Proceedings of the Standing Senate Committee on
Energy, the Environment and Natural Resources
Issue No. 45 - Evidence - May 8, 2018
OTTAWA, Tuesday, May 8, 2018
The Standing Senate Committee on Energy, the Environment and Natural Resources met this day at 5:08 p.m. to study the subject matter of those elements contained in Part 5 of Bill C-74, An Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018 and other measures.
Senator Rosa Galvez (Chair) in the chair.
[English]
The Chair: Good evening, and welcome to this meeting of the Standing Senate Committee on Energy, the Environment and Natural Resources. My name is Rosa Galvez, a senator from Quebec and I’m the chair of this committee.
I will now ask senators around the table to introduce themselves.
Senator Cordy: Senator Jane Cordy, Nova Scotia.
Senator Patterson: Dennis Patterson, Nunavut.
Senator Neufeld: Richard Neufeld, British Columbia.
[Translation]
Senator Mockler: Percy Mockler from New Brunswick.
[English]
The Chair: I would also like to introduce our staff, our clerk Maxime Fortin, and our library and Parliament analysts Sam Banks and Jesse Good. Today we continue our study on the subject matter of Part 5 of Bill C-74, An Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018 and other measures. Part 5 of the bill deals with the Greenhouse Gas Pollution Pricing Act.
For our first panel we will hear from two organizations. From the Railway Association of Canada, we have Michael Gullo, Director, Policy, Economic and Environmental Affairs. And from VIA Rail Canada, we welcome Pierre Le Fèvre, Senior Advisor to the President and Chief Executive Officer; Jacques Fauteux, Director, Government and Community Relations; and Bruno Riendeau, Director, Safety and Sustainable Development.
Thank you for joining us. I invite you to each proceed with your opening statement, after which we will go to a question and answer period.
Pierre Le Fèvre, Senior Advisor to the President and Chief Executive Officer, VIA Rail Canada: Chair, Senator MacDonald.
[Translation]
Hello, ladies and gentlemen of the committee. I am Pierre Le Fèvre, Senior Advisor to the President and Chief Executive Officer of VIA Rail Canada and director of corporate and strategic planning. I am pleased to be here today with my colleagues Bruno Riendeau, Director, Safety and Sustainable Development, and Jacques Fauteux, Director, Government and Community Relations.
As a non-agent Crown corporation, VIA Rail Canada offers Canadian travellers safe, efficient and environmentally friendly rail service.
[English]
VIA Rail’s corporate shift to a customer-centric model in 2014 has led to unprecedented passenger and revenue growth. For four consecutive years, VIA Rail has recorded an increase in revenue, as well as an increase in ridership for the past three consecutive years. With an increase of over 10 per cent compared to 2016, nearly 4.4 million Canadians made the choice last year to leave their cars in favour of taking the train.
As we celebrate the fortieth anniversary of our corporation, the 2018 federal budget recognized Canadians’ growing and renewed trust in passenger rail service. The government awarded us, VIA Rail, the necessary funds to renew its train fleet in the Windsor-Quebec City corridor. By as early as 2022, our passengers will be able to enjoy modern and accessible cars, meeting the highest international environmental standard.
[Translation]
Allow me to make an important point. Our service is becoming increasingly popular, and the capacity of our trains is growing, which means higher energy consumption. That said, since 2014, for every additional tonne of emissions produced by our trains, VIA Rail Canada has prevented 2.2 tonnes of car emissions since those trips are made by train rather than by car.
Moreover, this ratio will be multiplied by the introduction of lighter locomotives and rail cars that use less energy, and the optimization of these new rail lines with the introduction of high-frequency rail, or HFR, which I will talk about later — and which Mr. Yves Desjardins-Siciliano discussed in his last report.
More than ever, sustainable mobility is at the very core of VIA Rail Canada, which leads me to two important points in our presentation today. First, I will discuss our environmental performance in recent years, and then outline our current and future efforts related to climate change.
Last month, VIA Rail Canada published its third sustainable mobility report for 2017. Let me give you a few practical examples of our commitment. VIA Rail Canada has reduced its trains’ GHG emissions by 30 per cent since 2005, for a reduction of more than 52,000 tonnes of CO2, which exceed the objective of 20 per cent for 2020.
Since 2009, we have improved our fuel efficiency by making changes to our train handling, which has allowed us to reduce our GHG emissions by 24 per cent. The technology we created to reduce fuel consumption also earned us the environmental award of excellence from the Railway Association of Canada.
In addition to our efforts and creative solutions to reduce our environmental footprint, our most promising plan is that of introducing high-frequency rail in Canada, a proposal that was submitted to the federal government in 2016. Allow me to explain the real environmental benefits of this ambitious proposal.
[English]
As members of the committee are aware, VIA Rail has developed a proposal for High Frequency Rail, which we call HFR service, between Quebec City and Toronto that would see VIA Rail operate on dedicated tracks exclusive to its service. This would allow VIA to significantly increase service frequencies and reduce travel times by as much as 25 per cent.
Above all, VIA Rail’s HFR plan would result in clear benefits to the environment as the ridership is forecasted to reach 9.9 million trips by 2030. It means eliminating greenhouse gas from the equivalent of 2.3 million cars, or a 10 per cent reduction in vehicle emissions every year.
[Translation]
Our proposal would reduce CO2 emissions by 12.5 million tonnes by 2050. If the service was fully electric, the reduction would be 13.9 million tonnes.
In short, one of the keys to sustainability is our determination to reduce our carbon footprint. VIA Rail’s current and future service is part of a comprehensive solution to limit negative environmental effects and support the transition that we must all make, as individuals and as a nation, to a greener economy.
VIA Rail Canada wants to be the greenest method of transportation in the country and reduce Canada’s total carbon footprint. We believe that we can reach the GHG reduction targets that VIA Rail Canada has committed to, together with 65 other member countries of the International Union of Railways.
Finally, I would like to thank the committee for inviting us. We will be pleased to answer your questions.
[English]
Michael Gullo, Director, Policy, Economic and Environmental Affairs, Railway Association of Canada: It’s a pleasure to speak to you today. My comments will focus largely on the implications to the RAC’s freight railway members. With clear policy direction established in the Pan-Canadian Framework on Clean Growth and Climate Change, and Minister Garneau’s strategic plan for the future of transportation, railways are prepared to reduce transportation-related emissions by increasing the amounts of goods and people moved by rail. With its long-standing commitment to using fuel wisely and reducing emissions, Canada’s freight rail industry has lowered emissions by more than a third since 1990, while increasing workload by more than 80 per cent. The Canadian railway network consists of approximately 44,000 route kilometres across nine provinces and one territory. This network is operated primarily by two Class 1 railways and roughly 60 short-line railways.
With respect to the proposed bill, several federally regulated railways are already exposed to multiple carbon pricing policies, including the fiscal instruments in B.C. and Alberta, and the market-based approaches in Ontario and Quebec. These companies are required to meet multiple, often overlapping carbon pricing requirements to ensure they can secure a stable fuel supply chain to service their customers. The introduction of the Greenhouse Gas Pollution Pricing Act and supporting regulations will potentially introduce another layer of complexity in an already administratively heavy carbon pricing environment. We believe it’s critical for this legislation to recognize the unique aspects of the railway industry and its responsibility to provide a low cost and efficient service to Canadians.
My comments today focus principally on five areas. The first is the timing of the act. This bill aims to ensure all jurisdictions have a carbon pricing system in effect by January 1, 2019. The railway industry would like assurance that the resulting carbon pricing systems are not treated as temporary measures. This is important, as railways require an accurate understanding of fuel costs in order to understand operational expenses and establish rates. In the event the legislative proposal’s requirements come into effect and then change shortly thereafter through the introduction of new provincial pricing initiatives, railways will be faced with the challenge of reviewing their arrangements with customers in order to comply with new carbon pricing requirements. The RAC recommends the government requires relevant provinces to disclose their intentions to accept the Greenhouse Gas Pollution Pricing Act before the legislation becomes law.
My second comment is on transparency. Existing carbon pricing structures vary in terms of providing direction to fuel suppliers to disclose compliance costs to large purchasers of fuel such as railways. For example, B.C.’s carbon tax provides a transparent framework that ensures all parties of the fuel supply chain, from producers to distributors to users, understand the costs of carbon pricing. With respect to the proposed bill, the RAC believes the appropriate provisions need to be in place to ensure carbon pricing is transparent so that railways can understand the costs passed on by fuel suppliers.
