FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, May 31, 2001

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[English]

The Chair (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I would like to call the meeting to order and welcome everyone here this morning.

Because of the great success we had the last time you were here, and because of the important issue that we're dealing with, namely the environment, we felt as committee members that a second round table should be held. We're very impressed, obviously, with the quality of input we received.

Another reason we're doing this second round table is because I'm sure more ideas will be shared with us, and it does occur before the recess of Parliament, which means we'll have all summer to think about what you say. But if you do get some phone calls during the summer as we try to clarify some of the issue, don't be surprised.

One of the things I can in fact promise on behalf of the committee is that the environment will also play a very important role in our pre-budget consultations coming up in the months of September, October, and November, and so we will be looking to you as experts to give us further input during that period of time.

Having said that, I want to proceed right to the presentations, and once again, thank you.

We have representatives from the Green Budget Coalition, the National Round Table on the Environment and the Economy, and the Clean Air Renewable Energy Coalition, as well as some professors who are appearing as individuals.

You've been here before, and you understand how this committee functions.

We'll begin with the Green Budget Coalition: Mr. Robert Hornung, Mr. Barry Turner, and Ms. Angela Rickman. Welcome.

Who's going to start?

Mr. Barry Turner (Director, Governmental Affairs, Ducks Unlimited Canada; Green Budget Coalition): Good morning, Mr. Chairman. Thank you very much. It's nice to be back on behalf of the Green Budget Coalition.

I wear two other hats as well. One is chairman of the Canadian Association of Former Parliamentarians—and you will all be potential members of our association someday when you decide to leave this institution. But secondly, I'm also director of government relations for Ducks Unlimited Canada.

Today, the Green Budget Coalition wants to re-highlight, as you've indicated, a couple of issues that are important to us.

As you may recall, the coalition is composed of 16 national organizations, and it appeared here about a month ago. I'm filling in this morning for our quarterback and leader, Julie Gelfand, from the Canadian Nature Federation.

There are three key elements of the Green Budget Coalition submission for the next budget: one, protecting and conserving our national heritage; two, healthy communities; and three, clean air and climate change.

I'm going to make a few very brief comments about the needs we see for our natural heritage, in particular the need for expenditures on our very powerful national symbols, the national parks of Canada, and I believe the Prime Minister has attached a very high priority to new national parks and the integrity of existing ones.

I think some of the economic benefits with respect to national parks are probably clearly understood. I will just highlight them quickly. The parks of Canada get about 25 million annual visitations and contribute about $2 billion to the GDP annually. The parks are responsible for 50,000 full-time jobs across the country. Foreign tourists spend $425 million every year in our parks. Every dollar invested in parks generates $5 in economic activity throughout the country.

But the parks are under great stress: 80% of them are under ecological stress; 70% of our national parks visitors facilities are at risk; and two-thirds of our park assets are in poor to fair condition.

The Green Budget Coalition is calling for expenditures over the next five years in the area of the following: $240 million to fund the negotiation, creation, and operation of eight new national parks and four new national marine conservation areas; and $328 million to implement the recommendations of the ecological integrity panel and to reverse the decline in park ecosystems through science and partnerships.

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I'm going to ask Angela Rickman, from the Sierra Club of Canada, to talk about healthy communities under the Green Budget Coalition.

Ms. Angela Rickman (Deputy Director, Sierra Club of Canada; Green Budget Coalition): Good morning. Thanks for the opportunity to present again.

The Sierra Club of Canada is a member of the Green Budget Coalition and supports the package as a whole. I'm here today, however, to speak on one program area: healthy communities.

The healthy community section of the green budget area had identified three main concerns. One was the adoption of a pollution tax to reduce toxic emissions. The second was a fund to reduce reliance on chemical pesticides and fertilizers, to reduce both farmers' reliance on these inputs and those toxics being incorporated in our food. The third, which I'll focus on and which we've identified within our coalition as a priority, was the Clean Canada Fund.

The Clean Canada Fund will effectively create a mechanism for the cleanup and remediation of federal toxic waste sites and for the relocation of communities at risk in other sites.

We've estimated that the cost is about $540 million over five years for the contaminated sites working group—and I'll speak more on that in a second—and a special allocation of $2 billion in the 2002 year for relocation and remediation, relocation of communities and remediation of contaminated sites that have been identified both through the federal contaminated sites inventory and other identified sites such as the Sydney tar ponds.

The first phase, the $540 million, would go to address the Treasury Board inventory, which is an ongoing process. We're hoping that at the end of the Treasury Board inventory, which they estimate will be completed next year, there will be a public review period to help set priorities among the sites that have been identified by the various federal departments, and then that should be referred to the contaminated sites working group, which has been established for some time but is lacking funding.

So the $540 million over the next five years would go to fund the contaminated sites management working group, to identify priorities within federal departments and to identify remediation timelines and cleanup strategies, as well as engaging in public comment.

The Clean Canada Fund is an account that we're hoping will be established with $2 billion in start-up capital to begin the cleanup of the priority sites that have been identified through the federal program and sites that have been identified that aren't necessarily federally owned or managed.

This $2-billion fund would be replenished through a tax levy on sectors that have profited from the creation of the contaminated sites—for example, mining operations. Additionally, the fund could be replenished through moneys regained through settlements with polluters that can be identified, or through the sale or lease of properties that have been remediated.

Working towards this program is an investment not only in current and future generations of Canadians, but because Canada has recently signed and ratified the Stockholm Convention on Persistent Organic Pollutants, many of the contaminants that are found in contaminated sites across Canada and along the DEW line fall under the convention obligations. Canada has committed $20 million internationally to assist with capacity-building in developing countries to help them deal with their stockpiles of obsolete pesticides and persistent organic pollutants.

So there's a definite need for the development of best available technologies for cleanup of contaminated sites and for dealing with both remediation and the elimination of these pesticides. So moving forward on this particular initiative will not only help Canadians, but it will also help Canadian industry abroad.

I'd be happy to answer more questions later, but I'll move along to Robert Hornung.

The Chair: Mr. Hornung.

Mr. Robert Hornung (Climate Change Program Director, Pembina Institute; Green Budget Coalition): Thank you, Mr. Chair.

The Green Budget Coalition has proposed measures to reduce greenhouse gas emissions and clean the air in four areas: buildings, transportation, electricity production, and industry. You've received descriptions of all these measures in our previous visit, so I won't touch on all of them. I'll focus only on buildings in this presentation.

The key action to reduce greenhouse gas emissions and clean the air in the building sector is to improve energy efficiency in buildings. Study after study has shown that our residential, commercial, and institutional buildings are all extremely inefficient in terms of their energy use, and that it's both technically possible and cost-effective to improve the energy efficiency of our buildings by anywhere between 10% and 35%.

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Given that those opportunities exist, why is this not happening? It's because there are barriers. There's a need to support availability of initial capital that can be used to invest in these energy efficiency retrofits. There's also the issue of the payback period. While these measures are cost-effective over the life of the building, they pay back less quickly than some alternative investments. Therefore, investment does not go there.

We believe the federal government can build on some successful existing local programs to make the energy efficiency of buildings a national success story. The Green Budget Coalition is calling for three specific measures in this area.

First is to establish a national better buildings fund through a one-time investment of $250 million. This fund could do two things. It could provide loans to building owners for energy efficiency feasibility and design work or for covering the costs of retrofits, or the fund could simply serve as security for investors looking to obtain funds elsewhere.

The fund is a one-time investment and replenishes itself through interest payments paid on the loans. Those payments come from the energy savings generated or through fees paid to secure the loans.

This builds on the example and experience of the Toronto Better Buildings Partnership, which has demonstrated three things. Most of the money taken from that fund has been used for loan security, not for investments. Private lending institutions have been willing to lend the money once the design work is completed. That fund has also been able to leverage private investment at a rate of 5:1, and it has developed a rate of return for the City of Toronto of 25% annually. It's a very successful initiative, which we would like to see replicated at the national level.

The second measure is grants for energy efficiency retrofits of homes. Essentially, we would like these to be performance-based. We now have a rating system to guide the energy efficiency of homes. We believe that if citizens get their homes audited for energy use and can demonstrate both the level of pre-retrofit energy efficiency and afterwards a significant improvement in energy efficiency, according to the Natural Resources Canada ratings system, then they should receive a grant to cover about 20% of the expense of that retrofit. On average, we would estimate that would be about $800.

Finally, we'd like to see a national, community-based home retrofit advisory services program established. These exist in a small number of communities across the country, and they are very successful. In Ontario, for example, over 80,000 homes have received an energy audit, and 80% of those homes have subsequently decided to invest in energy efficiency retrofits. On average, those investments have averaged about $1,300 and have produced energy savings of 10%. We would like to see similar initiatives set up in a thousand communities across the country.

Thank you very much.

The Chair: Thank you.

Now we'll hear from the National Round Table on the Environment and the Economy: Dr. Stuart Smith and David McGuinty.

Mr. David McGuinty (President and Chief Executive Officer, National Round Table on the Environment and the Economy): Thank you very much, Mr. Chair.

This morning, I will pick up very briefly where we left off at the last meeting. Thank you again for the invitation to come back.

I understand you're going to be holding pre-budget hearings later in the fall. So instead of speaking about the five themes the round table is making recommendations on for the next budget, we will simply table with you a couple of initiatives we're pursuing. Then I'd like to turn it over to Dr. Stuart Smith, who's going to speak in much greater detail about the concept of emissions trading: what emissions trading is, what it means for Canada, and why it's important for us to begin addressing it aggressively.

I want to remind committee members that the last time we were here, we spoke about an ecological fiscal reform initiative. We were trying to show that a better alignment between expenditures, incentives, and disincentives—at the national level, the provincial level, and the municipal level—has not really occurred. We're now exploring this concept of ecological fiscal reform—not tax reform, but fiscal reform—in three key areas, to show that perhaps we're not getting enough bang for our buck in terms of environmental improvement. I want to table that first.

Secondly, I want to remind members that the round table is now pursuing a national indicators project, which was announced in Budget 2000. We are now looking to invent a small suite of environmental and sustainable development indicators that would complement, not supplant, the GDP.

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Last Friday, the minister attended a breakfast meeting on Toronto's Bay Street. It was organized by the round table and its members. We were expecting 250 people, so we were surprised and delighted when we ended up turning away 250 people, after 650 people sat down.

This means there's a huge appetite on Bay Street. Of course, it wasn't just business officials we were targeting: all sorts of constituencies came to hear more about this initiative. I would also commend to you the minister's speech of last Friday morning and his own views on what these new indicators could do for Canada and why it's so important to pursue them.

