INST Committee Meeting

37th PARLIAMENT, 2nd SESSION

Standing Committee on Industry, Science and Technology

EVIDENCE

CONTENTS

Wednesday, December 4, 2002

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1535

The Chair (Mr. Walt Lastewka (St. Catharines, Lib.))

Mr. Matthew Bramley (Director, Climate Change, Pembina Institute)

The Chair

Mr. Mark Jaccard (Director, Energy and Materials Research Group, Simon Fraser University)

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1540

The Chair

Mr. Mark Jaccard

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1545

The Chair

Mr. Matthew Bramley

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1550

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1555

The Chair

Mr. Jeremy Rudin (General Director, Economic and Fiscal Policy Branch, Department of Finance)

The Chair

Mr. James Rajotte (Edmonton Southwest, Canadian Alliance)

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1600

Mr. Matthew Bramley

Mr. James Rajotte

Mr. Marc Jaccard

Mr. James Rajotte

Mr. Mark Jaccard

Mr. James Rajotte

Mr. Mark Jaccard

Mr. Matthew Bramley

Mr. James Rajotte

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1605

Mr. Mark Jaccard

Mr. James Rajotte

Mr. Mark Jaccard

The Chair

Mr. Joseph Volpe (Eglinton—Lawrence, Lib.)

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1610

Mr. Matthew Bramley

Mr. Mark Jaccard

Mr. Joseph Volpe

Mr. Matthew Bramley

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1615

Mr. Joseph Volpe

Mr. Matthew Bramley

Mr. Joseph Volpe

Mr. Matthew Bramley

Mr. Joseph Volpe

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1620

Mr. Matthew Bramley

The Chair

Mr. Paul Crête (Kamouraska—Rivière-du-Loup—Témiscouata—Les Basques, BQ)

Mr. Mark Jaccard

Mr. Matthew Bramley

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1625

Mr. Paul Crête

Mr. Jeremy Rudin

Mr. Paul Crête

Mr. Mark Jaccard

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1630

The Chair

Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.)

Mr. Mark Jaccard

Mr. Matthew Bramley

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1635

Mr. Nick Discepola

Mr. Matthew Bramley

Mr. Nick Discepola

Mr. Jeremy Rudin

Mr. Nick Discepola

Mr. Matthew Bramley

Mr. Nick Discepola

Mr. Matthew Bramley

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1640

Mr. Nick Discepola

Mr. Matthew Bramley

The Chair

Mr. Brian Fitzpatrick (Prince Albert, Canadian Alliance)

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1645

Mr. Mark Jaccard

Mr. Brian Fitzpatrick

Mr. Mark Jaccard

Mr. Matthew Bramley

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1650

Mr. Brian Fitzpatrick

Mr. Matthew Bramley

Mr. Brian Fitzpatrick

Mr. Matthew Bramley

Mr. Brian Fitzpatrick

Mr. Matthew Bramley

Mr. Brian Fitzpatrick

The Chair

Mr. Jeremy Rudin

The Chair

Mr. Jeremy Rudin

Mr. Brian Fitzpatrick

The Chair

Mr. Mark Jaccard

The Chair

Mr. Mark Jaccard

The Chair

Mr. Dan McTeague (Pickering—Ajax—Uxbridge, Lib.)

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1655

Mr. Mark Jaccard

Mr. Dan McTeague

Mr. Mark Jaccard

Mr. Dan McTeague

Mr. Mark Jaccard

Mr. Dan McTeague

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1700

Mr. Mark Jaccard

Mr. Dan McTeague

Mr. Mark Jaccard

Mr. Matthew Bramley

Mr. Dan McTeague

The Chair

Mr. Paul Crête

»

1705

Mr. Matthew Bramley

Mr. Mark Jaccard

Mr. Paul Crête

»

1710

Mr. Mark Jaccard

Mr. Paul Crête

Mr. Mark Jaccard

Mr. Paul Crête

Mr. Mark Jaccard

Mr. Paul Crête

Mr. Mark Jaccard

Mr. Paul Crête

Mr. Matthew Bramley

Mr. Paul Crête

Mr. Matthew Bramley

The Chair

Mr. Joseph Volpe

Mr. Jeremy Rudin

Mr. Joseph Volpe

Mr. Jeremy Rudin

»

1715

Mr. Joseph Volpe

Mr. Jeremy Rudin

Mr. Joseph Volpe

Mr. Jeremy Rudin

Mr. Joseph Volpe

Mr. Mark Jaccard

Mr. Joseph Volpe

»

1720

The Chair

Mr. Mark Jaccard

The Chair

Mr. James Rajotte

Mr. Jeremy Rudin

Mr. James Rajotte

Mr. Jeremy Rudin

Mr. James Rajotte

Mr. Jeremy Rudin

Mr. James Rajotte

»

1725

Mr. Jeremy Rudin

Mr. James Rajotte

Mr. Jeremy Rudin

The Chair

Mr. James Rajotte

Mr. Mark Jaccard

Mr. James Rajotte

Mr. Matthew Bramley

»

1730

Mr. Jeremy Rudin

Mr. Matthew Bramley

The Chair

Mr. Nick Discepola

Mr. Andy Savoy (Tobique—Mactaquac, Lib.)

Mr. Mark Jaccard

Mr. Jeremy Rudin

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1735

The Chair

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CANADA

Standing Committee on Industry, Science and Technology

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NUMBER 008

l

2nd SESSION

l

37th PARLIAMENT

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EVIDENCE

Wednesday, December 4, 2002

[Recorded by Electronic Apparatus]

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[English]

    The Chair (Mr. Walt Lastewka (St. Catharines, Lib.)): I call the meeting to order.

    Our order of the day is pursuant to Standing Order 108(2), briefings on the potential economic impact on Canadian industry of implementing the Kyoto Protocol.

    Today we have witnesses from the Pembina Institute, Matthew Bramley; Simon Fraser University, Mark Jaccard; and the Department of Finance, Jeremy Rudin. We'll go in that order, unless you've decided differently. We'll start with Mr. Matthew Bramley. I would ask you to make your report, and then we'll have questions and answers.

    Mr. Matthew Bramley (Director, Climate Change, Pembina Institute): I think Mark will go first, if that's agreeable.

    The Chair: No problem. We'll just go across the table, and then we'll have questions and answers.

    Mr. Jaccard.

    Mr. Mark Jaccard (Director, Energy and Materials Research Group, Simon Fraser University): Thank you.

    Do you have in front of you this brochure from me? You all have it. Okay.

    I'll talk for ten minutes. That means I'm really going to focus only on the first few overheads in that diagram. The others are sort of teasers that might be useful to you or may come up in questioning. In fact, they are issues that I just found out Matthew is going to deal more with.

    My talk is entitled “Navigating the Greenhouse Gas Reduction Cost Debates”. There are English and French copies there.

    I just want to remind people that the definition of an action is a change in equipment, such as a light bulb; buildings, such as adding insulation; and infrastructure that changes emissions from what they otherwise would be.

    We have a dispute out there, which helps to explain the divergent cost estimates you've been hearing. One thing is called the bottom-up approach, which says we will make money and will be wonderfully well off by reducing greenhouse gas emissions. Then you have a completely opposite point of view that says we're going to end up with enormous costs. In a few minutes I'm going to try to help you get a sense of what causes those differences. The differences are related to the definition of a cost and the assumptions people make about long-term technological change and people's preferences for technologies.

    The next overhead says “Bottom-up definition and cost estimate problems”. This bottom-up approach simply looks at two different technologies and says, what's the cost of buying them in the store? What's their energy use? Let's look at the difference between those two things. We'll assume those technologies are perfect substitutes. If we switch from one to the other, what's the difference in costs and emissions?

    That can lead to estimates. Here's a recent one, entitled Kyoto and Beyond, from the Suzuki Foundation. It says that we will make a lot of money by reducing greenhouse gas emissions.

    What are the problems with that approach? Problem number one is that it has an incomplete definition of costs. If I gave you an example, I would use transit versus cars. This will show you that if you measured the mobility service you get from public transit versus a car, you can do that in what we call dollars per person kilometre travelled. Not surprisingly, transit has a much lower cost in person kilometres travelled, and it has lower emissions. So you then say, if everyone switches from cars to transit--we don't know how--we save money, and we reduce emissions.

    There are a couple of problems with this. It ignores what we call option value. Without spending a lot of time on that, it is simply that new technologies actually have greater risks associated with them, which is a real cost that shows up for households and businesses. Also, technologies that have a longer payback, which tends to be energy-efficient technologies, have greater risk associated with them. I can explain some of that if you have questions.

    Another one that fits in with my example is that technologies are rarely perfect substitutes. Consumers don't look at transit and a car as perfect substitutes. You have to bribe them somehow, induce most of them, to make the switch from a car to transit, and that amount of money you have to pay them is a cost that economists include. That's why economists will come up with a very different cost estimate. The C.D. Howe commentary by McKitrick and Wigle says it would be very expensive to reduce greenhouse gas emissions.

    So that's this definition of a cost.

    There's a second problem mentioned on that overhead, and that's a misplaced optimism about the direction and aggregate effect of technological change that's going on all the time. It ignores that polluting technologies actually are improving all the time. We are finding cheaper and cheaper ways of generating electricity from coal. That's rarely taken into account in the calculations. It ignores the rebound effect of lower-cost energy services. For example, now people will use energy for decorative lighting, patio heaters, or decorative fireplaces. They will use their vehicles more, as they have been. Those are things that have to be taken into account.

    Finally--and this is what I'm concerned about in the climate change plan for Canada that has just come out--we tend to look at individual actions and forget that there are synergistic or interactive effects in the economy. If you do a lot of electricity efficiency, the price of electricity falls. When that happens, it changes the economics of electricity efficiency measures.

    Those are the problems with the bottom-up approach.

    The top-down approach assumes that the cost of any divergence from business as usual can be estimated from the tax required for that divergence. So you build a model of the economy and say it's going to unfold in a certain way, which is a trend from how it unfolded in the past. Then you ask how we can get it to move away from that path. You put in greenhouse gas taxes or a tradeable permit system, and as it moves away, you include all of that as a cost.

    You do that because you're trying to capture those intangible costs I just talked about--transit versus cars--so there's some legitimacy to that as a way of estimating costs. At the same time, there are problems with that approach because costs can decline over time, depending on the policy design. Depending on the timeframe, if you can change over technologies in sync with the normal capital turnover rates--when people are renewing fridges and buying new cars--that can lead to lower costs. That is a concern about Kyoto, by the way, because we're talking about a lot of change in seven years.

    A second factor is that new technologies have high initial costs of production that fall with time and level of output. You've all heard of economies of scale. If you can mass-produce windmills, their cost goes down. There's also something called experience curves or economies of learning, which is simply that as we get more experience in operating new technologies, we find their costs fall, even where there are not economies of scale. So these are things that are usually not included in the top-down analysis.