My third point is about the recognition of renewable diesel, and again, about transparency. The general rules of application stated in item 8.6 provided quantification methodology for light fuel oil that makes an explicit reference to biodiesel and not renewable diesel. The RAC believes the bill should be amended to ensure that biodiesel and renewable diesel are treated the same. Both fuels are biogenic and have similar production emissions.
Also, the legislative proposal does not require fuel suppliers to disclose renewable or biodiesel blend rates. The RAC recommends a requirement be added to ensure fuel suppliers disclose all fuel blends so that registered carriers do not overpay nor default their respective warranties with the original equipment manufacturers.
My fourth item is about how the surcharge is applied. The legislative proposal indicates fuel imported into a province where the legislation applies will be subject to a fuel charge, while registered carriers can apply for a rebate when they export a portion of that fuel to another province where carbon pricing already exists. While the RAC and its members appreciate the government’s efforts to recognize that fuel used for railway operations is not static, it’s not clear how the fuel charge will apply when a railway imports fuel from a province where carbon pricing already exists.
The RAC is concerned a railway company may be obliged to pay carbon price in two jurisdictions for the same shipment of fuel and recommends the legislated proposal includes the appropriate provisions to protect railway companies from overpayment.
My last point is about reinvesting carbon pricing revenues into low-carbon transportation options. While this bill is not intended to establish a policy for how carbon pricing revenues should be allocated in Canada, we believe the revenues generated should be reinvested into real infrastructure projects for prospective railway customers.
The Government of Quebec has recognized the significant GHG savings that rail can deliver and has directed revenues from its cap and trade system to prospective railway customers for track, facilities and reload centres. No other programs exist at the federal or province level in Canada. We believe the federal government can play a pivotal role in demonstrating the leadership required to ensure goods are moved by the lowest emitting mode of transportation where feasible.
The Chair: Thank you very much. I don’t think we have copies of your statements. Could you please send it to the clerk?
Senator Patterson: I have one. It was in this binder here.
Senator MacDonald: Thank you for being here today. I see an old friend there. Hi Jacques; it is good to see you.
I’ll start off talking about the rail sector and diesel engines. I want to talk about diesel engines. I am one of those people who think the obsession with carbon is a little over the top in this country, but I have no problem in pursuing reductions in GHG emission and other emissions. I think the cleaner and more efficient all machinery is, we’re all better off. I’d like to see us pursue that.
I was struck over the years — and I have been on this committee for a number of years now — at the great advances with large ships and converting from diesel to LNG. It’s amazing the amount of effluent that comes from a large diesel engine, a large ship, but a lot of the large passenger ships in terms of freight are converting to LNG. You didn’t mention anything about converting the diesels in the train systems to LNG. I’m wondering if you’ve looked at that, how much you have looked at it? How far are we down the road to converting diesel engines on trains to LNG?
Mr. Gullo: I’m happy to answer it. If my colleagues want to supplement, that works out as well.
To answer the question fully, I would look at the existing railway emission footprint which, as I described, has been decreasing over time despite an increase in workload. That has principally been driven through investments in infrastructure that focus on enhancing system velocity and into new locomotives that follow a U.S. tier structure, and now a Canadian tier structure where we are becoming more efficient over time. There is the advancement of new and innovative operation practices, like distributed power and longer and heavier trains, and better load management. Those have been the principal drivers to the emission decreases despite the work loads increasing.
To answer your question spot-on about where things are going in terms of LNG, in its current state, LNG has been more of a research item. You’re seeing it deployed by the major Class 1 railways in North America for smaller operations. CN led some innovative work a few years ago where they piloted LNG locomotives. The other option — I would consider that an alternative fuel — is renewable fuels. Where you’re seeing more research and development, and going on parallel with the government’s clean fuel standard, is the increase of renewable fuel content into the diesel fuel supply chain.
LNG itself as a turnkey ready-made operation for the freight railway sector isn’t quite there yet. There are components that work, and there are components that do not work. The parts that don’t work are largely driven by economics, LNG fuel supply chains, the retrofitting costs associated with transitioning over the diesel fuel supply chain to the railway sector.
Senator MacDonald: Follow up?
The Chair: I think you have some complementary questions?
Senator MacDonald: I appreciate that. We know there have been large advancements in LNG engines that were formerly diesel engines on large ships. I think it’s unrealistic to think we’re going to get away from a carbon-based economy, particularly in the transportation sector. I don’t think it’s unrealistic to think that large diesel engines that drive trains, we’re almost to the point where they can be converted to LNG.
Even though it’s still a carbon-based fuel, it’s a much cleaner, much more efficient fuel than diesel. I’m just wondering, in terms of that evolution, when it comes to engines, how much work has the Railway Association of Canada done on it? How much are they pursuing it? When you talk about reinvesting money into the railways in the country, to reduce their footprint, would you recommend you invest the money into this type of technology?
Mr. Gullo: There are a couple of things there. The companies themselves are making advancements into alternative technologies. LNG is one of them. You have electrification, which my colleagues can speak to. You’re seeing that deployed in some of the commuter sectors. You also have new innovative ideas like Gensets and so on. Investments into alternatives are occurring.
The technology, the production on LNG, is in place. It’s a matter of deployment. It’s a matter of the significant infrastructure and retrofitting costs to existing locomotives, but also the fuel supply chain. The fuel supply chain in place right now to service all the different rail yards in Canada is expansive. It’s significant. To retrofit that, we’re talking about multibillion dollars in retrofitting costs. The economics aren’t quite there yet.
The Chair: I want to remind senators that we are talking about the carbon pricing tax.
Senator Massicotte: Thank you for being with us this afternoon.
I read your letter to the department in February, and obviously I heard you. What I heard predominantly in your argument, which is somewhat logical, is give us more money because we are so much more efficient than transporting goods — in your case, passengers — at a much lesser GHG cost. As you know, the government put out the proposal, how it is going to tax and how it’s going to work the system, the carbon pricing. Are you relatively happy with the structure, and the proposal the government is making?
Mr. Le Fèvre: Rail industry?
Mr. Gullo: My opening remarks focused on the fact that we have 44,000 kilometres across nine different provinces, one territory. The way things are working right now are less than ideal. You have the rising of regional carbon pricing structures and then you have large railway companies that traverse across the country having to comply with all the different provincial requirements. Now we have a new proposed federal requirement for jurisdictions that don’t develop their own by 2019.
From that aspect, I would argue that it’s less than ideal. If you’re a large company and you have representation across the country, that’s four or five different accounts. If there is an offsetting structure —
Senator Massicotte: It’s complex.
Mr. Gullo: It’s complex. It’s administrative heavy. In some cases, it is not always cognizant of our need to move fuel, to preposition it for the service —
Senator Massicotte: From a macro perspective, you must be pleased because you are immensely competitive with the greenhouse gases you emit compared to your competitors, trucking and so on. In that sense, you are becoming even more competitive as your customers or your clients would be. Am I correct in saying that?
Mr. Gullo: Theoretically, carbon pricing should translate into some gains for the railway industry because of its performance and GHG track record, and because of investments. In theory, it should.
Senator Massicotte: How about the February letter? Did you get a response from the ministry in that response? Did you have a meeting with them? Did they respond to your letter?
Mr. Gullo: Not explicitly, no.
Senator Massicotte: Are you getting feedback that says they will consider the point you raised?
Mr. Gullo: No explicit feedback yet.
Senator Massicotte: How about VIA Rail? We’re talking about the model. We’re talking about carbon pricing. How does that affect you?
[Translation]
Jacques Fauteux, Director, Government and Community Relations, VIA Rail Canada: Senator, first I would like to thank you for choosing to travel on our trains.
As to the implementation of the act we are discussing, VIA Rail Canada will of course implement the act as passed by Parliament.
Right now, we are interested in encouraging potential passengers to travel by train. Through our long-term plan, the HFR rail proposal that the government is considering, we think we can help reduce Canadians’ carbon footprint, from a public policy perspective, if the government approves the proposal.
In this regard, I think Mr. Gullo’s answer represents the rail industry. We are of course members of the association, but in terms of specific comments, we turn to our shareholder, the Government of Canada, to set public policy.