When Stuart and I huddled with the members of the round table to decide what would be best to share with you this morning, given the need for an emissions trading system that we see from our own work, we decided to speak to you about that in more detail.

So that's all I'll say, Mr. Chair. I'll turn it over to Dr. Smith.

Dr. Stuart Smith (Chair, National Round Table on the Environment and the Economy): Mr. Chairman, members of the committee, it's a pleasure to be with you again, and a particular pleasure to be here in association with our friends in the Green Budget Coalition.

I want to talk to you today about emissions trading in a general way, and about how it can harness market forces in favour of the environment. We all know that sometimes market forces seem to operate against the environment. As you know, the environment is rarely costed internally; and as a consequence, market forces seem to be the enemy of the environment. But they don't have to be. With a little ingenuity, we can harness market forces to actually benefit the environment.

One of the various instruments is known as emissions trading. I want to put that in front of this committee for your consideration, and I hope that at the end of the day you'll support the notion. We need to do much more modelling of the various emissions trading systems that Canada might adopt, particularly with respect to greenhouse gases. That way, when other countries become actively involved in this business of trading emissions and credits, we'll be ready with our own system that meets Canada's needs.

The other aspect I hope you'll support is encouraging the government to recognize early trades by people who have anticipated an emissions trading system. A number of Canadian companies have participated in emissions trading deals, both within Canada and internationally.

At the bottom of our handout is our suggestion of a way for us to provisionally recognize these early trades. Basically, it just says that as long as the early trades meet the criteria that will eventually be established, the trades should be recognized. The companies should not be punished for the fact that they did these trades early.

It's not a dangerous precedent, and it would certainly give some heart to the people within those companies who have been pushing for trades and who now find themselves asked by their CEOs, “Why are we doing this if the government isn't even glancing in our direction?”

Let me just explain about emissions trading systems. As most of you know, the idea of an emissions trade is that a standard is set for a nation, or for an airshed or a watershed. Within that standard, some companies and individuals will be able to do better than the standard, and there are others who will not be in a position to do as well as the standard.

Those who fail to meet the standard would be required to buy credits, which would then be gained by those who actually beat the standard. So companies in a position to make investments to do much better than the standards can then benefit by selling credits to others.

You may say that perhaps those others are just too lazy to meet the standard. But sometimes they're in a position, for instance, of having a plant with only two or three more years of useful life; so it would not make sense to make major investments to change that plant. But if you allow these people to buy credits from those who have more modern plants and can improve them to beat any standard that's set, then society as a whole benefits, because the total amount of pollution goes down.

What we find is that for every dollar invested, we've had far more benefit than we would have had without a system of trading. So you get the most benefit using market forces, the most benefit for every dollar spent.

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However, it's important that this be done within the same airshed or watershed. If somebody reduces the smog in Los Angeles, it obviously doesn't do me much good in Toronto. So we can't have trades between Toronto and Los Angeles on matters such as smog. Trades have to be within the same area, or people will perceive this as politically and scientifically unacceptable.

But in the case of greenhouse gases, there is only one airshed: the whole globe. It doesn't matter whether the improvement occurs in China or in Ottawa, the global benefit is exactly the same. Therefore, any system makes sense that will allow dollars to be spent where they do the most good. So the nations of the world have agreed to have an international trading system between them, and Canadians will obviously be able to participate in any international system.

As well, companies in countries with their own domestic systems can get further efficiencies from being able to trade among themselves. But if we compete with other countries and yet we do not have our own system, our companies will not get those efficiencies. So it's important for this committee to consider the fact that to remain competitive, we will need to have our own domestic system, in order for our companies to be able to compete with others.

Theoretically, you could always simply use command and control, and if Canada fails to meet its obligations, our government could buy credits on the open market. But in that case, our companies would miss out on the benefits of buying and selling credits among themselves.

Now, lest you think it's an easy matter for us to adopt a system on a moment's notice, I've included a paper of a speech I'm giving in Calgary next week. It tells you something of the complexities of setting up a system in Canada. What date do you choose as a baseline for giving out credits and permits? How do people earn these credits and permits? Do you ask each province to meet a certain target, as the European Union has asked each country to meet targets, or are the targets for the country as a whole?

More importantly, will you auction off credits and permits, or will you just give them out? That's not an easy question. Just giving them out seems fair, but on what basis do you give them out? That could mean you'd give them to companies that pollute, while those that don't pollute might not get them. Well, one day these permits could be worth money, so that would be a windfall.

There are many serious questions, and the only way to settle them is by computer modelling. We're urging the government to invest now in the proper preparation, so that we're ready to go. In the meantime, we're asking for recognition for companies that have already done trades, that have become familiar with the idea, pioneers. Rather than leave them out on a limb, as they are now, we ought to give them at least some minimal recognition.

I'll be glad to answer any questions later, Mr. Chair.

The Chair: Thank you very much, Dr. Smith, Mr. McGuinty.

Now we'll hear from Robert Hornung of the Clean Air Renewable Energy Coalition.

Mr. Robert Hornung (Climate Change Program Director, Pembina Institute; Clean Air Renewable Energy Coalition): I very much appreciate the opportunity to be here today on behalf of the Clean Air Renewable Energy Coalition. With me is Marlie Burtt, the director of taxation for Suncor Energy.

Our two organizations were the founding members of this coalition, which now has 17 members. It's a unique group that brings together corporations like Dofasco, B.C. Hydro, Shell Canada, and others, along with environmental groups such as Pollution Probe, the Toronto Environmental Alliance, and the Federation of Canadian Municipalities. It's the first time, I think, that such a cross-section has been seen.

What has brought this unique coalition together? A desire to see the federal government put in place two short-term plans to help to kick-start the renewable energy industry in Canada.

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They're short-term actions. Building on what Dr. Smith said, all the members of our coalition actually believe that to deal with issues like climate change and air pollution, we will need to put in place an emissions trading system. We also recognize there will be time required to move toward it. We can't wait that long to start moving on renewable energy.

You should have received a copy of a background brief related to our proposals, as well as a copy of a presentation deck that I will be working through right now.

Why have these forces come together to talk about renewable energy? It's because we believe renewable energy makes sense from a couple of perspectives.

Environmentally, renewable energy obviously has a key role to play in helping us to address a wide range of environmental problems, particularly air pollution and climate change. Renewable energy can help, and substitute for, the primarily fossil fuel energy sources that are contributing to those problems.

From an economic perspective, renewal energy sources are the fastest growing sources of energy in the world today. Throughout the 1990s, solar energy and wind energy production around the world grew at rates between 20% and 30% per year. Admittedly, they're starting from a small number, but they're moving in the right direction.

Shell Services International has estimated 50% of the world's energy needs in the year 2050 could be met by renewable energy sources. Under this scenario, it makes economic sense for Canada to pay attention to these energy sources and to capitalize on the investment opportunities, future export opportunities, and job creation opportunities associated with the new cutting-edge technologies.

Why is federal government action needed? Why has this group come together? There are two reasons. We have a very strong sense that Canada has fallen behind in the development of these energy technologies for the 21st century.

I'll use a couple of examples, such as wind power. Canada has 140 megawatts of production capacity of wind power. The United States has 2,800; Spain has 3,500; and Germany has 6,500. That's not all. Countries as small as Denmark, the Netherlands, and Sweden all have significantly more wind power production than Canada.

Why is that? In those countries, governments have put in place policy frameworks to stimulate and facilitate the development of these energy sources. The policy frameworks have focused both on increasing demand for these renewable energy sources and facilitating the expansion of supply of these sources. The policy frameworks have taken the form of regulatory initiatives, fiscal initiatives, and others.

Our group is firmly committed to the use of market mechanisms. The proposals we're putting forward here are not regulatory in nature. They are meant to influence market signals to encourage the development of renewable energy.

There are some challenges to overcome that are why these initiatives are required. There's currently a low demand for renewables. There are three key reasons.

Most consumers don't actually have the opportunity to purchase renewable energy. It's not being sold. Producers of renewable energy have a difficult time getting it into electricity grids, and renewable energy in some parts of Canada is currently more expensive. In other parts of Canada, for example, in Alberta, where we're seeing significant price spikes in the electricity sector, renewable energy is right now completely cost competitive with traditional fossil fuel sources.

There are also barriers to investments and supply. Again, cost is an issue. The economics for some of these facilities are marginal. Again, there is a risk, without having some sort of policy certainty looking out into the future, of making an investment you're going to be stuck with for the next 10 to 20 years.

The two actions we propose are, first, a consumer green energy credit to stimulate demand for renewable energy sources. Secondly, we would like to see an incentive put in place for producers that could help to increase supply. In that regard, we've actually proposed three different options, each of which has strengths and weaknesses that we'd be happy to discuss in questions.

One is the broadening of the Canadian renewable and conservation expense to cover all capital costs associated with the renewable energy investment. Second is to provide investment tax credit treatment for capital spending related to renewable energy. The third is the provision of either a production tax credit or a production rebate for entities that are non-taxable.

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I'd like to repeat, again, we see these as short-term measures. In our view, an emissions trading system will put a price on carbon. The price should provide a market opportunity for low carbon energy sources like renewable energy. We think the market signal will provide a strong boost to the development of renewable energy.

In the interim, when we're already falling behind, we need some initiatives put in place on a short-term basis. The consumer green energy credit is not only designed to stimulate demand, it's also meant to engage and educate the public on renewable energy and its environmental benefits. Action on the demand side is needed. We've seen and experienced in other countries that if you focus only on supply, you end up having a growth spurt in terms of the amount of production capacity built. In the end, if you don't have the demand for the production over the long haul, it's not sustainable.

We're proposing a credit that covers a portion of the premium cost of green power. For consumers, we're suggesting 2¢ to 3¢ per kilowatt hour. For commercial, industrial, and municipal users of electricity, we're suggesting 2¢ per kilowatt hour. We expect, in this three-year time period, to see a maximum of 2% participation of the various entities. We'd expect the total cost would be somewhere between $104 million and $134 million a year for the three-year period until emissions trading comes into place.

On the producer side, we believe any of the proposals we've put forward would provide enough policy and fiscal certainty to stimulate more renewable energy production. The three options have a variety of fiscal implications for government. When we estimate the cost, it's anywhere between $30 million and $90 million per year for this three-year period.

What would be the result? We believe these initiatives would help to kick-start the renewable energy industry in Canada. We believe it could increase, for example, wind energy production in Canada by more than 300%. It would create new jobs. It would help us deal with environmental problems. We've estimated we would reduce greenhouse gas emissions by 1.25 million tonnes annually as a result of these initiatives. Perhaps most importantly, these initiatives would help to position Canada to compete in the global energy economy of the 21st century.

