect. These imperfections result in increases in the cost of abatement. Cost differentials then occur among various economic instruments, especially when a low level of abatement is required. This means that command and control may under some circumstances be more cost-effective than environmental taxes.

Environmental taxes increase the relative price of polluting products, creating an incentive to use and produce fewer of them. But this leads to a paradox in that if environmental taxes are successful, they erase their own tax base. There are limits to this paradox, which comes from the limited substitution possibilities for some commodities, such as energy and transportation, which are subject to taxes.

Environmental taxes are essentially indirect taxes that fit nicely into the current trend to move away from income taxes. There is a concern that those environmental taxes are regressive. There is little empirical evidence of this. In case they are regressive, of course the income tax system and lump sum taxes or subsidies are needed for correction.

What's also important in the case of environmental taxes is revenue recycling, because revenue recycling has to ensure the neutrality of the tax system. Environmental revenues should go into general revenues, and they require tax reductions on either labour or physical capital. This is of course related to the double dividend concept, which means that shifting taxation from labour to natural capital increases environmental quality as well as employment in the absence of labour market rigidities. But there is very little evidence for increased employment, because in fact labour markets are very rigid. There is also little evidence of reduced tax burden on labour, because labour supports a substantial portion of the environmental taxes.

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Now let's look at commodity markets price responsiveness—that is, the commodity markets that are subject to environmental taxes. If the commodity supply is very responsive to price relative to demand, the environmental tax burden will be supported by consumers. There will be little impact on industry profits, and there will be little incentive, then, to use environmental technologies. On the other hand, if commodity demand exhibits very low price responsiveness relative to supply, demand will hardly be affected by the tax at all, resulting in very small environmental benefits from the tax.

I have two words about competitiveness. The impact of environmental taxation on competitiveness depends very much on revenue recycling. It may actually decrease competitiveness in the short run and increase it in the long run, if one believes the Kuznets' curve argument, for which there is very little empirical evidence.

There is very little evidence about the negative impact of environmental tax on competitiveness either at the sectoral level or at the general economic level. There is also very little evidence that there are pollution havens. To the extent that those havens exist, it's not impossible that increasing emissions and pollution levels could occur in these pollution havens as a result of environmental policies.

I will conclude with a couple of statistics that come from a recent report of the OECD. In Canada, the taxes on natural capital represent 7% of tax revenues and 2% of GDP, and amount to about $400 U.S. per capita, which is a very low figure for developed countries. The Netherlands and the Scandinavian countries charge from two to four times this amount per capita. In some Scandinavian countries and the Netherlands, environmentally related taxes amount to 5% to 10% of tax revenues, and from 2.5% to 5% of GDP.

Thank you.

The Chair: Thank you very much.

We'll now proceed to the question and answer session. We'll have a five-minute round.

Mr. Epp.

Mr. Ken Epp (Elk Island, Canadian Alliance): Thank you very much, Mr. Chairman, and thank you to our witnesses.

This is a fascinating topic and one I've been interested in pretty well all my life. You probably don't realize it, but in the interest of physical fitness, as well as preserving the environment, I've driven my bicycle—I still have an old mile speedometer on it—about 4,600 miles, and that's why I'm in such fine aerodynamic shape today.

Coming back to these presentations, I have a number of questions. I'd like to begin by asking whether there has ever been a study on how effective these taxes are.

I remember about 25 years ago, or maybe even more, the federal government brought in a $100 tax on air conditioners. We're still paying it. When you go to a car dealer now, you'll see in the sticker price on the window: Air conditioning tax, $100. I have read studies that say that a car driven with the windows open actually consumes more energy than a car with an air conditioner run with the windows closed. So it seems to me it's a contrary tax in terms of an environmental goal, and yet we still have that.

In your studies, do any of you actually look at those things and make recommendations to the finance minister on that? I'll just use that as an example.

The Chair: Ms. Gelfand.

Ms. Julie Gelfand: I think you're right that in fact it is more energy-efficient to use the air conditioner and keep your windows up, rather than to keep your windows down. So from an energy efficiency perspective, I've read the same study that indicates that.

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The concept of taxes is difficult and there may be some taxes out there that no longer make sense. There are also a lot of subsidies out there that no longer make sense. In the U.S. there's an initiative called “Green Scissors”, where they've brought together people who want to cut subsidies with environmentalists, and they've been able to cut $24 billion of government subsidies over the past few years. So if you're looking at a blue-green coalition, it has been done.

There are still some perverse tax breaks out there. For example, farmers are not charged GST on pesticide use. So when they buy pesticides, they're not paying any GST, which is an incentive to use more pesticides, which isn't really all that beneficial to the environment.

It's complicated. There are many different ones. We should be looking at all of them and deciding which to keep and which to take away. But millions of dollars provided in oil and gas subsidies, millions of dollars provided to the nuclear industry, millions of dollars of subsidies provided to exploration—those are the kinds of subsidies we need to look at, rather than the small taxes, which may or may not have an impact on behaviour.

Somebody else help me. Stephanie.

The Chair: Ms. Cairns.

Ms. Stephanie Cairns: I'm not familiar with the specific example used, but in general we need to look at the whole area of environmental taxes and use of economic instruments in just the same way as we look at regulation.

There are good regulations and there are bad regulations. When you bump into a bad regulation, you don't immediately throw the whole regulatory tool kit out the window. As an advocate for doing more budget work on environmental issues, I often hear all the examples of what has been done wrong.

But we need to keep our focus on the core issue: they're a very useful tool. They can be designed well or designed badly. We need to learn from the badly designed ones in order to design better ones, but still keep our commitment to using them, because they're a very important part of the overall tool kit.

When we look at the scale of environmental changes needed, the OECD came out just last month with its environmental outlook in response to a request from OECD environment ministers three years ago. They asked the OECD to please design a strategy for the next decade on environmental policy. The OECD came back and said economic instruments have to be part of the tool kit you use, because we will not be able to address the very difficult environmental problems facing us without the economic instruments. So let's focus on how to use them well.

Mr. Ken Epp: Okay.