Senator Massicotte: Your annual report mentions a significant increase in passengers and revenues. That does not affect carbon, except in a few provinces, such as Quebec and Ontario. With the tax increase, I expect your company is becoming increasingly attractive to your clients, as compared to travelling by car or air. You are becoming even more competitive.
Mr. Fauteux: The numbers speak for themselves. We have seen a significant increase in passengers since the arrival of our current CEO, who has focused on how Canadians can help protect the environment and what we can do internally to be more client-oriented. With this combination of factors, we have made further progress.
[English]
Senator Patterson: You have recommended two specific amendments to the legislation, as I understand your presentation, and some other non-legislative measures. One is about asking suppliers to declare the fuel blend. You suggest the legislation should be amended or that should be added to the legislation. The other one is about the potential double billing for industries like yours that run systems through many provinces.
First, have you recommended this to the government and they have not listened, at least they didn’t reflect your recommendations in the bill? Did you make those points in the consultation process?
Mr. Gullo: We did. That’s a copy of our submission from February you have; so as articulated at that time were our comments to the government.
Senator Patterson: I want to know what feedback you got. Is there a reason that what seems to me logical suggestions were not acted upon?
Mr. Gullo: We haven’t been provided any concrete rationale as to whether our recommendations have been accepted or why they were good recommendations or why they were maybe not so good recommendations.
The issue of disclosure for us is fairly straightforward. We need to know what it is that we’re buying. If we look at the potential for history to repeat itself, and you see something like the renewable fuel regulations where you have a percentage requirement that can be met almost at the beginning of the year and then over the balance of the year you’re not exactly sure how that percentage of the renewable fuel is distributed to those who are buying it. That is problematic for us because we need to know what it is we’re buying and putting inside our locomotives that cost millions of dollars.
We need to understand the costs. In some cases, it’s a guessing game depending on where the point of regulation is. In looking at similar structures, the point of regulation is typically the sale of fuel once it first hits the market. Depending on how a railway acquires its fuel, whether directly from a producer or a third-party retailer, they may not see those costs. It’s important to understand what the costs are so we can account for them, establish our rates accurately and not overpay or underpay.
The second part was about essentially the rebate. Our understanding of the proposal in the way it is worded, if you purchase fuel in a jurisdiction where the legislation is going to apply — theoretically, at this point, Saskatchewan — and then you transport a portion of that fuel into a province where a carbon pricing structure already exists, say over to Alberta, then you can apply for a rebate.
The question we have is that there is an explicit reference to biodiesel and not renewable fuel. I think it’s an administrative oversight that may have occurred. We would say let’s put both biodiesel plus renewable fuel in so we can maximize the options available to the fuel supply chain.
Senator Patterson: I think the administrative burden that will be placed on your industry was touched on already today. We have a checkerboard system in Canada with different regimes in provinces and some may have the federal backstop. As I understand it, each consumer of fuel will be required to account for the net quantity of fuels used in each jurisdiction and remit payment or claim a rebate.
Do you foresee this requiring efforts in personnel and time to meet the reporting requirements? Is this administrative burden going to be reasonable?
Mr. Gullo: To be frank, we haven’t done any clear forecasting on the potential administrative burden associated with the legislative proposal. It is a complex legislative proposal, no question. There are several requirements. You have to be a registered carrier. You have to file your rebates. You have to essentially claim what you’re using within that jurisdiction. It is going to add some administrative burden.
My point is perhaps at a bit higher level, when you anchor that into the administrative burden on a rail company with operations in multiple jurisdictions and an existing carbon pricing structure. Our class 1s are filing and participating in the carbon pricing regulatory requirements in B.C., Alberta, Ontario and Quebec. You add one more, and it’s the cumulative effect that’s starting to become the concern with the administrative burden.
The Chair: I want to ask a question of VIA Rail.
[Translation]
You operate in various provinces that have had a carbon pricing system for some time. Your operations extend from British Columbia to Quebec. Having dealt with the carbon tax, what would you say are the pros and cons?
Bruno Riendeau, Director, Security and Sustainable Development, VIA Rail Canada: Right now, it is hard to say what the pros and cons are because the tax is already paid on the diesel we buy. The bigger issue is for us is the administrative burden, which involves identifying where diesel was used in the various jurisdictions. I have not assessed the scope of that administrative work as of yet, but that is essentially the impact we feel.
The Chair: Thank you very much.
Mr. Le Fèvre: In our case, there is essentially one person who is responsible for the administrative work.
The Chair: One person.
Mr. Le Fèvre: It would be much more complicated for CN or CP owing to the nature of their business, the number of trains they operate and the number of jurisdictions. Our trains travel primarily in Quebec and Ontario. Very few of our trains operate in the other provinces. This is much easier for us to manage than for the major cargo shippers.
The Chair: Thank you very much for your answer.
[English]
Senator Neufeld: Thank you, gentlemen, for being here. Just to stay on that same topic, the trucking industry has been travelling across the country for some time. Every jurisdiction being able to pay, whether it’s a fuel tax, workers’ compensation — whatever applies differently in each province or territory. I can’t imagine it would be that difficult for CN or CP — large railroads — to actually figure out how to do that. It’s the same with the fuel tax. I don’t know what fuel tax applies to railroads, but when it comes to the highways, there’s a highway tax. That’s all done.
I operated a company that worked in two territories and two provinces. It certainly didn’t take a lot of time for the people who were doing my books to figure it out. I think you can figure that out.
The question I have is, first, to VIA. If you electrify — which would be great, I guess, and you have your own dedicated track — would you see a reduction in rates for people to travel on VIA Rail, or would there be an increase?
Mr. Le Fèvre: The rates, in the end could be, if we did HFR, somewhat regulated or changed based on what the government policy would be. Right now, the objective is to maintain at least entry level rates at the same kind of rates we have today.
From the point of view of the electrification, from the point of view of the financial side of the equation — straight P&L — the costs of electrification from the point of view of operating costs, it’s a wash. Fundamentally, whatever you’re going to save on fuel is going to cost you in maintaining the infrastructure for electrification. There’s not a lot to be gained from the point of view of electrification to be passed on to the customer.
It’s fundamentally that the costs of maintaining the electric infrastructure are high. It ends up offsetting costs from a fuel point of view. That’s why we’ve always told government that electrification becomes a government decision. From a financial point of view, it’s a bit a wash. There’s a bit of a benefit, but it’s smaller.
The benefit is higher if you’re doing local transport, because there’s a lot of stop-and-go. If you’re doing intercity transport, the benefits are much lower. We’ve always said the reason to electrify, from our point of view, is because of externalities — it’s to the benefit of society to be electrified. Therefore, it becomes a policy decision.
It should have little impact on the ticket price.
Senator Neufeld: Okay. The building of it, though, would certainly play a part, wouldn’t it? It’s building a whole new designated railway — buying electric engines — all of the things that go along with it would have a cost that would have to be passed on.
Mr. Le Fèvre: Yes. There are two things that happen. It doesn’t really get passed on. What happens is that the number of passengers goes up so drastically that you make it up on volume.
Yes, we’re expecting the average fare to be a little bit higher, but the reason it’s a little bit higher is because we’re expecting, particularly in certain markets, to have more business-class passengers because of the competitiveness of the train. That still makes it possible for us to maintain in the economy class access prices and pricing that remains comparable to today’s pricing.
It’s the mix of customers that changes the average fare we’re expecting to charge.
Senator Neufeld: Okay.
To Mr. Gullo, could you tell me what the railways that use diesel electric are anticipating? Are they going to have to increase their freight rates once the carbon price hits $50 a tonne? If so, by how much?
Mr. Gullo: It’s a great question, and I don’t have an exact answer other than to rephrase what some of our expectations are in terms of cost. I think it was in 2015 that our carbon-related costs were around $55 million. By 2022, they should be around $394 million. If you add up costs from 2015 to 2022, you’re at about $1.6 billion. To what extent that’s going to translate into higher rates, I don’t know, but the cost is going up for everyone. The costs will go up for you and me when we go to the pump to fill up our cars, if you have a conventional diesel-electric car —
Senator Neufeld: Mine does. I live in B.C.
Mr. Gullo: It’s difficult to predict what that science is, but costs seem to be going up for everyone.
Senator Neufeld: At $50 a tonne, you’re saying the increase will be how much again for the major railroads?