I'll use one example to highlight this. In the United States, the Bush administration has come out with a continental energy policy that many would describe, and I think accurately, as not an environmentally friendly document. Nonetheless, I think it's interesting to note, even though the document emphasizes supply over conservation and fossil fuels over renewables, it does include proposals for incentives for the production and distribution of renewable energy that far exceed anything we have in place in Canada.

The Bush administration is proposing far less than what has been done in other countries. It's why we're falling behind. It's why this unique coalition has come together to call for action.

Thank you very much.

The Chair: Thank you very much.

We'll now hear from Professor Philippe Crabbé from the University of Ottawa.

Mr. Philippe Crabbé (Individual Presentation): Ladies and gentlemen, I have six proposals for “eco-taxes”, three of which are based essentially on the 1997 Technical Committee on Business Taxation, from a report done at the request of the Department of Finance. Of these three, the first one is the most detailed. The first proposal is the following one.

The current excise tax on motive fuels that is on gasoline and diesel should be replaced by a broader-based environmental tax designed to, first, reduce the negative environmental impact of smog, for example, and, second, raise equivalent revenues. The advantages of this tax will be the following ones.

Competitiveness is not an issue because the tax exists both in Canada and the United States. It's already higher in Canada. By broadening the base, essentially one could lower it on oil. It's already a regressive tax, which is a feature of old environmental taxes. Excise taxes on fuels are the most common environmental-related tax in the OECD countries and raise the greatest share of revenue among the environmental taxes in those countries. It would complement measures recently taken by Environment Canada on clean air and the ones taken by the EPA, from which Environment Canada's measures are replicated. It might be politically astute if it results in lowering taxes on oil while oil prices are quite volatile. It would be timely while electricity market deregulation kicks in. It would increase CO₂ as a pollutant, as envisaged by the EPA initially, with Environment Canada following suit if and when climate change policies are in place.

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The design features of this tax would be the following. It would require increasing taxes on coal and to a lesser extent on natural gas with regard to the current taxation on oil and possibly decreasing taxes on oil in order to take the respective environmental impact into account. It could be extended to all forms of energy consumed in Canada, including imports. For example, it would be extended to bio-fuels, such as ethanol, and to electricity. It will be extended to non-POP industrial pollutants as well, to the extent that their environmental damage can be assessed.

It would require provincial consultation to avoid a province's clawback of the possible tax reduction on oil. It will require consultation with Environment Canada in order to harmonize it with CEPA initiatives. It could be introduced as a pilot project, using at first relatively low tax rates while at the same time offering tax cuts in other areas. Its environmental and revenue performance should be assessed after a trial period.

Potential criticism. The new tax could be criticized as a carbon tax in disguise. The reply to this criticism is the following. It's definitely not a carbon tax if non-POP toxics are included, and even if non-POP toxics are not included, the environmental damage would be assessed more on the smog impact—SO_x, NO_x, VOCs, carbon oxide—than on climate impact carbon dioxide. So that's the first proposal.

The second proposal is to equalize the marginal corporate tax rates. The current marginal corporate tax rates are lower for some highly polluting industries, such as mining, oil and gas, and chemicals. The current situation is tantamount to a subsidy to polluting industries. Broadening the tax base as suggested by the technical committee report would allow for the elimination of this negative subsidy.

The third proposal is that all federal subsidies with perversive effects on sustainable development, such as mineral and oil and gas pre-production development incentives, should be removed. The justification for this proposal is the implementation of full-cost pricing by removing a policy failure.

The fourth proposal is to link the green infrastructure transfer for waterworks to an efficient pricing scheme for water. This is tantamount to water demand management.

The fifth proposal is that subsidies to cleaner fuel systems, accelerated capital cost allowances on older polluting equipment, and SR and ED tax credits are to be encouraged for electric utilities. Incentives to prolong the economic life of polluting assets, if any, must be removed.

What is the justification for this proposal? The taxes that may be the most environmentally beneficial are the ones that affect business decisions about the long term. The most important business decisions are the ones that concern long-lasting capital investment, like the ones that will have to be made by deregulated electric utilities in the near future. Electric utilities' capital has a turnover time of about 40 years. It is crucial that the new investment take into account pollutants that affect human health and planning.

Finally, the sixth proposal, energy exports to the U.S. should be clear of any form of subsidy, whether at the exploration, development, extraction, or transportation phase. The justification is since the U.S. energy policy does not include the management, it is crucial that the U.S. pays at least the full cost of its energy imported from Canada.

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Let me conclude with a few general considerations. Whatever proposal you decide to adopt, we have to remember that eco-taxes are good at improving the quality of the environment but not at raising revenues. This is true for all taxes. The broader based the eco-taxes are, the more revenue they will generate.

At the same time they must be environmentally targeted in such a way that improvements in environmental quality are measurable and traceable to the eco-tax. Their proceeds should go to general revenues rather than be earmarked to a special environmental fund. Eco-taxes are regressive and therefore require complementary income tax rebates or lump sum transfers to lower-income households, especially in rural areas, if smog is the target.

Eco-taxes to be neutral require shifting to some extent the tax burden from other assets, such as labour or physical capital. Eco-tax should not be designed to achieve macroeconomic objectives, such as higher employment. As evidenced in the OECD and other literature, eco-taxes require wide public support and therefore wide stakeholder consultation. Therefore, the next federal budget should introduce the principle of eco-taxation, kick off the process of public consultation, and leave specific measures and their fine tuning for later. This would have the advantage, among others, of allowing the synchronization of eco-taxation with climate change policies due in 2002.

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

We will now hear from Professor McKitrick. Welcome.

Dr. Ross McKitrick (Individual Presentation): First of all, it would be helpful if everyone had a copy of the handout I've supplied.

The Chair: Yes, they do.

Dr. Ross McKitrick: I'd like to refer to the graphs in appendix 1, which begins on page 5.

I want to begin by setting out a bit of context. Then I'd like to pick up on a general point that was unfinished from our discussion the last time and add an additional proposal to the ones Professor Crabbé has already mentioned.

The two graphs on page 5 illustrate the point that there's a complicated relationship between economic growth and environmental quality. Oftentimes, if economic growth is bad for the environment, that tends to be in a low-income setting, whereas in many cases in higher-income settings, economic growth can actually be beneficial for the environment.

The top graph shows organic water pollution emissions per worker graphed against real income per capita for 65 countries between 1983 and 1994. You can see that is borne out there, increasing pollution with income at low-income levels, but in the high-income group that relationship reverses.

The second graph shows total suspended particulate concentrations in major cities, again graphed against real income per capita. There's a striking downward relationship there that as you move into wealthier countries, the air quality in major cities tends to improve.

On page 6 is a time series graph showing several measures from the United States. The top two lines, the dark ones, show real GDP and real consumption. Everything is indexed to begin at 100 in 1947. So over the post-war years the U.S. economy expanded about sixfold, but you can see that the air contaminants, which are also measured there, have not moved up in step. The line marked with the squares is the nitrogen oxide emissions measure. That increased up until the mid-1970s and since then has been more or less constant. The other air contaminants are either at or below the levels they were in 1947. What this illustrates is that it's possible to more or less decouple economic growth from pollution emissions.

On page 7 is some more local information. These are air pollution concentrations over time for the city of Toronto. Some of these measures begin as early as 1962, and everything goes up to 1997. You can see that sulphur dioxide concentrations dropped dramatically up until the mid-1970s and have remained fairly low since then. Total suspended particulates have also declined quite a bit. Measured ozone levels from the mid-1970s have declined somewhat, but more slowly. A measure called the coefficient of haze has not improved a great deal since the early 1970s.

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On the next page, NO_x concentrations have moved up and down but haven't shown much improvement since the mid-1970s.

Figure 4 shows data from the mid-1980s, which is the earliest I could find. The top line, the darkest line, shows what is called road vehicle volumes, the total amount of kilometres driven by the vehicle fleet. That has moved up fairly steadily about 40% since the mid-1980s.

You'll see that the vehicle-related emissions, carbon monoxide VOCs and NO_x, have not increased in step with the amount of road vehicle volumes.

So all of that allows me to make a couple of general points. The first is that Canada, the United States, and other wealthy nations have been reasonably successful in controlling pollution in recent decades.

They've done so using relatively unsophisticated command and control policies. The problem is that in the future these are going to be less and less effective and they will accelerate the economic costs of environmental protection. So it's very important that we begin to look at more efficient policy instruments, such as what we've been talking about today.

Finally, in terms of the context, I would remind you that pollution in Canada is a challenge, but it's not a crisis. In motivating economic instruments, since there will be suspicions out there about whether this is just a cover for, say, higher taxes, it's important to have a realistic picture of what it is you're trying to accomplish so as not to generate skepticism about your motives.

I won't go over everything in the second section. There was some discussion last time about what general rule or general principle would guide the development of environmental taxes.

The key is that you want to put a price on something called “marginal damages”. This is a term we apply to a theoretical notion of the total amount of people who are fully informed about the effects of the pollution and would be willing to pay to reduce that pollution by one unit, if there existed a market for them to go and do so.

People might by annoyed by some pollutants, but they wouldn't necessarily be willing to pay much to have them reduced. In different locations marginal damages are going to be different. On a very hot day in Toronto, people might be willing to pay a great deal to reduce ground-level ozone. On a cold day in Dog Creek, British Columbia, people probably wouldn't be willing to pay much, because it's just not an issue there.

As Professor Crabbé pointed out, pollution taxes should be considered primarily for their environmental effects and not for their revenue potential. If a pollution tax were extremely effective, it would generate no revenue at all, because it would cause all the pollution sources to stop generating the emissions. If that were the case, we wouldn't want to recommend that you reduce the tax rate in order to increase the revenue you're getting from it.

Finally, a key step in terms of the background research is that you need to have some numbers on what I've called marginal damages. This is an estimation technique that Canada has in fact a lot of expertise in. Ironically, a lot of the expertise has applied in the United States, where these kinds of estimation exercises are much more routine.

Moving on to the third section, you asked for some suggestions of policies to look at. I would suggest, though, that one of our continuing concerns is the effect of motor vehicles, especially on urban air quality. In recent years Ontario and B.C. have both introduced mandatory emission inspections.

For various reasons, which I won't go into, these are extremely ineffective policies. They are expensive and I just can't see that they accomplish anything. Other people have talked about putting taxes on new gas guzzlers, which is another option. As far as I can tell, all that would do is induce people to shift to used gas guzzlers, which would be even worse.