I have so many questions, Mr. Chairman, but I want to be sure to get back to this topic. I want to close this round, though. My time is up, and I'd like to give some of the others an opportunity.

These pollution credits, can you trade them? Can you buy a certificate permitting you to pollute, and then if you reduce that pollution, you can sell the certificate to somebody else?

It's my understanding that under the Kyoto agreement, this would actually take place from nation to nation. I would like to know from you as experts how exactly total world pollution is going to be reduced by shipping potentially millions, and maybe even billions, of dollars from North America to other countries where they haven't reached the same level of industrialization we have?

Basically all they have are lots of forests and jungles—things that are great for our environment worldwide. But how will shipping money to them—which will probably result in their buying cars and increasing pollution—how would this solve the problem of international or worldwide pollution? I don't understand it.

The Chair: Okay, go ahead.

Dr. Ross McKitrick: Well, in the specific example of trading permits between countries, the payment would be contingent on the emissions being reduced in the country receiving the payments. They couldn't use the money to then finance purchases of cars, or whatever, that would wind up increasing the emissions, because this would invalidate the transfer, invalidate the deal.

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The general principle of tradable permits allows the regulator to specify the total overall emissions that will be allowed without trying to figure out who has to do the abatement. So by trading the permits you don't change the total overall cap, you just transfer the entitlement to the emission between parties.

If I buy an emissions permit, that means that I'm allowed to increase my emissions. But in order for the person that receives the payment to be entitled to that payment, they have to reduce their emissions by an offsetting amount so that the overall cap stays the same.

If I could also comment on the air conditioner tax, that goes to the point I made about targeting. It's hard to see what the target of that tax is. It certainly doesn't have any environmental impact. So I wouldn't really consider it an environmental tax, especially if it winds up increasing fuel use, for instance. So when we talk about environmental taxes in economics, we mean taxes on the emissions themselves and not on various associated things that may wind up having nothing to do with the decision about how much to emit.

Mr. Ken Epp: This tax of course is older than you are, so you don't remember it, obviously. But I do quite distinctly recall that it had the design to discourage people from buying air conditioning so that we would use less fuel. Now, whether that was to retain the non-renewable resource or reduce pollution...I don't remember the exact mix of that, but that was in it.

Mr. Chairman, I pass, and I would like to come back if there's time.

The Chair: Sure.

Mr. Loubier.

[Translation]

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): Thank you, Mr. Chairman.

Each time we talk about green taxation, the deliverance of permits for a certain level of pollution or reduction of externalities, the issue of today's open economy surfaces. We just came out from the Summit of the Americas where we talked about multilateral trade liberalisation with 33 countries from the three Americas. We know that those countries are not equally advanced regarding their fiscal planning, their different fiscal policies, their environmental policies, etc. I am wondering—and this question is often raised—how to discipline ourselves into having a green economy while controlling what enters the country, our importations. How can our effort be rewarded if at the same time we are importing goods manufactured without the control of green taxing? This is rather complicated.

I am wondering if it would not be necessary in order to make progress on that type of issue to have multilateral treaties in the same way we are talking about having a free trade area and fiscal arrangements at the same time. For instance, we have tax treaties with several countries right now. Those fiscal treaties deal mainly with double taxation but would it not be necessary in order to really make progress on that type of issue to have arrangements similar to tax treaties but that would include green taxation?

[English]

The Chair: Mr. McGuinty.

[Translation]

Mr. David McGuinty: This is an excellent question, Mr. Loubier. I had the chance last week to spend two hours with the Mexican Minister of the Environment and I bluntly asked him what was his first priority as a Minister nominated for six years. His answer was that he convinced his President that they had to progress as quickly as possible economically to have a better environmental performance. Of course, Mexico's main concerns are water, its treatment and its price. I addressed another group this morning, the Canada-United States-Mexico committee on nature. They have great expectations as regards Washington. We first want to see if this country can succeed in reducing greenhouse gases using those instruments.

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Then we want to see if there could eventually be fungibility, that is the possibility to establish common measures in the United States, Canada and Mexico.

It is the right time to ask your question, especially when we see what happened in Quebec City. To be honest, the work that was to be completed at that time was not. It is one thing to start an analysis on the domestic front, that is here in Canada, but it is another one to see how we can cooperate, at least between the three countries, that is to say with the two countries South of ours.

Ms. Julie Gelfand: I would like to say that at the conferences I attend, where we talk about the differences between the taxation levels on different goods, I heard that there are often customs charges at the border on goods manufactured through processes that are not so environmentally friendly.

I am not an expert in commercial trade but I heard that in Europe customs duties are assessed at the border.

Mr. Philippe Crabbé: I will answer to that that in fact Canada could establish a green tariff that would apply to imported goods. It should then be in a position to prove to the World Trade Organisation that this tariff is not discriminatory. Therefore, the first requirement that Canada would have to comply with would be to prove that it produces those products or equivalent products under the environmental conditions that it requires in the case of imported goods.

A slightly objective formulation of those environmental conditions would be the use of the green label. But it has to be felt that the green label was established under objective conditions verifiable by third parties. That is the problem.

[English]

The Chair: Mr. Bélanger.

[Translation]

Mr. Jean Bélanger: I think that one of the problems is that very often one tries to rely on one instrument as opposed to a set of instruments. It is that aspect that we take an interest in within our study.

There will probably always be negative aspects if we only use one instrument. From that moment, we have to study the impact of that instrument, consider its negative effects and introduce other instruments into the game. That is why Julie has talked about a horizontal aspect.

This is what counts in the end. It is important not to consider only the implication of my department or my business in the problem, but to have a horizontal look to see what other instruments could be used to reduce the negative impact.

It is one of the important aspects we must start thinking of. There is no instrument that has no negative effect. We must look at the whole set of elements or aspects and combine them in order to win on both counts.

[English]

The Chair: Thank you very much, Mr. Bélanger.

Thank you very much, Mr. Loubier.

Mr. Shepherd.

Mr. Alex Shepherd (Durham, Lib.): Yes, thank you very much. I find this quite fascinating.

I have three questions. Maybe I'll ask all three questions, and people can answer whichever one they feel appropriate.