    The final one is that new technologies have high initial costs of public acceptance. So if I have to bribe someone today to buy a hybrid car, eight years from now, when 25% of someone's neighbours have hybrid cars, the bribe I have to pay them will be a lot smaller. So public acceptance evolves over time as well, but it takes time. That's a problem with the top-down estimates.

    To summarize, one approach is to say we're all going to make a lot of money and everyone will be happy. But it forgets that somehow we'll need either a financial penalty, strong regulations, or to raise tax revenue to subsidize people to make these switches. That's a problem with the cost estimates that say it'll be really cheap.

    But those who say it'll be expensive are forgetting we can take some actions that will affect research and development and the turnover of stock, and that becomes an important policy question for reducing the long-run costs, and it becomes a timeframe question.

    The next two overheads just show you some examples of this. The model names don't matter, but I use the CIMS model, which is a hybrid model that tries to take into account all of those behavioural costs, as well as the financial costs.

    The bottom one, MARKAL, is that bottom-up kind of model. If you look at the bottom of the chart, that's megatonnes of reduction. At 90 megatonnes, MARKAL's still at negative cost, which means you're making profits up to that point. If you go to 120 or 130 megatonnes, the costs you incur are still offset by the profits, so that leads you to those kinds of estimates that say Canada can reduce its emissions and do just fine.

    CIMS, the higher-cost curve I'm showing you, is based on a Kyoto timeframe. If you go to the next overhead, it shows that if you allow more time, the costs will fall--that will also happen for the MARKAL model, but I'm just showing you the CIMS results from the previous overhead--and if you have very strong policies that induce technological change, the costs will fall. You need to have both of those things. My critique of Alberta's counter to the federal government is that Alberta's policies won't drive long-run technological change--at least what they've looked at so far, as I've seen it.

    That leads me to the final sets of overheads. I won't go through them with you, but will just summarize the point and say that certain policies are not going to do as well. There is multiple criteria for how you evaluate policies, and you can see the four standard ones that you're well aware of. Volunteerism, which we did in the nineties, is not very effective because of those high costs. Command-and-control regulation can be effective, but is always criticized for economic efficiency. I don't shy away from it, but there are some design issues.

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    Finally, economic instruments like taxes, or even raising general taxes to have subsidies, have the political acceptability problem. This leads me to recommend the kinds of policies that are hybrids or crosses of this, which my final overhead talks about. Maybe this will come up in questions, but I've spent ten minutes now, so....

    The Chair: You haven't spent ten minutes yet.

    Mr. Mark Jaccard: Well, then, I will take two minutes to explain the final overheads.

    There are combinations of policies that even the Americans are applying right now, and the Europeans and the Chinese. They are regulations, in that they set an aggregate requirement on industry. They force manufacturers to think long term. Yet, at the same time, they have a long lead time—Kyoto and beyond—and they allow manufacturers to trade among themselves and to negotiate different kinds of outcomes, so that they're done as economically efficiently as possible. But they still do guarantee a certain outcome.

    That's what overhead eight describes. An example would be the renewable portfolio standard. This is a requirement that a minimum percentage of electricity be renewable forms of energy. I've been involved with the British Columbia government in putting in last week its new policy with a 50% renewable portfolio standard for new electricity investment. I've helped the Chinese government implement one as well.

    You're all familiar with the vehicle emission standards in California, where the government put forward standards in 1990 and said to industry, “Look, there's zero emission, low emission, and you can balance this out. But we're going to give you a long lead time, so then it's private R and D funding that generated.” The companies all said, “We cannot do it. It's ridiculous. Consumers will never buy it.” They sued the California Air Resources Board, but meanwhile they started putting a lot of money into the development of the new, innovative vehicle technologies we're witnessing today.

    I have a ninth overhead, which I won't go through. It characterizes the benefits or the strengths and weaknesses of this approach.

    My final overhead, on possible applications, points out how this approach can actually be brought into other areas. I'll just give you one example, the fossil fuel production industry. What I would say to Alberta is, if you're serious that you want to bring long-run technological change—and we now know we can capture carbon and still use fossil fuels, and probably sequester or somehow store them underground—by the year 2010, then 1% of your carbon goes back under and gets stored. By the year 2020, it's 15% of your carbon. That would be another example of this type of policy.

    I'll stop here.

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    The Chair: Mr. Bramley.

    Mr. Matthew Bramley: I'm Matthew Bramley, director of climate change at the Pembina Institute.

    At the outset, I don't want to mislead anyone; I'm not an economist, I'm a climate change policy specialist. However, for the past three years I have been a member of the expert advisory panel to the Analysis and Modelling Group, which is the federal-provincial government body that has been commissioning extensive economic modelling of options to comply with the Kyoto Protocol in Canada.

    Under the national climate change process, I've followed closely the work of the Analysis and Modelling Group and the wider debate about the costs of the Kyoto Protocol to Canada. I'm taking it as a given for this presentation that Canada is ratifying the Kyoto Protocol. I'm not going to try to argue the economic case for ratification. Instead, I want to make some key points I think should be taken into account in Canada's implementation of Kyoto.

    I am going to talk about four areas. The first one is innovation and opportunities. The second one is our position relative to the United States. The third one is the connection between the polluter-pay principle and economic efficiency. And the final area is the question of policy uncertainty.

    Beginning with innovation, it is one of the most fundamental determinants of economic growth and competitiveness. Although there is some dispute about the evidence, there is considerable evidence that government leadership in implementing environmental policy measures can stimulate innovation, and thereby enhance competitiveness.

    Environmental initiatives like the Montreal Protocol on Substances that Deplete the Ozone Layer and the U.S. acid rain program—which was an emissions trading system to cap and reduce sulphur dioxide emissions—are two good examples of where industry's fears of the costs it would have to bear turned out to be grossly exaggerated. One of the key reasons was that those initiatives, in reality, provided enough flexibility to allow or stimulate unforeseen innovation, which opened possibilities to reduce pollution much more cheaply than was thought at the outset.

    The Pembina Institute conducted an extensive survey of evidence of how Kyoto can benefit Canada's competitiveness. Much of the argument does centre around innovation. Our report on the subject is available on our website. One of the reasons why the economic models, much cited in the public debate in recent months, tend to overestimate costs of reducing greenhouse gas emissions is that they're not at all good at taking into account the cost-reducing effects of innovation. Simply put, it's very difficult to predict technological change, which generally allows one to do things more cheaply than first feared.

    So a general point I want to make is that we need to stop seeing Kyoto as an issue of costs and sacrifice and restrictions. Canada's Kyoto implementation plan needs to place more emphasis on fostering economic opportunities, and less emphasis on protecting the positions of current economic players—specifically, the largest greenhouse gas emitters. I'll return to this in a moment.

    Moving on to our position relative to the U.S., the Pembina Institute published earlier this year a comparison of government implementation of measures that reduce greenhouse gas emissions in the U.S. and Canada. We found that governments in the U.S., especially at the state level, have in fact taken far more significant action to reduce greenhouse gas emissions than governments in Canada have to date, particularly in the areas of low-impact renewable energy and energy efficiency.

    It is true that the current U.S. administration has abandoned leadership on climate change. Nonetheless, even at the federal level, there is a much more substantial body of greenhouse gas-reducing measures in place in the U.S. than in Canada. I'll come back to some examples in just a moment. But I want to make the point that, as Canada implements its Kyoto commitments, there are a lot of good examples of government initiatives in the U.S. we can be drawing on.

    For example, some fifteen U.S. states have the renewable energy portfolio standards for low-impact renewable energy, which Mark referred to. What these essentially say is that electricity suppliers have to source a minimum percentage of their power from low-impact renewal sources. There's allowance for one producer to overexceed its target while another producer underexceeds, using a trading arrangement to even things out.

    Another example is the federal production tax credit for wind energy in the U.S., which is worth considerably more than the wind production incentive recently introduced in Canada. It's no wonder that the U.S. has twenty times more wind power capacity than Canada, but only nine times the population.

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    Another example is public transit. In the year 2000, the total capital investment in transit in Canada was less than $1 billion Canadian. In the New York City urban area alone, it was more than $2 billion U.S.

    Coming back to competitiveness, in implementing Kyoto, Canada needs to make a concerted effort to position itself as a leader in the technologies and the infrastructure that are needed as international restrictions on greenhouse gases are tightened increasingly, and we know that Kyoto is only the first step. Our long-term competitiveness depends on our being well positioned in that respect.

    Thirdly, on the connection between the polluter-pays principle and economic efficiency, economic modelling studies tend to show that policy to reduce greenhouse gas emissions that follows closely the polluter-pays principle by putting a price on greenhouse gas emissions actually maximizes overall economic efficiency for the economy.

    An example of this is one of the modelling rungs conducted by the Analysis and Modelling Group, which is reported in the federal government's discussion paper on climate change from last May. One of those scenarios for implementing Kyoto used a domestic emissions trading system, where most of Canada's emissions would be subject to emissions permits that would be auctioned by government--that's pure polluter-pays--with the proceeds used to recycle into the economy to reduce taxes. That scenario actually showed faster economic growth with Kyoto than without, because of the stimulating effect of the tax reductions.

    So auctioning emission permits implements the polluter-pays principle, because emitters have to pay for every time they emit. Why does this also maximize economic efficiency? Because it sends the clearest possible undistorted price signal in favour of reducing emission. But it does potentially create big losers among high-emitting sectors and big winners among low-emitting sectors.

    The federal government has indicated up to now that it's looking at allocation of emissions permits among large emitters under its Kyoto implementation plan, something like an amount of permits that would cover up to 85% of each sector's or each subsector's emissions. An indicative effect of this is that, for the oil industry, it would add something like 3¢ to 12¢ only onto the cost of producing a barrel of oil. My point is that this is not sending a strong enough signal to drive emission reductions.

    It may not be realistic in the domestic emissions trading system that the government envisages for large emitters to have 100% auctioning of emission permits. The government should nonetheless, in my view, be ready to allow a larger difference between the financial incentives and disincentives felt by large high and low greenhouse gas emitters as a result of the emission trading system. The result will be easier progress through overall emission reductions at lower overall cost.

    The final area that I want to address is policy uncertainty. Many commentators are emphasizing economic damage caused by uncertainty about the government's precise intentions in complying with Kyoto. Obviously, uncertainty does make it more difficult to make investment decisions.

    I have three suggestions to address this issue. The first relates to the choice of policy instruments, something that Mark touched on. The current federal climate change plan does lack clarity regarding the choice of policy instruments used to reduce emissions. Economists will tell you that clear financial incentives and disincentives and regulated standards or regulated targets, again which Mark referred to, are needed to achieve meaningful emission reductions. Voluntary educational outreach-type approaches have their place, but they will not drive the major emission reductions we need.