Mr. Gullo: The cumulative costs from 2015 to 2022 are estimated to be $1.6 billion. That’s additional.
Senator Neufeld: That will have to come from someplace. That will be the person who’s shipping.
Thank you.
Senator Wetston: Sorry for arriving here late.
Can you talk to me about the north-south issues with respect to U.S. and Canada, and the U.S. approach at this stage to carbon tax or cap and trade service that’s occurring in Canada? Has anyone asked you that question already?
Mr. Le Fèvre: No.
Senator Wetston: You obviously spend a fair bit of time in the U.S., as well as north-south routes. Do you have any comments on that?
Mr. Gullo: Sure. We operate within a North American railway network that’s very competitive. Both of our Canadian class 1 railways have infrastructure and operations within the U.S. We do have some visibility on how carbon pricing is being treated here versus there. We have carbon pricing occurring at a provincial level and now at a federal level. We also have other instruments like a clean fuel standard coming into play.
There aren’t really parallel structures in the States right now. There are a couple of states that have priced carbon, like California, for example. By and large the remainder remain unpriced. Also, there isn’t a federal clean fuel standard. There is a disadvantage, you could say, from a Canadian railway perspective, when they’re competing for traffic with their U.S. peers because of the cost of the pricing.
Senator Wetston: Chair, I’d like to pursue this a bit. What I’m getting at here is the competitive disadvantage of Canadian railways. Do you have any sense of what that disadvantage might be? We know what’s going on in the U.S. Some states are potentially looking at carbon tax and cap and trade, but certainly the federal government is not at this stage. California is in cap and trade. I’m just going to assume that the two jurisdictions in which you have the most traffic might be Ontario and Quebec, only because of the size of both provinces, and both are in cap and trade.
I’m just trying to get a sense of what you think the implication of that is. If you don’t have an ability to comment more specifically, I understand that. I think it’s important, particularly as we’re in the midst of NAFTA negotiations as well and haven’t resolved that issue.
Mr. Gullo: They’re all very fair points. I can only speak qualitatively. Aside from the $1.6 billion we have as an estimate, which is clearly a cost Canadian railways would have to pay and, theoretically, U.S. railways would not, we do have concerns about the competitive aspect of this, as well as our ability to provide a low-rate, efficient service to our customers that also maintains competitiveness and allows us to continue to advance our export conditions in particular markets, whether in North America or abroad. That’s front and centre. It absolutely is of grave concern for us.
Senator Wetston: May I have a quick third question?
The Chair: Yes.
Senator Wetston: I’m concerned about what we’re looking at from the point of view of railways. We understand the importance of these railways, and their contribution to Canada and its economy. We talked about that a lot today in the Senate when it comes to the transportation bill.
From my perspective, the federal government has taken a position, whether it’s constitutionally valid, that they’re going to allow the provinces to pick what they want to do. That only adds complexity for those having businesses across Canada. It also adds complexity because of what’s going on in the U.S. Complexity is a big cost to business, I think. You’ve talked about some of it, but perhaps some of it you haven’t experienced yet. In that circumstance, I suspect there’s little you can do except be frustrated. From VIA Rail’s perspective as opposed to the association, do you have any views on that? You are in the business.
Mr. Le Fèvre: From a north-south point of view, we only operate in Canada.
We’re not really touched by any differences between the two countries.
Senator Wetston: Excuse me because I’m thinking CN a little bit there.
Mr. Le Fèvre: From our point of view, that doesn’t matter much. From the point of view of Canada, we live in a federation. There are costs and benefits associated with it. That’s what we operate in. This is not the only area where we have to deal with varying regulations. We just have to deal with the nature of our country. We’re not going to be making it one jurisdiction soon, and it works that way.
Senator Cordy: Thank you very much for being here. I agree with the previous comments that train travel really has been the fabric of our nation, how we got started. We’ve got a long history of train travel in Canada.
I didn’t know that rail was generally four times more fuel efficient. That would, I think, be a good advertising motto for you because it really is important as we move into these times of reducing greenhouse gases.
I’m looking at the comments you sent to government officials. You spoke about the revenue. We know the federal government has said they will not be getting any revenue from the carbon tax, that, in fact, it will all go back to the provinces. You suggest it be reinvested in infrastructure and the government then suggest courses of action to the provinces. I’m not sure how realistic it is that the federal government will be able to tell the provinces what to do.
I understand your frustration — you just want to know what the rules are you can follow the rules. You don’t want things to be put in place, and then, six months later, a few of the provinces decide to change. I understand the frustration, but, again, asking that the provinces disclose their intention before the legislation becomes law — we live in a complicated system with the federal and provincial governments. I’m not sure how you would iron out those kinds of things. They’re great ideas. I understand, from the perspective of your business, why it would be important to know what the provinces are going to be doing. I know, from your business and the trucking industry and others, that using that money to develop infrastructure, I think, is a very positive thing that you’ve recommended. I’m just not sure, realistically, that the federal government can tell the provinces what to do.
Mr. Gullo: I can take that on. I think you’re hearing our point of view. We would look for some leadership and some advocacy, on behalf of the federal government, to look at all of the options where carbon pricing revenues can be reinvested as a means to facilitating a low-carbon society.
Our policy wording is in there because of a precedent that’s already been set in Quebec, where there is a program that has been renewed several times, that has been fully subscribed to. They take the revenues from their cap-and-trade program and put them into, essentially, a financing program that’s available for prospective railway customers to connect themselves to the railway network. As a result, they’re lowering emissions around $11 to $14 a tonne. They’re doing a competitive job in terms of price per tonne. About $30 million has been invested to date, to our knowledge, and it has resulted in over 200,000 tonnes in reductions.
It’s a program that’s working. It’s a program that businesses in Quebec seem to like. We try to promote it every chance we get.
[Translation]
Senator Massicotte: I would like to ask for a clarification. In your annual report, it says that after the number of passengers increased, so too did your revenues, by about $45 million. Yet your losses or need for capital is nearly unchanged at $353 million. Why has the increase in passengers and revenues not had a bigger impact on your net profits?
Mr. Le Fèvre: The impact on our net profits is that we are now able to carry many more passengers over a greater distance, at the same cost to the government.
The way we have been able to increase rail revenues is by increasing what we offer. We have been able to increase what we offer, that is, by offering more seats, at a lower average cost per seat, but overall, in absolute numbers, the total loss is roughly the same.
Senator Massicotte: This suggests that the additional revenues are equal to the marginal production costs per additional kilometre travelled, because the result is effectively the same.
Mr. Le Fèvre: Yes, it works out to the same, except the percentage of kilometres travelled is higher.
Senator Massicotte: But the cost of those additional kilometres is equivalent to the additional revenue, so it is equal to the marginal costs.
Mr. Le Fèvre: Only if they are considered together. If we took the marginal cost per passenger kilometre, the amount would be lower, but I do not recall what that is right now.
Mr. Fauteux pointed out that we went from 37 passenger miles in 2013 to 28 today. So we have given the Government of Canada greater mobility at a lower cost. Although the total amount is roughly the same, we have greater mobility at a lower cost.
Even if we had HFR, the problem is that it would still be very expensive for us to operate. For example, the costs that have increased a great deal for us are the costs owing to poor punctuality, which means we have to pay our employees overtime. This year, the cost of overtime has been very high, especially on the Vancouver-Toronto route.
There are a number of such problems that will be solved by HFR because the trains will be on time. So HFR will increase efficiency and there will not be as many delays. The ratio will improve greatly, so we will not need as large a share from the government and we might perhaps get into the black.
Senator Massicotte: Your president appeared before the committee a year or a year and a half ago. He expected to have significant capital requirements and said that the private sector does indeed have an important role to play in meeting those requirements. What is the status on that?
Mr. Le Fèvre: First, the funding decision is up to the government. It has various options. It could decide to give us a cheque so we can take charge of the project ourselves. It could decide to use a PPP and ask us to find private sector partners to build the lines only. It could ask us to raise capital to invest in the company’s operations. If it is a PPP, for instance, according to the latest rules, Infrastructure Canada would be involved. If there is an investment in the company, that would involve the Infrastructure Bank.
Senator Massicotte: According to your figures, what percentage of the capital needed could be raised?
Mr. Le Fèvre: I am always careful when I talk about these numbers, but it would be a significant share of the capital needed.