Mr. Grafton, you have a graph here, which I sort of find interesting, under the topic of performance criteria and reference points. I think that as legislators we're always trying to find what's the filter—how do we quantify an economic instrument against another economic instrument? I know somebody said something about how we can't have one brush, one stroke of brush that does all.

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Having said that, though, we need as legislators to be able to determine what our best tools are in a toolbox. Clearly, legislators have to make choices. They have to make choices between different policy criteria and so forth. In my mind, that process seems to be missing here, in that we can't actually take all of these wonderful ideas, quantify them, and say what is going to have the impact of reducing greenhouse gases, carbon dioxide emissions, etc., based on this kind of cost, this kind of tax shifting, or this kind of incentive system. So a cost-benefit or some kind of relationship filtration system is what I think legislators need.

With that comes a second question that maybe alludes to the air conditioner problem. Attached to every one of those analyses, presumably we should have some kind of form of unintended consequences. Sometimes we're good at talking about what the intended consequences are, but what are the possibilities of unintended consequences, and do we analyse those as well?

Finally, as you know, we have a federation here. I haven't heard anybody address that aspect of these kinds of proposals. It would appear to me that some of these proposals are more appropriately allocated to the provinces, which license vehicles, etc., and charge provincial sales taxes on certain things, whereas there are other areas in which the federal government would be more appropriately involved, such as with corporate taxes or personal income taxes. Indeed, maybe there are some areas where you can see we're going to have to both get together to make the thing work, but it would certainly help legislators if you went through that kind of process as well.

The Chair: Who's going to start?

Mr. Quentin Grafton: I'll start. I'll try to answer all three, but I'm sure others will step in to assist me.

Your first issue was performance criteria and reference points. They are linked to objectives, so the Government of Canada, the provincial governments, and local governments have to determine what their objectives are.

It's all very well to talk about wanting to have a clean environment, but what does that actually mean? Does that mean we're going to reduce E. coli in our water? Are we going to do X, Y, and Z? Are we going to reduce ground-level ozone? By how much? What's the target? What's the worst that we want, what's the best, or what's the desirable thing we want to achieve? They're all related to objectives, so the objectives have to be clear, they have to be defined, and these performance criteria or indicators then need to be set up to try to see if we are achieving them or not. That's where it's coming from.

The question that I think you are trying to address, number one, is this issue of how we do it. There are a lot of things to think about, but what is the best way to do it? That, to me, is the issue of strategies and tactics. As much as we all like to think we're experts here in our presentations, clearly we don't have all the answers. Nobody does. I think it's the issue of doing careful analysis at the beginning, but following it up.

The example of the air conditioner is a very good example of how people don't follow things up. Some tax was put in place I don't know how many years ago. For whatever reason, apparently it's not achieving what it was supposed to achieve. That means there wasn't follow-up, there wasn't a response, somebody was asleep on the watch.

What I'm suggesting is that when we talk about green economics, we should think about the things we want to achieve, the objectives; have these performance criteria and indicators quantifiable and measurable; and then, thirdly, set up these strategies. If they're not successful, if they're not working well, let's do something different. Let's adapt, let's move it along, let's be pragmatic. I think that's the way to do it.

When you're talking about major changes in terms of fiscal reform, clearly you want to have the analysis before it takes place. Before free trade took place between Canada, the United States, and Mexico, there was a considerable amount of analysis done by academics and by the government itself. If there are major reforms, then there needs to be that sort of analysis. You look at different options, you look at the costs, and you look at the benefits. That's the sort of thing that's necessary. And then you follow those things up. You don't just take those analyses as though they're written in stone. As they're implemented, you ask yourselves if you were right or wrong, what you have achieved and what you haven't achieved. That's what I would suggest. It's more of a pragmatic approach to achieving things.

The second aspect of what you said is the unintended consequences. That gets back to the point I was making about evaluation and responses. You can't just implement taxes or implement rules or regulations, just let them be, and then hope you're going to achieve what you set out to do. That's just nonsense. No one lives their life that way. You set them up and then you evaluate them on a regular basis. That's the only way to avoid unintended consequences. There may well be unintended consequences no matter how good the analysis. Nevertheless, then you follow it up, and you see how costly they are and how they can be changed. It's a question of what I would call adaptive management.

• 1700

Turning to the third question you had about the provinces, the local jurisdictions, and the federal jurisdictions, of course it's extremely important. Provinces have a lot of jurisdiction with respect to the environment. And I think that part of what I was trying to say, although I didn't make it explicitly so, is this respect for differences, this notion that there will be different ways to achieve different outcomes in different provinces.

I think the federal government does have an important role to play. The federal government has an important role to play in terms of the international agreements that Canada has signed—the framework convention on climate change, for example, and others. The federal government has an important objective in terms of trying to set standards, trying to coordinate, trying to facilitate coordination across provinces and jurisdictions. That's what the federal government should be doing.

And then the third aspect, which I gave in my talk, is the issue of information. There are a lot of reasons to discuss as to why the information we want to have on the environment is not available, and we can discuss that perhaps at a later date. But the point is, I think, that the federal government has an important role in providing that information and in helping us understand where we are and where we want to go. So I would say that's an important role for the federal government. I think there are, of course, very important roles for the provincial jurisdictions, as well.

Thank you.

The Chair: Thank you.

We'll have to go to the next questioner, and then we'll see if you can incorporate the answers to the first questioner as well.

Mr. McCallum.

Mr. John McCallum (Markham, Lib.): Okay, thank you, Mr. Chairman.

I actually was thinking of following the same approach: making three points or questions, and then letting you loose on them. The first is, in a sense, the least important, and it's only because I'm an economist that I probably mention it. I don't know quite what “green economics” means. Does it mean you have to be a green type to do it, or is it some special kind of economics? My assumption is that it's just a fancy word for “standard neo-classical economics applied to environmental issues”. But if I'm wrong on that, maybe someone could comment.