    So a clear commitment on the part of the federal government to the kinds of instruments and the kinds of meaningful financial incentives and regulated standards that will reduce emissions significantly will reduce uncertainty about the government's intentions as to how emission reductions will be achieved.

    The second point on uncertainty is that, on the emissions trading system for large emitters, the government has indicated that there will be a period of negotiation of the exact allocation of emission permits under that system. These are potentially very arduous negotiations that have the potential to drag on for a long time. I think the federal government should set a clear and short timeframe for settling the allocation issue and having it completely clear exactly how many permits or exactly what targets emitters will be subject to, something like a six-month period to get those negotiations out of the way and get that uncertainty off the table.

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    A final point is that the next federal budget provides an admirable opportunity to provide funding for the measures the government intends to implement in complying with Kyoto in order to bolster the credibility of government statements about measures it intends to put in place. The more those measures are clearly funded now, the clearer intentions will be.

    I'll stop at that point.

    The Chair: Thank you very much.

    Mr. Jeremy Rudin from the Department of Finance.

    Mr. Jeremy Rudin (General Director, Economic and Fiscal Policy Branch, Department of Finance): Thank you, Mr. Chairman.

    Mr. Bramley, whom I know, introduced himself in the following way: I'm not an economist, I'm a climate change policy expert. Let me introduce myself by reversing that: I am not a climate change policy expert; I am, however, an economist.

    My opening remarks will be very brief. I'm simply going to rearrange a few things that I think are the salient points from the government's climate change plan, which was distributed a few weeks ago and posted at www.thenewclimatechange.gc.ca. It is the position of the government, based on the economic modelling that has been done so far, that the impact of taking action on climate change would be manageable.

    The government recognizes that there will be a cost, but it is a cost that the government views as manageable. That comes in large part because the plan is based on a number of principles, including an approach based on collaboration, partnerships; that no region should bear an unreasonable burden; that the plan should take a step-by-step approach that is both transparent and evergreen, which is to say kept up to date and revised; that mitigation costs should be minimized while benefits maximized; that the policy should promote innovation; and that the plan should, to the extent possible, limit uncertainties and risks.

    Thank you very much.

    The Chair: Thank you.

    We'll open with questions.

    Mr. Rajotte.

    Mr. James Rajotte (Edmonton Southwest, Canadian Alliance): Thank you, Mr. Chairman.

    Thank you very much for coming in today. They were very good presentations.

    I did want to start off with the issue of the domestic emissions trading system. The three of you could certainly comment. How exactly will this work and how exactly will the prices be set?

    I think it was Mr. Bramley who mentioned the acid rain treaty. Maybe you want to describe how that worked in that situation and then how you think it would work in this situation.

    I'll just raise one point. I met with two steel companies on the same day. The first company said they had reduced their emissions by 24% over the last 10 years. The second company disputed that and said that in fact the first company had only reduced it by about 12%, and in fact that second company had also reduced it by 12%. So given that you have disagreements even between companies, how does this type of system work?

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    Mr. Matthew Bramley: Clearly, you have to have a reliable system in place to measure emissions. There's no doubt about that. In fact, the federal government is currently considering whether or not to make greenhouse gas emissions reporting mandatory under the national release inventory. In my view, it would be helpful to move ahead with that as soon as possible in order to ensure that we do have the machinery in place whereby all major emitters are actually measuring their emissions according to reliable standard methodology.

    Your initial question was about price. My understanding is that the federal government envisages that the domestic emissions trading system would be transparently linked to the international emissions trading market created by the Kyoto Protocol. There are three international trading mechanisms available under the Kyoto Protocol.

    If, as appears the government's intention, there were no restrictions on the use of international emissions units for purposes of compliance with the domestic system, then the international market would simply set the price for the Canadian domestic emissions trading system. A number of projections have been made as to what that price might be in 2010.

    I can tell you the international market is already up and running. The Government of the Netherlands recently paid roughly five euros per tonne of carbon dioxide for units that it intends will be Kyoto-compliant on the international markets. The federal government has talked about $10 Canadian a tonne as a most likely scenario, and I think most of the projections are roughly in that ballpark.

    Mr. James Rajotte: Mr. Jaccard, do you have a comment?

    Mr. Marc Jaccard: No.

    Mr. James Rajotte: So you agree with the estimate that it will be likely $10 a tonne?

    Mr. Mark Jaccard: No, I have not followed that closely to make a projection one way or the other. But most of the literature I follow does suggest that because Kyoto doesn't take us that far as a total mechanism globally, given the reductions that have already occurred in Russia and elsewhere, the price would be quite low for international permits provided there is no monopolistic kind of activity wherein those who own the credits are able to collude and get those prices up. That's your only challenge. If one group is always buying from another group, how large is the group they're buying from?

    Mr. James Rajotte: If we use the example of buying credits from Russia, can Russia do what you just said, in terms of influencing the price of credits, by itself?

    Mr. Mark Jaccard: I don't know. I read an article on that by Denny Ellerman at MIT, in The Energy Journal about a year ago, in which he suggested that would happen. It's conjecture at this point.

    Mr. Matthew Bramley: People talk a lot about buying credits from Russia, but there are other sources as well. If Canada has to buy units internationally, it's by no means obliged to buy them from Russia. There are any number of eastern European countries and developing countries that would also be able to create units for sale that Canada could draw on, if it needed to.

    Mr. James Rajotte: My second question, Mr. Jaccard, deals with your presentation on page four. You talk about the first problem being a top-down approach. Your third point is that new technologies have a high initial cost of public acceptance.

    You mentioned hybrid cars. I visited a car manufacturer in September, and they said they could make hybrid cars quite easily; it's just that they would be more expensive for people. It would cost about $8,000 more for an average car, and they would also need more refined gasoline, which he said would then add to the problem. You would need to either increase the additive to gasoline or refine it further, which would obviously increase the CO₂ emissions.

    Is there a way of estimating the costs? Do you think the government should give tax credits for buying hybrid cars, or subsidize the purchase of these cars in some way?

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    Mr. Mark Jaccard: First of all, that $8,000 or $10,000 is the upfront capital cost. Then you figure out the fuel cost savings, to try to calculate the total net benefit or cost of buying that car instead of another car. That's my example of an action.

    On which kind of policy is better to encourage people to purchase those kinds of cars, I believe that if Canada ratifies Kyoto, it should immediately adopt the California emission standards. The states of New York, Massachusetts, Vermont, and several others now have an automatic provision wherein they have adopted the California standards. If the California Air Resources Board, after hearing from the manufacturers that they have to move the deadline for a certain market percentage of hybrid cars by one year, finally agrees to that--they're quite belligerent and intend not to--the same change would automatically occur in New York and everywhere else.

    This would provide some certainty, or at least consistency, for manufacturers. It's been a mystery to me why the Canadian government has not done that, and even why the Canadian plan says we will try to encourage a 25% reduction. I believe this is one area where there would be zero cost to Canada by adopting the hard work that somebody else had already done with the vehicle manufacturers.

    Then the vehicle manufacturers would have to sell a certain number of those cars. They'd figure it out, if they were really good at marketing. They'd say, be like Leonard DiCaprio and drive a hybrid. They'd get enough people who wanted to emulate that--politicians, movie stars, and others. Or they'd have to lower that cost premium to $4,000--which is the capital cost, because there would be the big operating cost savings--by raising the cost of all their other vehicles by $100 or $200. So it would thrust it onto manufacturers to figure out how to market that car.

    Mr. James Rajotte: The auto manufacturer I spoke to said it would be very easy for them to manufacture cars that were better at reducing emissions, but they said Canada has not adopted that because of the further refinement that would be required. The bitumen that comes out of the oil sands would need a fair amount more refining, so you'd obviously be increasing the amount of CO₂ the oil companies were releasing into the atmosphere. The auto manufacturers are quite willing to do this, but what sorts of incentives would you offer to the oil companies to further refine to get to that level?

    Mr. Mark Jaccard: First of all, I can buy a hybrid today in Canada and buy gasoline for it, so they're already producing the gasoline we need. I once did an inquiry into gasoline. The refining industry has to adjust the mix of what comes out of a refinery all the time. When we talk about people purchasing hybrid vehicles as new cars, this is a very slow process. The inertia in the capital stock means you'll be lucky to get 10% or 20% of new stock sales by 2010. This will be quite easy for the refining industry to predict, and adjust in accordance.

    Now, if someone is suggesting to you that the net greenhouse gas effect of switching will be extra greenhouse gas emissions from the refinery in making this more refined product, I have looked at net balance calculations for hybrids, and their net effect is a dramatic decrease in greenhouse gas emissions. I'd be interested in what numbers those people have, but I haven't seen that.

    The Chair: Thank you very much, Mr. Rajotte. You were getting close to the end. We'll come back. Okay?

    Mr. Volpe.

    Mr. Joseph Volpe (Eglinton—Lawrence, Lib.): I was glad, Mr. Bramley, that you said the ratification isn't an issue, that for better or for worse, it's behind us. But for those of us who are interested in why people would make that kind of decision or, more importantly, how to go to the next phase, I wonder if you could....

    You use two examples, what's going on in Britain and what's going on in the United States. I think you said we're not very good at predicting economic impacts of innovation. Is that kind of a--I don't know the correct word--technical phraseology or is that just a general impression? It would seem to me that nobody is ever very good at predicting the economic impact of innovation on anything. It's highly speculative.

º  (1610)  

    Mr. Matthew Bramley: What I was referring to is that in the economic models, which these two gentlemen know more about in detail than I do, that are used to try to predict costs and benefits of something like implementing Kyoto, those models, or some of them at least, have databases of technologies in them, different menus of technologies that can be used to produce a particular good or service, some with higher and some with lower emissions. But these models are then used to model scenarios that stretch out over a number of years.

    It's really quite difficult for us today to know, first of all, which technologies are going to be available in 10 years' time, what the costs of those will be, and by how much the costs of them may have fallen. To the extent that the overall costs depend on innovation, which I think is significant, the models that are used are handicapped and in some cases, I think, are clearly biased towards what we know about today's technologies and quite likely don't sufficiently take into account falling costs over time as innovation takes place.

    Mr. Mark Jaccard: Could I provide a two-sentence quote that supports that?

    This is the report of Ross McKitrick. This is a modeller who is describing exactly what Matthew was just talking about. He says that in his model he will assume that people are already minimizing costs:

The reason is that if a company could really save money by using some new energy-saving technology, a profit-maximizing organization would have undertaken it already. Companies are assumed to have exhausted all such economically beneficial innovations.

    I'm sorry to interrupt, but that seemed so relevant.