Mandating more and more expensive emissions control devices on new vehicles has the downside that it encourages people to keep their vehicles longer. It raises the cost of replacing the vehicle stock. One of the things that has happened in North America is the vehicle fleet is aging. Older vehicles become dirtier very quickly. That's the downside of using pure technological requirements.

An option I would prefer would be to put a direct emissions tax on motor vehicle use. It wouldn't be as complicated as you might think.

• 1155

The emissions tax would consist of three components. The first would be an emissions factor specific to the vehicle, the second would be the amount the vehicle has been driven since the last time it was licensed, and the third would be a factor representing the local marginal damages per thousand kilometres from that vehicle class. This information is readily available. The kilometres driven is always available every time the vehicle is re-licensed, so presumably the information would be at hand to implement this kind of fee.

This would replace the existing vehicle licensing fee so that vehicles that are fairly clean and that aren't driven very much would pay very little to renew their licence each year. The owner would pay more to renew the vehicle licensing fee for dirty vehicles or vehicles that are driven quite a bit.

Putting the tax on the emissions directly would have a number of effects on the vehicle fleet. One of them would be that naturally those who drive a lot would either pay a lot or they would be encouraged to buy low-emission vehicles. Another effect would be that the high-emission vehicles that are on the road would be reallocated through the used car market into the hands of people who either live in low-damage areas or who drive very little.

It's not actually a problem that people have dirty old pick-up trucks still on the road if they live, say, in rural areas where there are hardly any vehicles or if they hardly ever use the vehicle. A bigger problem are the cars of medium quality that are driven quite extensively. It's that type of user whom we want to encourage to either move up to a cleaner vehicle or find ways of reducing their vehicle use.

In addition, if all vehicle owners know they're paying per kilometre, they would have a continuing incentive to economize on their distance travelled, and that may translate into increased use of public transit or the elimination of some of the more frivolous car trips.

In terms of administration, as you probably know, this would require a great deal of coordination among Finance Canada as well as Transport Canada, possibly Environment Canada, and the provincial governments. So I realize there are administrative issues there.

In thinking about environmental taxes generally, I would say you are looking at some work involved in coordinating with provincial governments and with the other ministries that have a stake in the related environmental issues.

So I'm happy to answer any questions.

The Chair: Thank you very much.

Before I go on to the question and answer session, I'd like to have a point of clarification vis-à-vis your chart on page 6 where you talk about U.S. air pollution emission versus economic growth. And this is obviously only about the United States.

Dr. Ross McKitrick: Yes, although I'm not sure the Canadian numbers would look a lot different; they'd be a little different.

The Chair: I'm not even worried about that; I'm talking about the global issue. In the 1970s, if memory serves me correctly, you had a lot of production activity, pollution-generating activity, being pushed offshore in the United States that other countries took on. I'm just wondering, if you were to do a global perspective, would this in fact bear out. In other words, when you saw, let's say, economic growth in Singapore, Thailand, and other countries going up, was the pollution index actually going down?

Dr. Ross McKitrick: There is not enough long-term data to definitively answer your question. There is a lot of cross-sectional data.

In terms of industry relocation, there have been quite a few studies that have looked at whether or not variations in environmental regulation cause industries to relocate. If it's happening, it's not happening enough to show up in the data. The reason is when companies choose where to locate, their big cost items are going to be labour costs, capital costs, energy, and taxes. Environmental compliance tends to be somewhere around 2% or 3% of costs. So firms are more likely to make their decisions based on the big cost factors and live with whatever environmental regulations they find where they're located.

Studies have looked at the environmental performance of multinationals in other countries...for instance, a major survey done in Indonesia a few years ago. It was at a time when there was no effective pollution regulation in Indonesia; there were laws on the books but there was not staff to enforce them. And it was found that the foreign-owned companies, on average, were actually operating more cleanly than the domestic-owned companies. This meant the multinationals that had come in brought with them some of their developed-country technology, which tends to be cleaner.

• 1200

Finally, one of the patterns in the data is that as companies are more free to locate internationally, capital-intensive companies tend to build up in developed countries rather than in underdeveloped countries. Capital-intensive activity requires a lot of skilled labour, and that's more abundant in countries like Canada, the United States, and Europe. It's very hard to operate technologically sophisticated operations in developing countries where you may not have a steady steam of graduates from university and the backup maintenance sector.

But it's the capital-intensive industries that generate more pollution. There's actually this offsetting flow of capital-intensive activity out of the third world into developed countries the more trade is liberalized between them. I would doubt that the gains made by the U.S. in terms of pollution control were offset by companies just moving outside to other countries. I think chances are these would represent net gains to the globe as a whole.

The Chair: Essentially what you're saying is the richer the world gets, the cleaner it's going to get.

Dr. Ross McKitrick: For a lot of the common air contaminants and a lot of the more toxic water pollutants and for very ordinary contamination problems that we don't tend to think about—drinking water quality, bacterial loads in water, things like that—yes, I think the evidence is extremely strong that economic development leads to cleaning up of the environment.

It's certainly the case that the dirtiest cities in the world are also in poor countries. In Toronto, if particulate concentrations go above 60 parts per million, that triggers something of a crisis—there's an air quality alert, the minister is empowered to force companies to shut down, and that sort of thing. A place like Mexico City deals with 400 parts per million on average over the year. Cities like Beijing and Shanghai deal with particulate loads of between 300 and 400 parts per million. When we look at where the pollution hot spots are in the world, they do tend to be in countries that don't have the wealth to apply the technology to control emissions.

The Chair: Thank you.

Mr. Epp, sorry about that.

Mr. Ken Epp (Elk Island, Canadian Alliance): No, you're fine, Mr. Chairman.

Thank you all for being here. This is a topic that has actually interested me for a long time.

I grew up on a farm in Saskatchewan. We were miles and miles away from anything that polluted anything when I was a youngster, since we used horses to pull our farm implements. I guess there was a form of pollution there, but it soon went away, and it didn't hurt anybody. We used to burn wood. I think this is quite bad in terms of the environment, but there were so few farmers. Our nearest neighbours were two miles away, so their fires really didn't affect us all that much. So I've been interested in this all my life.

I don't know whether you've heard me tell this before. I used to ride a motorcycle to work. Actually, I used to drive my bicycle, but we moved farther away. I just didn't have four hours a day to be bicycling, so I bought a little motorcycle. I just computed here that it used 2.8 litres every 100 kilometres, which is very efficient. It was a nice clean-burning four-cycle engine, too. I wouldn't have a two-cycle because I didn't like that blue stream coming out the back. So I'm with you, but I have some real problems.

The Green Budget Coalition is suggesting that we should have some credits. We should give people grants to retrofit. I think we run into really dangerous ground when we do that because governments and bureaucrats I think generally don't make a very good job of picking good ways to solve problems.

I remember a number of years ago we had a grant for putting insulation into attics. Do any of you remember that? They gave you up to $500 to put insulation into your attic. Well, I had good insulation in my attic, but there was a $500 grant for it. So my friend who sold insulation said, “You know, Ken, I'll put some insulation up into your attic for only $200. I get $500 from the government, $200 from you, and we'll put some insulation up there.” So I did it. It didn't make very much difference because it wasn't that bad to start with. If they had said, “We'll give you a grant for anything that will reduce your fuel consumption”, I could probably have bought myself a better furnace instead.

• 1205

I have some problems with governments choosing things. You're talking about environmental pollution. I think of taxes we get. It used to be when I got a new battery for my vehicle, I could then take the old one to the recycling place and get $4 for it. Now when I go to buy a battery, they charge me $4 to dispose of the old one. In both cases, I took it back and it was recycled. I don't know why the government got into it. I hate them for it, because now it costs me instead of giving me money. It is the same thing with tires. They charge me $4, and it goes into government revenue for every tire I buy.

Do you know what I find? Because I live out in the country now in Alberta, I find that since we've had these regulations our ditches are full of tires. Guys would rather throw them in the ditch at my place than take them over to the dealer where they charge them $4 to get rid of them.

The local dumps used to be free. You could drive in there and bring anything you wanted to get rid of and it would go into the landfill site. Then they decided to charge you $20 a load. Now I can go down my ditch and pick up a chesterfield, if I want to, or a bed or whatever I want. People are just throwing stuff.

Governments are not good at figuring out who should do what in order to reduce pollution. I think we're on a much better track if we follow Dr. McKitrick's idea, and that is, to simply come up with a formula that says here's how much you're polluting. Whether you have a big vehicle or a little vehicle is irrelevant; it's how much fuel it uses. It's how efficiently it uses it. It's how much pollution it puts out. It's how much you drive it per year.

I would like both of you to debate your two different points of view. One of you wants grants and tax credits. The other one wants simply a system whereby you get charged for whatever you do and then your incentive is automatic to reduce the amount of pollution you create. Who has a comment?

Mr. Robert Hornung: Just one comment?

Mr. Ken Epp: Go ahead. Let's make it interesting.

Mr. Robert Hornung: I think it's actually a very good question. You may be surprised to hear that I actually agree with most of what you said. The proposals that we've put out in the Green Budget Coalition are not—how would I say it when we're talking about grants—technologically specific. We're not saying, do this and you'll get a grant.

What we're saying is there's a certain level of performance. I'll use the example I talked about with the home energy retrofit. We're saying if you can get your house audited and it says you've got a score of 50 on this energy rating scale, we'll give you a grant if you move that up to 70. We don't care whether you do it through insulation, buying a more efficient furnace, getting more efficient appliances, changing your light bulbs to be more efficient—your choice. We're not being prescriptive. What we're concerned about is performance.

In the other organization I was speaking for today, the Clean Air Renewable Energy Coalition, when we're talking about a consumer credit for the purchase of green power, we're not saying you're only going to get credit if you buy wind energy. We're going to say you're going to get a credit if you buy an energy source that meets a certain level of environmental performance. It could be wind, solar, Run-of-River Hydro. It could be all sorts of things. We're not trying to be prescriptive. What we're concerned about is performance.

If I may, Mr. Chairman, my colleague, Stephanie Cairns, was not able to come today. She's ill this morning. But you have a copy of her presentation. In that presentation she has tried to indicate that when thinking about ecological tax reform and these sorts of initiatives, you need a set of principles to work from. She's highlighted what some of those are, and I encourage you to look at the presentation.

One of the things we believe very strongly in, as an organization, the Pembina Institute, is that both taxes and incentives have a role. I'll give you an example of why.