The second point is that I'd like to know what you think the implications are of the U.S. not signing onto Kyoto. It seems to me that this skews our choices quite a lot. For example, I know from experience that the mention of a carbon tax causes lots of people in Alberta to go red in the face at the best of times. But if the Americans aren't doing it, it would be even worse. So does this change our emphasis? Should it change our emphasis away from things like controlling polluting industries like coal, oil and gas, and forestry to other things?

That leads me to my third question. Some of this discussion.... I used to be in the academic world, but some of it strikes me, from our point of view, as a bit academic, in the sense of being quite a long way from what governments might actually do. So I guess my third question would be: if you had to choose two or three major thrusts that you think the federal government might do, instead of this long shopping list—one, two, or at the most three things—what would you say?

And I have just two possibilities, which I'd be interested in your response to. What about support for public transit? That seems to be Kyoto-neutral, if you like. Is that cost-effective? Is that a good way to go? And finally, what about carbon sinks? I've heard it said that Canada has a comparative advantage there, and we create jobs for marginal farmers planting forests. I wonder if you have any thoughts on that.

The Chair: Ms. Gelfand.

Ms. Julie Gelfand: I don't think any one of us can answer all of these effectively, but I want to try a couple of ideas.

I can't define “green economics”. I'm not an economist, so somebody else will have to do that.

If you were to ask us two or three major thrusts that we could do tomorrow, I think you could implement a pollution tax pretty quickly on certain pollutants, and Stephanie could tell us more on which ones. I think you could remove some subsidies right away—oil and gas, I would think, first of all, because then you would perhaps meet your Kyoto agreements. And you could also perhaps bring in some energy-efficiency standards. And those are three things you could do tomorrow that would move towards greening the budget and implementing green economics right away.

• 1705

What I wanted to address on another question was think about the unintended consequences of what we are currently doing—the unintended consequences right now of low stumpage rates. What does that mean? It means more forests are cut because it's cheap. It's dirt cheap to cut them.

The unintended consequences of oil and gas subsidies are that we are building more oil and gas...there's carbon.... We're using more and more carbon because we're helping that industry, and in fact we're not creating jobs in the renewable sector because there are no subsidies to them.

So there are unintended consequences of what we're currently doing, not just what we're trying to propose. That's my quick answer.

The Chair: Thank you.

Ms. Julie Gelfand: An emotional answer, I'm sorry.

The Chair: I'm going to take two. Mr. McGuinty and then Mr. Pollock.

Mr. David McGuinty: I'd just like to respond to the first point, which was the role of the provinces.

All of us are cognizant of the work that's been done in British Columbia. We're cognizant of the work that's being done in Ontario, for example, which has just announced a major amendment or proposed amendments to its EPA to treat the brown field problem in Metro Toronto, which is costing the city of Toronto a minimum of $100 million a year in municipal taxes.

But I'd like to go back to the Kyoto question for a second. I don't think we should take our eye off the ball. If you've been following American conduct, as in the conduct of the nation of the United States of America, on multilateral negotiations over the last ten years.... They say that multilateralism is part of our genetic makeup. I don't think it's part of the genetic makeup in terms of what we're seeing out of Washington in terms of conduct.

If we understand that we've signed on to 90-odd multilateral environmental agreements in this country, and, as the last commissioner of the environment told us, the implementation gap, the gap between promise and performance, is so large you can drive a truck through it in most instances, and we understand that the Americans, to pick up on the playoffs in Canada in terms of hockey, play a very good multilateral hockey game, but they also rag the puck, if you remember Danny Gallivan.... They rag the puck well, but at the same time they've got 60-odd individuals at the State Department refining domestic emissions trading for the United States, which I suspect they'd be pretty interested in springing on the rest of unsuspecting North America and the globe.

So I don't think we should lose sight at all of the efforts that we have to make in order to reduce greenhouse gases and overall fossil fuel consumption. Exploiting, converting, and burning fossil fuels are 86% of greenhouse gases.

The question is who's going to win the race. If we're in a race in terms of arriving at transition fuels, which some people say is one of the reasons why natural gas is so high in terms of price right now, and we're moving to a hydrogen economy, how fast are we going to get there, and who's going to get there first?

So I think it has to be seen in the context of the language of President Bush, who said it's not a question of debunking myths or rejecting the science of climate change. We agree, says the President, that America is moving into a carbon-constrained economy. The question is how we're going to reduce greenhouse gases and become more competitive in doing so.

So watch for a 90-day to 120-day announcement from Washington, which will talk about new technologies, new economic instruments, new incentives and disincentives, which are going to make America more competitive rather than less.

I don't think we should take our eye at all off the climate change ball. We should simply understand that Kyoto is one game. It may not be the final one.

The Chair: Mr. Pollock.

Mr. David Pollock: David has certainly shortened my response. Well said, David. I was going to say much the same.

I will maybe just turn my attention, then, to the carbon sink question that you raised. I don't think Canada should become too enthusiastic about carbon sinks and the advantage that we have here. It needs to be really science-led, and there are a lot of questions that we need to work through and a lot of policy issues that need to be resolved. Farmers can sign agreements. Farmers grow old. Farmers die. Farmers sell their fields. New uses are put to land. The question of the extent to which we want to rely on agricultural lands for carbon sinks, I think, is an issue that needs a lot more policy thinking in it. So I'm not particularly enamoured of that idea. I think we want to be very clear about genuine offsets.

When we look at the use of wind power, for example, we know what we've got. We know what the payback periods are and the investment. We know what the consequences are for the environment. So I would be much more prone to try to drive new technology through subsidies than I would be to get too excited about the potential in Canada for carbon sinks.

The Chair: Ms. Cairns, followed by Mr. Crabbé.

Ms. Stephanie Cairns: I'd like to respond from a slightly different perspective.

• 1710

I spend half of my time advising corporations on the strategies they should be using around climate change issues and how they should approach the reduction in greenhouse gases. What they are looking for is policy certainty, and there is tremendous frustration in Canada's corporate community over whether the federal government is committed to the climate change issue or not. All these issue tables were launched several years ago, and 450 people spent two years of their lives in never-ending meetings trying to come up with options for how we should address the climate change issue. There's a general feeling that there's been a loss of momentum from the energy that was put into that process.