    Mr. Joseph Volpe: It is relevant. I guess what you're both saying to me is that, in the final analysis, it's the marketplace dynamics that will dictate what will eventually happen in terms of any kinds of emissions outcome of consumption, whether the consumption starts at the industrial level or is at the commercial level--that is, at the end user level--because all of these economic models that had been cited by you and others focus on industry as opposed to consumer behaviour.

    You use the example of England and the United States--and I've made a note to myself, so I hope I don't misquote you--that they appear to be more progressive than Canada in terms of innovation that's directed to reduction of pollution and greenhouse gases. I'm wondering whether you chose those two for a specific reason or because they seem to be a couple of industrial nations that are close to us culturally--in terms of consumption, I mean, rather than anything else.

    I'm wondering whether those reasons aren't mitigated by the fact that you've had economies of scale in Britain, with a population that's really concentrated, that you wouldn't have in Canada. In Britain, the population is roughly twice the size of Canada, in a geographic location that's one-fifth that of Ontario. In the United States you have a population that's about 10 times that of Canada, in a land mass that's about the size of Canada, or just a little bit smaller.

    Mr. Matthew Bramley: Well, I don't actually think I did explicitly reference the U.K., although I could have done, because the U.K. has actually implemented some very interesting policy initiatives to address greenhouse gas emissions.

    But why did we look at the U.S.? We actually did that comparison between policy implementation in the U.S. and Canada precisely to address the claim that people were making--those who were opposed to Canada's ratification of Kyoto--saying that, well, the U.S. isn't doing anything so we can't afford to do anything either. When you actually look on the ground, especially at the state level, you find that's really not the case.

    My point, when talking about U.S. initiatives, wasn't actually so much on innovation there. It was on the kinds of examples in terms of government policies that Canada, I think, can fruitfully draw on when implementing our Kyoto commitment.

    When you compare the more populace provinces in Canada with a number of U.S. states, it's a fair comparison. You're talking about jurisdictions with populations of five and ten million and governments with similar levels of capacity to actually put in place policy. I think those are fair comparisons.

    As to a comparison with the U.K., it's a country with roughly twice the population of Canada. It doesn't have the federal structure, so that obviously makes a difference for policy-making. If the U.K. or states in the U.S. can show leadership in implementing their agreements to reduce greenhouse gas emissions, we shouldn't be making excuses in Canada that we can't do it.

º  (1615)  

    Mr. Joseph Volpe: It is in many respects a question of leadership, and I acknowledge that. But so much of leadership is born out of necessity. In an industrialized, geographical, geopolitical place like Britain, where you have such intense industrialization, although now it's becoming a little bit more modern, it seems to me to be a little bit easier to talk in terms of the reduction of emissions because of the concentration of the placement--relatively very few sinks and other mitigating factors.

    In Canada, you're looking at a place where, even though you have a population of something like 30 million, once you get out of this ribbon going along the United States, it's really difficult to capture the imagination of somebody who says this is a polluted place and a great emitter of greenhouse gases on a per square kilometre basis. All the figures we've seen relate to emissions on a per capita basis. You're familiar with them all--2% of the world's output. That sounds nice. That's relative to our population and our industrial capacity. When you relate it to the land mass and the land mass's ability to absorb that carbon, we're way ahead of a place like the U.K. Wouldn't you agree?

    Mr. Matthew Bramley: I've seen modelling done by scientists at Natural Resources Canada suggesting that Canada's forests as a whole are actually a net source of carbon, not a net sink. So we shouldn't be complacent.

    Mr. Joseph Volpe: Do you mean because of the forest fires?

    Mr. Matthew Bramley: The forest fires increasing in recent years, more insect infestations, various disruptions, and of course logging itself. So I think we should be careful about any complacency about Canada being a massive sink of greenhouse gases.

    Mr. Joseph Volpe: Let me address the issue of complacency. I'm trying to get a firm understanding. When I've heard environmentalists and climatologists talk about one side of the issue and those who are on the industrial or manufacturing side talk about another side of the issue, they seem to be sort of religions in conflict. But I'm assuming they all have the best interests of everybody in mind.

    I had the occasion recently to tour some of the lumber activities in northern Ontario. Perhaps I looked at it through rose-coloured glasses. I was struck by the desire and at least the plan to enforce management and the impacts it would have in terms of the capacity to absorb carbon dioxide. For example, if you're planting four trees for every one you cut down, which is the common practice in northern Ontario, and I think it's pretty well nationwide now, a minimum of three is the national average....

    You just made the statement that the forests are drying up and are therefore more prone to forest fires. I'm not sure that I, as a Canadian citizen who's living in a city, can take responsibility for the fact that nature has traditionally burned those forests. What we're trying to do is cut that down, because it's not economical for us, quite frankly. It has nothing to do with environmental issues. Rather than let that timber burn, we want to sell it to the Americans or anybody else who'll buy it. So I don't think we're being complacent. There's an economic pressure for us to become much more efficient in areas that then have a subsequent emissions outcome.

    I'll go back to the question I had before about the modelling that's being done. Has it been done simply on a per capita output, or has it taken into consideration the fact that we have land masses that have the capacity to absorb? Put aside the fact that nature really isn't as effective as we would imagine it to be. In other words, what I'm saying as a counter-argument to your complacency issue is that perhaps we're being hard on ourselves, and we shouldn't be.

º  (1620)  

    Mr. Matthew Bramley: The modelling that has been done of the costs of Kyoto has taken into account Canada's success in the international negotiations in getting credits for forestry management and also for so-called carbon sinks in agriculture. My understanding of the modelling is that it includes all of the standard sources of emissions that are in our national greenhouse gas inventory, but it also assumes that Canada gets some credit for the things you've been talking about. That has been recognized in the rules for Kyoto. Many of us at the time were somewhat unhappy with Canada being given such a generous allowance of credits for something like forestry management and, as the federal climate change plan says, for simply business-as-usual activities. In other words, no additional effort will result in Canada getting some 30 megatonnes per year of sinks credits under Kyoto. So I think we've actually done rather well in terms of getting recognition for those kinds of issues.

    The Chair: Mr. Crête.

[Translation]

    Mr. Paul Crête (Kamouraska—Rivière-du-Loup—Témiscouata—Les Basques, BQ): Thank you, Mr. Chair.

    Thank you for your presentations; they were extremely interesting.

    What I have learned from all this, but especially from Mr. Bramley's presentation and Mr. Rudin's comments, is that it is essential to take advantage of the momentum created by ratification to very seriously introduce, for example, within the next budget, very concrete actions to implement the protocol that will produce results.

    My question is directed primarily at Mr. Bramley. I would like you to give us three examples of concrete incentives that you would like included in the next budget. I would also like you to indicate how intensive you want these incentives to be. In the last budget, we started to see some measures on wind power. Must we radically improve on plans for this and other sectors?

    In closing, I want to tell you that your presentation reminded me that, about ten years ago, the paper companies were quite hesitant to consent to modernize their facilities to meet the new requirements, until they realized that this would save them money and lead to very substantial profits. I think that the same thing will happen with Kyoto.

    I want you to talk specifically about the relevant budgetary measures. Without getting into politics, I want Mr. Rudin to tell the committee how, concretely, these things can be organized within a budget. Is this possible and could this be done in the February or March budget?

[English]

    Mr. Mark Jaccard: Maybe I'll go first, because I probably have the least to say.

    Just being consistent with what I said earlier, I'm someone who believes that you can't spend your way to this solution. While I can agree that significant efforts need to be made in the coming budget, I don't believe we'll be able to get very far in trying to subsidize the changes in behaviour in technology choices. That effort is important and should be in the budget, but I believe that if we rely on that alone, plus information programs looking for voluntary efforts by people, for the reasons I've already stated I believe we will fail to make significant changes.

    Therefore, whether it's in the budget or in policies associated with that timeframe, I think you need to move to some of what I call market-oriented regulations in association with that budget.

    So my simple concern would be that we not think we can spend our way to this solution.

[Translation]

    Mr. Matthew Bramley: Overall, in the next federal budget, I would like to see clearly marked funding for all measures announced in the Climate Change Plan for Canada, thereby making the plan credible and leaving no doubt as to the government's intention to implement such measures.

    Allow me to give you the three examples you requested.

    With regard to renewable low impact energy sources, I mentioned in my presentation that the Wind Energy Production Tax Credit in the United States is approximately double the one introduced in the last federal budget. This is one instance where the federal government could substantially improve the financial situation of people in this industry, in accordance with the national climate change plan objective to ensure that 10% of all electricity comes from renewable low impact sources.

    A second funding opportunity would be incentives for building retrofits to improve energy efficiency. We have been members for the past two or three years of the Green Budget Coalition, which is trying to convince the federal government to establish a loan fund to finance retrofits of commercial and institutional buildings throughout Canada. This money would be refunded through energy savings resulting from the retrofits. There is a very interesting model for this initiative, implemented by the City of Toronto and called Better Buildings Partnership. We have proposed establishing a similar partnership Canada-wide.

    A third specific action, quite a simple one, would be to provide funding for the addition of greenhouse gases to the National Pollutant Release Inventory to ensure the existence of a mandatory greenhouse gas emissions disclosure system for industry, so that comprehensive and coherent data on industry greenhouse gas emissions would be available. This initiative would be extremely important with regard to the design and implementation of an emissions trading system.

º  (1625)  

    Mr. Paul Crête: Yes, Mr. Rudin.

    Mr. Jeremy Rudin: Thank you. I would simply add that the budget will be submitted more or less as usual. An attempt will be made to assess fiscal flexibility. The Minister of Finance will consult his colleagues with regard to the government's priorities and prepare a budget that will aim to invest in the priorities of the government and all Canadians within budgetary constraints. That was the government's approach to investing in climate change under Action Plan 2000. This will also be in line with the part of the plan that suggests going step by step and that the plan constantly be revised.

    Mr. Paul Crête: I would like to ask Mr. Jaccard another question. You talked about market oriented. I do not know the French equivalent of that term. Could you give us examples of this type of measure? I would like you to identify them clearly.

[English]

    Mr. Mark Jaccard: There's a French translation of my overheads. Do you have that? All right. If you look on page 8--

[Translation]

    Excuse me for not speaking in French. As I live in Vancouver, I rarely speak French.

[English]

    I call these sector-specific market-oriented regulations because they are negotiated with individual sectors. You go to the cement industry or the construction industry or the automobile industry. And this is what the plan is starting to talk about. Even the Alberta government is starting to talk about this.

    Economists usually don't like that because they'll say, oh, you'll negotiate something with this industry, which is different from that industry, yet you'll end up with one industry doing things that are more expensive than what another sector does. I believe as an economist that you have to worry about that, but I don't believe the concern is as great at this early stage in reducing greenhouse gas emissions. In other words, we're looking for innovation and change in every sector of the economy.