Senator Massicotte: Eighty per cent, for instance?
Mr. Le Fèvre: No.
Senator Massicotte: Sixty per cent, then?
Mr. Le Fèvre: It all depends what we include in the project, if it is partially funded by the private sector. If we include high-frequency lines only, it could be almost 100 per cent privately funded. The more lines there are to serve the public, the more difficult it will be and the more the government will have to invest, but that is up to the government.
HFR would generate enough revenues and profits to fund itself. That is what caught the pension fund’s attention during the first funding round three years ago. But if the decision is made to include the whole network, the definition of what we put — Because there is always a line between the services that can be paid for by fare revenues and the services that exist because they are public services. Ultimately, we are asking the private sector to fund what can be paid for by fare revenues.
Senator Massicotte: Aside from the initial capital needed for construction, will annual requirements change significantly if we proceed with this project?
The Chair: I would ask you to be very brief because we have gone over our time limit.
Mr. Le Fèvre: Yes, it would be very positive. If we used private funds, there is a chance that the government would no longer have to publicly fund VIA Rail Canada.
Senator Massicotte: Remember that the committee’s proceedings are recorded.
Mr. Le Fèvre: Yes, I know, but since I have been telling the government this for four years, I am already in trouble.
The Chair: Thank you very much. I’m sorry, but we have gone over the time allotted.
[English]
We are ready to welcome our second panel. Thank you very much for coming and for having this very interesting conversation with us.
Welcome to the second portion of the Standing Senate Committee on Energy, the Environment and Natural Resources. We are continuing our study on Part 5 of Bill C-74.
We now welcome, from the Canadian Trucking Alliance, Jonathan Blackham, Director, Policy and Public Affairs. And from the National Airlines Council of Canada, we have Massimo Bergamini, President and Chief Executive Officer; and Geoffrey Tauvette, Co-Chair, Environment Committee and Director, Fuel and Environment, WestJet.
Jonathan Blackham, Director, Policy and Public Affairs, Canadian Trucking Alliance: Good evening, senators. As mentioned, I’m Jonathan Blackham and I’m Director of Policy and Public Affairs for the Canadian Trucking Alliance. The CTA is a federation of the nation’s provincial trucking associations. We represent over 4,500 companies from coast to coast.
I’m pleased to be back with this committee. I was here before as part of your work on transitioning to a low-carbon economy. I’m pleased to be here again to talk about carbon pricing, an important issue for our industry.
Trucking is a high-revenue, low-margin business where the difference between profit and loss can sometimes be measured within a few dollars. This is largely due to the highly competitive nature of our industry, with the primary benefactor of that competition being Canadian consumers.
Fuel is a major component in the equation for every single trucking company. Along with labour it is the number one leading cost component for most trucking companies. The Canadian trucking industry also competes internationally, with north-south trade being critical to this country and also to our industry. Competition with large U.S. fleets with natural advantages related to economies of scale is an everyday reality for our industry. Needless to say, every single dollar and cent count.
While we agree in principle that pricing something is an effective way to spur change, we are also limited in the options we have in the trucking industry to see change, particularly radical change.
While research and development on new technologies remains a strong focus for many OEMs, or original equipment manufacturers, there still lacks a widely available and wholly viable alternative engine such as an electric power source, for example, available for mass deployment in the heavy truck sector and particularly in the long haul segment.
On that point, the trucking industry itself is not a monolithic entity. There are short- and long-haul companies, the latter consuming the bulk of the fuel.
Although low-carbon technologies such as electric engines have somewhat less operational infrastructure and supply chain challenges for the short-haul companies, there remain significant barriers for implementation in the long-haul segment. This means the diesel engine will remain the workhorse of the trucking industry for the foreseeable future. We have seen some carbon pricing systems return revenues to industry to help investments in a range of technologies as part of provincial carbon pricing strategies, such as aerodynamic devices to improve fuel economy and, in some cases, assistance for technologies like electric trucks where available, and natural gas.
This remains a critical component of any carbon pricing system for us. I know that we are speaking federally and these are provincial systems but this is something of critical importance to us in this conversation. We believe revenues that are taken, extracted or generated from our industry must be reinvested in the industry into meaningful programs with the local industry’s buy-in and, we would hope, participation from the local provincial association in its design.
We believe there is a limit on how far the price can be pushed, and the gains expected to be made from that price — again, at least, without a totally viable alternative for to us switch to.
If we put carbon pricing aside for a second, carriers already have a strong incentive to be as efficient as they possibly can be. For the government, they are already regulating the types of equipment we can buy from a GHG perspective through phase one and phase two of their GHG regulations.
At the same time, we also have U.S. competitors who, again, enjoy certain advantages and, at least in our view, are unlikely to face similar cost pressures from the current federal administration.
The bottom line is that at current prices, in some of the jurisdictions that have systems right now — we’re talking in the $10 to $20 per tonne range — the industry is managing. Once we start to get closer to that $50 per tonne range we have concerns about the potential impact that might have on our industry, which again is the dominant mode of freight transportation in this country, carrying more trade by value than air, rail and marine combined.
In our original submission, we stated we believed that there needed to be an economic analysis completed throughout the process, especially as the price escalates, and we maintain that it is important. I know this committee is looking to get a sense of what the impact will be. To put this into perspective, at $50 per tonne, which translates to between 13 and 14 cents per litre for diesel, we estimate this would translate into about $10,000 per year, per truck, in added costs. For example, for a carrier with 100 trucks who works mostly in Canada, this would be about a million dollars in added costs.
That’s a hypothetical. I sat down with one of our member companies to understand what this would mean for them. It’s a Canadian-owned and operated company. If you’re familiar with the trucking industry, you would know who they are. They are on pace to consume 19 million litres of diesel this year, which for that company, at 14 cents per litre, would equate into roughly $2.66 million in added costs.
At the moment we also have an acute driver shortage, projected to be close to a deficit of 34,000 drivers by the year 2024. Within our sector, we have rapidly rising labour costs. If we’re talking about the two leading cost components in a company’s equation increasing, then it’s realistic to expect the cost of transportation, at least in our sector, will also be rising.
With that, I think I’ll hold my comments and I’m happy to take questions later.
Massimo Bergamini, President and Chief Executive Officer, National Airlines Council of Canada: Good evening, Madam Chair, members of the committee.
[Translation]
My name is Massimo Bergamini. I am the President and CEO of the National Airlines Council of Canada. With me is Mr. Geoffrey Tauvette, Director, Fuel and Environment, with WestJet. He also co-chairs the Environment Committee of the National Airlines Council of Canada.
I want to thank you for the opportunity to appear today to provide our perspective on this bill, especially as regards the need for a consistent carbon pricing policy.
The National Airlines Council of Canada was formed in 2008 by Canada’s four main airlines, Air Canada, Air Transat, WestJet and Jazz.
[English]
Our members carry over 92 per cent of Canada’s domestic air traffic and 65 per cent of its international air traffic. They employ over 50,000 Canadians directly and contribute to an additional 400,000-plus jobs in related sectors, such as aerospace and tourism.
Those are significant statistics that reflect the role that a strong, competitive aviation industry plays in ensuring Canada’s economic prosperity.
Today in Canada, commercial aviation has become the only practical way for millions to travel to be with family, for work, or simply to explore our country. There is no doubt the era of elite jet setters is long past. For Canadians, flying is now part of daily life. It is the life blood of an open, diverse, and geographically dispersed society.
The 2016 Canada Transportation Act Review, also known as the Emerson report, recognized this in its detailed chapter on aviation. It also recognized how mounting fees and charges risked making our industry uncompetitive, particularly vis-à-vis U.S. carriers operating in contiguous markets. Simply put, our current system fails to recognize that air transportation serves both individual air travellers and the country’s larger social and economic interests.
Our organization has repeatedly said that as a market-based measure the carbon tax is not well suited to commercial aviation in general, and is particularly ill-suited to the Canadian context.
We believe it would exacerbate commercial and emission leakage while not contributing in any meaningful way to emission reductions. Adding an additional layer of costs in the form of a carbon tax, on what Minister Garneau has called the litany of fees and taxes that already exist, would stifle our global competitiveness and penalize the people that air transportation is meant to serve.
Given the demographics of air travel today, and the fact it alone cannot incentivize technological breakthroughs, let’s call the carbon tax in this context for what it would be: another tax on the middle class.