The very worst thing that could happen right now is for companies that have been trying to be leaders on climate change—and those are companies I work with, that are trying to figure out how to diversify from being an oil-and-gas-based company.... How do I diversify over to becoming a sustainable energy company providing renewable energy and working on energy efficiency? They need policy certainty.

They have a lot of barriers right now because all the incentives are on the traditional economy side, the traditional oil and gas industry side. As they try to make the business case for how to diversify into being truly sustainable, it's very hard for them to actually make a business case to their shareholders that, despite those booming markets that we know.... That's where the market growth is right now, and yet the tax structures that we have in the country make it very difficult for them to diversify.

The worst thing we could do to those companies right now is start to equivocate on whether Canada is actually going to go somewhere on its climate change commitment. On the contrary, we need to start making the investment now in some of the long-term policy design issues. Designing a domestic emissions trading system for Canada is going to take another five years of in-depth policy research, public debate, public analysis, and getting the public on board to understand what it's about. We need to continue doing that because five years from now we will need those answers. We need to have them at that point.

Even the countries that decide to go down an emissions trading route instead of a carbon charge route—so the U.S., Australia, New Zealand—are much further down the path in terms of understanding how they will design that system than Canada, so we need to get going on it.

The Chair: Thank you, Ms. Cairns.

Mr. Crabbé, go ahead.

Mr. Philippe Crabbé: To answer the questions raised by Mr. McCallum, I would say first of all that to the extent that most of the problems of ecological taxation can be handled through neo-classical economics, there is no green economics. But to the extent that one wants to shift the emphasis from labour productivity to natural capital productivity, natural capital being a concept that many neo-classicists are not willing to accept, then there is a green economics.

On the second point, about the Kyoto agreement, I fully concur with Stephanie. What's very important is the institutional capacity to cope with the long-run climate change problem. In other words, I figure that what Parliament has to worry about is the successor to the climate change secretariat. In other words, an institution should be in place to continue to cope with the climate change issues, whatever happens with the Kyoto protocol.

As far as the third question, on public transit, it's obviously very important that we have a good policy for public transit. A lot of the emission problems could be resolved.

As far as carbon sinks are concerned, while Mr. Pollock has mentioned some issues related to scientific information, I would remind you that Canada, by signing the United Nations Framework Convention on Climate Change, has agreed to the distribution of the burden according to the ability to pay. So I think the big question in those international negotiations is whether Canada and other countries are trying to evade this distribution of burden by putting emphasis on carbon sinks.

The Chair: Thank you.

Thank you very much, Mr. McCallum.

Maybe we'll go to Dr. McKitrick. Go ahead, sir.

Dr. Ross McKitrick: On the first question, I do neo-classical economics applied to environmental issues, and I don't know what adjectives apply to that, but I suppose green might. I probably differ from just about everyone here in my response to the U.S. decision, which is that I think they made the right decision, and our response should be to copy it.

I can't see the logic behind the Kyoto protocol. It will make no difference in the climate change trajectory. It won't change the rate at which carbon dioxide accumulates in the atmosphere. It's all costs, as far as I can tell, and no benefits.

• 1715

The only puzzle for me is why the Europeans reacted the way they did. Canada may have to think this through in a hurry, because the Europeans were so galvanized on this that they are working to put together a coalition to ratify it without the U.S. Our signature is on the protocol. Part of Bush's decision involved an instruction to the State Department to get their signature off the protocol so that if it is ratified, they won't be affected.

We may find ourselves in a position where we've signed it; we haven't ratified it, but it's coming into force. In that case, we have to make a conscious decision as to whether we're going to go along with it or remove our signature.

The third point, I suppose you're asking, is where to begin. You mentioned public transit. To me, I can see sort of intuitively why people think about that. If you're going to subsidize public transit because you want public transit, that makes sense. But if you're going to subsidize public transit as a highly indirect way of getting some environmental benefit, chances are you could have gotten that benefit much more cheaply by addressing the direct emissions issue itself.

There was an earlier point about unintended consequences. Here, I think, emission taxes have the advantage in that we tend to be able to predict the consequences a little bit more easily than with standards and with command and control instruments. The horror stories of unintended consequences tend to come about through standards because what standards do is create a very obscure set of incentives.

The way people respond to those incentives can sometimes completely undermine the policy. The textbook example of that is the Endangered Species Act in the United States because that threatens landowners with the loss of the value of their investment. They have an incentive to make sure that endangered species don't live on their land, and there are many anecdotes of people who have actually destroyed habitat in order to prevent those endangered species from living on their land. Over time there has not been much of an improvement in the United States in terms of protection of endangered species. There are more endangered species now.

So economists I speak to who have looked at our own legislation coming through are very concerned that we haven't sent a clear signal that landowners will be compensated if regulation causes them to lose the value of their land. Unless that signal is clarified, you can create a situation where people have an incentive to destroy habitat and chase away endangered species if what's at stake is their investment in their land.

The final point is on constitutional issues. This one I guess is unique to Canada. We're talking about the tax system here, which is a federal responsibility, but we're talking about using the tax system to effect changes in something that's a provincial responsibility. I guess the real key there is that if you go ahead with some kind of emissions pricing scheme, as a political matter it can't be seen as some kind of back-door way for the federal government to intrude on provincial responsibilities. Presumably, that's something that can be worked out with the relevant provincial governments.

The Chair: Thank you, Mr. McCallum and Dr. McKitrick.

Mr. Nystrom.

Mr. Lorne Nystrom (Regina—Qu'Appelle, NDP): Thank you very much, Mr. Chair.

I want to first of all thank everybody for being here. This is a very important issue, and we have to somehow deal with what I think is the biggest issue in the world today—the environment and the green economy, and how to preserve the environment.

I suppose maybe I'd like to make a suggestion first of all. It might be useful to us if we could have some kind of consensus as to what the short-term priorities of the government should be in a budget context, along with long-term priorities, in the context of our very unique federation. That might be useful if we could have a consensus on a priority list.