    Also, when you negotiate with individual sectors, you do have modelling and work that gives you some sense of what we economists call the marginal costs, or those incremental costs in each individual sector. It is sector-specific in your negotiations, yet it is market-oriented, because once you set this requirement--so many vehicles, so much renewable electricity--then you give a long timeframe that allows industry to put money into research and development. You allow industries to trade among themselves in achieving that target, so that those who can do it most cheaply do that and then sell additional credits. You'll have some vehicle manufacturers who will not meet the zero emission standards, but they will then pay those manufacturers who are meeting it.

    These were all innovations that were created by industry in its negotiations over a 10-year period with the California Air Resources Board, for example, or with utility commissions that enacted renewable portfolio standards in the United States. An example I would give you is the sulphur emission program in the United States, which most of you are familiar with, that started in 1990. What I just want to point out there is that economists like to talk about this as a great instrument because it's a tradeable permit system. It looks like it's economically efficient for reducing sulphur emissions. But in fact that program was negotiated only with the electricity industry. Other requirements for vehicles were set up through regulation for automobile manufacturing, for individual industrial cement plans, and so on--a different set of regulations. Even in this case where economists would say, oh, we need an economy-wide program, it was actually sector-specific. That's what I mean by sector-specific and market-oriented.

    On the examples that I gave, if you go to the final page, page 10, I already gave the example of the fossil fuel production industry. Let me talk about the building construction industry, on that final page. We have wanted to increase the market share of Energy 2000 or--what is it called--R-2000 homes for 15 years now. Yet their market share really has not increased. I'm wondering what would happen if we said to the building industry, trade among yourselves, work out how you're going to do this, but by the year 2010, here's the percentage of new homes that must meet that standard. Here's the target for 2015. That would be an example.

º  (1630)  

    The Chair: Thank you very much.

    We'll now go to Mr. Discepola.

    Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.): Thank you.

    If we're beyond the ratification debate, which I think we've moved beyond, why are we still on the cost-benefit debate, then? I just don't understand what the purpose is of trying to simulate different models, argue about what the job losses would be, or what the costs of Kyoto would be or the implementation would be. What benefit does it serve to continue debating that?

    Mr. Mark Jaccard: I'll let others speak to it, but there's still an issue of the distribution of costs. Different policies have different cost impacts. I haven't been talking about distribution of costs, whether between industrial sectors or provinces, perhaps others can speak to that. I can talk about how costs are influenced by policy. I think that was perhaps what we were discussing as well. I don't know if that helps what your point was.

    Mr. Matthew Bramley: I have some sympathy with the question. I have to confess I'm not sure how this session we're in today came about and whether it was planned before ratification was so clear.

    I think one point to make is that, as I indicated in my presentation, one area of considerable uncertainty that remains in the federal government's intentions for implementing Kyoto is the whole question of allocation of targets, or emission permits, or covenants, or whatever name you use for them under the emissions trading system. I imagine there will be a need to continue doing economic modelling to look at what might be the impacts of different options for allocating targets or permits under that system. I anticipate that people will be looking closely at those kinds of modelling results as those negotiations take place over the next several months.

º  (1635)  

    Mr. Nick Discepola: What do models measure as final outcomes? Is it cost, is it CO₂ emission levels, reduction levels? What do they measure?

    Mr. Matthew Bramley: Again, these gentlemen are actual modellers and they can probably talk in great detail. But the kinds of economic models that have been cited in the public debate recently produce outputs like effect on GDP for Canada as a whole, for individual provinces, effect on GDP of an individual sector, effect on prices of different forms of energy, and those kinds of things.

    Mr. Nick Discepola: Let me put the question to Mr. Rudin, who mentioned that in order to implement Kyoto--you went on so fast I couldn't write them all down, but these are the ones that stuck in my mind--we were going to be able to do it with collaboration with the stakeholders, that you have to make sure that the impact on any sector or region doesn't unduly burden one sector or region. So how do we reassure those people who are concerned about being negatively impacted by these things that the government will limit the uncertainty and risk, to quote you again? What are we doing as a government, or what will we be doing as a government?

    Mr. Jeremy Rudin: Thank you, that's a very good question.

    I think there are basically two steps that the government is attempting to follow to limit uncertainty and risk. First of all, it's to come forward with a plan that is as comprehensive as can be, while still guarding the flexibility that's needed to react to further input from stakeholders and other information events that come forward.

    Furthermore, in particular cases such as the impact of an emissions trading requirement on what are called large industrial emitters, what it says in the plan is that the government will discuss with emitters, industries who would be covered by this, what steps might be taken to mitigate the risk associated with the price of permits that these firms may be required to purchase in the future. That's the sort of step that the government is contemplating.

    Mr. Nick Discepola: I'd like to also move beyond trying to see what the government can do in terms of fiscal measures that we introduced last year. You gave some examples to Mr. Crêtes' question. They don't seem to be significant measures, in my opinion. I don't know, maybe I'm too pessimistic on it. But retrofitting buildings, or new credits, for example, seem to have been tried before, and I don't know if you have any measures to gauge what, by retrofitting, for example, federal or other commercial buildings, would the net gain be in terms of reduced emissions.

    I'd be more interested in hearing what you have to say on your recommendations on introducing or helping new technologies. I think that's where Canadians could seize the advantage.

    So what should we be doing as a government to help businesses as well as industry? In my case, I'm more interested in what we'd be doing to help--whether it's through R and D, tax policies, new credits, or new subsidies in terms of particular areas--Canadian businesses get a head start on implementing these new technologies.

    I'd also be interested in knowing what you think the lead time is. If there are new technologies in the works and it's going to take five years, or six years, or seven years to implement, maybe we should be prioritizing certain areas that we want to invest in that will give us the maximum return on the objective, which is to reduce the emissions.

    Mr. Matthew Bramley: I apologize. I didn't come here prepared to make very detailed suggestions as to measures to be funded in the budget. I'd be happy to have ongoing discussions with anyone about that in more detail. But I would contest your comment about not obtaining very significant reductions from, for example, retrofitting buildings.

    Mr. Nick Discepola: Well, I'm not going to pretend...but I've heard it's been tried before. I'm not sure what the total benefit would be.

    Mr. Matthew Bramley: The city of Toronto has been a tremendously successful example, in having a revolving fund that finances the retrofitting out of the money savings from reduced energy use. I don't know the exact numbers, but the Better Buildings Partnership in the city of Toronto has been considered by all involved as a tremendous success in reducing emissions and in saving money.

    Our suggestion is that this should be tried on a national scale. This kind of financing mechanism to ensure retrofits take place has not been tried on a national scale in Canada. I don't have a number in front of me, but the federal plan aims at a certain number of megatonnes of reductions from retrofitting buildings. Well, here's a specific measure that can be put in place now, which promises not only to reduce emissions but also to actually save money at the same time. It's something the government could commit to concretely as soon as possible.

    I talked about increasing the incentive for low-impact renewable energy. My point was that, for example, wind energy is booming in the U.S. in places like Texas. It might surprise some people that the U.S. is leading Canada by a large margin, and a country like Germany is even further ahead. The current incentive available to wind production in Canada is significantly lower than what it is in the U.S. So this is an area where we can at least match the level available in the U.S., and there are considerable emission reductions available through ensuring that any new electrical capacity in Canada is not things like new coal plants—which have been put on table in Alberta, for example—but tries to focus on low-impact renewables.

    You asked a question about stimulating technologies. I think investments in technology research and development are important, but they are of a longer-term nature, and you need to ask about lead time. So there are things that need to be done now. But at the same time, in order to achieve the shorter-term emission reductions required under Kyoto, we need things like the emissions trading system for large emitters in place as soon as possible. We need things like regulated vehicle fuel efficiency standards, which Mark has been talking about, investments in transit, and so on, and things that are going to give nearer-term reductions.

º  (1640)  

    Mr. Nick Discepola: Do I have time for one more question?

    In the absence of a cost-benefit study prior to ratifying Kyoto, or in the absence of a full implementation plan prior to ratification of Kyoto, is it conceivable to view this implementation over a short-term timeframe? Are we under the gun right now to come up with an implementation plan agreed to by everybody within a short timeframe? Or is it as per Mr. Rudin's comment before, that this might be a work in process or in progress for the next five to ten years, needing constant fine-tuning and adjustment?

    Mr. Matthew Bramley: In the year 2000, Canada's greenhouse emissions were almost 20% above the 1990 level. As you know, the Kyoto target is 6% below the 1990 level. Now, we don't absolutely have to meet that target purely through domestic reductions—although I think most people agree it would be a good idea to go as far as we can through domestic action. So clearly there is an urgency to start making significant reductions as soon as possible, because we're already so far above where we need to get to. After all, we only have 10 years in total.

    I think the point Jeremy made was that governments are obviously going to want to be fine-tuning and adjusting as they go along. I don't think it's realistic to imagine we can write a plan today that will guarantee getting us to where we want to go. One obviously can't foresee all circumstance, and one can't foresee the success or lack of success of every policy measure.

    The Chair: Mr. Fitzpatrick.

    Mr. Brian Fitzpatrick (Prince Albert, Canadian Alliance): My understanding is that in 2005 we'll already have UN or international inspectors in here monitoring what we're doing, so I'm not exactly sure we have all this time that everybody's talking about.

    I have a fear that in this town what this Kyoto thing could end up doing is creating a whole new branch of government that will massively interfere in the day-to-day lives of Canadians. You can talk all your models you want, but I think central planning--dictating results, commanding results--was an utter failure in the 20th century as an economic model. I think a highly competitive economic climate where you build a better mousetrap and are awarded with minimal government interference is a much preferable model.

    Somebody said we need a reliable system to monitor this situation. Now, I don't want to conjure up the firearms registration system, but I'm going to, because somebody said at one time that it would only cost a few million dollars to set this up, as it's a simple exercise. Now we're at a billion dollars.

    Back in Saskatchewan, I have some industries that are very much concerned about this thing. Let's take IPSCO, the steel pipe manufacturer. If I understand this correctly, somebody has to go out there and do an inventory on that industry and determine where they are in terms of emission standards on CO₂ and so on. There are going to be hundreds of other businesses and industries that this is going to have to happen to. It seems that somebody's going to have to do that, and it has to be government. We're going to have a system where we have a lot of government people roaming around this country knocking on your door and doing inventories and so on and evaluating your business in terms of your CO₂ emissions.

    This is the question I'm going to ask the gentlemen. We have a plan. Everybody's says we have a plan now. This is a slam-dunk. What is the government's plan for going out and monitoring all the different businesses and industries and so on that we have in this economy? How are they going to measure that? Is it a government bureaucracy that's going to do that or who's going to do it?

º  (1645)  

    Mr. Mark Jaccard: I'll just say something, but others may have to answer.