Let me be clear, Canada’s commercial aviation industry has and continues to invest billions in fleet and other fuel-efficiency improvements. Our member airlines are on track to invest about $47 billion in fleet upgrades between 2012 and 2027. These investments help explain our performance, an average improvement of 1.8 per cent per year. That is in terms of emission reductions. Canada’s 2016 action plan report shows an improvement of 3.2 per cent year over year.
We believe an output-based carbon pricing system such as the 2016 international Carbon Offsetting and Reduction Scheme for International Aviation, also known as CORSIA, or the framework provided for large emitters in this bill that you’re studying, is much better suited to the global and domestic realities faced by Canada’s commercial airlines.
Specifically, we find three principal issues with the policy framework that this bill is designed to operationalize. One, it does not reflect Canada’s international commitments and obligations under the CORSIA agreement, notably with respect to the development of ancillary programs and strategies, such as strategies to enhance the commercialization of aviation biofuel to help further reduce aviation carbon emissions. Two, while it recognizes the negative impact of a carbon tax on the competitiveness and overall trade exposure of certain sectors, it fails to extend that recognition to commercial aviation in Canada. By virtue of geography as well as its external cost structure — notably high taxes and fees as well as the high price sensitivity of demand — is also trade exposed. Three, in addition to resulting in emission leakage, a carbon tax would do nothing to curb emissions over the medium term.
Commercial aviation is a technologically mature sector, the fruit of decades of massive investments in technology and operational systems. This means over the medium term, it will not be possible to incentivize technological breakthroughs. The one exception is probably biojet — and we will speak to it. Unless airline load levels fell to the point that individual routes were no longer practicable — in other words, unless it resulted in service cancellations — a carbon tax would have no real impact on overall emission levels.
We therefore recommend to this committee that the Greenhouse Gas Pollution Pricing Act be amended to extend the output-based opt-in option that is available to other sectors to Canada’s commercial airline industry.
We have distributed a more detailed brief that should be available to you. We’re ready to take your questions. Thank you very much.
Senator Neufeld: Thank you gentlemen for being here. Mr. Blackham, you said that $50 a tonne is 14 cents a litre — $10,000 per year per truck. What I would like to know is what that equates to in a truckload. Carrying your average load, you’re heading across Canada — what is the increase in freight costs for the people who are shipping things in your trucks?
Mr. Blackham: It’s hard to say. I could sit down and try to do the math for you, and I would be happy to try to put a number to that. I think it depends on a lot of things — what the rate is for that load, or how competitive it was for that load.
Senator Neufeld: Take an average load, something that gives us some sense of it — because you’re going to increase costs. I mean, the fuel costs are going up by $10,000 a year for someone with 10 trucks?
Mr. Blackham: 100 trucks.
Senator Neufeld: One hundred trucks. Obviously you’re going to have to charge someone. Somebody is going to pay the bill. I always said it’s Fred and Martha — it’s the person at the bottom end of the stick.
That’s who really gets to pay all the bills at the end of the day when you put in a new tax. Could you figure that out for us — in an average — and provide it to the clerk?
Mr. Blackham: Ultimately, it would be the carrier’s customer who presumably would pass it on to the consumer.
Senator Neufeld: Yes; we would like to know what that is. Thank you.
I’m not familiar with what the airline industry pays now. Let’s take British Columbia, for example. You fuel up in Vancouver airport and it’s $35 a tonne right now. How much per litre does that equate to WestJet for their aircraft? Do you have to pay it on the full load or are you paying just part of it? Do you pay it in different jurisdictions that you fly over? Explain to us a bit about how WestJet goes about paying the $35 a tonne applied in British Columbia.
Geoffrey Tauvette, Co-Chair, Environment Committee and Director, Fuel and Environment, WestJet, National Airlines Council of Canada: British Columbia is an example of an intra-jurisdictional program. The carbon tax is charged on emissions we generate to service cities within British Columbia, Vancouver, Prince George, Vancouver-Victoria for example. It only applies to the volume of fuel that we burn there. At $35, I think for every $10 it’s 2.5 cents, so we’re up in the 8- or 9-cent a litre range. We pay that within the volume we burn in the province, which I think equates to something like $2.5 million to $3 million a year. The other province with a similar system is Alberta. They have a carbon levy that applies in a similar fashion to the emissions we generate within the province. You can see how this becomes problematic if every jurisdiction starts putting in its own system where we have 10 provinces and three territories to adhere to, as well as a federal system on top. This is why we’re advocating for a consistent national system.
Senator Neufeld: What happens to your competitors that come out of the U.S.?
Mr. Tauvette: Once CORSIA is in place in 2020, the U.S. flights to Canada would fall under that program. But nothing is stopping, for example, someone from driving across the border and hopping on a plane and going to Asia or going down to the southern states.
Senator Neufeld: I get that, but Delta flies into Vancouver. Do they pay the same?
Mr. Tauvette: They would not pay, no. In the B.C. program, it’s only for emissions generated flying between B.C. locations. An international location coming in doesn’t pay the B.C. carbon tax.
Senator Neufeld: If WestJet flies out of Vancouver, and goes to Ottawa, they don’t pay anything.
Mr. Tauvette: Under the B.C. program, correct.
Senator Neufeld: Okay. That’s interesting. Every airline is treated the same, whether it’s Air Canada or WestJet.
Mr. Tauvette: Inside the province, yes.
Senator Neufeld: They pay nothing for carbon tax if they fly across Canada. But if they fly within the province, they have to pay a certain portion. Do they pay the whole portion? Do they pay the full price, whatever the rate would be for $35 a tonne?
Mr. Tauvette: To my knowledge, yes.
Senator Neufeld: One question again for Mr. Blackham, if I could. If you are trucking through Canada, obviously you have to pay all those different rates and different provinces or territories. You said there are other things you have to comply with in a reduction of using fuel.
Mr. Blackham: Yes.
Senator Neufeld: If an American truck comes up from Washington into British Columbia and goes on to Alaska, or through Alberta and goes on through to Alaska, do they get to come through with anything they want to come through with, or do they have to comply with all the rules and regulations and pay the same carbon tax as a Canadian truck?
Mr. Blackham: The rules and the regulations that I was speaking of were phase one and phase two of the GHG reduction standards. The U.S. EPA has similar standards. In fact, much of the Canadian rule was based on the EPAs work. From that perspective, it’s very similar.
In the trucking business, cross-border is very fluid. There are many reciprocity deals between Canada and the U.S. to allow for equipment to go back and forth.
You raise an interesting point. For example, in a backstop jurisdiction, we were happy to see mention there would be requirements for U.S. carriers to register and pay on the fuel burned in a backstop jurisdiction. We’re still waiting to see what that looks like and how it might be enforced. There are other things in our industry where Americans will come up and maybe not play by the rules as we would like. That was certainly something that we were happy to see.
If that is ignored, that would be a major issue for us.
Senator Neufeld: Thank you.
The Chair: That’s a major positive issue for you. The competition from the States will be minimized because I don’t think they will want to pay here.
Mr. Blackham: If we’re paying it, we want them to pay it, yes.
The Chair: Okay.
Senator Neufeld: If they are not paying it, it’s not a problem for these guys.
Senator Massicotte: Mr. Blackham, I’m trying to get a sense, like Senator Neufeld, over the quantum. In other words, how significant is it? Let’s say your company has 100 trucks or 10 trucks. If you look at the total revenues, what does the percentage of that CO2 cost? I assume $10 or $50 a tonne, or whatever. What is the additional cost relative to the operation? Is it a 1 per cent increase in the total cost? Is it half of 1 per cent? Do you have any sense of how important that is?
Mr. Blackham: No, but it would be significant for a 100-truck operation to have, all of a sudden, an extra million dollars of costs on the books. It would be significant.
Senator Massicotte: You’re saying it would be a million-dollar cost compared to zero today.
Mr. Blackham: If the price of fuel went up 14 cents, the added cost for the carrier would be roughly a million dollars.
Senator Massicotte: What are the expected total revenues?
Mr. Blackham: I don’t know. I couldn’t answer that for you. I can ask companies. Yes, absolutely.
[Translation]
Senator Massicotte: Mr. Bergamini, if I understand you correctly, you obviously know that everyone who comes here says it does not apply to them, that they have achieved maturity, that no innovation is available, and that they are seeking an exemption.