I wanted to ask you a couple of the tougher political questions, and I certainly support doing what we can for the environment. Mr. McCallum mentioned the carbon tax. I come from Saskatchewan, and I know the internal combustion engine is the single biggest polluter, along with fossil fuels, in the world. But how do we square an idea like a carbon tax or higher taxes on fuel with the fact that this is a regressive thing for people that live in rural Canada and for farmers?

We also go back to a federal government policy where they decided to allow the abandonment of railways in rural Canada, forcing farmers to transport their grain on trucks, which means the country elevators are gone. In most cases, we now have inland terminals. Of course the trucks are big trucks; they're not little, tiny trucks. You destroy roads. You have inland terminals, and you have the use of a lot of fossil fuel. Then if the price of fuel goes up, it discriminates against the rural folks and the farmers.

• 1720

Then the other question I get—and I even got this today when I was in the region around Toronto, but I get this in Saskatchewan all the time—is on the price of gasoline at the pump. For people who make salaries like members of Parliament, it doesn't matter if it goes up ten cents or twenty cents, or even thirty cents; it doesn't really affect us very much at our income level. But for someone making $30,000 or $40,000 a year, feeding a family of four, it makes a big difference. It's the same with home heating fuel. It also makes a big difference.

And we see now certain provinces wrestling with the idea of rebates in terms of home heating fuel, and the federal government as well. So this is where you have the collision of the environmental principle with the principle of fairness and equality and egalitarianism in a society in terms of the common good. I'd like to have some advice on this from the panel, because these are questions we wrestle with all the time.

I know that's a very simple question, and it would take only about seven or eight minutes to respond, but give it a try.

The Chair: And he'll have to do it in seven minutes.

Mr. Pollock.

Mr. David Pollock: I'll make a very brief response on it.

If you go to the Netherlands and some of the European examples where they've been trying to deal with some of the incoming equality issues, you have a variety of design methods you can use. You can use exemption outright. You can then, if you want, look at thresholds at certain income levels. You can look at exemptions for certain groups in terms of usage. And then you can look at phasing in over time, so you give people an opportunity to prepare for and make alternative plans and alternative investments.

I think those three methods have all been used depending on what the particular adjustment was or who you were trying to protect in the economy. So each of them would have their own complications, but I think there are ways one can look at the threshold levels and exemptions and so on for farmers, for example.

I think the broad issue we have to keep in mind is we have to ground our economic discussion in the concept of the carrying capacity, and whether that's a particular air shed and cumulative effects in terms of economic activity that can be allowed, as you were saying, in terms of the long- and short-term planning. That's probably the largest single concept I think I would work from, and then from there try to insert economic policies within a framework of ecological footprint and carrying capacity and try to do the assessments in that way.

The Chair: Who is going to go next?

Mr. McGuinty.

Mr. David McGuinty: I can only sympathize. I think what you're really alluding to is the context within which we're calling for change.

I had a discussion with Ekos polling about a month ago. They called to tell me there was really good news on the climate change file. The number of Canadians who understood what climate change was and what it meant in terms of Canada had doubled, from 2.5% to 5%.

The price at the pump is a bit of an icon for Canadian citizens right now. One of the the interesting responses from both the Province of Alberta and the federal government, which sent a signal back that they're going to temper the effects of the open commodity pricing system we work within, was to send everyone, in the case of Alberta, or nationally those who had a lower income, back a cheque, because they believe we should soften the blow. It's a mixed message. And for many people who are pure environmentalists they believe it's the wrong message, that in fact we shouldn't be sending back rebates, we should be telling citizens that they have to consume less and insulate more.

So I don't have an answer. And the rural-urban divide you're alluding to also is a tough one. Mr. McCallum and I had a discussion and debate the other night. We're about 80% urban now, and rapidly increasing. That's not slowing down. There are no signs of it slowing down. However we respond with the population, it's going to have to be in an urban context, I think, largely. And it's not simple, for what that's worth.

Mr. Lorne Nystrom: Yes. It's both a rural-urban divide and also the poor-rich divide in terms of how these things really affect us when you have a policy where it's uniform across the country.

Does anybody else want to respond on that?

Dr. Ross McKitrick: In terms of where to start or a priority item, the environment minister has targeted NOx emissions, on which there hasn't been a lot of progress since the 1970s. I think a very practical way to start is to look at how Sweden controls NOx emissions. They use an emissions tax on power producers. The money is put into a fund and then it is given back to the same power producers based on their energy production. So the firms that produce a lot of emissions and not much power are paying a big subsidy to the firms that produce a lot of power and not much emissions. That's been a very effective incentive for the power industry. They agreed to it because they could see it was a revenue-neutral plan, but it's been very effective in getting the power industry to innovate in pollution reduction.

• 1725

As far as the possibly regressive effects of price changes are concerned, I think we do have some capacity to try to predict these and offset them with other fiscal instruments. So when the GST was brought in, for instance, and it was understood that would be regressive, an offsetting subsidy was put in place.

The Chair: Tax credit.

Dr. Ross McKitrick: But the important principle is to keep the offsetting measure that's going to deal with regressivity separate from the pricing instrument, so that you don't scramble the incentive of the pricing instrument by, for instance, saying you're going to charge an emissions tax in one city but not in another because the other city might have a lower income. If you put it on that kind of basis, then you can just predict that all your emission activity is going to move to the other city. So they need to be kept separate.

Finally, on the question of fuel prices, one of the puzzling issues here for me, with respect to Canada's obligations under the Kyoto protocol, is that we have not had any serious discussion about the magnitude of the policies that will be required here. Pamphlets that recommend people put some caulking around their windows may be helpful, but they aren't even on the map in terms of the scale of policy that would be required.

The fact that people have responded, or have found fuel price increases so difficult this year, just points to the fact that the activities that generate the emissions are valuable in their way and we can't be indiscriminate in the way we interfere with those activities.

The Chair: Monsieur Crabbé.

Mr. Philippe Crabbé: To respond to Mr. Nystrom's comments or questions, first of all, the first point, about the regressiveness of ecological taxation, is a very important issue, which means essentially that ecological taxation cannot be simply an add-on. It has to be fully integrated in the taxation system.