    In this kind of situation, I would argue that there's a large role for business to determine how things unfold. I've seen this in other environmental areas, where business says ratification or some other social objective has been determined in the political arena and now we want to make sure that government is interfering as little as possible in our affairs. So let's get out there and take the initiative to set up our own monitoring systems, to design policies that we bring to government.

    Now, I've been doing some writing and commenting for business groups. For example, my own institute at the university gets funds to collect data on energy for industry for the whole country, and we've worked with the group CIPEC, the Canadian Industry Program for Energy Conservation, which is strongly supported by industry. They want that separate from government. So we've always had the data that we collect separate from government available to industry.

    I would assume that if industry is proactive here, it can minimize the role of government controlling what it does.

    Mr. Brian Fitzpatrick: That involves a lot of trust--

    Mr. Mark Jaccard: Anyway, I'm just saying I've seen examples of this. But I should let others talk about what the plan involves.

    Mr. Matthew Bramley: On your point about emissions, I would make the analogy with financial accounts. Financial markets expect companies to produce reliable, verified financial accounts, and increasingly, the public expects companies to produce reliable environmental accounts, which means accurately measuring and publicly declaring their emissions. Of course, many companies do this voluntarily, and they see it as part of good corporate citizenship.

    For greenhouse gas emissions, there's a voluntary program in Canada whereby many large emitters, including several companies from Saskatchewan, as it happens, voluntarily declare their greenhouse gas emissions. The National Pollutant Release Inventory, under the Canadian Environmental Protection Act, is now requiring major emitters of so-called criteria air contaminants, basically from fuel use, to declare those emissions The extra effort to calculate greenhouse gas emissions, once you've already had to calculate those criteria air contaminant emissions, is very minimal, so I don't think it's a big burden on industry. That certainly isn't the intention.

    On your point about government interference in the economy, one way of looking at Kyoto is to say that it's a first attempt to try to reflect in market prices the cost of environmental damage. Unfortunately, if government does not intervene, the cost of damage to the public environmental good does not tend to be reflected in prices. So if you really want to start having behaviour change in response to price signals that do reflect environmental damage, you do have to have a degree of government involvement. If you do that through an emissions trading system, which is what the federal government is proposing for large emitters, it can actually be done with very little administration. Government merely sets the overall cap and issues permits, and then the industries are free to make their own decisions as to how they comply with the system.

    Mark has eloquently talked about policy instruments where government regulates a target, but then flexibility is given to the emitters or the producers, whoever the industrial actors may be, as to how they meet that target. Again, I think that can be done in a way that involves very little bureaucracy.

º  (1650)  

    Mr. Brian Fitzpatrick: Let's say there's a manufacturer back in Saskatchewan that just said to the government, we've done our inventory and this is the way it is, and we won't need any government to come along and double-check on it. Then they come back a few years later and say, we've done a whole lot of innovation in our plant, and our emissions are down 20% or so. Don't they have to get somebody in the government to give them a credit for this? Somebody has to come along and police this. Or are you just going totally on complete trust that everybody is going to be totally honest and provide this information and you're not going to have to have the heavy hand of government coming around to double-check everything and make sure the information is accurate?

    Mr. Matthew Bramley: Once again I've made the analogy of financial accounts, where you have to have your accounts verified by credible verifiers. I know there have been problems with that recently. You're going to have to have a system of credible verification. That is regarded as normal practice in financial accounting, and I think it should be regarded as normal practice in environmental accounting, too.

    Mr. Brian Fitzpatrick: I'm going to use the IPSCO example. They're a very competitive manufacturer of steel pipe on the Prairies. They are recognized as leading edge people on efficiency and Canadian waste and all that sort of stuff, and they have to be because of where they're located. Everybody assumes everything is manageable. IPSCO relies on a power utility that generates its power from coal. It says that's a major disadvantage in trying to produce pipe vis-à-vis other competitors. Their point of view is, if you're going to drive up our energy costs in Saskatchewan for that pipe, it isn't manageable for us, so we're going to shut down our operation and relocate it in the United States or potentially some province that produces hydro power; we're already manufacturing pipe in Iowa, and there are a lot of other more favourable things in place.

    I'd like somebody in this group to explain to me how you tell an industry like that their problem is manageable.

    Mr. Matthew Bramley: One of the attractive features of an emissions trading system, which is proposed for the large emitters that represent something like 50% of Canada's emissions, is that you have almost total flexibility as to how you allocate responsibility to reduce emissions between different sectors.

    If you have a sector that comes forward and says, we have a legitimate competitiveness issue here and we need to be given a more generous allocation, then that can be taken into account in those negotiations. But government has total flexibility as to the allocation of the permits between different players in the system.

    Mr. Brian Fitzpatrick: That involves a lot of government to achieve the purpose, right?

    Mr. Matthew Bramley: It will require an arduous negotiation, which I hope will be carried out as quickly as possible to create the certainty to allow the system to go ahead.

    Mr. Brian Fitzpatrick: Like the firearms registration.

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

    Mr. Jeremy Rudin: Mr. Chairman, if I might add, on the question of steel--

    The Chair: Sure.

    Mr. Jeremy Rudin: --on page 31 of the plan there are estimates of how much costs would increase in both conventional steel production and electric arc steel production as a result of this. There certainly are cost increases, but as a percentage of current prices you'll see that they're very small.

    Mr. Brian Fitzpatrick: The CEO of IPSCO doesn't agree with that. He says it's going to be a lot more than what you're saying.

    The Chair: I want to make a comment on that. I haven't been in industry for a while, but in the province of Ontario--I'm not sure of Saskatchewan--every stack and every emitting portion of a manufacturing plant is permitted by the Ministry of the Environment today. So if you were going to add stacks, you would have to get a permit to do that. So that's all in place in the province of Ontario.

    I don't know whether that is the same across the country. Could anybody comment on that?

    Mr. Mark Jaccard: Yes, it generally is.

    The Chair: It generally is, so we're doing that today.

    Mr. Mark Jaccard: Yes.

    The Chair: Thank you.

    I will go to Mr. McTeague.

    Mr. Dan McTeague (Pickering—Ajax—Uxbridge, Lib.): The idea of ratification requires--one assumes, and is comfortable with the notion--that climate change is the result of CO₂ greenhouse gases and that we are not in fact dealing necessarily per se with pollution, but with the belief that this is an acceptable target and around that we'll have to create an environment and infrastructure that will assume a more positive, or less negative, outcome as a result of pursuing these new technologies.

    Mr. Jaccard, I was very interested in your comments, as I was in those of the others. I am painfully aware of the imperative of the relevant markets as it relates to energy. We certainly saw that in California with the carbon regulations you were referring to a little earlier. Two years ago the President of the United States had to involve himself in several states that had varying standards of gasoline, as an example. We saw, of course, increases in prices for a number and variety of energies, and I'm not going to get into Enron issue of the speculative market.

    You raised the issue of sequestration. I too am interested in sequestration, but of course burying CO₂ in gas wells is a great idea until of course there's a question of liability when these gases potentially escape, as they did in Africa in 1990, killing hundreds of people. I think you know the case I'm referring to.

    We also know in my province, for instance, that the hydrology of our province limits us in terms of our ability to look at other forms of resources. We're not going to be able to compete with Quebec. And in your province of British Columbia we know what happens when rivers dry up, as they did last year, and the issue of producing energy from hydro became somewhat more limited.

    I'm not an advocate of the mix of energies that are out there, but I am painfully aware of what happens when Canada, for instance, goes back to see if it can perhaps cash in on some of the credits and finds out that Europe is quite willing to go with a 1996 per cent below figure, because of course in that period of time Russian natural gas has been able to pretty well convert most of the energy, or the sources by which we derive energy, in most of Europe. So for them it's a win.

    Given the relevant market is the U.S.--and you've stated that there are many jurisdictions that have varying forms of energy--how do you see it possible for us to assert with some confidence that this is not going to have a dislocative effect on our economies heretofore?

º  (1655)  

    Mr. Mark Jaccard: So we're talking about the Kyoto--

    Mr. Dan McTeague: Correct. The implementation.

    Mr. Mark Jaccard: Achieving Kyoto.

    Mr. Dan McTeague: Right. Your presentation seems to demonstrate that it seems to be okay and I think that's true of Mr. Bramley and certainly the Department of Finance.

    Mr. Mark Jaccard: No, if you look at my overhead, I'm suggesting that Kyoto is very expensive. If you look at number five, the CIMS line, which says $150 per tonne of CO₂ at 180 megatonnes, that's a very high cost. That leads to very high energy prices and a great deal of dislocation in the economy.

    That's why if you look at the next overhead, number six, I show what happens when you put in strong policies and relax the time deadline of Kyoto to 15 years, and then 20 years, for the same 180 megatonne reduction.

    So I am someone who is very concerned about what we're doing with respect to Kyoto. The message I was trying to give, though, is that if we're hell bent for ratification, then there are things we can do on a policy side that can start to get those costs down right away. I talked about them, and Matthew Bramley has been talking about them as well.

    I do a lot of work on long-term energy system forecasting--50 years, 100 years. In the long term, we're heading to an energy system where our secondary forms of energy will be primarily electricity and hydrogen. Almost everyone agrees on that. The big debate is what will be the primary forms of energy--mega-hydro power, small renewables, nuclear, fossil fuels with the CO₂ sequestered in some way, and I see these as big issues in environmental risk. I've studied very closely the issues where CO₂ may have escaped from the ground, and people are doing a lot of research into that particular risk. It still may be that fossil fuels are our best option over the next 100 years, are the least risky, relative to any of the alternatives.

    Mr. Dan McTeague: On the issue that was raised earlier, windmills, I have the largest windmill in Canada. It was put right next door to a reactor in my riding. As you know, four of the eight reactors are down, and of course, some of the by-products are sitting on a dock--that is, the spent rods--out in the open.

    The ratio I've heard--and maybe Matthew Bramley could give me some help on this--is that for every 10,000 windmills, you get one nuclear reactor. Perhaps the number is exaggerated. Do you see the possibility of meeting our targets? Is it 1,000 or 10,000 windmills?

»  (1700)  

    Mr. Mark Jaccard: It's l,000 windmills.

    We're now putting up windmills that are about 1 megawatt--and smaller, too. A nuclear reactor might be about 1,000 megawatts.

    Mr. Dan McTeague: Then my question to you is this. Obviously you've suggested a cost and that, over time, a delay or implementing this slowly but surely might be the better approach in terms of dislocation. But given that many other nations will not be participating in this, is there for Canada an objective that you think will clearly say that in 10 years this will be a better economy for the changes that we have, the technologies that we involve ourselves into?

    Mr. Mark Jaccard: There is a debate, and Matthew has been involved in an interesting document--and this is an area in which I do research as well. It's the argument that, if you guess right and you put in regulations that the rest of the world will eventually follow, then there could be very large benefits to your economy in doing that. Whether or not it's a regulation, you put in policies that induce technical change in a certain direction in your economy. The challenge to that is, do you want government involved in trying to guess right?