We can put taxation in place and that definitely sends a signal. However, if the barrier that prevents you from reducing pollution is not financial—there's actually a regulatory barrier in place or something else—then you need some incentive to get around that. You need a complementary measure to do that. We think that's the case in many cases. We would support, for example, taxes on fuels that encourage people to travel by transportation more efficiently. That may encourage some people to use public transit, but it only works when we've actually got a public transit system and those sorts of things.

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It's a complex issue, but I'm totally in agreement with you that, whether it's taxation or it's incentives, what we should be looking for are not things that are technology specific, that are choosing winners and losers, but environmental performance. We should leave it up to individuals to find the best way to get there on their own.

The Chair: Mr. McKitrick.

Dr. Ross McKitrick: I think it's important to remember with energy use that people pay for their electricity and their oil and gas. They already have incentives to be energy efficient. I have a problem with a lot of these subsidy schemes. It sounds to me like the things that were done back in the seventies, during the last oil price shock. They didn't have a great effect back then, although one of the things they did do was, in some cases, so insulate people from the cost of energy that they actually made them more profligate in their use of it.

It's very easy for well-intentioned subsidy schemes to wind up generating the wrong outcomes, demand site management in utilities, for instance. When I lived in British Columbia, we could get subsidies to buy those little compact fluorescent bulbs. Like many people, I took the subsidy, bought the bulb, took it home, and realized, first, it didn't fit in most of my light fixtures. Second, I really hated the light it gave off. So it went on a shelf. I'm sure many of the people who went through that program could tell the same story. It was well intentioned, but what you wound up doing was subsidizing a lot of fancy light bulbs that sit on peoples' shelves.

If people are paying the cost of the energy they're using, let them make up their own minds how much they want to use. If they're paying the cost, including the environmental cost, of generating electricity and they want to live in a leaky house and have to pay all this extra money to heat it, it's almost impossible for governments to come up with a scheme that's going to convince them to do otherwise. We'll never have the information to design a subsidy scheme or a regulatory scheme that can micro-manage people's behaviour. I think the best we can do is charge people the social cost of their actions, make sure they're paying that, and then let them make up their own minds about how they're going to balance the various cost items in their budget.

Mr. Philippe Crabbé: I have three comments about your comment. You feel uncomfortable with credits and grants for environmentally friendly activities, but what is existing today is that, effectively, there are credits and grants implicitly built in legislation, regulation, and budgets. There are implicit credits and grants for polluting activities, marginal corporate rates, for example, that are lower for highly polluting industries. Those have to be removed.

Second, I presume your critique would not be applied to incentives, to research and development grants, that aim at increasing energy efficiency.

Third, with the $4 for tires and batteries, I would say that's just a design problem. If I have to pay the additional $4 when I buy the tire and the battery, and I get it back when I return the used tire and the used battery, the incentive to ditch it doesn't seem to exist. I think that's just a minor design problem more than anything else.

The Chair: Go ahead, Marlie.

Ms. Marlie Burtt (Director, Tax, Suncor Energy Inc.; Clean Air Renewable Energy Coalition): I'm Marlie Burtt of Suncor Energy.

With respect to your comments about subsidies and their effectiveness, in this particular instance we are dealing with renewable energy projects. We have found, on an international basis, that they will not proceed on their own with the marginal economics that are there and the lack of an ability for customers to make choices.

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With respect, I understand Dr. McKitrick's comments about using potential taxes to have a social cost associated with decisions, although I also, actually more strongly, support the use of incentives to begin to change social behaviour in a positive way, like a deposit on return of disposable containers. It's an incentive as opposed to a penalty, and I think the effectiveness of such things in social change can be very significant.

With respect to renewables, every country in the world that has renewable energy and understands the importance of energy diversification, of regional development, and all those factors has found that it absolutely has to use incentives to have the renewable energy kick-started and sustainable.

Our coalition shares your concerns about government subsidy. We would prefer the market forces referred to by my friend Stuart, and we are strong proponents of those aspects. In view of the length of time it takes to deal with a number of the issues associated with the design factors of a good system and the possibility of going to school on many of the other countries' proposals that have been announced within the last two years concerning renewable energy certificate trading, other domestic emission trading systems, Canada does have an advantage. But in the interim we are falling substantially behind and need to do something to help kick-start the renewables industry.

The Chair: Thank you.

Mr. Ken Epp: Can I ask Dr. Smith a quick question?

The Chair: Sure, if that's what you would like to do.

Mr. Ken Epp: I have this other question, and I'm afraid I might not get back in the second round.

Dr. Smith, you seem to be a very strong advocate of emission trading, and it seems to me it's counterproductive, because if you take a country, an industry, or an individual who has to pay money to somebody else who is less polluting, that reduces the resources that person has to reduce his own pollution. For example, if there's a manufacturing plant, it could be using some of that money to actually change its own infrastructure to become more efficient. Instead, it has to pay a much smaller amount, so it's economically better to give the neighbour who's doing it better some small amount of money, thereby even further postponing the correction on his own site. Respond to that.

Dr. Stuart Smith: Assume that the person with his own site, Mr. Epp, could clean up a certain amount, x. If it turns out that he can purchase x amount of cleanup more cheaply somewhere else, then society has achieved x amount of cleanup for a lower price. This is why it is in no way counterproductive.

Obviously, every person has to make a choice. If you're the owner of a plant that only has a few years of life left, and you would have to do a complete refit of that plant to bring your pollution down, because it's an old-fashioned way of doing things and you would have to refit it completely, it's a whole lot smarter for you to pay somebody else. Government could simply say, everybody's got to reach this new level, and then you end up shutting down your plant, because there's just no way you can do that economically. This way you can keep your plant going, society can get the full benefit it wants to get, the total amount of pollution can go down, and it costs you some money. You say you would have used that money to fix up your plant, but you might not have been in a position, even if you wanted to, to use that money to fix up your plant. The cost of fixing up your plant may have been way too high, and that amount of money couldn't have achieved anything.

So it's much better for you to live in a regime that doesn't force you to meet a certain standard, where you throw up your hands, you have to close the place down and put your people out of work. It's a whole lot more sensible for you to use your limited resources to let somebody else do a super cleanup and make an even better contribution to the environment than you would have made.

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For x amount of pollution, you can be guaranteed that society is paying the least amount of money. So whatever contribution comes out of the economy to make these things happen, you can be sure you're getting the biggest bang for your buck.

[Translation]

Mr. Bernard Bigras (Rosemont—Petite-Patrie, BQ): Mr. Chairman, I am not really opposed to an emission trading system just as I am not opposed to a carbon sinks system in order to reach our goals regarding climatic change. However, I think that we must not miss the real debate about the change that must come about in our energy production. We must make a fundamental turn toward green energy, toward renewable energy.

In this regard, I sincerely think that wind power potential in Canada is greatly under-utilized. In the last few weeks, I have been looking for concrete and efficient ways to develop this source of renewable energy. For example, I read category 43.1 of the income tax regulations that already allows, unless I am mistaken, deductions for the conversion of equipment for wind power into electricity among other things.

I would like your views on that point. How could we change the income tax regulations in order to include concrete measures, tax incentives that would allow us to develop this under-utilized ecological new source of renewable energy?

[English]

Ms. Marlie Burtt: Thank you for your question. It's an excellent one, particularly in light of the fact, you may be interested in knowing, that Canada has a better wind resource than any of the countries that are outperforming us in their development. You're absolutely right in your observations.

As to what would be an effective measure with respect to the Canadian renewable conservation equipment, 43.1, currently those rules are very limited in scope. A very small percentage of the total capital required for a wind farm is eligible for the accelerated depreciation that is permitted within that clause.

What the Clean Air Renewable Energy Coalition has proposed is, first, expanding that definition to include substantially more of the capital up front on the wind farm or any eligible renewable green power project.

The second alternative is very similar in effect, using an investment tax credit of 20%. That rate is comparable to the provisions under 43.1 in economic effect. This would permit an investment decision to be made on renewable energy projects.

The third alternative we proposed, which has the same effect in economic incentive, would be a production tax credit similar to that used in the United States. In this case we're talking about 2 cents per kilowatt hour of green power generated. It could be a short-term measure, until an emission trading system came in. If it were to be based on an annual production amount, as opposed to the capital spent up front, it would need to be announced for a minimum of 10 years, as in the U.S. rules, in order to have an investment go forward for the development of the wind resources in Canada.

There are immense resources in Canada. Some of the most prolific provinces are Alberta, Saskatchewan, Newfoundland, and Quebec. There are excellent wind resources, much better than in California, Spain, and Germany, and we really do believe that it is critical for Canada to develop these resources effectively.

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[Translation]

Mr. Stuart Smith: To build on Ms. Burtt's remarks, I will say that category 43.1 strictly applies to equipment and not at all to installation costs. We made recommendations in that sense to the Minister of Finance three years ago I think with the cooperation of this alliance in order to... [Editor's Note: Inaudible] We are still awaiting an answer. In general, senior officials from the Department of Finance do not like capital cost allowance to be taken into consideration other than from the perspective of depreciation.

I would like the application of category 43.1 to be modified in order that all installation costs are accepted and not only the cost of equipment.

Mr. Bernard Bigras: There is another aspect that Ms. Rickman raised earlier. We are greatly preoccupied with contaminated federal sites. We know that a report from the Auditor General estimated their number to be over 5,000 and the cost of decontamination close to 2 billion dollars. Even if we are not at the pre-budget study stage, I would like it if we were able to talk about that. My question is this: how much money should the federal government set aside in a future budget for the decontamination of those sites?

What strikes me is that several departments are now waiting for funds. Site characterizations have been made, decontamination plans are nearly finalized, but a lot of departments are waiting for funds from the government before proceeding with decontamination. Yet, some of those sites pose a high risk for health and for the environment. Not only the soil is contaminated but there is ground water threatening to drag contaminants, nitrates or others, towards the drinking water reservoirs of some municipalities.

How much money should the government set aside in its next budget in order to proceed with decontamination of those sites that often pose a health or environmental hazard?

[English]

Ms. Angela Rickman: We know there are at least 5,000 contaminated sites. What we had proposed originally was that $540 million be allocated to the group within Treasury Board that would set priorities among those 5,000 sites to determine which have the most effect on communities, which have the most effect on departments, and allocate between the departments the $2 billion that we had originally anticipated as the start-up.

I don't think the $2 billion will clean up all the sites that exist. I think that's a really low figure. What we need to do is get a commitment for an initial $2 billion to begin that cleanup. But Treasury Board has told us they're not even prepared to begin a cleanup until they've concluded their inventory of the sites, which won't be concluded until next year.

We know there are sites that have been identified already as priorities, not just federally owned and managed sites, but other sites as well, and we'd like to see the $2 billion extended to helping include those other priorities as well.