In your case, you are also saying that you should have the opportunity to participate. You used a technical term. Is that like large industrial companies?
Mr. Bergamini: The regulatory framework developed by the Government of Canada clearly recognizes that a carbon tax could affect the competitiveness of certain companies. Moreover, that is exactly the same calculation, the same analysis, the same finding that the International Civil Aviation Organization made a few years ago. For that reason, internationally, the organization and the member nations, including Canada — which was also one of the leaders in supporting this approach — have adopted an output-based carbon pricing system.
It is our view that, precisely because of the technological maturity of our industry, in order to get real results on GHG emissions, we have to recognize that a carbon tax will simply not be sufficient in the short term. So we have to find other mechanisms to achieve environmental benefits. That is why the carbon credit approach makes a lot of sense.
Senator Massicotte: The department’s rationale for the system you are referring to pertains to cases of unfair competition, where your competitor is not paying the carbon tax. I am trying to understand where you face unfair competition. A potential passenger might drive or fly to the United States. Is that the only major example of competition from someone whose basic costs are lower than yours?
Mr. Bergamini: That is why I mentioned the Emerson report, which addresses this issue.
Senator Massicotte: Is that the only case? Suppose you go to Florida, drop off your Canadian passengers, bring back some passengers, but then —
Mr. Bergamini: It is an issue our industry has been dealing with for a number of years. There have been fluctuations owing to the value of the dollar, which also has an impact in this regard, but an analysis done in 2012 estimated that close to 5 million passengers use U.S. airlines. That has a huge impact.
Senator Massicotte: So it is just those who drive to the United States.
Mr. Bergamini: That’s right.
Senator Massicotte: Because, otherwise, you benefit from the price of fuel, which is less expensive if you buy it in the U.S. So it balances out.
Mr. Bergamini: The real issue is operating costs and the cost that will be added to the ticket price. To give you an example, 60 per cent of the base or economy fare is taxes and various tariffs. So we already pay tax on fuel, and now another tax is being proposed. At some point, since consumers are greatly influenced by the cost of the ticket, we will lose passengers to airlines that offer lower fares.
Senator Massicotte: Those passengers could always take a U.S. flight.
Mr. Bergamini: That will exacerbate the situation.
Senator Massicotte: I understand, thank you.
[English]
Senator Wetston: I think Senator Massicotte covered a number of areas I wanted to pursue, which is fine and helpful.
I still don’t have an appreciation for the entire rationale for your desire for the output-based option. Does the trucking industry also want that option or are you eligible for that option? Or do you have it now?
Mr. Blackham: Are you asking in terms of how we pay it?
Senator Wetston: No, I’m really responding to the notion here that the extension of the — you’re wishing to be included in the output-based opt-in option for Canada’s commercial airline industry. What about the trucking industry?
Mr. Blackham: I haven’t had any discussions with our folks about that.
Senator Wetston: What do you think? Do you think the trucking industry — I’m just kidding.
Is there any intermodal competition between your industry and the airline industry today?
Mr. Blackham: Not really. We work together mostly.
Senator Wetston: To help you along, I realize you would be potentially competing with FedEx and UPS and the others of the world, but not necessarily with the airlines? You’re not doing any commercial, or is this simply all passenger related?
Mr. Bergamini: Well, there’s cargo.
Senator Wetston: That’s what I’m getting at. You would be competing with one another in that regard, would you not?
Mr. Blackham: For our member companies, we would be — I don’t know if that cargo would be put on a truck, to be honest. I think it’s mostly time-sensitive items that need to go long distances quickly. I think you would find a situation where a truck would drop it off on one end and pick it up on the other.
Senator Wetston: I’m wondering, you talked a little bit, I think, Mr. Blackham, about the 8 cent — the differential was 13 to 14 cents for the trucking industry, I think you mentioned, and 8 cents for the airline industry.
Mr. Tauvette: It was 8 cents at $35. I think diesel and jet fuel is about the same.
Senator Wetston: It’s comparable?
Mr. Tauvette: Yes.
Senator Wetston: There’s no disadvantage between the industries. Did you have any input into the $50 number at all? Did you get consulted on that?
Mr. Blackham: The CTA did not, no.
Senator Wetston: What about you?
Mr. Tauvette: No.
Senator Wetston: Do you have any idea how they came up that number?
Mr. Bergamini: No.
Senator Wetston: Do you have any idea how they came up with the future numbers?
Mr. Bergamini: Well, that’s one of the problems, right? Right now we’re confronted with 2022 and it stops dead. A lot of uncertainty. It makes projections into the future, including planning for airlines and airports, very difficult in that context because of the impacts we’ve mentioned. That’s problematic.
I know we have asked the Department of Finance and the Department of Transport on numerous occasions to share with us econometric analysis they may have done and we have not seen it.
Senator Patterson: Thank you for your presentations. I’d like to further drill into the airline council’s recommendation about the advantages of an output-based carbon pricing system.
I think basically what you’re saying is you’re highly efficient already and whatever can be done has been done. Pricing carbon won’t drive the airline industry into more efficiency than it already has. Therefore, all it’s going to do is increase the costs to you or to the consumer.
It reminds me of my situation in Nunavut where we don’t have any alternate energy. We’re just going to have to pay more and get angry about it.
You’re suggesting to go to the output-based carbon pricing system. I’d just like to ask you if you would please explain how that’s going to work for your industry and what are the advantages.
Mr. Tauvette: Thank you for the question. We’re comparing the output base. The CORSIA system adopted by our International Civil Aviation Organization, which is a UN body, allowed us to be the first industry in the world with a climate change plan. This included a goal of capping our emissions at 2020 levels and then using an offset-based system to handle any growth emissions over the cap.
Basically international aviation is developing a baseline as of 2020, total international emissions, and then any growth above that we are using carbon offsets to grow on a carbon-neutral basis, essentially.
What we’ve tried to do is compare it to what Canada has in place and the output-based system really is the closest tool that resembles the CORSIA system. CORSIA ICAO has spent more than 10 or 15 years with the states — what is it, 191 states across the world — and the aviation industry to develop this program in which Canada was a major contributor in achieving the recommendation. It’s in front of ICAO council to approve all the processes this June.
How we saw the output-based system working is we would agree, similarly to CORSIA, to cap our domestic emissions and then work with the government to develop a program to handle any growth emissions over that cap, such as paying a simple carbon tax, which I think is an option under the output-based system.
We know Environment and Climate Change Canada today is negotiating Part 6 of the Paris Agreement and developing its ideas of what offsets might count towards it, whether it be domestic or international offsets, which could count towards some of these programs as well.
Senator Patterson: As I understand it, the output-based system has been applied to industries in Canada under this act. There’s a list of them and they’ve got to have over 50 kilotons of CO2 emissions annually, which I’m sure you would easily qualify for.
Are you recommending we just add the airline industry to the list in the bill?
Mr. Bergamini: We went through the bill. It will require additional amendments. It’s fairly complex. It really reflects the backstop, and in that sense just adding it won’t be sufficient.
We would suggest a few things. We would suggest that, in the preamble, in addition to recognizing Canada’s commitments under Paris, it also recognizes Canada’s commitments under CORSIA and ICAO, for instance and that, furthermore, it provides for airlines the same treatment available to heavy industrial emitters, full stop. That would mean rewriting the bill and removing certain sections that relate to airlines.
This is the backstop. The government is pursuing a policy based on the assumption that provincial and territorial governments will adopt compatible approaches to carbon pricing and emission reductions.
We have turned to provincial governments. We have made representations to provincial governments. We have had conversations, including with B.C., which is sort of ground zero. They’ve been very positive because there is a recognition that airlines are unique. I can tell you in B.C. they’re very sensitive to the competition that YVR is facing from American carriers at American airports, even as the area is trying to position itself as a gateway. They’re very sensitive to that.
We believe there’s a possibility to move with provincial and territorial governments in this area. However, it is not helpful, neither politically nor from a public policy perspective, to have the federal government put forward a set of policies in opposition to Canada’s international obligations and plainly don’t work.
We would like to say we can work with provincial governments and we’re optimistic we will make progress with provincial governments. We would like to see the federal government remove that log jam it has created for itself by recognizing that aviation in Canada is different. That would be an incredibly positive outcome for our sector and for Canadians, to be frank.