On the second point, about the abandonment of railways, as I understand, railways used to get huge subsidies in the past. The question today is really to find out about the subsidies the roads get. I know that in the United States, 79% of the total cost of road infrastructure and services is paid by road-related taxes and tolls. In other words, they are subsidized. By how much are they subsidized in Canada is a question we have to answer.

On the question about the price of gas at the pump, I still think there is room for rebates in the short run, but certainly in the long run those rebates should be removed. In other words, one should make sure there is a proper system of incentives so that people don't buy gas guzzlers again, for example. So there should be taxes on gas guzzlers, for example.

Finally, I have a general comment about the questions that have been discussed here. A big problem in the environmental area is that we have so little empirical information. We have a set of principles that are very useful. Many of the studies that have been done by the OECD, for example, are essentially based on simulations. We don't really have the empirical information. So there should be a huge effort, a huge investment, in that area.

The Chair: Ms. Gelfand.

Ms. Julie Gelfand: Yes, I have a quick answer.

I totally sympathize with some of the issues you're talking about, but I think we'd need to have a beer to talk about those. But in terms of short-term priorities, every year the round table puts forward some proposals as to what should happen in next year's budget. The Green Budget Coalition puts forward submissions, so there are a variety of places where you can go to look to find what we should do next year. So those we are presenting to you. The longer-term ones are more complicated and more difficult to see through or to figure out, and we do need to figure them out. But I want to tell you that we are trying to help you on the short-term priority list.

• 1730

The Chair: Thank you, Ms. Gelfand and Mr. Nystrom.

Mr. Brison.

Mr. Scott Brison (Kings—Hants, PC): Thank you, Mr. Chairman.

Thank you to all of you for giving us some insight into environmental policies, particularly as they pertain to finance issues. I think it's great that we're no longer compartmentalizing environmental policies over here and economic issues over there, because both are dealing with the management of scarce resources and should be, as much as possible, integrated in lock-step.

My first question is to Ms. Cairns. I believe you indicated that from an environmental perspective it's more effective to raise taxes on environmentally unsound practices, as opposed to lowering taxes on environmentally sound practices. I would appreciate some explanation of that, because to me it seems a little counter-intuitive in some ways.

Further to this—and I would appreciate comments from others—there's the need in Canada for massive tax reform focused on a number of areas. One is to create, in my opinion, greater opportunities for growth and prosperity. But I think we can integrate into tax reform greater incentives for environmentally sound practices. Tax reform in a revenue-neutral situation always involves winners and losers, but if we combine tax reform with tax reduction in specific areas, we can eliminate the need for there to be any losers coming out of tax reform. So if one of the goals of tax reform were to incentivize environmentally sound practices, that's something we should be dealing with. I'd appreciate feedback on that.

As my colleagues opposite did, I may as well list a few other points and get feedback from the group. I'd appreciate some feedback on how you feel the federal government does typically in Canada in terms of engaging both sub-national governments and corporate interests in environmental discussions. It strikes me that one of the failures in Kyoto was that we really didn't do a great deal of that prior to going into the final negotiations. There is little expectation or hope that we can actually meet those goals if in fact there's not an engagement with the players early on.

Lastly, if we identify—as I believe we should—alternative energy as an area of great potential growth and opportunity in Canada, particularly with the energy crisis we're seeing in various jurisdictions on the electricity side, what public policy instruments would you suggest we utilize to create growth and attract investment in those areas?

The Chair: Who would like to start? Ms. Cairns.

Ms. Stephanie Cairns: Perhaps you'll allow me to comment on all three.

My comment on the need to look at an integrated package that looks at incentives for cleaner technologies and good environmental practices, but also puts in place disincentives for the polluting technology, arises from some concern around many conversations I'm in where I repeatedly hear people say they could solve this problem if they could get a different type of capital cost allowance treatment for an investment of new technologies.

You start to think through that process. You realize that the long-term consequence of that approach will be a Christmas tree tax code, which is something we've tried to move away from, and a mainly subsidy approach on policy issue areas, which in many cases are going to continue to be issues for decades.

You are in essence missing out on the big message. For instance, to use your example of alternative energy, if you look right now at the pricing of energy in the marketplace, there is almost an inverse relationship between the price of energy and the environmental impact of energy. Coal is the cheapest form of energy we have on the market right now, and natural gas among the most expensive. Some renewables can come into market right now lower than current natural gas prices, but they're up there as well.

• 1735

You could address that in two ways. You could bring in a set of tax incentives—a consumer tax credit, for instance, and capital cost allowances to incent greater use of renewable energy. There are proposals circulating right now, as David mentioned, specifically to say that. That would be one way, and that in many ways, politically, is the easiest way to deal with the issue.

The much more visionary long-term integrated cost-cutting way, however, would actually be to start to reflect the price of carbon in the prices that we have on the marketplace. It's much more politically difficult to do, but it actually starts to send the right signals in the long run. What you need is one instrument to do it, instead of designing 100 types of tax breaks to create incentives for 100 types of different behaviour.

That's why I said we have to be thinking on both sides of the equation. In that way, we're not only creating new subsidies, but we're also saying if you continue to pollute, it will be expensive for you to do that, but we're willing to match the expense of pollution by giving you incentives to help you along the way in terms of bringing in cleaner technologies or improving your performance.

I want to make one comment on how the federal government is doing in this area in general. It is something that hasn't been raised here. You have done admirably well in inviting a green discussion to the finance committee.

One of the biggest barriers that we have in terms of development of federal policy is the fact that we have split responsibilities between federal departments in terms of who is responsible for, say, environmental or natural resource management issues and who actually has the power to bring in economic instruments.

I repeatedly encounter the following type of situation. Environment Canada is trying to figure out how to deal with their clean air agenda, but they can't really think about the fiscal instruments side, because at the end of the day they do not get to say whether or not they can use economic instruments or tax measures. All the power for that resides at finance.

Finance is not engaged. Finance does not have the same commitment to the clean air agenda. Therefore, the safe response for Environment Canada on a file like that is to go down a purely regulatory and perhaps voluntary route. They cannot be certain that if they try to go down a more creative economic instrument approach, they will actually get the support that they need across the federal government system. That's a huge barrier to us making progress in this direction.