So the initial amount that we'd like to see allocated in the 2002 budget year is $2 billion for that, plus $540 million for the contaminated sites working group to work with the various federal departments to develop what the priority list should be for beginning to deal with the contaminated sites.

The Chair: Are there any further comments?

Thank you, Mr. Bigras.

Ms. Guarnieri.

Ms. Albina Guarnieri (Mississauga East, Lib.): Thank you, Mr. Chair.

Thank you all for driving and flying to Ottawa to help guide us on green taxes and fiscal and regulatory policy. I presume all of you didn't bicycle here today like our good Mr. Epp.

• 1230

It has always struck me as one of the great ironies whenever I pick up a newspaper and read about all the environmental damage that's being done, especially when a three-inch newspaper probably cost us 20 acres of trees for one edition. We've all heard the horror stories. I've always wondered why we don't tax newsprint as a way to reduce waste, especially when most people chuck half the paper out before they even read a word. However, we all know what the pitfalls of such a measure would be.

But I would probably argue that you could apply the same logic to taxing other products as well. We all know gasoline prices are very high. Taxing gasoline to reduce emissions would probably be a non-starter in 2001. We're all aware that baby diapers fill up 5% of landfill sites. I don't think you're going to find very many people with the courage to heap more taxes on diapers, heating oil, and other products widely used by consumers.

So while I can see the theoretical benefit in taxing rather than regulating, I can't see any government surviving such a decision, to be quite frank. It seems that any effort targeted at reducing consumer demand would be economically, and perhaps politically, hazardous. So I would suggest that it would be much better for us to focus on government investment in green technologies such as hybrid vehicles, cleaner fuels, and some of the innovative ideas we've heard here today.

Dr. Smith, having abandoned politics for what some might argue is the cleaner business of waste, could you provide us with an insight on how we could tax and reduce waste in a way that would be acceptable to Canadians?

Perhaps I can open the question out to each of you here, whether you agree that green taxation is a dead end politically or think there's a way we could make it acceptable to Canadians.

Dr. Stuart Smith: I think we heard already from the professors some ways in which you try to offset the effect of one tax by levying it in such a manner that, overall, people can avoid paying the tax by improving their behaviour or can find some offset in a temporary way. If you tax one thing, you can take the tax off something else.

Having said that, I don't believe the population will accept environmental taxes until and unless they truly understand, first of all, what the environmental problem is, and secondly, that indeed the money—not necessarily the money collected, but the very fact that it costs money—will serve to improve their neighbours' behaviour as well as their own.

There's a deep distrust among people of governments levying new taxes and promising this will have some great benefit other than adding to the government coffers. People have a very deep distrust about that. Raising taxes is a good way not to get re-elected. Any kind of new tax is always going to be unpopular.

Emissions trading, by the way, is one way you can be applying a tax without calling it a tax, because in emissions trading, if you set a limit on how much you'll tolerate by way of emissions in the entire country, it's going to cost people money to clean up, and that's going to be passed on in the cost of the product, whatever the product is—energy, transportation, or whatever. If you decide to buy the credits elsewhere rather than clean up, that's going to cost you money too, and that's going to end up in the price of the substances you're talking about.

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So one way of applying a tax and not being blamed for applying a tax is to introduce a system of emissions trading. But listen, the fact is that if we're going to clean up, it's going to cost money. It's as simple as that. If we all have to reduce the amount of pollution and reduce the amount of energy we use, there's a transition to a different kind of economy, and during that transition there will be expenditures.

I don't think we can pretend that we can do this without any pain or without any financial cost at all. Of course it's easy for governments to subsidize as opposed to tax. That's what we see in the United States right now. They're not increasing the price of the fuels, but they're subsidizing the research and so on into developing more efficient engines, and so on and so forth. You can only do this for so long. If you live in a market economy, ultimately the only way to be truly efficient is for the price signals in the market economy to genuinely reflect the costs that the prices are supposed to reflect.

If you believe in market forces.... What bothers me is people who come out claiming the market is everything—“We believe in the market; get the government out of our life; we're all market people,” and so on—but as soon as you say, “Let's use the market to reflect the actual cost of something”, then they start saying, “Hold it! Hold it! Now we're not so much in favour of that.”

I'm afraid that, if we live in a market economy, we have to accept that one way or another things must bear their fair price—their accurate price. Whether you do it by emissions trading or by taxation is another matter. Our ecological fiscal reform initiative basically is taking the position that it should be revenue-neutral, so if we raise this tax for environment we'll lower some other tax.

Professor McKitrick's point is that ultimately, if you're successful, you'll stop raising money by the environmental tax. Then what are you going to do to replace that revenue? That's a pretty good point, and that's why you have to have a constant...to my way of thinking, you need a watchdog. Whenever you do environmental fiscal reform, you need to have a watchdog that is reporting to the people the relative collection versus the offset and adjusting it from time to time.

I guess my answer to you is that I think you're going to have to bite the bullet one way or another, but it's got to be offset in a way people understand.

Remember the famous GST. The notion of removing the manufacturer's sales tax and replacing it with this tax and also removing some income tax at the same time made a lot of sense. I think people could have accepted that. But what happened is that the government of the day chose, before an election, to remove all the taxes that were supposed to be the offset. Then after the election they decided to apply the GST, and then they wondered why the provinces didn't want to cooperate. Well, the provinces were only going to be partners in this enterprise if in fact they could have been partners on both sides. But the good side was taken up by the federal government to get re-elected, and the bad side was then dumped on the provinces as, “How come you're not cooperating with us any more?” So if you're going to do offsets, you've got to do offsets.

Ms. Albina Guarnieri: It's an excellent explanation.

Mr. Philippe Crabbé: First of all, on the basis of the other OECD countries, eco-taxation generally is successful only after wide consultation. So very clearly one shouldn't rush to do things. There should be a large degree of consent behind it.

Second, my first proposal essentially consists of reforming an existing tax, which is the excise tax on motor fuel. That one was set up in 1975, I believe, to raise revenue. That was its objective. It had no environmental objective. Second, it had an objective to reduce oil imports. At the time, oil prices were very high.

So the tax is already in place. Just fiddle with it in such a way that now it has an environmental objective. I think that's feasible.

Three, one should not forget that already we have all kinds of perverse incentives, from the environmental point of view, in the system. So the first thing we should do is remove those perverse incentives.

The Chair: Ms. Burtt.

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Ms. Marlie Burtt: Thank you. To build on Stuart's remarks, market-based incentives are effective, I think, with a lot of the emission trading systems in California, for example, on sulphur dioxide. The actual cost to society and industry that was bearing it was lower than anticipated, and the environmental benefit was greater than expected. And I think you set yourself up for the optimum results. However, if you use an environmental tax, the environmental benefits you're trying to drive aren't always assured. The response may not be what you need it to be, and any recycling, unless it's very carefully designed, may not actually get the right result either. So you really need a balance, and a great deal of thought to the design needs to be built into that.

The Chair: Yes, Mr. Hornung.

Mr. Robert Hornung: I'd just briefly like to say that there certainly are a whole range of political challenges associated with putting in environmental taxation. On the other hand, a number of other countries have done it. They've done it quite successfully, for some of the reasons that other speakers have mentioned, in terms of broad-based consultation, in terms of positioning it as part of a broader tax reform where other taxes are reduced. For example, you have in several European countries taxation on specific industry sectors that is accompanied by programs that provide an opportunity to get out of the tax—for example, if you meet a certain performance standard, or things like that.

So there certainly are a lot of creative ways to do it. And one of the reasons why we're very pleased that these hearings are being held is that, I think, relative to other countries, this was another area where we're behind the game.

The Chair: Mr. Turner.

Mr. Barry Turner: Mr. Chairman, I'd just like to answer the question of whether green taxation is a political dead end. One could argue that any taxation is a political dead end. We'd all love to not have to pay any taxes at all. But, as Dr. Smith said, you're going to pay one way or the other, and I think, when we look at the damage we've been doing for decades to our environment, it's time for the governments—I say “governments”—and industry and Canadians to realize that we can't continue to live like this. It's extremely unhealthy for a variety of reasons.

I happen to be a fan of targeted taxes. An airport improvement tax is a targeted tax to improve the airport. Highway road taxes are targeted taxes that I think should go right back into improving the roadway. Environmental taxes, to some extent, have been used in other jurisdictions. I know it's very dangerous, and the government doesn't want to entertain targeted taxes, but maybe it's something worth thinking about on an experimental basis—if the river in the local community needs some work, who's going to pay for it? The people of P.E.I., or British Columbia, or all Canadians? I don't know. “Targeted taxes” are dangerous words to use in our consolidated revenue approach, but perhaps it's something worth thinking about.

The Chair: Thank you very much.

Ms. Rickman.

Ms. Angela Rickman: Building on what other people have said, I handed around a piece of paper that's entitled, “Sweden Legislates for Sustainability”. It's a series of announcements that Sweden made on May 4 of this year on a number of initiatives that it's taking on environmental issues that go way, way beyond what they're even required to do by EU standards. So I don't think it's necessarily true that governments that legislate on environmental issues or that impose strong legislation don't get re-elected. And that's reinforced by polling that the Liberal government did in May of last year, which showed that people would link their vote to environmental initiatives.

We know, through a number of different polls, that people link the quality of their environment to the quality of their health, and their health is very important to them. In addition, in October 2000, Environics did a poll on behalf of the Green Budget Coalition that showed that by a wide margin Canadians favoured using budget surpluses for environmental protection over tax cuts. For example, two in three Canadians supported increased taxes on pollution if it protected the environment and even if it meant higher prices for consumers, and a high majority of Canadians would link their vote to environmental stewardship by a political party.

So I think you're wrong. I think the opportunity is there for you to take a lead, and with the huge majority and the support the Liberal government has, the door is wide open. You really should do it.

The Chair: Thank you, Ms. Rickman.

Mr. McKitrick, and then we'll go to Mr. Gallaway.

• 1245

Dr. Ross McKitrick: In a way, what you are picturing are environmental taxes as a proliferation of a whole bunch of irritating little charges on all the conveniences of life, and that's certainly not going to go over very well.

Think of it in terms of what you're already doing at the federal and provincial levels to control pollution. Environmental taxes and tradable permits can be a way of doing what you're already doing, at a lower social cost. That's the place to begin. Just look at what you're already regulating and controlling, and see about doing that in a cheaper way.

Ms. Albina Guarnieri: Thank you. In this committee, we're not allowed to ask two consecutive questions on increasing taxes. So I'm going to shift quickly to more palatable proposals that we received about the economic benefits of a clean environment.