    My own take on this is somewhere around, yes, government could play a role here. Government can say, we think energy systems are going to have to be less environmentally risky, whether it's nuclear or fossil fuels, so let's start heading down that path. That's why there are some strong arguments to ratifying Kyoto and getting the jump on where the world is headed.

    I do note--and then I'll let Matthew answer--that I do a lot of advisory work with the Chinese government. I go there twice a year. I'm going there on Saturday. For 12 years I've been doing this. People all say that China and India are going to keep increasing emissions. We tried to help them look at policies like renewable portfolio centres, getting rid of coal subsidies, to reduce their emissions. Prior to 1997 they did nothing. When the Kyoto accord was signed, the Chinese did not want to be left behind in terms of technological change and immediately started to get rid of the coal subsidies and put in a renewable portfolio standard. In terms of their emissions, the trajectory they were on, they've pulled far away from that trajectory. So there is this debate about whether or not you can benefit by getting out ahead.

    I don't know if you want to add to that, Matt.

    Mr. Matthew Bramley: I just want to start by saying that obviously the primary purpose of Canada participating in Kyoto is not economic; it's environmental. It's because we want to be part of the international effort to address this pressing global problem. If you look at the modelling done for costs, the worst-case modelling results for the impact on Canada's GDP is in the realm of a couple of percentage points of GDP. That is relative to a strong underlying growth, so over a decade you'd have something like 30% growth, and I'm saying in a worst-case scenario that might fall to 28%.

    Is that a big impact? I would argue it's actually quite small relative to the margin of error in the modelling and the underlying growth, and that's before we've talked about a range of benefits. I've talked about how these models don't do a very good job of modelling technological innovation and the benefits that can provide--the longer-term benefits in Canada's positioning as a low-emissions economy beyond the Kyoto timeframe. The benefits to health have been estimated at hundreds of millions of dollars per year from reductions in air pollution.

    Of course, the whole point of this is to reduce climate change. Climate change, if left unchecked, is going to have extremely costly impacts. Kyoto is only the beginning, but if we don't get on this path toward preventing damaging climate change, we're going to face extremely high economic costs from allowing it to proceed.

    Mr. Dan McTeague: Thank you, Mr. Chair.

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

    Monsieur Crête.

[Translation]

    Mr. Paul Crête: Under the framework of implementing such measures, which method would you favour so that provinces that are doing a good job do not feel penalized? It will be important, over the next few years, for people to have the sense that the results were worth the sacrifice. I would like you to explore our options for improving the situation and so that people who have already made an effort, feel satisfied.

»  (1705)  

    Mr. Matthew Bramley: This issue will be addressed during negotiations on emission allocation under the system for large emitters.

    In my presentation, I already said that I would like greater emphasis to be placed on the polluter pay principle in emission allocation. The federal government said that each sector would be allocated up to 85% of its emissions for free, which means that even a sector or sub-sector whose emissions have increased significantly will still get 85%. That is the opposite of the polluter pay principle. The best use of the polluter pay principle would be to auction off emission allowances and reinvest the revenue into the economy by lowering taxes, for instance. It is probably unrealistic in the current context, but I would like some of the emission allowances to be auctioned off.

    We could also consider giving free emission allowances to renewable energy producers. Those producers are currently not receiving any emission allowances.

    There are things we can do in emission allocation that would reinforce the polluter pay principle. We could increase financial penalities for the largest emitters and compensate those who emit less or have reduced their emissions the most.

    Mr. Mark Jaccard: I believe that the federal government should tell the provinces to negotiate among themselves. In Europe, there is no federal government to go up against and I see that it took European governments (with help from economists) no more than a year to negotiate allowances for each country. As such, Spain is entitled to a significant increase in its emissions, whereas Germany must decrease its own. It surprises me a little to see that here, within a single country, we cannot reach an agreement.

    Mr. Paul Crête: What would it take for us to reach an agreement on these issues? In Europe, I believe it is called a triptych approach.

»  (1710)  

    Mr. Mark Jaccard: What type of approach?

    Mr. Paul Crête: Triptych approach. This approach takes into account the sectors, geography and another element, and in effect, what you are saying was achieved. Here, what would it take for this to occur?

    Mr. Mark Jaccard: The federal government should tell the provinces to negotiate among themselves.

    Mr. Paul Crête: It could add that this could be done between the provincial governments, provided that they meet the objectives, somewhat like the model you propose for the private sector.

    Mr. Mark Jaccard: Today, Alberta is the one fighting with the federal government, but the battle is, in fact, with the other provinces as well , over the cost breakdown. Each province can challenge the federal government, but one day there will have to be negotiations between the provinces. That is what I mean.

    Mr. Paul Crête: Help me understand this better. The Government of Alberta, for instance, could say that, to assume its responsibility, it is prepared to buy or sell, depending on the point of view, some pollution points, so another province that has made extra efforts or has a better track record will receive a kind of benefit from Alberta's being obliged to correct its situation. Is that it?

    Mr. Mark Jaccard: Yes, but in Europe they have calculated the marginal cost for each country, and that calculation gives the cost breakdown. The Europeans have established targets or objectives for each country, according to a more or less equal distribution among the countries. So objectives can differ markedly from country to country.

    Mr. Paul Crête: I would like to have Mr. Bramley's point of view.

    Mr. Matthew Bramley: I could make two points. There are differences between Canada and Europe.

    First of all, here the federal government has never wanted to do a province-by-province breakdown, at least that is what I have gathered from the ministerial negotiations.

    The other difference is that, in Europe, the European Union itself ratified the Kyoto protocol, and all member states did so as well. So each member state had responsibility as a sovereign state, because it has ratified an international protocol. In Canada, the provinces do not ratify the protocol individually, which raises some questions. If a province had a target, how would we ensure its compliance? What legal tool could be used for that?

    Mr. Paul Crête: Here in the federal system there is a bit of a negotiating game going on. The federal government has international responsibilities as far as its commitments go, but actually meeting the objectives has a lot to do with the provinces. Somewhere between the two, there is the extraordinary bargaining power available to the provinces. If Canada wants to see its international commitment respected, the provinces are going to have to agree to get involved.

    Mr. Matthew Bramley: The provinces have a major role to play in emission reduction, but there is a lot the federal government can do without provincial agreement to reduce emissions, if needed. The ideal would be for everyone to agree, but the federal government does have a lot of tools available to it.

[English]

    The Chair: Thank you very much.

    Mr. Volpe.

    Mr. Joseph Volpe: Thank you, Mr. Chair.

    Mr. Rudin, I'm intrigued by your presence here, and I thank you for coming. Since they've been doing economic models, has the finance department done any economic models relative to Kyoto and its impact on the economy--industrial growth, jobs gained and lost, and revenue to the finance department through CCRA?

    Mr. Jeremy Rudin: The finance department participated, in quite a bit of detail, in an earlier round of modelling. That was where I met these gentlemen. The exercise was run by the Analysis and Modelling Group that Matthew Bramley mentioned, which culminated in a report by the AMG in November, 2000, called “An Assessment of the Economic and Environmental Implications for Canada of the Kyoto Protocol”. Four modelling groups were engaged, essentially as consultants. Mark Jaccard's research group was one of them. Our research division--

    Mr. Joseph Volpe: Mr. Chair, could our researchers get copies of these and distribute them, if we don't have them?

    I'm sorry, carry on.

    Mr. Jeremy Rudin: I said four groups functioned essentially as consultants to the Analysis and Modelling Group, one of which was Mr. Jaccard's research group, and another a research group in the finance department. Again, these functioned more or less as consultants.

    In the more recent round of federal modelling, different consultants were engaged. Neither Mark Jaccard's group nor ours participated in this in any detail. We're not plugged into the details of the data collection consultation with stakeholders, as we were in the year 2000.

    That said, we have a variety of things or models of various descriptions. In the course of our ongoing responsibilities, we do need to keep an eye on and ask ourselves what our models might imply, or what the economic and fiscal implications might be.

»  (1715)  

    Mr. Joseph Volpe: Now, your colleagues in NRCan and Industry Canada have been doing their own modelling. Their reports recently made the newspaper headlines. We have Environment Canada's models, thanks to the briefing notes that the minister made available to parliamentarians. Where are yours?

    Mr. Jeremy Rudin: Okay. Well, let me back up just a bit. In terms of NRCan, I suppose they have some in-house models. But their principal involvement in the modelling—for example, with the deck or the presentation on the climate change website—was to run or manage the consulting contracts with the two new consultants who they had engaged.

    Industry Canada has a recently released, albeit fairly old, paper on where they use a model they constructed at the time. It's an interesting model and interesting paper, but it's not so much about the current plan.

    Mr. Joseph Volpe: No. But you're right that it is a plan with some assumptions about the validity of Kyoto as a philosophical position not adulterated by other considerations.

    These considerations, Mr. Jaccard, involve trading in credits and achieving particular objectives through in-house domestic strategies. I assumed these would be acceptable to anybody who wanted to buy into the argument this is a valuable exercise for Canada to go into to exercise leadership.

    It's only a few years old, and it certainly came after the signing of Kyoto and obviously before ratification. I'm assuming it still has relevance. I was intrigued that it was dismissed a little bit by one department of government. You're suggesting that perhaps it might be the prevailing view.

    Mr. Jeremy Rudin: My view of the recently released Industry Canada study is that it's an interesting study, but that the policy measures to implement Kyoto, which are assumed in the modelling, are not representative of the current plan. Therefore, I think it's currently of limited applicability.

    Mr. Joseph Volpe: Perhaps I could just switch back to Mr. Jaccard. I think this question is probably more related to you, because we—or Mr. Bramley, I guess—were initially talking about naturally developing efficiencies in the exploitation of natural resources.

    But I'm wondering if I can take you back to the demographics. Canada is one of the few industrialized countries in the world where we have population growth, where the national government has said we have a particular demographic target. If we meet the target by 2012, the population of Canada will have increased by an additional 10%. Given the nature of the clientele we're targeting, it's quite possible that we would be getting or increasing the population of the same type of consumers currently prevailing in the population.

    Is it fair to assume that the consumption rate, and therefore the emissions that will be the outcome of that consumption rate, would increase appreciably as well? You would have greater numbers—even if you had built in some greater efficiencies. I don't know whether this is better.

    Mr. Mark Jaccard: The 240 megatonnes that you hear talked about, that's 240 megatonnes based on a forecast, a business-as-usual forecast for the year 2010. So it factors in population growth, consumption patterns. It in fact generally assumes that consumption stays business as usual in its attributes. So R-2000 homes don't penetrate greatly, efficient cars don't penetrate greatly. That is why I'm alarmed, because that's a 30% drop in emissions to get down to 6%, if you did it all domestically, which the government is not, and if you did it all with the kind of actions we talked about.