The Chair: Monsieur Bélanger.

Mr. Jean Bélanger: Yes, I just want to talk about the aspect of not engaging various constituencies.

I believe this is one of the major differential benefits that we at the round table are trying to put into the process. What we are trying to do is to bring everybody to the table. We haven't restricted ourselves to the federal level. We have a number of provinces that are very engaged in the process. It's not a question of having everybody at the provincial level engaged, but rather to have that perspective brought in. So we've had very active participation from provinces like Ontario, Alberta, and B.C., which have been participating in the processes. We are building linkages with some of the other provinces as well.

The other part is that we are also bringing everybody to the table, from corporations as well as environmentalist groups. You talked about certain aspects of international negotiations that perhaps have been negotiated without the proper inputs. Here we are bringing in everybody at the same time and considering both the pros and cons. Then we are trying to see if there are ways around the difficulties or barriers that may be arising.

• 1740

That is why we are trying to do it. Instead of keeping on talking about concepts of fiscal reform, we have decided to take the approach of.... Let's look at three issues and how they can be resolved through fiscal reform.

Fiscal reform really brings in everything if you really consider it, because the budget brings in the various programs of all departments. So that is part of the fiscal reforms in terms of expenditures. It brings in aspects of taxation, but it also brings in aspects of capital cost allowances. You have both the carrot and the stick approach.

We're also having participants from the government in the processes not just to sign on, but to be active participants in the discussion. They can raise the questions at the time when we're looking at the various issues, rather than receiving a report and then asking the questions. There are opportunities there, and we call them interactive observers. They are full participants in everything but name—and that occurs the same way with the provincial governments as well.

So it is an aspect of ensuring that everybody who has a stake is involved.

The Chair: Thank you.

Dr. McKitrick, go ahead.

Dr. Ross McKitrick: Just on your last point, in terms of encouraging renewable or alternative energy, some provinces are going through a process of deregulating their energy industry. Among other things, that's making it much easier for small-scale power producers to sell their output. In those settings, I think you might just want to sit back and watch what the small-scale entrepreneurs do. Things like wind power are becoming more economically viable. Rather than trying to rush in and take a wild guess at what would be worth doing, there are people on a small scale starting to generate power using alternative renewables. That's often just the best way to get information about what's going to be economically viable in the long run: looking to see where that entrepreneurial activity is going.

The Chair: Thank you.

Mr. McGuinty.

Mr. David McGuinty: I'm going to be very brief. I want to zero in on your question of consultation.

In many quarters they talk about consultation fatigue when it comes to environmental issues. It's well beyond fatigue now. It's what I call consultation exhaustion. Businesses and the good people inside businesses, in many of the companies alluded to earlier by David Pollock, are fighting the good fight. Executives in those businesses are going to the CFOs and are saying they just need a little bit more money. Their foreheads are not bloody, they're callused, because the CFOs' doors are increasingly remaining closed.

Somebody made the point earlier about companies, and particularly ones in the private sector, looking for clarity and certainty from the government in terms of its overall position on many of these issues. They are becoming frustrated or are beyond frustrated. It's becoming very difficult to sell change inside that corporate structure.

Furthermore, there doesn't seem to be any clear evidence the markets are reacting favourably. Whether a company reports on a triple-bottom-line basis—it starts talking about its corporate social responsibility and environmental performance, its shareholder performance, and its economic performance—it doesn't seem to be having much of an impact on shareholder value, access to capital, credit rating, or the human resources implications—I want to go work for you because you're a good company. On the consultation side, people and organizations from every sector are exhausted.

The climate change secretariat process had 16 issue tables, 32 co-chairs, and 450 experts. I don't know how many millions of dollars later, they're asking themselves if there is going to be a national response. If there is, what is it going to be?

You've touched a really important question here on the consultation side, Mr. Brison.

The Chair: Thank you.

Mr. Crabbé, then Ms. Gelfand, and that will be it.

Mr. Philippe Crabbé: I would like to come back to the question of investment in renewable energy. It seems to me that it's not an absolute priority in the short or medium run, because renewal energy is not capable of taking over a substantial part of the market in the medium run.

One form of energy no one has talked about at all is atomic energy. In the short run, it's certainly not competitive either. The huge overruns this industry is accustomed to don't make atomic energy really competitive.

What I think is really important for green economics is to focus on environmental measures that affect capital turnover in any industry.

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There is huge turmoil currently both in Canada and the United States in the area of electricity production because of deregulation, and there is a huge opportunity to harmonize environmental regulation. Mrs. Whitman, the EPA administrator, was supposed to do that for the U.S. market, and then President Bush backed off from that. I think there is a lesson for Canada. There is a fantastic opportunity to harmonize environmental regulation of all the emissions in that sector, which is so important in terms of emissions. In the U.S., the electricity sector is responsible for roughly 30% of the carbon dioxide emissions, while in Canada it's about 15%. But there is an opportunity there that should not be missed.

The Chair: Thank you.

Ms. Gelfand, a final comment.

Ms. Julie Gelfand: We suffer from consultation exhaustion as well, and we need to be very careful that consultation isn't an excuse for inaction.

Many times we're consulted, and many times we come in agreement with industry, such as Pembina has or we have with the species at risk and the mining association or pulp and paper, yet the government doesn't necessarily move even then.

The second thing I want to say is to help enhance renewables we could create Renewable Energy Canada. We have Atomic Energy of Canada trying to promote the nuclear industry; we could create Renewable Energy Canada tomorrow to help us push renewable energy.

The Chair: Thank you very much.

On behalf of the committee, I want to thank the panellists. It was great, very interesting.

As you know, a nation never really excels until it faces the truth about its challenges and choices, and certainly you've outlined some of the challenges and choices we face as a committee and indeed as a government.

I do want to leave you with another challenge. There's no question that you'll be reinvited to appear in front of this committee, and this time we'd like to focus on exactly what the priorities are. Some members have asked that particular question, and I think you need more time to answer that. So expect an invitation before the summer recess.

Members and panellists, thank you very much.

The meeting is adjourned.