The Chair: Very good.

Ms. Albina Guarnieri: I noticed that, Mr. Chair.

Apart from Canada's abundance of scarce wilderness area that might attract a greater flow of ecotourists—I believe, Mr. Turner, you highlighted earlier the benefits of our national parks and the economic advantages there—have you found any evidence of investment decisions of multinational companies that are influenced by more everyday environmental factors?

Is there evidence, for instance, that companies would locate a North American headquarters here in a particular city because of a lack of congestion, less air pollution? Essentially, I'm asking if you see environmental superiority as being a factor that attracts investment to our country.

Mr. Barry Turner: I'll speak on behalf of Ottawa, where David McGuinty and I have both been brought up.

The high-tech community of this region is marketing itself around the world as a wonderful place to bring your family and live and work because it's a clean environment, as opposed to some of the smog you might find in Silicon Valley in California. Therefore, the answer to your question is yes.

Where would you like to live with your family and your friends and neighbours? An area that is subject to water pollution, air pollution, ground pollution, and noise pollution, or where you could work in a healthier, cleaner, happier environment?

We don't develop industries in national parks; that's excluded from national parks. But the national capital region has been aggressively marketing itself as a place to bring your family because it's a nice place to live.

Other countries do this around the world. Look at Ireland these days, the growth in Ireland. It's a wonderful place to live and grow up, have fun and enjoy life, and it's a clean working environment. That's why many industries are establishing in Ireland. They've also changed their tax system to encourage corporations to go there. It's extremely attractive for them.

We could talk about this for hours, I'm sure, but the answer to your question is absolutely yes. Where would you rather live and work? Where it's polluted or where it's clean and healthy?

Ms. Albina Guarnieri: Is there evidence to suggest that more companies are coming because of our environmental superiority?

Mr. Barry Turner: I don't know the direct answer to that.

Mr. David McGuinty: I think the direct answer to that question is no. We had a team of economists at UBC a year ago trying to prove that there was a causal connection between the quality of life in an urban area specifically and ability to attract investment. But what we do know is that there's anecdotal evidence.

We know jurisdictions like Portland, Oregon, which is the single fastest-growing economic jurisdiction in the United States, which has attracted already $24 billion U.S. of high-tech investment and is turning away the lower-end high-tech activities, has managed to do so by offering a new approach to the management of their urban and built infrastructure.

Many Canadian cities are now launching COSTRA studies to find out what their competitive edge is and what kind of economic activity.... We do know, in terms of the new high-tech economy, that high-tech leaders tell us repeatedly that the most important assets, for example, for this region, aren't pulp and paper, on which this region was built, or the government, or minerals, or any other renewable or non-renewable resources; the most important input is people and brain power. So if you're going to attract people and brain power, you have to offer a certain quality of life.

• 1250

In terms of the last report we commissioned from the FCM, which was launched just last week at their annual general meeting in Banff, one thing it showed us was, clearly, when it comes to U.S. and European cities, the evidence is conclusive that, first off, they are better funded by their national governments on a more sustainable basis in terms of direct investment in urban areas; and the second thing we know is that they have more powers to raise more moneys. So Canadian cities are facing a situation that is different from their European and American counterparts.

Ms. Albina Guarnieri: Thank you for planting the seeds of a possible future merger between the finance committee and the environment committee. Is that a premature announcement?

The Chair: I don't know if they'll ever be approved, but go ahead.

Mr. Gallaway.

Mr. Roger Gallaway (Sarnia—Lambton, Lib.): I don't want to talk about taxes like Ms. Guarnieri.

Ms. Albina Guarnieri: You wouldn't get a question, Roger.

Mr. Roger Gallaway: Dr. Smith, you raised two concepts that I thought were interesting. You talked about your neighbour's behaviour and about the market economy.

In a couple of weeks, Premier Klein is going to be meeting with Vice-President Cheney. The new U.S. administration has signalled that they are going to put an emphasis on fossil fuels, that they're very interested in Alberta and northern Canada.

When you talk about your idea of emissions trading, I assume—and it's a big assumption—that many of our environmental problems are related to fossil fuels, whether it be gasoline, diesel fuel, or in fact the downstream effects of petrochemicals.

I'm looking for political advice. How is it sold to the Canadian public that certain environmental programs are being undertaken when in fact in great swaths of this country it wouldn't matter what we did in terms of the environment? I'm talking now about air quality in particular. There's no wall down the border, and so the pollution index would change only marginally if we shut down all the cars in certain centres in this country, because pollution is transborder.

What do you do in that case? How do you sell it to people or convince them that what is happening is the right thing? Perhaps put that in the light of how one weighs the fact that one could possibly—and I'm not certain of this—put Canadian businesses at a disadvantage.

Dr. Stewart Smith: My answer may not be popular with everybody else at this table. My view is that Canada cannot go very much farther than the United States in most of its efforts with respect to greenhouse gases, which is a global problem, of course, or even smog.

In the case of smog, we have a slightly better case, because we're negotiating with them all the time on transboundary air pollution. Right now, you could make a pretty good argument that they're doing a better job than we are. So it's not so much a question of getting ahead of them and putting ourselves at a disadvantage; here it's a matter that maybe we ought to catch up with them, because in many ways they are more effective.

If they go ahead and build 1,000 new coal plants, as they're talking about, or whatever...first of all, this is nonsense. Now that the senator from Vermont has moved, they're not going to get it through.

Secondly, in a way, if they did ever build 1,000 new coal plants, I'd call them all the Ralph Nader coal plants, because it was thanks to the pure environmentalists that we ended up with the abomination we have. But the situation is not likely to happen. You wouldn't even be able to get local permits to build these coal plants. There are so many state rules, and so on, that it's just not going to occur.

So at this point, I honestly think we can't get too far ahead of the United States. As I say, not all environmentalists would agree with me on that, but my view is that our economies and our environment are so closely interlinked that it would be very hard to get public support or business support for us going way ahead and becoming super clean compared to the United States. But let's not kid ourselves; we're not even as clean as they are in many of our rules.

• 1255

So I think we've got to continue to negotiate transboundary pollution agreements with them. We have to make sure our system of credit trading will correspond with theirs. We can't have a system here that's totally different from the one they're going to have. So we have to talk with them and make sure we're going to adopt similar systems in the two places so that our companies can function as well as theirs.

Apart from that, I think we just have to keep talking with them and keep pushing them—and them pushing us. We've got to move together on this. I think Canada is in an unusual position insofar as we are so tightly tied to another huge economy, as well as to the continent, in terms of its airshed.

As I say, not everybody will agree with my point of view. My point of view is that we can't get too far ahead of them, but right now we're not even with them in some ways.

Mr. David McGuinty: Last week, in his speech to the folks we assembled on Bay Street for the minister, he made a comment where he said something about how inspiring Canadians to poetic heights when it came to cutting or eliminating the deficit was not something that came easy. It wasn't as if Canadians rallied around this concept of cutting costs and tightening their belts and so on.

But he alluded to the fact that we needed to build the same kind of understanding and nobility of purpose, effectively—and those are my words, not his—as to why we should do this. I think Mr. Gallaway's comment really speaks to what we see repeatedly as we go out and consult, and we've heard many references to the need to consult Canadians.

Part of the problem with consulting Canadians is that there isn't consultation fatigue any more in Canadian society; I think there's consultation exhaustion. Mr. Gallaway alluded to, I think, a feeling of hopelessness and helplessness—after all, Canada is responsible for 2% or less of global greenhouse gases. We're not really responsible for this, whereas the United States is responsible for 25%.

When Stuart spoke earlier about the United States playing a very good bilateral game, this is not uncommon. Having watched multilateral negotiations from my own past career in the United States, they play a very good multilateral hockey game, but when it comes time to doing deals, they do it on a bilateral basis, whereas the Canadian approach seems to be that our genetic makeup is partly multilateralism.

So what's required here...and I think one of the beautiful things about holding this second meeting on this subject is that I think this committee is looking for guidance as to how to move forward. Last year's budget was a very good start in sending out signals to Canadians that the federal government is taking some leadership steps in this area.

Of course it's not perfect. It's never enough money. So the question is, what would this next budget build on in terms of announceables that lead Canadians to develop more hope and more nobility of purpose to understand that the next great challenge for us is not wrestling the deficit to the ground, it's achieving the more appropriate balance between economic growth and environmental and ecological integrity?

I think that is perhaps the tone that might be taken forward. At least we're hoping it's taken forward, and we're hoping it's taken forward by making submissions again to next year's budget.

The Chair: Thank you, Mr. McGuinty.

Thank you, Mr. Gallaway.

Mr. Nystrom.

Mr. Lorne Nystrom (Regina—Qu'Appelle, NDP): I'd like to say thank you to everyone for appearing here this morning and to welcome our old colleague Barry Turner back; and Dr. Smith, whom I've known for many, many years, going into his previous incarnation as well.

I want to ask three very quick questions, if I may, and the first one is to Dr. Smith. He's a person who's very thoughtful, has considerable wisdom and insight, and who's been involved in public policy discussions for many, many years.

My general question is, why is our environmental record just so bad in this country? There recently was a study by the University of Victoria that used, I think, 15 different indices in terms of measuring the environment. We ranked 28 out of 29 OECD countries.

I also noticed in the Ottawa Citizen this morning a headline saying: “Carmakers urge oil firms to lower sulphur”. We now have the technology where cars burn fuel with less sulphur in it, and yet our oil companies are not producing the fuel that has lower parts of sulphur in it. Therefore consumers can't even buy those cars. So our standards are a lot worse than those of the United States.

From a public policy view—and you were an opposition leader at one time yourself, and very thoughtful—why is our record so bad? We have a pretty good record in many fields in this country, in terms of good social programs and a mixed economy. We seem to be insightful in many different areas, in terms of the value of education and so on, but why have we lagged so far behind many parts of the world in terms of the environment?

Dr. Stuart Smith: Well, first of all, I don't know if the record is as bad as all that, Mr. Nystrom. Thank you for your kind remarks about me personally. I enjoyed our friendship when I was at the Science Council and enjoyed our consultations back then.

• 1300

I'm not at all sure that our record is that bad. It depends on what you measure. Basically, our water is pretty clean. Our air is pretty clean compared to other countries. We protect wilderness. We have so much wilderness that we don't protect enough of it; we perhaps should be protecting it differently, but we certainly do protect a fair bit compared to a lot of other countries. So it depends on what you measure.