    Mr. Joseph Volpe: If I understand that concept of business as usual, and if we both agree that it means those models have taken into consideration a 10% demographic growth with the attendant consumption rates, then.... I don't mean to be Machiavellian about this, but if we shut down our demographic growth rate--easily done, by the way; there's a department of government that can do that when we go back into the House tomorrow--you would have presumably a 10% reduction built in right away, would you not, Mr. Jaccard?

»  (1720)  

    The Chair: Your last question, Mr. Volpe. I'll let him answer it.

    Mr. Mark Jaccard: My answer is yes.

    The Chair: Mr. Rajotte.

    Mr. James Rajotte: Thank you, Mr. Chairman.

    I want to follow up, Mr. Rudin, with you and Bob, on some of the points my colleague Mr. Volpe was making.

    In Mr. Bramley's presentation, his fourth point dealt with policy uncertainty. I think he stated that the climate change document from the federal government does lack clarity. Then he went on to say that the government should act quickly once Kyoto, we assume, will be ratified next week, which would assume the next federal budget. So the detail that is lacking in the document from Environment Canada would obviously be filled in by finance in terms of the fiscal incentives, in terms of the distribution of costs that Mr. Jaccard talked about, in terms of the policy measures.

    Can you fill us in on what specific actions or policy measures are being talked about within Finance for the next federal budget, which would implement Kyoto? Are they talking about tax credits for renovation of buildings? Are they talking about credit for purchase of a hybrid vehicle? Are they talking about more money for infrastructure? Can you just highlight some of the proposals for us?

    Mr. Jeremy Rudin: To the best of my knowledge, all of the proposals that will be considered in the upcoming budget are set out in the planned document. The question will be which of these proposals are brought forward in the coming budget.

    As I was saying earlier, I would expect we'll continue to do budgeting, as we have. So we'll be investing in climate change to the extent that there are fiscal resources available and how it reflects the government's ranking of priorities, and we'll proceed step by step, so that I would not expect to see an unveiling of a 10-year plan with every single detail in the upcoming budget. That wouldn't indeed be consistent with the principles set out in this plan--that the plan should evolve, that we should proceed in stages. Which of the many things that are suggested here are more likely to be represented in the upcoming budget, frankly, I simply couldn't say.

    Mr. James Rajotte: I'm not asking for every detail in the budget as to what is going to be done, but there should be some indication, certainly to industry, which is very concerned about the implementation plan, of some of the details and some of the actions that the government's going to take. They've been asking for that for some time. I think it's a reasonable request, even for those people who are strongly supportive of Kyoto.

    Let me just ask about one specific proposal in the latest document, which is this notion of building a CO₂ pipeline. Is industry expected to build that pipeline or is the government going to finance the building of that pipeline?

    Mr. Jeremy Rudin: I'm afraid I have to tell you this all remains to be determined.

    Mr. James Rajotte: I find this astounding. The finance department is going to introduce a budget, in which case it's going to allocate money to infrastructure, in which case it will obviously do some fiscal incentives to help us all reduce our emissions. Is there no set of priorities that they're going to highlight here, other than the broad measures outlined in the Minister of the Environment's plan? Is that what you're telling us?

    Mr. Jeremy Rudin: I don't think I'm saying that. I'm not saying that there won't be any specific measures funded in the budget. I'm saying I'm not able to tell you today which specific measures will be funded in the upcoming budget.

    Mr. James Rajotte: Well, it seems to me that the main concern of a lot of industries, even those industries that do support Kyoto, is the fact that there's a lack of detail as to what sorts of costs they will be expected to bear and what sorts of programs the government will implement. So you cannot highlight for us today any priorities or allay any of their concerns by saying that the finance department, once Kyoto is passed on Monday or whatever, next week.... We expect a federal budget fairly soon--in the new year, I would suspect. Certainly the finance department should be identifying a list of priorities as to what they're going to do in this upcoming budget.

»  (1725)  

    Mr. Jeremy Rudin: The department is identifying a list of priorities, but the question you asked me was, which are the more likely items to be funded or which items will be funded? The answer is that I'm not in a position to tell you that. You'll have to wait for the budget.

    Mr. James Rajotte: Am I the only one here that...? There's this CO₂ pipeline idea put in a document, and there's no notion--or maybe there is a notion and you just can't tell us. Is there a notion within the finance department that they may actually build this pipeline? If so, what will the cost be? Has that idea at least been costed out?

    Mr. Jeremy Rudin: That's a perfectly legitimate question, but I don't know the answer. I don't have that much detail in front of me. There may be a fully costed proposal and I just haven't seen it--or I don't remember seeing it--or there may not. It's not a very good answer but it's a truthful one.

    The Chair: I understand that Minister Manley is still consulting. I take it the finance committee is still doing something. Is that finished?

    Mr. Jeremy Rudin: We've finally finished our report.

    The Chair: They've finished their report. I know Minister Manley is consulting.

    Mr. James Rajotte: Well, I think that's just astonishing, but maybe I'll move on to Mr. Jaccard.

    I am interested in the fact that you do recommend a longer time period. What time period are you recommending in terms of bringing in the Kyoto targets?

    Mr. Mark Jaccard: You need the turnover of capital stock. That's why I had numbers in there for 15 and 25 years, when things can happen quite dramatically.

    I was also interested in this new plan the government is talking about with respect to some of the covenants it might negotiate with industry, where it would say, all right, we understand that you can't do as much by 2010 as we hoped, but we expect you to do that much more by 2020. That seems to be legitimate, and I think there are provisions in Kyoto--Matthew may know better than I--that allow Canada to take advantage of some of those provisions and do more later. That would have to be in sectors where there is some real technological potential, obviously, cost-effective potential for dramatic change over a longer time period.

    That would just be part of how you would structure this thing. I'm seeing some of that in the plan, which is encouraging to me.

    Mr. James Rajotte: I want to ask him, doesn't Kyoto not allow that, in the sense that by 2005 there has to be substantive progress made? The accord, I think, states in section 3 that it's between 2008 and 2012, which is not very far away in terms of economic cycles. Is that allowable under the Kyoto accord?

    Mr. Matthew Bramley: I want to first answer the question about the longer timeframe. One often hears economists saying that while Kyoto is not economically optimal and it would be better to have a different timeframe from purely an economic perspective, this often loses sight of the political reality. That is, when governments face a timeline that is too far away, very little happens until suddenly you find yourself a few years before the timeframe and you suddenly have to do something. I think that's why it's important to have a timeframe on the order of 10 years, and that's why I worry when I see in the Alberta plan that most of the emission reductions are delayed until after 2010. One has to be skeptical about whether they would actually materialize.

    To answer your question about timelines in the protocol, the protocol does say that countries have to show demonstrable progress by 2005. I believe that there is a compliance committee that has been set up under the protocol, and it has an enforcement branch and a facilitative branch. I don't recall which of the branches it is that will carry out the assessment of demonstrable progress, but to my knowledge there is no language that really gives that assessment very much in the way of teeth. I think it will be more of a case where a country that has not really done anything very significant will be held up to some shaming internationally, but I don't think there's anything in the way of concrete penalties.

    Yes, 2008 to 2012 is the compliance period. Canada's emissions during that period will be measured. Any credits Canada has purchased internationally will be added to its allowed amount, and then the reckoning up will be done. As you know, Canada has the opportunity to buy credits on the international market if it is unable to comply through purely domestic action.

»  (1730)  

    Mr. Jeremy Rudin: Wasn't there also a provision, though, that if Canada missed its target, the penalty might be simply to do more in subsequent periods? I may be wrong, so I'm just asking you.

    Mr. Matthew Bramley: That's correct. The principal compliance penalty is that if we overshoot on our emissions, that overshoot in terms of tonnes of carbon dioxide equivalent is multiplied by 1.3 and we then have to make that up in the subsequent commitment period.

    The Chair: I'm going to let Mr. Discepola and Mr. Savoy both ask one short question, and then we'll let the panel answer. Thank you.

    Mr. Nick Discepola: My question is for Mr. Rudin.

    In my previous questions, I don't think I got an answer to this. What mechanism is the government--I presume it would be the Department of Finance--going to use to make sure the impacts of Kyoto are not unduly felt in one region or one province? Is it similar to, say, equalization payments that we use right now? Has a mechanism been thought about, and will it be a monetary compensation to the province, or what kind of compensation will it be?

    Mr. Andy Savoy (Tobique—Mactaquac, Lib.): Mine is just a basic, almost yes-or-no kind of answer. As sophisticated as models can be--and I know that some of them are quite amazing--I assume that your economists and/or mathematicians.... Is it possible in some of the better models to include, vis-à-vis Canada, U.S. policy or non-policy on Kyoto, those impacts on the Canadian situation, or are the models strictly within our boundaries? Can we actually factor in parameters emitting from the U.S. and its impact on our economy?

    Mr. Mark Jaccard: Yes, we do factor in the U.S., and there are various ways to do it. There are people who actually build joint models. There are people who have parameters...this is what I have in a model that shows how trade relationships might change as the cost of production for Canadian industry changes, for example. Another model involved here had energy exchanges and transmission lines built from the United States to Canada. So those things are in our models to some degree.

    Jeremy, do you want to add something?

    Mr. Jeremy Rudin: No, that's an excellent answer to the second question.

    As far as the first question goes, what the plan anticipates is not a system of cash payments to compensate, but rather, quite a large suite of policies such that the entire suite together distributes as evenly as possible the burden across regions.

    One particular aspect, for example--and Matthew Bramley mentioned the counter-example before--a system of emissions trading, an emissions permit requirement, a very simple system that was broadly applicable across the country and where the permits were given away, say, to consumers, in the first instance, would have very different regional impacts. This is one of the things that Mr. Jaccard and I were able to establish along with the other consultants in the 2000 exercise. That has very different impacts from region to region because it falls very heavily on things like oil sands production, coal-fired electricity production, all of which happen to be found in one region more or less.

    So the plan we have is a much more complicated plan than that very simple policy, and part of the reason, although only part, is to come up with, as I said, a suite of policies that has a more even regional distribution. And indeed, while emissions trading is an important part of the plan, it's not a simple emissions trading scheme at all; it's based on an output-based allocation, as Mr. Bramley mentioned briefly, and although that does add a certain amount of complexity, it has the very important feature that it does even out the regional impact quite a bit.

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    The Chair: Thank you very much. I want to thank the witnesses for appearing today on short notice. This will surely make the industry committee a little more knowledgeable on the input on Kyoto and going forward, and I'm sure there will be a lot of discussion with the Minister of Finance and the Minister of Industry as we go forward on behalf of the industry committee.

    I want to thank you all for coming and sharing and being with us today. It was very, very helpful. Thank you very much.

    The meeting is adjourned until tomorrow.