Senator Seidman: Thank you very much for your presentations. Mr. Blackham, the Canadian Trucking Alliance made a submission last year regarding the technical paper released by the government. This goes back to something you were discussing in a previous question.
In the technical paper, the industry says a carbon pricing system is being established that will generate inequity between the freight modes. I suppose that means you’re saying that rail, trucking, marine and aviation — the different freight modes — are not going to have the same advantages and disadvantages. There’s an inequity being set up.
Mr. Blackham: At the time, those comments were largely based on our assumptions. We were making assumptions based on what we were reading, I think, and since in subsequent conversations, many of those have been relieved. We don’t feel like we’re being beaten up on.
I think the overall point should stand. There are multiple modes of transportation carrying freight in this country. They largely work together. They compete on a relatively small amount of freight, but they do compete. It’s imperative that there be fair treatment of the modes.
Senator Seidman: Could you be more specific? What is it that you think would make it more equitable? Is there something in particular?
Mr. Blackham: No. As I said, we’ve since talked out a lot of our concerns, as it were. Just as a sort of general statement of principles, it’s something we believe.
Senator Seidman: What about you, Mr. Bergamini? Do you have anything to say to that?
Mr. Bergamini: With respect to equity? My friend from VIA Rail was here earlier, and this is part of the problem. You know that commercial passenger air transportation is the only passenger mode that is entirely user pay and, in fact, is user pay plus. We do compete with rail and the Government of Canada will be investing in new rolling stock for VIA Rail, in addition to continuing with operating subsidies.
I don’t want to put too fine a point on that, but that’s our reality. That reality must be considered when a government puts forward another public policy that is economically based and has a cost component, such as this one.
In this context, I would not look at equity with respect to the carbon tax, but the inequity of the treatment of the airline industry in terms of public policy is certainly problematic and does affect our competitive position vis-à-vis the U.S. carriers, no doubt.
Senator Seidman: The other question I’d like to ask you is, again, based on the presentation of the CTA. The technical paper makes no recommendations on how carbon pricing and the revenue raised will be reinvested back into our sector to reduce carbon emissions.
I would ask both of you, Mr. Blackham and Mr. Bergamini, what you have to say with regard to that. What should be done with the revenues generated from the carbon tax? There has been a lot of discussion. In fact, there have been claims the government might just send a cheque to Canadians in order to have some kind of equal footing for them.
Mr. Blackham: If you don’t mind, I’ll take that on. In my opening remarks I mentioned it’s very important for the local industry to have buy-in to whatever programs result from the revenues. I think that’s absolutely important. These dollars can’t just flow out there into the grey continuum. I really believe the local industry should be involved in telling government the kinds of programs they want.
We have seen in some provinces — and I’m thinking of Ontario right now — that there is money for aerodynamic devices and alternative fuels if carriers are interested in looking at it. There is also electric, which would be primarily for the return-to-base or the courier sector, really, or natural gas, for those who want to take that on. The way that system works is they offset a portion of the purchase price of the power unit.
Those are the kinds of things we’re talking about when we say reinvest in the industry, particularly when it comes to retrofitting. I think that’s an area where we can certainly help support making the current fleet the best we can while also incentivizing the purchase of new state-of-the-art technology.
Mr. Bergamini: Thank you for the question. We mentioned how the backstop and this legislation is out of alignment with our international obligations under CORSIA.
One of the important aspects under the CORSIA agreement and the framework is that signatory states commit to developing what I believe is called a basket of measures, non-market-based measures — in other words, incentive measures, programs and so on — to increase investments in alternative fuels, technology advances, air traffic control infrastructure and so on.
I guess probably the single biggest disconnect in terms of policy is that one. We understand why. There was a decision made to funnel the money, but to do so absent any kind of direction from the Government of Canada with respect to the allocation of those sums is highly problematic. We’ve seen it in the past with the creation of trust funds, as you know, that sometimes were used for the purposes they were intended, sometimes not.
In this case, it puts us out of whack with our international obligations. Because of what we said, because we are technologically mature, the one area where there is potential for massive improvements is in the commercialization of aviation biofuel. Massive improvements. There are a host of issues around that, which we won’t get into. To me that’s a missed opportunity for the Government of Canada, to seize, to run with the ball and position Canada as a leader, both domestically and internationally.
That’s part of the discussion I think needs to take place as we go forward and I believe your committee has the bill in front of it and can actually move in that direction. Thank you.
Senator Wetston: Let me ask you this: When I look at the Canadian economy and I look at Canada as a country, obviously we’re a trading nation and we’re a large, complex country from coast to coast to coast. Your airlines and trucking companies compete and function coast to coast to coast as well as north-south.
It looks like the federal government had decided to let the provinces decide what systems they want to put in place. I’m sure it was Senator Neufeld who may have talked to you a little bit about B.C. What do you do with Ontario and Quebec when your airlines fly into or out of those provinces, which are cap and trade? What do the trucking firms do, similarly, when you have to manage within a system that has — I think Alberta has a hybrid system. B.C. is carbon tax.
My other question, if I may, is I think you are saying the airline industry itself has pretty much reached its efficiency scale. Other than biofuel, I think, the fuel you talked about?
Mr. Bergamini: Biojet, yes.
Senator Wetston: You haven’t said that for the trucking industry. I realize there are differences. I don’t understand why you wouldn’t be supporting a cap and trade regime, mostly because that will give you the opportunity, given the success you’ve had to date, to be purchasing credits. In a competitive market, you would be paying less for them and that would advantage some of the unpredictability. When the economy is not doing so well, you would be paying less as well from the point of view of credits, which doesn’t mean your airline wouldn’t be doing well.
I’m just trying to understand your position and why you wouldn’t be sort of saying, “Let’s do that system. That’s the one we want.” For an efficient industry that would be focused on dealing with environmental issues, I would have thought that is where you might be. That may have been one of the reasons why Europe went with cap and trade. Any thoughts?
Mr. Tauvette: You’re correct. The CORSIA system is a hybrid cap and trade system. We’re capping our emissions at 2020 levels for international emissions and then buying offsets for anything on top of it. What we’re trying to do, most of our emissions are really the interjurisdictional emissions. Those emissions fly between locations in different provinces and that falls under a federal program. They’re waiting for each province to put their programs in. The provinces are only dealing with emissions contained within the province and then we have the emissions generated going between provinces.
The federal system that’s closest to cap and trade is the output-based method. We are trying to match the language to the federal system. In theory it is a cap and trade, but the federal government doesn’t want to put a cap and trade in their backstop.
Mr. Bergamini: That’s right. In terms of the mechanisms, we’re really speaking about the same thing. With respect to Ontario and Quebec, right now aviation is exempt.
Senator Wetston: Any comments on that?
Mr. Blackham: Sure. I’ll pick up on a few things. My friends here mentioned they’re at peak efficiency. I think we’re getting close. We’re perhaps not there, and that’s why when we talk about some of these programs to help the technology get into the industry, they remain important.
Part of the reason we talk about the concerns at $50 a tonne and perhaps beyond is at some point we are going to get very close to as efficient as we can be. The technology in our trucks has jumped leaps and bounds in recent years.
There was one thing you mentioned I wanted to mention earlier. It came up in the discussion with the railways. In any sort of potential backstop jurisdiction, we do have some concerns in terms of registering and reporting a potential for administrative burden. I think you’re right, CN and CP are large companies with armies of workers to crunch those sorts of numbers. There are a lot of mom and pop shops where they don’t have full-fledged departments to do these sorts of things.
We do have experience with similar programs. I’m thinking primarily IFTA, which is a fuel tax sharing program between jurisdictions. We’ve asked to be at the table to understand how that reporting and registration system is going to work. We have experience in that area. That’s something I wanted to say earlier.
Senator Patterson: I’m so impressed that the airline industry got ahead of the curve with CORSIA. You’re getting no credit whatsoever for having done that. Zip.
I’m betraying my ignorance here, but did the Americans sign on to CORSIA? That means that the competitive issue that carbon pricing introduces in Canada is eliminated, is not there with CORSIA?
Mr. Tauvette: That’s correct. For international players.
Senator Patterson: For international players.
I thank you for that. Very good presentations.
The Chair: Thank you very much for your testimony and your questions and answers.
(The committee adjourned.)