If you measure things related to fossil fuel use, then for sure our record looks bad. There it looks bad because of a number of things that happen to be the nature of this country. We're a very large country, so transportation becomes a huge part of what we do. Furthermore, we tend to produce bulk commodities, and it again requires a tremendous amount of energy to move bulk commodities around.

We are producers of fossil fuel. Well, it costs a lot of fossil fuel in order to produce fossil fuel. People don't realize that one of the most energy-intensive industries in the world is the production of energy. We also have large electricity grids and so on, and much of that is fuelled by fossil fuel. We're sparsely populated, to say nothing of the fact that we're also a cold country and therefore have the need for a lot of energy. So it depends on what you measure when you say we're good or bad.

On the fossil fuel side, I think it's the nature of the country. I don't think it's because Canadians are unwilling to make sacrifices for the environment. I think they, generally speaking, would be surprised to hear anybody say that about them. I think Canadians feel they are as willing as anybody else. Where they start to get antsy, of course, is if they don't understand the problem.

Now the greenhouse gas issue is one that Canadians do not understand. I'm telling you right now that you can say all you like about greenhouse gases and emissions trading—and I can discuss with you, Mr. Epp, and everybody else on this committee the issue of how best to do it—but most Canadians do not understand what you're talking about when you speak about greenhouse gases.

They believe that global warming is largely a consequence of pollution because of all that dirt up there making everything hot, or they think it's because the ozone layer has been thinned out. They were told to protect their children and put on sunscreen and big hats and so on because the sun is hot, and then you tell them the globe is getting warm. They say, “Oh, yes, we understand that. The sun is hot; we have to protect our kids”. They think the reason the globe is getting warm is because of the ozone layer. They don't understand the notion of a greenhouse effect that has very little to do with dirt.

Every time you see a CBC or CTV program about greenhouse gases, you see these dirty smokestacks. It has nothing to do with dirty smokestacks—almost nothing to do with that. In fact, the pollutant we're talking about isn't even a pollutant; it's necessary to life. It's carbon dioxide. People have to understand that greenhouse gases are a consequence of fuel use, for the most part. It's an energy issue. It's not an environment issue.

So there's a tremendous amount of education that has to be done. But I don't honestly believe that we are way behind, except when it comes to fossil fuels. There I do agree.

The other thing is that we don't live in that many cities. We're becoming an urban society, but up until now we've been more or less a rural society. As a rural society, we didn't suffer the effects of pollution as much as they would in a more urban environment, and so maybe we're a little slow on some of that.

But I don't know if that answers your question.

Ms. Angela Rickman: Well, I'm sorry to disagree, but I don't think we're....

I agree with you. I think we are very far behind.

In Canada we don't have any federal legislation to protect water. We don't have a clean air act. We don't have an endangered species act. We don't have a federal contaminated sites cleanup act. There are a whole number of areas where we just don't have federal legislation to protect Canadians' health or the environment. So I would disagree with the notion that Canada is not that bad.

To get back to Ms. Guarnieri's question about financial incentives related to endangered species, during hearings on endangered species it's come out that industry is saying that the lack of strong environmental measures, particularly around protecting endangered species, is actually a possible trade barrier with the U.S. The U.S. is weighing using the lack of endangered species protection in Canada as a possible trade barrier to Canadian products. So lack of environmental regulation can be a disincentive, or it can also hurt.

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Why is this a problem? Well, Canada has been a progressive country in a lot of different areas, and Canadians generally feel we're progressive on social issues; we're progressive on a whole bunch of human rights issues, although that's arguable given Amnesty's report of yesterday.

But they assume that we're good on environmental issues and they're very surprised when they find out we're not. Our Pest Control Products Act is 31 years old. It's almost as old as I am! We haven't changed it. That's not progressive.

What's missing? I don't know. A public uproar to get politicians to act. We shouldn't need that, but maybe that's what it's going to take. I think now that people are linking health to environment this may well be what we see. What we need is political leadership.

The Chair: Mr. Hornung, followed by Mr. McKitrick.

Mr. Robert Hornung: Yes. I have just a brief comment to make on the fossil fuel side. Indeed, there are many cold countries and there are many large countries. In terms of the efficiency with which we use energy, there's a fairly clear record of Canada falling somewhat behind other countries. One of the prime reasons for that is precisely what we're talking about here in this committee. Our energy pricing structures do not incorporate to any extent the environmental costs associated with that, certainly not to the same extent as seen in many other countries. We've built an economy on the concept of cheap and abundant energy and, in doing so, have ignored the environmental implications and the environmental costs associated with those energy sources.

Dr. Ross McKitrick: I was anticipating your question. This is why I included some of the graphs that I did. I could show you lots more that pick up on Dr. Smith's point. With regard to a lot of the ordinary air and water contaminants, we've actually made pretty considerable progress. The question is, how can we make further progress. As you reduce pollution, the cost of further pollution reduction goes up. That's where doing things efficiently really matters.

Also, in comparison to the U.S., one of the differences is for a long time the U.S. has been using economic instruments. When we agreed with them to reduce sulphur dioxide emissions, they went off and set up a national sulphur dioxide permits trading market. We used command and control.

When we agreed to get lead out of gasoline, they went and set up a permits trading program with a banking system that let the refineries get lead out of gasoline ahead of schedule and below the expected costs. We used command and control.

With the CFC regulations and in the Montreal Protocol, they used CFC taxes and we used command and control.

Just on a lot of these issues, we've taken the basic objective and come up with the most unsophisticated instrument possible to accomplish the goal, whereas the U.S. has put more thought into how to do it cheaply and efficiently. And because they accomplish their goals more cheaply, they can set more ambitious goals than we do.

The Chair: Lorne Nystrom.

Mr. Lorne Nystrom: As we move into more marginal areas for fossil fuels, such as the Arctic and the tar sands and the sea and so on, it costs more and more. As Dr. Smith was saying, you use fuel to obtain that fuel.

What kinds of options have you considered to this? What are the solutions to this? It gets more expensive to get the fuel. We pollute more to get the fuel. What are the options on that?

I guess the other question would be with regard to transportation as well. We're moving more and more into trucking all the time and more away from rail and into what you might call a “just in time” management system. Diesel fuel is being burned. The ratio of trucking over rail is I think five to one. Again, we're just spending more fuel and polluting the atmosphere. What is the alternative to that?

These are two specific questions. Dr. Smith was saying it's in the area of fossil fuels that we seem to have our biggest problems, and here are a couple of specifics where it's getting worse rather than better.

I come from Saskatchewan. We've ripped up all the rail lines, as Barry Turner knows. Farmers are now forced to truck their grain to market. This of course destroys all the roads and highways. These are thin-membrane highways. We're spending all kinds of money now putting in thick-membrane highways. Rail lines are gone and it costs the farmer more. It's polluting the atmosphere and it's doing all kinds of things that shouldn't happen.

What are the alternatives to this? And what are your solutions?

Mr. Robert Hornung: Big questions.

The Chair: Brief answers.

Mr. Robert Hornung: Yes, brief answer, big question.

It seems to me that when we're talking, for example, about future oil and gas development in this country, it's absolutely right that conventional oil fields are being depleted. It is becoming a more energy intensive process to do that in the oil sands, in the north, etc.

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I think what we're starting to see is a glaring contradiction that's in existence when, at the same time as we are open and willing to rapidly expand production, we say we're going to meet our environmental commitments. At this point, there's a gap there because we don't actually have the policies in place that will allow us to do the two. One set of policies we can do relates to some of the things we've talked about here, in terms of putting a price in the market, sending a signal that says, okay, you can go ahead with that sort of production, but recognize that there are higher environmental costs and therefore you can take that into account.

If, for example, in the climate change scenario, Canada is to implement the Kyoto Protocol, we are in a situation right now where we're seeing in Alberta three new proposals for coal-fired electricity generating stations. We're looking at massive expansion in petroleum production. Can that be reconciled with our greenhouse gas emission commitments? Possibly. But the only way it can be reconciled is if we put in a policy framework that allows those emission reductions that are required to happen somewhere else in society. That's going to actually require a debate and a discussion within the country about how that's set up and how that would work. We need to get started on that discussion. And that's what Stuart Smith was talking about. Put that issue right on the table right now. The longer we ignore it, the more likely it is that this contradiction will not be solved and we'll end up sacrificing environmental objectives in pursuit of these economic development goals.

Ms. Marlie Burtt: In answer to your question, I would also add to what Robert has indicated. Canada is a natural resource-based country and it has strategic assets that substantially contribute to the economic development—the GDP—of the country. Don't underestimate the fact that companies that are participating in non-renewable energy sources appreciate that there is a continuing cost to them.

Many companies are leaders in the industry. They're actually looking for solutions and offsets and a way to deal with that effective liability. Unfortunately, in the absence of definitive policy, credit for early action, the ability to use market-based initiatives to seek lowest-based alternatives, it's very difficult for companies to take action.

Therefore, what you have is a bit of a stalemate. Corporations that are leaders in the industry and are prepared to spend the money and to take the initiatives don't have the certainty and the definition of policies to ensure they're going to get benefit for the dollars they're spending. They may have to show shareholders that they're going to end up paying twice.

So through a lack of policy, clarity, and progressive approaches towards this thing, you're actually creating more of a problem than a solution.

The Chair: Mr. Turner.

Mr. Barry Turner: Mr. Chairman, Mr. Nystrom asked how bad our record is or why it is so bad. I think for all of the last century we took our environment for granted. I don't think we can do that any more. All of the indications are there that we have to wisen up and make intelligent fiscal decisions, tax decisions, personal decisions, whether it be blue box recycling or throwing tires in the roadside way in Saskatchewan. We have to stop doing this.

A voice: Alberta.

Mr. Barry Turner: In Alberta.

My point is in this century we have to stop taking our environment for granted, look at it with intelligence and wisdom, show some leadership, show some courage, and make the right decisions not only for ourselves but for our children.

The Chair: Thank you, Mr. Turner.

On that note, on behalf of the committee, I'd like to express our sincerest gratitude. I almost feel like I have to invite you again. This is very good.

I just want to give a context to what we're going to be looking at during pre-budget consultations, so that you can have a greater appreciation as you prepare yourself. We're basically going to look at the issue of the environment, as the OECD did, looking at economic instruments, regulatory instruments, voluntary approaches, incentives for technological development and diffusion, and information-based instruments. And, of course, at the end of the day we'll be favouring some over others or have a combination.

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So these are the things we would like to look at very carefully.

I would welcome any kind of briefing, even during the summer months, on these issues, because, as I said earlier, the issue of the environment will be a very important part of our pre-budget consultation hearings.

So once again, thank you very much.

The meeting is adjourned.